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FEDERAL DISTRICT COURT FINDS STATE FAIR DEBT COLLECTION CLAIM NOT PREEMPTED BY OTS REGULATIONS

The United States District Court for the Northern District of California has denied defendant Citimortgage Inc.’s motion to dismiss a case filed by a mortgage borrower alleging violations of, inter alia, the California Rosenthal Fair Debt Collection Practices Act (CFDCPA) for failure to state a claim. Alkan v. Citimortgage Inc., ___ F.Supp. 2d ___ (N.D. Cal. 2004), 2004 WL 2125857.

The CFDCPA claim stemmed from the defendant’s alleged failure to properly credit a payment sent by the borrower to prepay the remaining balance on his mortgage. Although the payment should have satisfied the principal balance, the plaintiff alleged that Citimortgage subsequently reported his account as past due, assessed a late charge, sent threatening collection letters and made harassing collection telephone calls.

Citimortgage challenged the CFDCPA claim on the grounds that the CFDCPA is preempted by Office of Thrift Supervision (OTS) Regulation 560.2(a). Pursuant to its power under the Home Owners’ Loan Act (HOLA), the OTS explicitly declared in Regulation 560.2(a) that it “hereby occupies the entire field of lending regulation for federal savings associations.” 12 C.F.R. § 560.2(a).

Citimortgage challenged the CFDCPA claim on the grounds that the CFDCPA is preempted by Office of Thrift Supervision (OTS) Regulation 560.2(a). Pursuant to its power under the Home Owners’ Loan Act (HOLA), the OTS explicitly declared in Regulation 560.2(a) that it “hereby occupies the entire field of lending regulation for federal savings associations.” 12 C.F.R. § 560.2(a).

The District Court rejected Citimortgage’s argument that because debt collection is an essential part of lending practices, any limitation on debt collection constitutes a lending regulation. Comparing illustrative examples of lending regulations in Regulation 560.2(b) (i.e., laws affecting loan terms, interest rates, security requirements, loan-related fees, escrow account requirements and processing or servicing issues) to the practices regulated by CFDCPA (i.e., making harassing telephone calls, using obscene language or engaging in threatening conduct to collect a debt after a loan is made), the court concluded that the CFDCPA was too dissimilar from Regulation 560.2 examples to constitute a “lending regulation.” In reaching this conclusion, the court relied on Hussey-Head v. World Savings & Loan Association, 111 Cal. App. 4th 773, 782 (2003), which held that the California Consumer Credit Reporting Agencies Act was not preempted by Regulation 560.2(a) because “[t]he California statutory scheme does not come into play until after a loan is made or credit otherwise extended, and it does not affect the manner in which the lender services or maintains the loan.” The same is true for the CFDCPA, posited the Alkan court, so the CFDCPA does not constitute a lending regulation and the plaintiff's claims under the CFDCPA are not preempted.

Jeff Langer