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ILLINOIS SUPREME COURT FINDS FEE LIMITATION UNDER THE ILLINOIS INTEREST ACT PREEMPTED BY DIDMCA

On September 22, 2005, the Illinois Supreme Court reversed a decision of the Illinois Appellate Court (First District), and concluded that a 1992 amendment to Section 4.1a of the Illinois Interest Act failed to override the federal preemption under Section 501 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). U.S. Bank N.A. v. Clark, No. 98379 (Ill. Sept. 22, 2005).

The U.S. Bank case involved foreclosure actions brought by plaintiff creditors in which the defendant debtors filed counterclaims and affirmative defenses arguing that the creditors violated Section 4.1a of the Illinois Interest Act by imposing fees in excess of 3% of the principal amount on loans with an interest rate in excess of 8%. See 815 ILCS 205/4.1a(f). The creditors filed motions to dismiss that were granted because, according to the trial court, the defendants’ counterclaims and affirmative defenses under the Interest Act were preempted by the DIDMCA and, in certain cases, the federal Alternative Mortgage Transaction Parity Act of 1982 (Parity Act). Section 501(a) of the DIDMCA generally preempts certain state usury laws on federally related loans secured by a first lien on residential real property. See 12 U.S.C. § 1735f-7a.

On appeal to the Illinois Supreme Court, the creditors argued that the restriction on points and charges in Section 4.1a of the Interest Act was implicitly repealed by legislative amendments to Section 4 of the Interest Act. The Illinois Supreme Court agreed. According to the court, the plain language of Sections 4 and 4.1a is irreconcilably inconsistent because Section 4 was amended in 1981 and 1982 to permit lenders to impose unlimited noninterest costs on all mortgage loans while Section 4.1a, which was enacted in 1974, restricts the same broad category of costs to 3% of the principal amount when the loans’ interest rate exceeds 8%. Thus, the court held that the portion of Section 4.1a of the Interest Act restricting applicable charges to 3% when the mortgage loan rate exceeded 8% was implicitly repealed by the amendment of Section 4.

The court also indicated that Section 4.1a of the Interest Act was preempted because the refinancing mortgages under consideration in the case were “first lien” mortgage loans within the scope of Section 501 of the DIDMCA. The court declined to find that Illinois had opted out of the DIDMCA preemption. According to the court, Illinois had not opted out pursuant to Section 501(b)(2) of the DIDMCA by adopting a law or certifying that the voters of Illinois had voted in favor of any provision, constitutional or otherwise, stating explicitly and by its terms that Illinois does not want the provisions of Section 501 to apply. Moreover, the court indicated that Illinois had not opted out pursuant to Section 501(b)(4) of the DIDMCA by adopting a provision of law after March 31, 1980 that places limitations on discount points or such other charges on any loan, mortgage, credit sale, or advance described in Section 501(a)(1). The court indicated that the Illinois legislature’s 1992 amendment to a different portion of Section 4.1a was not sufficient to opt out under Section 501(b)(4) because the amendment was insufficient under state law to revive the statutory limitations provision. For these reasons, the court found that federal preemption by Section 501 of the DIDMCA had not been overcome, and thus the appellate court had improperly reinstated the debtors’ Interest Act counterclaims and affirmative defenses.

-Jeff Langer and Chuck Gall