Question:        Is a lawsuit challenging a federal savings and loan association’s prepayment penalty formula preempted by the Home Owner’s Loan Act?

Answer:           Yes, according to the Second District Court of Appeal in Weiss v. Washington Mutual Bank, 07 C.D.O.S. 1013 (Jan. 29, 2007).

In this case, plaintiffs borrowed $4 million from Washington Mutual Bank and signed promissory notes that included a formula for calculating the "prepayment premium."  A disagreement then arose as to its interpretation, and plaintiffs sued the Bank for fraud, unfair and deceptive business practice, and similar claims.  The trial court dismissed the complaint on the grounds it was preempted by HOLA.

The court of appeal affirmed, holding that the Office of Thrift Supervision "has the exclusive authority to regulate the operations of federal savings associations such as Washington Mutual."  Why?  "Because all of Weiss’s claims against [the Bank] seek relief that if granted would necessarily impose requirements on Washington Mutual’s prepayment penalty provisions."  For good measure, the court also affirmed the dismissal of the plaintiffs’ fraud claim against the Bank’s loan officer, noting that he was at all times acting within the scope of his authority and "thus cannot be personally liable" to the plaintiffs.  "In short, claims preempted as against the employer are necessarily preempted against the employee who acted within the course and scope of his employment."

An electronic copy of the opinion is attached.

Authored by:

Robert Stumpf

(415) 774-3288

rstumpf@sheppardmullin.com