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WFS Financial v. Superior Court: Federal Home Owners’ Loan Act (HOLA) Preempts California Automobile Sales Finance Act California Court Holds

California Appellate Court Agrees With Defense And Dismisses Lawsuit Against Lender Based on Federal Preemption: Class Action Defense Issues

WFS Financial and its subsidiary are federal savings associations that operate under the federal HOLA (Home Owners’ Loan Act), 12 U.S.C. §§ 1461 et seq. A car dealer assigned WFS a motor vehicle loan and the borrower defaulted: “WFS repossessed the vehicle, gave notice of its intent to dispose of the vehicle by private sale, sold the vehicle, and filed suit against [the borrower] for the deficiency between the sale price and remaining balance due, including various costs and fees.” WFS Financial, Inc. v. Superior Court, 140 Cal.App.4th 637, 44 Cal.Rptr.3d 561 (Cal.App. 2006). The borrower cross-complained, alleging that WFS failed to comply with California’s Rees-Levering Automobile Sales Finance Act, California Civil Code, §§ 2981 et seq., and included an unfair business practice claim under California Unfair Competition Law (UCL), California Business & Professions Code, §§ 17200 et seq., based on the alleged violations of Rees-Levering. Id., at 563-64. In defense, WFS demurred, arguing that HOLA preempted Rees-Levering. The trial court disagree and overruled the demurrer, and WFS sought a petition for writ of mandate from the California Court of Appeal.. Id., at 564.

Before agreeing with the defense, the appellate court set forth a detailed summary of HOLA, the Federal Home Loan Bank Board (FHLBB) that originally regulated federal savings and loan associations, and FHLBB’s replacement by the Office of Thrift Supervision (OTS). Id., at 565-68. The Court highlighted evidence from numerous sources that Congress intended HOLA to preempt state laws and regulations, concluding:

These statutes, regulations, and comments of the OTS make abundantly manifest and clear the congressional intent to expressly preempt state law in the area of lending regulation of federal savings associations. There is no issue of implied preemption here. Id., at 568 (citation omitted).

California enacted Rees-Levering to regulate the sale and financing of motor vehicles for the purpose of protecting unsophisticated purchasers. Rees-Levering contains detailed requirements for the repossession and sale of a motor vehicle, see California Civil Code, § 2983.2, and the borrower alleged that the notice provided by WFS failed to comply with this State law. WFS, at 568-69. The trial court agreed with the borrower’s lawyer that “post-repossession debt collection activities” by WFS were not preempted by HOLA. Id., at 569. The Court of Appeal did not.

The Court held that California Civil Code § 2983.2 directly affected “the lending operations of companies providing automobile financing, including WFS, specifically conditioning their exercise of their security rights.” WFS, at 569. The Court held Section 2983.2 was preempted by 12 C.F.R. § 560.2(b)(4), which “preempts state laws purporting to impose requirements regarding ‘terms of credit,'” and by 12 C.F.R. § 560.2(b)(9), which preempts inter alia state laws concerning “‘credit-related documents,'” id., 571-72.

Finally, the Court held that the UCL claim could not survive because it was premised upon the violation of a statute that was preempted by federal law. WFS, at 574. Accordingly, it issued a writ of mandate directing the trial court to sustain the demurrer to the borrower’s cross-complaint without leave to amend. Id.

NOTE: The Court of Appeal hinted that California Civil Code § 2983.2 also may be preempted by 12 C.F.R. § 560.2(b)(10), which concerns inter alia the “servicing” of mortgages, WFS, at 572-73.

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