Thomas W. McCarthy v. Option One Mortgage Corporation and Bnc Mortgage, Inc.

Citations: 362 F.3d 1008; 2004 WL 726914Docket: 03-3474

Court: Court of Appeals for the Seventh Circuit; May 7, 2004; Federal Appellate Court

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Plaintiff Thomas McCarthy filed a lawsuit against BNC Mortgage, Inc. and its servicer, Option One Mortgage Corporation, alleging violations of the Illinois Interest Act due to a prepayment penalty assessed when he paid off his mortgage early. The district court denied McCarthy's motion for summary judgment and granted summary judgment to the defendants, ruling that the Alternative Mortgage Transaction Parity Act (Parity Act) preempts the Illinois Interest Act. 

The background reveals that the McCarthys, facing credit challenges, secured an adjustable-rate mortgage from BNC, with a prepayment charge applicable if the loan was paid off within two years. They paid off the loan after just over one year, incurring a penalty of $6,376.39. The district court found jurisdiction under 28 U.S.C. 1332 due to diversity of citizenship and the amount in controversy exceeding $75,000. The court concluded that the Parity Act, aimed at addressing interest rate volatility and authorizing alternative mortgages, preempts the Illinois Interest Act's application to this case and does not apply to servicers like Option One. McCarthy's appeal challenges this decision.

Federally chartered lenders were allowed to issue alternative mortgages, while many state-chartered lenders faced prohibitions due to state laws. The Parity Act aims to eliminate these discriminatory state regulations and ensure that state-chartered lenders can offer alternative mortgages if they comply with federal laws. Compliance with federal regulations allows state regulations to be preempted, particularly when they restrict lenders from offering credit under federal terms. To invoke preemption, lenders must demonstrate "substantial compliance" with regulations set by the Office of Thrift Supervision (OTS). 

The OTS permits prepayment penalties for state housing creditors, aligning them with federal counterparts, while Illinois law prohibits such penalties for loans with interest rates exceeding 8% per annum. This Illinois provision is preempted by the Parity Act if a non-federal housing creditor complies with federal law. Preemption is an affirmative defense, placing the burden on defendants to show substantial compliance. In this instance, the defendants successfully demonstrated that BNC, as a housing creditor, substantially complied with applicable OTS regulations.

BNC made 4,884 adjustable-rate mortgage loans in 2000 and holds an Illinois Residential Mortgage License, qualifying as a housing creditor. McCarthy contested BNC's compliance regarding required disclosures, specifically the failure to provide a Consumer Handbook. However, BNC provided evidence of compliance, including procedures for ensuring distribution of the Handbook, a cover letter indicating it was sent to McCarthy, and signed acknowledgments of receipt by him. The court found BNC's evidence sufficient to establish substantial compliance with the regulation, without needing to prove actual receipt of the Handbook by McCarthy.

Evidence of established office procedures and customary practices creates a presumption of delivery that cannot be easily rebutted by mere denial of receipt, as affirmed in Godfrey v. United States. McCarthy's claim of non-receipt does not raise a genuine issue regarding BNC's compliance with 12 C.F.R. 226.19(b) since he failed to present evidence contesting BNC's compliance with other OTS regulations. McCarthy argues that the evidence submitted for summary judgment violated mandatory disclosure requirements, specifically disputing witness affidavits and an OTS opinion letter. He delayed raising new compliance theories until the end of discovery and did not engage in document requests or depositions, relying instead on a passive litigation strategy which ultimately did not succeed. The district court has broad discretion in managing discovery, and its choice not to exclude evidence was justified as the defendants' initial nondisclosure was substantially justified. Additionally, McCarthy claims BNC did not demonstrate that LIBOR qualifies as a national or regional index under 12 C.F.R. 560.35; however, an OTS opinion letter supports that LIBOR does meet this criterion. Consequently, with no material fact disputes regarding BNC's compliance with OTS regulations, summary judgment for the defendants was appropriate. McCarthy's claim under the Illinois Interest Act is preempted by the Parity Act, rendering further discussion unnecessary. The district court’s decisions are affirmed.