Mortgages; Prepayment Penalties

McCarthy v Option One Mortgage Corp, 362 F 3d 1008 (7th Cir 2004).

Facts: Thomas McCarthy, after entering into a contract for the purchase of a home in Waukegan, Illinois, obtained an adjustable rate mortgage loan in the amount of $145,800 from BNC Mortgage, Inc. BNC's servicer for the loan was Option One Mortgage Corporation (Option One). The terms of the loan provided for a prepayment penalty if the loan was paid back within two years of the loan's implementation. McCarthy completed paying off the loan a little over a year after the loan was made. Option One then assessed a $6,376.39 charge.

McCarthy filed suit in district court, alleging that the prepayment charge violated the Illinois Interest Act. The district court determined that, in this case, the standards set forth in the Illinois Interest Act were preempted by the federal Alternative Mortgage Transaction Parity Act (Parity Act) and granted summary judgment to Option One. McCarthy appealed.

Holding: Affirmed. The Illinois Interest Act disallows prepayment penalties, so long as the annual percentage rate of the loan exceeds eight percent. 815 ILCS 205/4(a). On the other hand, the federal Parity Act provides that "alternative" mortgages - mortgages involving flexible interest rates and similar variations - are allowable if the creditor complies with federal regulations. Additionally, the Parity Act applies to non-federally chartered lenders (and thus preempts state law in this area) so long as housing creditors substantially comply with regulations governing federal savings and loan agencies. 12 CFR § 560, et seq. For housing creditors to get the benefit of the more favorable federal legislation, the creditors must comply with Sections 560.35 and 560.210. 12 USC § 3802(1).

Option One's lending practices substantially complied with Section 560.210 because there was evidence of procedures designed to ensure compliance with federal regulations, including evidence that a handbook was mailed to McCarthy, and a signed acknowledgment by McCarthy. Option One also substantially complied with Section 560.35 because the LIBOR index, used by Option One to adjust interest rates, was a "national or regional index." The court therefore affirmed the judgment of the district court.

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