Court Says National Bank is Not Bound by State Reverse Mortgage Law

A national bank does not fall under state reverse mortgage law that could restrict the fees the bank can include in principal when making a reverse mortgage loan, according to a decision in the U.S. District Court for the District of Minnesota decided this month.

In a class action case decided November 1, Taft V. Wells Fargo Bank, N.A., the daughter of a reverse mortgage borrower alleged that the reverse mortgage violated several Minnesota statutes, one South Dakota statute, a federal law, and constituted a breach of contract and unjust enrichment.

In her complaint, Elizabeth Taft, representing her mother, Ethel, alleged alleged that the bank had violated Minnesota and South Dakota law by charging fees including origination fees, servicing fees and mortgage insurance charges in the principal amount of the reverse mortgage.


“As an initial matter, the court rejected her argument that the loan agreement’s choice-of-law provision barred the bank from relying on preemption and required the application of Minnesota law. Instead, the court found that the provision contemplated that the agreement would be governed by federal law and the law in which the mortgaged property was located,” wrote Alan Kaplinsky of Ballad Spahr in an Association of Corporate Counsel article.

Additionally, the court rejected Taft’s claim that the two states had, by opting out of the National Housing Act (NHA) limits on “the amount of interest which may be charged” on reverse mortgages, ability to determine the kinds of fees on which to charge interest. The court found no right for a state to opt out of all NHA regulations, thus the state had no authority to do so, Kaplinsky explained in the article.

“It would be illogical for Congress to authorize banks to enter into reverse mortgage loans pursuant to strict national standards but then allow each state to set its own requirements for what may be included or not included in the principal balance of those loans,” U.S. District Judge Susan Richard Nelson wrote in the court documents.

Written by Elizabeth Ecker

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  • Huh? So if the plaintiff’s argument had been upheld, since this was a class action suit, potentially all of the HECM borrowers in the two states would be member of the class?
    Thanks to Judge Nelson for reaffirming that the HECM program is a National one first.This sounds more like a law firm hunting for a big case than any actual harm visited upon a borrower. Here’s why…

    A decision favorable to the plaintiff might have refunded of the fees of probably $10,000 to $15,000 to an unknown number of borrowers/class members, but that’s just the immediate consequence.

    Next it would throw a sudden wrench into principal limit calculations and loan pricing for HECM loans in the two states. This could motivate lenders and investors to withdraw some of the rates and products offered in those states or to withdraw their state licenses entirely.

    Then, because it set the precedent, it would have opened the door for any number of other state-driven preferences to what is a now nationwide program. We’ve seen that state legislatures have a very poor record of enacting meaningful reverse mortgage laws much less truly beneficial ones. This could easily lead national or multi-state HECM lenders to a “too difficult and too expensive to continue” decision and  leading to more lender exits from the respective states or from the reverse industry altogether.

    Another possible unintended consequence is that the same fees that the lender could no longer include in the principal limit could be pushed out to the borrower as direct out-of-pocket expenses paid at closing. That would mean not only finding the $10,000 or more to close, but also documenting the source of funds. That financial and underwriting requirement would put the HECM loan out of reach for many financially stressed seniors.

    I don’t see how any of these would really help past, present, and future borrowers in Minnesota and South Dakota or elsewhere. Cui bono? Who benefits? Looks like just the past borrowers and one law firm.

    • Bill,

      All good points but is it that meaningful?  For years no HECMs could be originated in Texas because of their state constitution.

      I am no legal eagle but will the Dodd-Frank preemption rule change the result for HECMs originated after its date of enactment?

      The greatly non-litigious days of HECMs are now in the rear view mirror as we move forward.

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