Court Says National Bank is Not Bound by State Reverse Mortgage Law

A national bank does not fall under state reverse mortgage law that could restrict the fees the bank can include in principal when making a reverse mortgage loan, according to a decision in the U.S. District Court for the District of Minnesota decided this month.

In a class action case decided November 1, Taft V. Wells Fargo Bank, N.A., the daughter of a reverse mortgage borrower alleged that the reverse mortgage violated several Minnesota statutes, one South Dakota statute, a federal law, and constituted a breach of contract and unjust enrichment.

In her complaint, Elizabeth Taft, representing her mother, Ethel, alleged alleged that the bank had violated Minnesota and South Dakota law by charging fees including origination fees, servicing fees and mortgage insurance charges in the principal amount of the reverse mortgage.

“As an initial matter, the court rejected her argument that the loan agreement’s choice-of-law provision barred the bank from relying on preemption and required the application of Minnesota law. Instead, the court found that the provision contemplated that the agreement would be governed by federal law and the law in which the mortgaged property was located,” wrote Alan Kaplinsky of Ballad Spahr in an Association of Corporate Counsel article.

Additionally, the court rejected Taft’s claim that the two states had, by opting out of the National Housing Act (NHA) limits on “the amount of interest which may be charged” on reverse mortgages, ability to determine the kinds of fees on which to charge interest. The court found no right for a state to opt out of all NHA regulations, thus the state had no authority to do so, Kaplinsky explained in the article.

“It would be illogical for Congress to authorize banks to enter into reverse mortgage loans pursuant to strict national standards but then allow each state to set its own requirements for what may be included or not included in the principal balance of those loans,” U.S. District Judge Susan Richard Nelson wrote in the court documents.

Written by Elizabeth Ecker

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