Severson Prevails Before State’s Supreme Court in Challenge to Void Oakland, California's Home Lending Ordinance

(Last updated January 31, 2005)

In a decision of nationwide importance to the consumer finance industry, the California Supreme Court today took a major step toward halting the recent proliferation of city and county ordinances regulating home lending, particularly in the subprime market. The court invalidated Oakland, California’s so-called Anti-Predatory Lending Ordinance, finding the ordinance is preempted by California state law covering the same subject matter.

The decision was rendered in a case known as AFSA v. Oakland, which Severson & Werson filed on behalf the American Financial Service Association, the nation’s largest trade association representing market-funded providers of financial services to consumers and small businesses.

Adopted just days after the California Legislature had passed a similar state-wide statute, Oakland’s ordinance imposed tighter restrictions on certain home lending terms and practices, such as banning prepayment penalties altogether on some home loans though the state law permitted those charges. This, the Supreme Court held was beyond Oakland’s power. When the state Legislature has spoken on an issue of statewide concern, local governments cannot contradict its policy choices. By restricting lending terms and practices that the Legislature chose not to regulate or prohibit, Oakland’s ordinance impermissibly conflicted with state law. The Court held that the state law “fully occupied the field of predatory practices in home loans.”

The Supreme Court noted that lending is and always has been heavily regulated at the state and federal levels, not locally. The high court said, local home lending is now closely tied to national capital markets. Home loans made in Oakland and other California communities are sold to Fannie Mae, Freddie Mac, pension plans and other large investors, thereby pumping more loan capital into California’s economy.

Ordinances like Oakland’s interfere with that market, threatening to balkanize California into a series of isolated local economies. National lenders and investors cannot keep track of comply with differing ordinances in the hundreds of California cities and counties. National bond rating agencies had already announced they would not rate bonds secured by Oakland home loans if Oakland’s ordinance went into effect. For these reasons, as well, the California Supreme Court ruled, the state statute regulating lending practices preempted localities from legislating in that field.

Mark Kenney, who argued the case at the trial level and before the state supreme court, said he was gratified by the decision. “This case was not about lending abuse”, Kenney said. “In fact, AFSA has been a leader in the fight against consumer predation, a pioneer in innovative programs for consumer education and a partner to state legislatures crafting solutions for the problem. What the case was about was the threat of a confusing and inconsistent patchwork of local mortgage lending regulations.”

“Home loans aren’t made and kept by your neighborhood S&L any longer”, Kenney added. “The secondary market which was so important in making loans available to the historically underserved just won’t tolerate an unpredictable mess of local regulation.

The decision has important implications for California and other states as well, Mr. Kenney stated. In California, the decision will nullify not only Oakland’s ordinance, but also a similar one passed by the City of Los Angeles and others adopted or being considered by other California communities. What might otherwise have become a trend toward increased local regulation of lending and other business markets has been squelched. Other states’ high courts often follow the California Supreme Court’s lead, according to Mr. Kenney. This well-reasoned decision will be cited, and likely will prove persuasive, in on-going litigation challenging similar ordinances in other states such as New York, Pennsylvania and Ohio, he said.

AFSA and its members support the responsible delivery and use of credit and credit-related products, promote the use of best practices by lenders, and are committed to preventing abusive practices Oakland calls predatory lending. AFSA worked closely with the California Legislature, supporting passage of the state statute curbing lending abuses, which was the subject of this lawsuit. AFSA looks forward to working Oakland’s City Attorney and City Council to address Oakland’s special concerns in a manner consistent with state law.

For further information regarding the AFSA v. Oakland decision (a copy of which is attached to this e-mail), the status of Oakland’s ordinance or other similar enactments nationwide, briefs in the case, or other information, please contact Mr. Kenney, Donald Querio or Jan Chilton, the Severson & Werson attorneys principally in charge of this case at One Embarcadero Center, 26th Floor, San Francisco, CA 94111, telephone: (415) 398-3344, or e-mail them at mjk@severson.com , djq@severson.com , or jtc@severson.com.

Daily Journal publishes Jan Chilton’s response to critics of Supreme Court’s decision in AFSA v. City of Oakland.