U.S. National Association v. Clark
By LISA D. BURDEN
4/6/2004

Plaintiffs' attorneys and industry insiders are sharply at odds over the impact of an Illinois appellate court ruling last week that upheld a state law prohibiting mortgage lenders in the state from writing high-cost loans. The homeowners' attorneys say the court's ruling could affect thousands of homeowners while others dismiss that claim as exaggerated.

In U.S. National Association v. Clark, the appellate court affirmed the validity of the Illinois Interest Act. The act forbids lenders from making loans with a combination of fees in excess of 3 percent of the principal and an interest rate over 8 percent. The decision overturned a trial court's holding that two federal laws, the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Alternative Mortgage Transaction Parity Act, preempted the Illinois Interest Act's ban on mortgages that combined high fees and high interest, according to a written statement issued by one of the law firms involved in the case.

Plaintiffs' attorney Jamie Franklin, an attorney with Meites, Mulder, Burger & Mollica, said that any subprime loan written in Illinois after 1991 could be affected by the appellate court's ruling. She estimated that the court's ruling could affect thousands of homeowners. "Any consumer that has one of these high-fee, high-interest rate loans, which, in our view are often predatory loans, could potentially recover twice the interest due on the loans. In a lot of cases, that would wipe out the entire loan and allow the homeowner to own the house free and clear," she said.

The court's ruling could also impact homeowners who have paid off such loans. Franklin explained that, because of the state law's statute of limitations, homeowners can file suit up to two years after they have paid off such high-cost loans or they can file suit two years after the last payment was made under such a loan.

But Marve Stockert, the executive director of the Illinois Association of Mortgage Brokers, disputes Franklin's claims, calling them a "strong exaggeration." He explained that, to his knowledge, only federally-chartered institutions are making loans "above the high-cost triggers in Illinois." He said that, even in that arena, only one institution, Eastern Savings Bank, had been making the loans and that the bank was doing the loans only on a "spot basis."

Stockert explained that laws put into effect in 2001 created such legal risk for institutions that many decided to stop offering loans that exceeded the high cost triggers.

In fact, Stockert said the recent court ruling could hurt borrowers with low credit scores and homeowners who are delinquent on their mortgage payments. He said that if Eastern Savings Bank faces legal liability for making such loans, borrowers could be deprived of one of their few sources of funding.

Eastern Savings Bank did not return calls for comment.

One of the lenders' attorneys, Craig Varga, a partner with Varga, Berger, Ledsky & Casey, said further litigation in the case is a certainty. He said the appellate court's decision is at odds with decisions handed down by other courts and Illinois state regulators on the scope of federal preemption of state laws.

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