Lead Opinion
Opinion
“Predatory lending” is a term generally used to characterize a range of abusive and aggressive lending practices, including deception or fraud, charging excessive fees and interest rates, making loans without regard to a borrower’s ability to repay, or refinancing loans repeatedly over a short period of time to incur additional fees without any economic gain to the borrower. Predatory lending is most likely to occur in the rapidly growing “subprime” mortgage market, which is a market generally providing access to borrowers with
In 2001, California enacted legislation to combat predatory lending practices that typically occur in the subprime home mortgage market. (Fin. Code,
We consider whether the Ordinance is preempted by Division 1.6, and if not, whether the Ordinance is nevertheless preempted by Civil Code section 1916.12. We conclude that the Ordinance is preempted by Division 1.6, and therefore reverse the judgment of the Court of Appeal.
I. Factual and Procedural Background
On October 15, 2001, American Financial Services Association (AFSA) filed this action against the City of Oakland and the Redevelopment Agency of the City of Oakland (City) seeking a declaration that the Ordinance was preempted by state law, and an injunction against its enforcement. On October 25, 2001, by stipulated order, the Ordinance was stayed pending, as relevant here, final resolution of this action. In December 2001, the trial court denied AFSA’s motion for a preliminary injunction against enforcement of the Ordinance, and AFSA appealed from that order.
The parties then filed cross-motions for summary judgment. On June 21, 2002, the trial court entered an order finding that the Ordinance was preempted to the extent that it exempted federally chartered lending institutions from its restrictions. The court held that the sentence exempting such institutions should be severed from the Ordinance. Subject to elimination of the federal exemption, the court denied AFSA’s summary judgment motion and granted the City’s. Judgment was entered severing the sentence exempting federal lenders, dismissing AFSA’s complaint, and deeming the Ordinance valid as modified.
AFSA appealed from the judgment, and the City cross-appealed. The Court of Appeal ordered the appeals and cross-appeal consolidated. The court held the Ordinance was not preempted by either Division 1.6 or Civil Code section 1916.12. It reversed the trial court’s judgment insofar as it ordered severance of the portion of the Ordinance exempting federally chartered lenders from its coverage. In all other respects, the judgment was affirmed. AFSA’s appeal from the denial of its motion for a preliminary injunction was dismissed as moot.
We granted AFSA’s petition for review.
II. Discussion
A. Background
According to its legislative history, the purpose of Division 1.6 was to regulate and thereby curtail predatory lending practices that typically occur in the subprime
Division 1.6 contains numerous prohibitions and limitations with respect to covered loans. For example, a person who originates covered loans shall not (1) “make a covered loan that finances points and fees in excess of’ the higher of $1,000 or 6 percent of the original principal balance, exclusive of points and fees (§ 4979.6); (2) “make or arrange a covered loan unless at the time the loan is consummated, the person reasonably believes the consumer . . . will be able to make the scheduled payments to repay the obligation based” on specified factors (§ 4973, subd. (f)(1)); (3) “pay a contractor under a home-improvement contract from the proceeds of a covered loan other than by an instrument payable to the consumer,” both the consumer and the contractor, or under certain circumstances to a third party escrow agent (id., subd. (g)); (4) “recommend or encourage a consumer to default on an existing consumer loan or other debt in connection with the solicitation or making of a covered loan that refinances all or any portion of the existing consumer loan or debt” (id., subd. (h)); (5) “refinance or arrange for the refinancing of a consumer loan such that the new loan is a covered loan that is made for the purpose of refinancing, debt consolidation or cash out, that does not result in an identifiable benefit to the consumer” after considering various factors (id., subd. (j)); (6) “steer, counsel, or direct any prospective consumer to accept a loan product with a risk grade less favorable than the risk grade that the consumer would qualify for” based on certain information (id., subd. (/)(!)); (7) “finance, directly or indirectly, into a consumer loan or finance to the same borrower within 30 days of a consumer loan any credit life, credit disability,
Moreover, a covered loan shall not (1) include a “prepayment fee or penalty after the first 36 months after the date of’ loan consummation, but “may include a prepayment fee or penalty up to the first 36 months after the date of’ loan consummation under certain conditions (§ 4973, subd. (a)(1), (2)); (2) “contain a provision for negative amortization such that the payment schedule for regular monthly payments causes the principal balance to increase, unless the covered loan is a first mortgage” and appropriate disclosure made (id., subd. (c)); (3) “include terms under which periodic payments required under the loan are consolidated and paid in advance from the loan proceeds” (id., subd. (d)); (4) “contain a provision that increases the interest rate as a result of a default” except under certain circumstances (id., subd. (e)); (5) generally “contain a call provision that permits the lender, in its sole discretion, to accelerate the indebtedness” (id., subd. (i)); or (6) be made unless a seven-paragraph disclosure form set forth in section 4973, subdivision (k)(l), which includes encouragement to the borrower to consider financial counseling, is provided to the consumer no later than three business days before signing of the loan documents. A “covered loan with a term of 5 years or less may not provide at origination for a payment schedule with regular periodic payments that when aggregated do not fully amortize the principal balance as of the maturity date of the loan.” (§ 4973, subd. (b)(1).) “For a payment schedule that is adjusted to account for the seasonal or irregular income of the consumer, the total installments in any year shall not exceed the amount of one year’s worth of payments on the loan.” (§ 4973, subd. (b)(2).) In addition, a “person who provides brokerage services to a borrower in a covered loan transaction by soliciting lenders or otherwise negotiating a consumer loan secured by real property, is the fiduciary of the consumer, and any violation of the person’s fiduciary duties shall be a violation of’ section 4979.5. (§ 4979.5, subd. (a).) “Except for a broker or a person who provides brokerage services,” however, “no licensed person or subsequent assignee shall have administrative, civil, or criminal liability for a violation of’ section 4979.5. (§ 4979.5, subd. (b).)
Similarly, the Ordinance regulates predatory lending practices in home loans in Oakland. (Oak. Mun. Code, §§ 5.33.010, 5.33.030.) A “home loan” does not include a reverse mortgage, and is defined as a “loan of money, including without limitation a line of credit or an open-end credit plan,” if certain criteria apply. (Id., § 5.33.030.) One criteria is that the “principal amount of the loan does not exceed the current conforming first mortgage loan size limit for a single-family dwelling as established by the Federal National Mortgage Association.” (Ibid.) Since January
A “high-cost” home loan is a home loan that meets one of two specified thresholds.
Like Division 1.6, the Ordinance contains numerous prohibitions and limitations with respect to home loans and “high-cost” home loans. The Ordinance prohibits prepayment penalties for high-cost and certain refinanced home loans, and limits prepayment penalties for other home loans. (Oak. Mun. Code, § 5.33.040(A).) For home loans generally, no lender may (1) “finance any credit life, credit disability, credit property, or credit unemployment insurance, or any other life or health insurance premiums when making a home loan”; (2) “recommend or encourage a borrower to default or not to make a payment on a home loan or any other debt, when such lender action is in connection with the closing or planned closing of a home loan that refinances all or part of the borrower’s debt”; or (3) “make a home loan that violates any applicable provision” of certain federal laws regulating lending. (Oak. Mun. Code, § 5.33.040(B), (C), (D).)
In addition, the following practices are prohibited for high-cost home loans: (1) making the loan without obtaining written
Thus, Division 1.6 and the Ordinance are similar in that they regulate the same subject matter, i.e., predatory lending practices in home mortgages. However, Division 1.6 and the Ordinance differ in significant respects with regard to how they regulate these predatory practices. For example, Division 1.6 does “not impose liability on an assignee that is a holder in due course” and the provisions of the division do not apply to “persons chartered by Congress to engage in secondary mortgage market transactions.” (Fin. Code, § 4979.8.) The Ordinance expressly applies to a holder in due course. (Oak. Mun. Code, § 5.33.070 [“Any person who purchases or is otherwise assigned a home loan is subject to all claims, actions and defenses related to that home loan that the borrower, the City Attorney, or others could assert against the original lender”].) Moreover, Division 1.6 permits prepayment penalties under certain conditions during the first 36 months of the loan; the Ordinance prohibits them for all high-cost and certain refinanced home loans, and limits them for other home loans. (Fin. Code, § 4973, subd. (a); Oak. Mun. Code, § 5.33.040(A).) In addition, Division 1.6 requires that borrowers be encouraged in writing to seek loan counseling; the Ordinance prohibits a high-cost home loan being made without either the borrower receiving loan counseling or giving the credit counselor a written waiver of counseling. (Fin. Code, § 4973, subd. (k)(l); Oak. Mun. Code, § 5.33.050(A).)
In addition to other enforcement mechanisms, Division 1.6 and the Ordinance both allow for civil and criminal penalties and for civil enforcement by borrowers, including punitive damages. (Fin. Code, §§ 4975, subd. (c), 4977, subds. (b), (c), 4978, subds. (a), (b)(2); Oak. Mun. Code, §§ 5.33.080, 5.33.100.) However, Division 1.6 imposes civil penalties up to $25,000 per violation; the Ordinance imposes such penalties up to the amount of $50,000. (Fin. Code, § 4977, subd. (b); Oak. Mun. Code, § 5.33.080(D).) Under Division 1.6, the amounts collected from such civil penalties are to be used by the “licensing agency, subject to appropriation by the Legislature, for the purposes of education and
We now turn to the question of whether these similarities and differences may coexist or, if instead, the Ordinance is preempted by Division 1.6.
B. Analysis
“Under article XI, section 7 of the California Constitution, ‘[a] county or city may make and enforce within its limits all local, police, sanitary, and other ordinances and regulations not in conflict with general laws.’ ” (Sherwin-Williams Co. v. City of Los Angeles (1993)
A conflict between state law and an ordinance exists if the ordinance duplicates or is coextensive therewith, is contradictory or inimical thereto, or enters an area either expressly or impliedly fully occupied by general law. (Sherwin-Williams, supra, 4 Cal.4th at pp. 897-898.) Relying solely on the Legislature’s failure to include express preemption language and the unique local interests of Oakland, the City contends that Division 1.6 sets only “statewide minimum standards, not statewide uniform standards, for subprime home mortgage lending.” We conclude
“[I]t is well settled that local regulation is invalid if it attempts to impose additional requirements in a field which is fully occupied by statute.” (Tolman v. Underhill (1952)
Here, of course, there is no express preemption language in Division 1.6. However, there are clear indications of the Legislature’s implicit intent to fully occupy the field of regulation of predatory lending tactics in home mortgages.
“Where the Legislature has adopted statutes governing a particular subject matter, its intent with regard to occupying the field to the exclusion of all local regulation is not to be measured alone by the language used but by the whole purpose and scope of the legislative scheme.” (Tolman, supra, 39 Cal.2d at p. 712; Wilson v. Beville (1957)
“The denial of power to a local body when the state has preempted the field is not based solely upon the superior authority of the state. It is a rule of necessity, based upon the need to prevent dual regulations that could result in uncertainty and confusion. Thus, the term ‘conflict’ as used in section 11 of article XI has been held not to be limited to a mere conflict in language, but applies equally to a conflict of jurisdiction.” (Abbott v. City of Los Angeles (1960)
Thus, in Wilson, supra,
Similarly, in Eastlick v. City of Los Angeles (1947)
Likewise in Birkenfeld v. City of Berkeley (1976)
Like the statutory schemes considered in Wilson, Eastlick, and Birkenfeld, Division 1.6 comprehensively regulates predatory lending practices in home mortgages. It delineates at length what mortgages are covered, what lending acts are prohibited, who can be held liable for violations of Division 1.6, the various enforcement mechanisms available, who may invoke such enforcement mechanisms, and defenses to such violations. The provisions of Division 1.6 “are so extensive in their scope that they clearly show an intention by the Legislature to adopt a general scheme for the regulation of’ predatory lending tactics in home mortgages. (Lane, supra,
Moreover, in regulating such lending tactics in home mortgages, the Legislature was not suddenly entering an area previously governed by municipalities and unexplored at a statewide level. To the contrary, as the City acknowledges, regulation of mortgage lenders has historically occurred at the state, not the municipal, level. (See, e.g., Fin. Code, §§ 5000 et seq. [Savings Association Law], 50000 et seq. [California Residential Mortgage Lending Act]; Civ. Code, §§ 2947-2955.5 [mortgage of real property provisions].) In determining whether the Legislature intended to occupy the field of regulation of predatory home mortgage lending, we consider this historical role, and view Division 1.6 not in isolation, but as part of an overall legislative scheme addressing mortgage lending. As the Legislative Counsel’s Digest to Division 1.6 notes, “Existing law provides for regulation of banks and savings associations by the Department of Financial Institutions. Existing law provides for regulation of real estate brokers by the Department of Real Estate. Existing law provides for regulation of finance lenders and residential mortgage lenders by the Department of Corporations. Existing law provides that willful violations of provisions governing savings associations, real estate brokers, and residential mortgage lenders are crimes. [][] This bill would impose various requirements on consumer loans secured by specified real property, defined as ‘covered loans.’ ” (Stats. 2001, ch. 732.)
Indeed, when asked at oral argument, the City could point to no other instance in
Moreover, it is beyond peradventure that effective regulation of mortgage lending, and in particular here abusive practices in such lending, “requires uniform treatment throughout the state.” (Chavez, supra, 52 Cal.2d at p. 177; see Northern Cal. Psychiatric Society v. City of Berkeley (1986)
We therefore conclude that through the enactment of Division 1.6, the Legislature has fully occupied the field of regulation of predatory tactics in home mortgages. While in other cases the determination of whether the state and local laws occupy the same “field” may be somewhat nuanced, little is left to the imagination of even the most casual reader here. Both Division 1.6 and the Ordinance regulate predatory lending tactics in home mortgages, and do so in parallel fashion. The Ordinance, like Division 1.6, addresses at length what mortgages are covered, what lending acts are prohibited, who can be held liable for violations of the Ordinance, the various enforcement mechanisms available,
In drafting Division 1.6, the Legislature balanced two compelling and competing considerations, i.e., the need to protect particularly vulnerable consumers from predatory lending practices and the concern that homeowners not be unduly hindered in accessing the equity in their own homes. (See, e.g., Sen. Judiciary Com., Analysis of Assem. Bill No. 489 (2001-2002 Reg. Sess.) as amended June 21, 2001, p. 2 [“Although many subprime lenders offer a vital service to some low-income borrowers who would not otherwise qualify for credit, many other low-income borrowers have been victimized by improper practices . . . referred to ... as ‘predatory practices’ ”]; Assem. Republican Bill Analysis, Analysis of Assem. Bill No. 489 (2001-2002 Reg. Sess.) as amended Sept. 6, 2001, p. 3 [noting federal regulators “believe that responsible sub-prime lending can expand credit access for consumers,” and that “ ‘a practice that can be abusive in some contexts can also-in [the] absence of fraud or deception-be highly beneficial to consumers .... Well meaning but haphazard reactions on the part of the regulators . . . may have the unintended consequence of hurting those whom we intend to help’ ”]; Assem. Com. on Appropriations, Analysis of Assem. Bill No. 489 (2001-2002 Reg. Sess.) as amended May 1, 2001, p. 2 [“The cycle of high-cost loan refinancing can ultimately deplete the homeowner’s equity and result in foreclosure”].) While destructive lending practices occur most often in connection with subprime lending, such lending is not inherently abusive, and has enabled an entire class of individuals with impaired credit to enter the housing market or access the equity in their homes. (See U.S. Gov. Accounting Off., Rep. on Federal and State Agencies Face Challenges in Combating Predatory Lending, testimony of David G. Wood before Sen. Special Com. on Aging (Feb. 24, 2004) p. 4.) Severe regulation of subprime lending might cause lenders to cease making such loans in California, or preclude borrowers from obtaining a loan based on equity in their home even though such loans can serve a legitimate need. (Cal. Dept. of Real Estate, Enrolled Bill Rep. on Assem. Bill No. 489 (2001-2002 Reg. Sess.) Sept. 27, 2001, p. 7.) Moreover, increased regulation generally entails additional cost, decreasing further the availability of loan funds to subprime borrowers. Thus, the Legislature was aware regulation of certain predatory practices in mortgage lending, practices which occur most often in the subprime market, could have the unintended consequence of hurting those the legislation was intended to help, and sought to balance these competing concerns. The Ordinance, and the possibility of other divergent
Taking just one example, Division 1.6 expressly does “not impose liability on an assignee that is a holder in due course” and the provisions of the division do not apply to “persons chartered by Congress to engage in secondary mortgage market transactions.” (Fin. Code, § 4979.8.) The Ordinance expressly imposes such liability. (Oak. Mun. Code, § 5.33.070.) Such an extension of liability to “[a]ny person who purchases or is otherwise assigned a home loan” (ibid.) may result in secondary purchasers being hesitant or unwilling to purchase mortgages originating in Oakland. Should other cities adopt a similar extension of liability,
Thus, contrary to the City’s and the dissent’s assertion, Division 1.6 does not set “statewide minimum” standards beyond which municipalities are free to regulate. (Dis. opn., post, at p. 1271; id. at p. 1275.) Rather, the Legislature’s full occupation of this field preempts the Ordinance’s regulation even of those mortgages not addressed by Division 1.6, such as loans between $250,000 and $359,650. For the reasons cited above, it is difficult to imagine how the state could maintain a centralized and uniform command in regulating predatory tactics in home mortgages if municipalities were free to regulate the area with respect to loans in amounts in excess of the state statutory ceiling.
Thus, in Lane we held that a city ordinance, making criminal sexual conduct the state Penal Code did not, was preempted because the state had fully occupied the field of regulation of sexual conduct by enacting a detailed legislative scheme. (Lane, supra, 58 Cal.2d at pp. 103-105; see Issac, supra,
The City and the dissent essentially assert, however, that Oakland has a higher incidence of subprime lending and the predatory tactics associated with such lending than other areas of the state, and hence may suffer more than other parts of California the resulting blight and poverty such tactics can foster. (Dis. opn., post, at pp. 1268-1271, 1275.) Assuming this is correct, and while these would be important local concerns, they do not give the City a license to regulate a highly complex financial area comprehensively addressed by state law. Such an approach would mean that any city which claimed to experience a disproportionate number of foreclosures, or instances of securities fraud, could simply write its own measures regardless of any confusion these competing measures may foster. Rather, the state’s interest in uniformity in the area of mortgage lending law demonstrably transcends the concerns of a particular municipality, and is a “convincing basis for legislative action . . . based on sensible, pragmatic considerations.” (Calif. Fed., supra,
The City relies on certain language in Sherwin-Williams, supra, 4 Cal.4th at page 904, taken out of context, to support its argument that the failure on the part of the Legislature to include express preemption language means that it had no implied intent to preempt. In Sherwin-Williams, there existed at all relevant times a statute that provided, “ ‘Nothing in this code shall invalidate an ordinance of, nor be construed to prohibit the adoption of an ordinance by, a city, city and county, or county, if such ordinance regulates the sale of aerosol containers of paint or other liquid substances capable of defacing property.’ ” (Sherwin-Williams, at p. 899, quoting former Pen. Code, § 594.5.) We observed that former Penal Code section 594.1, the statute at issue, as originally enacted in 1981, had regulated aerosol paint containers larger than six ounces in section 1, an express preemption provision regarding sales and possession of such aerosol containers in section 2, and a no reimbursement provision in section 3. (Sherwin-Williams, at p. 900.) In 1988, former Penal Code section 594.1 was amended such that it generally applied to all aerosol paint containers in section 1, and had a no reimbursement provision in section 2. No express preemption provision was included in the 1988 amendment. (Sherwin-Williams, at pp. 900-901.)
We found that the amended section 594.1 of the Penal Code did not preempt a local ordinance governing the display of aerosol paint containers and marker pens. (Sherwin-Williams, supra, 4 Cal.4th
As can be seen, Sherwin-Williams was decided based on a significantly different statutory landscape than we encounter here. Unlike Sherwin-Williams, the City points to no language in Division 1.6 which states that nothing in its provisions shall invalidate a local ordinance if such ordinance regulates predatory mortgage lending practices. Hence, the Legislature’s failure to include an express preemption provision in Division 1.6 does not ineluctably mean there is no implied preemption. Significantly, aside from the Savings Association Law (Fin. Code, § 5000 et seq.), at least two other state laws governing mortgage lenders, the California Residential Mortgage Lending Act (Fin. Code, § 50000 et seq.), and the mortgage of real property provisions in the Civil Code (Civ. Code, §§ 2947-2955.5), do not have an express preemption provision. Indeed, the City does not point out for us any state mortgage lending law that has an express preemption provision.
The City and the dissent rely on testimony at a Senate subcommittee hearing held shortly before the passage of Division 1.6, urging inclusion of an express preemption provision, and the fact that several members of the Legislature had a brief conversation regarding preemption at that subcommittee hearing, in asserting Division 1.6 does not impliedly preempt the Ordinance. (Dis. opn., post, at pp. 1266-1267.)
Of course, by definition, the Legislature’s implicit full occupation of a field occurs only when there is no express intent in the state law. We disagree with the Court of Appeal’s statement that “when the Legislature is silent on preemption, courts presume there is no intent to preempt.” Adopting this approach would be a notable departure from our implied preemption precedents. Instead, in such circumstances we consider factors including the language and scope of the adopted measure, the history behind the adopted measure, and the history of regulation in the area, as we have done in this and other field preemption cases. (E.g., Great Western, supra, 27 Cal.4th at pp. 860-867; Tolman, supra,
Taken to its logical extreme, the City’s and the dissent’s approach would eliminate the doctrine of implied preemption at least to the extent someone somewhere ever suggested to the Legislature an express preemption clause would be useful, and the Legislature declined to adopt that suggestion. Such a standard would be easily manipulable, and would punish constituents who attempt to educate the Legislature about their concerns to the extent their concerns were not addressed in the precise manner proposed to the Legislature. Moreover, for well over a century, mortgage lending has occurred at the state, not municipal level, and the effects of such regulation are no longer simply statewide, but national. While we cannot know the reasons for the absence of express preemption language, the Legislature is deemed to be aware of existing law, and may have comfortably assumed that given such state dominance in mortgage lending regulation, and having omitted express preemption provisions in other mortgage lending laws without such an omission being read as a license for local regulation, that an express preemption provision was unnecessary. Indeed, unlike the dissent, we are reluctant to reward the opponents of preemption when nothing in the statutory language or history suggests they persuaded the Legislature to consider relinquishing its historical control of this particular regulatory field and to tolerate municipal, and possibly conflicting, regulation.
In addition, our prior cases establish that even when the Legislature amends a bill to add a provision, and then deletes that provision in a subsequent version of the bill, this failure to enact the provision is of little
assistance in determining the intent of the Legislature. (Graham v. DaimlerChrysler Corp. (2004)
Similarly, in recounting the opposition arguments to Assembly Bill Nos. 489 and 344 (the cleanup bill for Assembly Bill No. 489), the enrolled bill reports for the State and Consumer Services Agency, the Department of Real Estate, and the Department of Financial Institutions do not mention the absence of an express preemption provision. Thus, the Department of Real Estate enrolled bill report states, “[s]ome lenders may leave the California market limiting access to capital for those who need it most. In addition, this bill would effectively preclude equity based lending for covered loans even though it has been demonstrated such loans have served a legitimate need.” (Dept, of Real Estate, Enrolled Bill Rep. on Assem. Bill No. 489, Sept. 27, 2001, p. 7.) Under “[v]otes,” the enrolled bill report notes, “[m]any [m]embers who voted ‘no’ expressed concerns that the passage of the bill would cause lenders to cease making subprime loans in California. In addition, many [m]embers who voted ‘no’ expressed concern that this bill would preclude a borrower from obtaining a loan solely based on the equity in the property, even though such loans may serve a legitimate need.” (Ibid.; State and Consumer Services Agency, Enrolled Bill Rep. on Assem. Bill No. 489, Sept. 20, 2001, p. 7 [“Could eliminate a source of funding for a segment of consumers that are not served by traditional, mainstream lenders (the same argument that is applied
The Court of Appeal also noted that the Governor in signing Assembly Bill No. 489 expressly lamented the fact it did not contain express preemption language, and the Legislative Counsel opined a local ordinance would be valid to the extent it did not conflict with state law. We may not consider such postenactment events as a Governor’s signing statement, and not even the City relies on this circumstance. Moreover, the Legislative Counsel’s generalized and routine discussion of preemption law is not evidence the Legislature believed an ordinance such as the one challenged here would survive a preemption challenge. The Legislative Counsel expressly observed, “Because we have not been provided with a specific local government ordinance regulating high-cost mortgage lending, we . . . discuss generally the grounds for preemption of a local government ordinance by state law.” (Deputy
AFSA also claims that the Ordinance is preempted by Division 1.6 because it duplicates and contradicts state law and the Ordinance is preempted by Civil Code section 1916.12. Since we conclude the Ordinance is preempted because by enacting Division 1.6 the Legislature has fully occupied the field of regulation of predatory practices in home loans, we need not address these additional preemption arguments.
Disposition
The judgment of the Court of Appeal is reversed, and the case remanded to that court for further proceedings consistent with this opinion.
Baxter, J., Werdegar, J., and Chin, J., concurred.
Notes
All further undesignated statutory references are to this code.
Assembly Bill No. 489 (2001-2002 Reg. Sess.) (Assembly Bill No. 489) added Division 1.6. (Stats. 2001, ch. 732, §§ 1, 3-5.) A trailer bill, Assembly Bill No. 344 (2001-2002 Reg. Sess.) (Assembly Bill No. 344), made certain changes to Division 1.6. (Stats. 2001, ch. 733, §§ 1—10.) Both bills were signed into law on October 10, 2001.
Oakland’s “Anti-Predatory Lending Ordinance” (Oak. Ord. No. 12361 CMS) is codified at Oakland Municipal Code chapter 5.33 (Ordinance). The City of Oakland also amended its linked banking services ordinance to require lenders seeking to do business with the City or participate in certain projects or programs that involved the City, to certify that neither they nor their affiliates engage in predatory lending practices, and adopted a resolution seeking a similar certification from financial institutions desiring to participate in any development projects financed by the Redevelopment Agency. There is no dispute that the validity of the other measures depends on the validity of the Ordinance, and we do not discuss them further.
Because there was no petition for rehearing in the Court of Appeal, we take our statement of facts largely from that court’s opinion. (Cal. Rules of Court, rule 28(c)(2); People v. Hernandez (2004)
Division 1.6 does not use the term “subprime,” and the term has no standard industry definition. (U.S. Dept, of the Treasury & U.S. Dept, of Housing and Urban Development, Joint Rep., Curbing Predatory Home Mortgage Lending (June 2000) p. 27.) It generally, however, refers to loans in smaller amounts, with significantly higher interest rates and fees, and faster prepayments, than “prime loans.” (Id., p. 28.) “Predatory lending occurs primarily in the subprime mortgage lending market.” (Id., p. 2.) Both Division 1.6 and the Ordinance address predatory practices regarding such high-cost loans, and the legislative history of Division 1.6 is replete with references to “subprime” lending. Therefore, like the Court of Appeal, we will at times refer to both the Ordinance and Division 1.6 as regulating predatory practices in the “subprime” mortgage market.
“For a mortgage or deed of trust, the annual percentage rate at consummation of the transaction will exceed by more than eight percentage points the yield on Treasury securities having comparable periods of maturity on the 15th day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor” or the “total points and fees payable by the consumer at or before closing for a mortgage or deed of trust will exceed 6 percent of the total loan amount.” (§ 4970, subd. (b)(1)(A), (B).)
(Http://www.fanniemae.com/aboutfm/loanlimits.jhtml?p=About+Fannie+Mae&s=Loan +Limits [as of Jan. 31, 2005].)
The “annual percentage rate of the loan equals or exceeds (a) by more than 3 percentage points, if the home loan is a first mortgage, or (b) by more than 5 percentage points, if the home loan is a junior mortgage, the rate set by the required net yield for a 90-day standard mandatory delivery commitment for a first mortgage loan from either the Federal National Mortgage Association (FannieMae) or the Federal Home Loan Mortgage Association, whichever is greater, as such yield is reported on the fifteenth day of the month immediately preceding the month in which the application for the home loan is received by the lender; or (2) the total points and fees on the loan equal or exceed either 5% of the total loan amount or $800, whichever amount is greater. If the terms of the home loan provide for an initial or introductory period during which the annual percentage rate is lower than that which will apply after the end of such initial or introductory period, then the annual percentage rate to be considered for purposes of this definition is the rate which applies after the initial or introductory period. If the terms of the home loan provide for an annual percentage rate that varies in accordance with an index plus a margin, then the annual percentage rate to be considered for purposes of this definition is the rate that is in effect on the date of loan consummation. In the case of a home loan with a regular interest rate that varies in accordance with an index plus a margin, but with an initial or introductory interest rate established in some other manner, the annual percentage rate to be considered is the rate that would have been in effect on the date of loan consummation were the regular rate determined by the index plus the margin to apply, that is, the fully-indexed rate on the date of loan consummation.” (Oak. Mun. Code, § 5.33.030.)
California Constitution, article XI, section 5, subdivision (a) provides: “It shall be competent in any city charter to provide that the city governed thereunder may make and enforce all ordinances and regulations in respect to municipal affairs, subject only to restrictions and limitations provided in their several charters and in respect to other matters they shall be subject to general laws. City charters adopted pursuant to this Constitution shall supersede any existing charter, and with respect to municipal affairs shall supersede all laws inconsistent therewith.”
Los Angeles has already done so in its antipredatory loan ordinance, added January 29, 2003. (L.A. Mun. Code, ch. XVIII, art. 1, § 181.07, subd. (B) [“Any person who purchases or is otherwise assigned a High-Cost Refinance Home Loan is subject to all claims, actions, and defenses related to that High-Cost Refinance Home Loan that the Borrower could assert against the original Lender”].)
The dissent bases much of its position on a “concession” by AFSA that “ ‘the Legislature could say nothing for or against preemption without risking defeat of’ ” Assembly Bill No. 489. (Dis. opn., post, at p. 1266; id. at p. 1267.) The dissent points to no evidence AFSA was involved in the legislative process of Division 1.6 even as an interested constituent. More critically, we have repeatedly concluded, as noted above, that even the statements of individual legislators are not generally considered in construing a statute. Of how much less worth is a third party’s opinion regarding that legislative process? Indeed, discerning legislative intent from an outside party’s “concession” appears not only a novel but a problematic approach. Had AFSA not made such a “concession,” would the dissent then find there was preemption? As in the case of comments from constituents to the Legislature, on which the dissent also relies, our preemption principles simply cannot be so arbitrary and malleable.
Even if there was competent evidence the Legislature had debated and rejected the notion of including an express preemption clause, and deliberately decided to remain silent, such history would merely show that lawmakers left the preemption issue exactly where it would have been if nothing had been said during the bill enactment process. Under such circumstances, and contrary to what the dissent claims, there would still be no basis for straying from our traditional examination of the language, scope, and purpose of the enacted statutory scheme in determining whether the Legislature manifested an implicit intent to occupy the field and preempt all local regulation. Considering that language, scope, and purpose here, as delineated at length above, we find clear indications of such an intent, and conclude the Ordinance is preempted.
It is noteworthy that one such letter writer, FannieMae, expressly withdrew its opposition to Assembly Bill No. 489, and then urged the bill authors to consider adding an express preemption provision. (FannieMae, letter to Sen. Machado and Assemblywoman Migden (Sept. 13, 2001) p. 1.) Similarly, the California Mortgage Bankers Association noted it had withdrawn its opposition to Assembly Bill No. 489, was now neutral on both Assembly Bill Nos. 489 and 344, and then mentioned it looked forward to working with the Legislature on an express preemption provision. (Cal. Mortgage Bankers Assn., letter to Sen. Machado and Assemblywoman Migden (Oct. 4, 2001) p. 1.)
Other than the statements of individual legislators at one Senate subcommittee hearing, and testimony by constituents at that same hearing, which we have already discussed, the dissent cites nothing in the legislative history of Division 1.6 to support its repeated assertion that the Legislature “consciously considered including express preemption language in the statewide statute . . . , but ultimately omitted any such language from the statute as one of the essential elements of a compromise that led to the enactment of the legislation.” (Dis. opn., post, at p. 1265, fn. omitted; see, e.g., ibid. [“Here, there is considerable extrinsic evidence . . . that the Legislature specifically considered and purposefully rejected an express preemption clause despite extensive lobbying for the inclusion of express preemption language in the state statute”]; id. at p. 1266 [“the issue of preemption was arguably at the forefront of the debate over Assembly Bill No. 489”]; id. at p. 1267 [“silence on the preemption issue was not inadvertent but deliberate, part of a legislative compromise”]; ibid, [“passage of the bill hinged on the inclusion or exclusion of express preemption language”]; id. at p. 1271 [“All we can be certain of is that Division 1.6 was the product of a legislative compromise, and that the compromise included deliberate silence on the matter of preemption”].)
Dissenting Opinion
I respectfully dissent.
Past California cases establish that a general statewide statute will be held to preempt all local legislative measures only when the state legislation, explicitly or impliedly, “clearly indicates” that the Legislature intended to fully occupy the field and preclude all local regulation. (Sherwin-Wlliams Co. v. City of Los Angeles, (1993)
I
Unlike our previous implied preemption cases, this is not simply a case in which the Legislature was silent about preemption. Here, there is considerable extrinsic evidence, and a concession from the party arguing in favor of preemption, that the Legislature specifically considered and purposefully rejected an express preemption clause despite extensive lobbying for the inclusion of express preemption language in the state statute. As plaintiff American Financial Services Association (AFSA) itself acknowledges, there were strongly held disagreements over preemption between industry representatives and consumer proponents of the bill. Indeed, the record reveals that the subprime lending industry vigorously lobbied for express preemption language.
Under normal circumstances, the mere absence of express preemption language would not be dispositive. But here the party arguing in support of preemption explicitly has admitted that there were
Moreover, contrary to the majority’s reading of the relevant legislative history, I believe this history supports AFSA’s concession. This is not a situation where the preemption issue was abstract or peripheral. Indeed, the issue of preemption was arguably at the forefront of the debate over Assembly Bill No. 489 (2001-2002 Reg. Sess.) (Assembly Bill No. 489). For instance, the members of the Senate Banking Committee that forged the legislative compromise that led to passage of the bill heard testimony from Oakland City Councilman Ignacio de la Fuente regarding the imminent passage of the Ordinance. In response to this testimony, a committee member expressed concern that without express preemption language, there would be a host of different lending policies from community to community. In response, the bill’s co-author, Assemblywoman Migden, stated at the August 27, 2001, hearing on Assembly Bill No. 489 by the Senate Banking, Commerce and International Trade Committee: “We’re trying to make sure that everyone can live with the bill, industry and consumers alike and . . . we’ve decided ... to be silent on [preemption], which does lend different interpretations.”
At the same hearing, the committee also heard from numerous financial industry representatives who urged the committee to include preemption language. (Adam Bass of Ameriquest Mortgage Company: “preemption is a major issue”; John Ross, Mortgage Bankers Assn.: “preemption is a big issue for our members”; Brian Kennealy of the Responsible Mortgage Lenders Coalition: “preemption is a very, very important issue to us and our members”; Eleanda Delgado of Irwin Home Equity Corp., agreeing with the others; Bernard Nevins, Cal. Assn, of Industrial Bankers: preemption “can’t hurt and it would be very bad if you didn’t do it”; Phil Eisenberg, American Intemat. Group: “the preemption issue is fundamental. It’s not cursory. It’s not a medium-sized issue. It’s fundamental”; Tom McMorrow, Countrywide Mortgage and First Union: “Preemption remains fundamental.”) This effort by the financial industry to include express preemption language in the statute further establishes that silence on the preemption issue was not inadvertent but deliberate, part of a legislative compromise “to make sure that everyone can live with this bill, industry and consumers alike . . . .” The majority’s assertion that the Legislature’s silence on preemption was inadvertent, or that the Legislature believed that express preemption language was unnecessary, is simply untenable.
The majority minimizes the foregoing history by arguing that although an express preemption issue “may have arisen” at some point during the bill enactment process, the issue was peripheral. As noted, this ignores AFSA’s concession that the issue of express preemption not only “arose,” but threatened to derail passage of the bill. Thus, this is not simply a case where “someone somewhere . . . suggested to the Legislature an express preemption clause would be useful, and the Legislature declined to adopt that suggestion.” (Maj. opn., ante, at p. 1261.) This is a case where passage of the bill hinged on the inclusion or exclusion of express preemption language. Thus, this is not a case where the city relies on the mere absence of express
Nonetheless, it can be argued, as AFSA does, that the stalemate on the preemption issue neither supports nor undermines a conclusion as to preemption, and that the court should resort to certain default rules about preemption that it has developed over the years. But one of those rules, indeed the principal rule, is that legislative intent be clearly indicated. As the Court of Appeal noted in California Rifle & Pistol Assn. v. City of West Hollywood (1998)
II
The majority’s emphasis on state uniformity and historical regulation patterns also fails to acknowledge properly the respect this court traditionally has accorded to localities regarding issues that have a unique local impact. As we stated in Fisher v. City of Berkeley (1984)
The regulation of predatory lending undoubtedly is an area of statewide concern. Nevertheless, I am not persuaded that the field is exclusively so, thus leaving no room for local regulation. “The significant issue in determining whether local regulation should be permitted depends upon a ‘balancing of two conflicting interests: (1) the needs of local governments to meet the special needs of their communities; and (2) the need for uniform state regulation.’ ... [1] That basic issue, in turn, may in a specific instance be fragmented into the component issues which combine to effect its resolution such as whether local legislators
As the court made clear in Robins, although the need for state uniformity is an important consideration in resolving preemption questions, the interests of the locality also are entitled to considerable weight. “The pervasive question to be answered is: Does the demand for uniformity throughout the state outweigh the needs of local governments to handle problems peculiar to their communities.” (Tri County Apartment Assn. v. City of Mountain View (1988)
The record in this case establishes that Oakland’s Ordinance was adopted because many low-income homeowners in the City of Oakland were targeted by unethical mortgage lenders using predatory lending practices. Many low- and moderate-income homeowners in Oakland were unable to obtain conventional legitimate financing. Local conditions allowed predatory lenders to thrive, and their practices unfairly stripped homes of equity value and resulted in a number of unjust home foreclosures. Often, through fraudulent means, homeowners were charged exorbitant fees and interest rates and unfairly were persuaded to incur mortgage debt in excess of their needs or ability to pay. The record reflects that the Oakland City Council, in passing the ordinance in question, found that the predatory lending problem in Oakland was particularly aggravated “because of the high number of minority and low income homeowners in Oakland, and the pressures of gentrification in certain neighborhoods that increase property values and home equity,” which have led to a situation in which “Oakland residents in low income areas have been perceived to be ‘the house rich and the cash poor’ and thus are prime targets for predatory lending practices.”
Oakland’s findings mirror the conclusions of the United States Department of Housing and Urban Development (HUD) in an analysis of almost one million mortgages reported nationwide in calendar year 1998 under the Home Mortgage Disclosure Act. (See HUD Rep., Unequal Burden: Income and Racial Disparities in Subprime Lending in America (Apr. 2000), http://www.hud.gov/library/bookshelfl8/pressrel/subprime.html [as of Jan. 31, 2005] (HUD Report).) HUD’s detailed analysis reached four critical conclusions: (1) from 1993 to 1998, the number of subprime refinance loans increased tenfold;
As HUD’s conclusions illustrate, Oakland’s particular interest in regulating subprime loans goes beyond merely protecting its particularly vulnerable citizens. As one amicus curiae points out, “predatory lending is not just a consumer protection issue; it is a community development issue, because it threatens the stability of lower income homeowning neighborhoods ....[][] Predatory home mortgage lending has enormous impacts on targeted neighborhoods. Predatory lending practices, particularly the phenomenon of ‘asset based lending,’ contribute to an increase in the number of foreclosures. This can result in abandoned houses and blighted neighborhoods and contribute to the physical and economic deterioration of lower-income, minority, and inner city communities. ‘Foreclosures, especially in low- and moderate-income neighborhoods turn what might be typically viewed as a consumer protection problem . . . into a community development problem, in which increased foreclosures lead to property abandonment and blight.’ ” (Quoting HUD Rep., Recommendations to Curb Predatory Home Mortgage Lending (June 2000) pp. 24-25, available online at http://www.treas.gov/press/releases/reports/treasrpt.pdf [as of Jan. 31, 2005].)
In view of the community degradation caused by predatory lending, Oakland reasonably could have concluded that it was important to include holders in due course within the Ordinance’s purview. The bulk sale of mortgage loans on the secondary market is the primary profit incentive for subprime mortgage lenders. (See Eggert, Held up in Due Course: Predatory Lending, Securitization, and the Holder in Due Course Doctrine (2002) 35 Creighton L.Rev. 503, 577 [noting that a primary reason for the rapid growth of the industry “is that the existence of ready capital available to lenders through the securitization of subprime loans has dramatically increased their ability to make those loans”].) The innovation of selling mortgage loans in bulk is, in fact, what fueled the enormous growth of the subprime mortgage industry. (See id. at p. 578) As the City of Oakland points out, “sales of subprime loans by predatory lenders is the inducement and profit-basis for their business practice of encouraging ever higher and larger loans to subprime borrowers, i.e. larger ‘inventory’ of loans for sale to others—all to the detriment of the consumer
The Legislature was free to conclude that treatment of predatory lending requires statewide uniformity. Alternatively, however, it could conclude that only a statewide minimum standard of conduct is necessary, and that local jurisdictions have some freedom to additionally regulate predatory lenders pursuant to the municipal police power to prevent urban decay and neighborhood blight. Because of the local, varying nature of the problem, this is not a case in which having differing local standards is wholly illogical. (Cf. Tolman v. Underhill (1952)
As discussed above, predatory lending is characterized by loans that are aggressively marketed to borrowers who often cannot afford the payments and eventually default on the loans. The city argues that the high rate of default and foreclosure has led to the degradation of entire neighborhoods and has contributed to the already substantial problem of urban blight in Oakland. The field of predatory lending regulation is one in which conditions peculiar to the locality are likely to differ from place to place and where supplemental regulation may well fall within the realm of local government. (Gluck v. City of Los Angeles, supra,
This court has acknowledged that the balance of power between state and local municipalities recognizes that a one-size-fits-all solution is not always in the best interest of the residents of a particular community. (See, e.g., California Rifle & Pistol Assn. v. City of West Hollywood, supra,
The cases cited by the majority do not compel a contrary conclusion. Although our numerous preemption cases resist easy
Similarly, in Eastlick, we struck down a requirement in the Los Angeles City Charter that required a personal injury claimant to itemize the damages in her claim. The requirements for a personal injury claim under state law did not require such specificity. (Eastlick v. City of Los Angeles, supra, 29 Cal.2d 661, 666.) Again, as in Wilson, the locality had attempted to abridge and circumscribe a state law right, thereby undermining the purpose of the state regulation. (Ibid.) Likewise, in Birkenfeld v. City of Berkeley (1976)
The common theme running through these cases is that a locality may not impose additional burdensome requirements upon the exercise of state statutory remedies that undermine the very purpose of the state statute. Here, we are presented with a fundamentally different relationship between the state statute and local regulations. The Ordinance does not appear to undermine any of the stated goals of Division 1.6. To the contrary, the ordinance grants borrowers additional rights not afforded under state law, such as restrictions on prepayment penalties, mandatory credit counseling, and the opportunity to present defenses to secondary buyers of their mortgages if the borrowers have been victimized by predatory lending practices. Far from subverting Division 1.6, the Ordinance furthers the stated goal of the state legislation by providing additional protections to the low-income borrowers in Oakland who are especially vulnerable to predatory lending practices.
The majority argues, however, that the Ordinance does disrupt the balance struck
Although it undoubtedly is true that the Legislature struck a balance to ensure passage of the bill, the balance was the product of compromise between consumer protection interests and finance industry interests. In order to glean the intent of the Legislature regarding preemption, we must examine the entirety of that compromise, and not selective parts of it. As discussed above, that compromise included the omission of any provision relating to preemption of local legislation. Yet, the majority concludes that preemption nonetheless was intended, emphasizing the Legislature’s supposedly overriding concern regarding the threat that patchwork regulation might pose to low-income borrowers’ access to capital. This emphasis on the need to prevent undue regulation ignores the principal purpose of Division 1.6, which is to improve consumer protection against predatory lending practices, not to protect lenders from unduly restrictive regulation.
The majority’s implicit assumption is that Oakland’s Ordinance, by providing for stricter regulation of certain areas of subprime lending, necessarily will cause lenders to cease making loans in Oakland and in California as a whole. (Maj. opn., ante, at pp. 1257-1258.) Had a majority of the Legislature agreed with that proposition, however, it could be expected that the legislation would have included a provision expressly preempting local legislation. The conscious omission of an explicit preemption provision demonstrates that" the Legislature could not agree that local legislation would undermine or impair the objectives of the state legislation. Furthermore, should the undesirable consequences forecast by the majority come to pass, the Legislature, of course, would be free to step in and add an express preemption provision to Division 1.6.
The majority also places great emphasis on the City’s admission that in more than 150 years of California history, no municipality has attempted to regulate mortgage lending. (Maj. opn, ante, at p. 1255.)
Thus, despite the circumstance that mortgage regulation historically has occurred at the state rather than the local level, we must recognize the concerns implicated by the recent rapid escalation of predatory lending. In view of the documented evidence that predatory lending is especially pervasive in low-income and minority neighborhoods, it is beyond dispute that Oakland and other similarly situated localities have a more significant interest in regulating subprime lending than localities that, because of demographics and composition, are not targeted in similar ways. Local regulation thus is not only constitutionally valid, but practically vital to the affected communities. Although predatory lending certainly is a matter of statewide concern, the specific interests of the communities most affected by the banned practices make the regulation of this field particularly amenable to local variations. Oakland’s own interest in preventing predatory lending provides ample justification for that locality’s enactment of stricter and more protective regulations designed to ensure that its residents receive adequate information before saddling themselves with financial obligations that could prove devastating.
In sum, I agree with the city and the decision of the Court of Appeal below that Division 1.6 establishes a floor, not a ceiling, for the regulation of predatory lending practices. As the majority recognizes, the rule of implied preemption is a “ ‘rule of necessity, based upon the need to prevent dual regulations which could result in uncertainty and confusion.’ ” (Maj. opn., ante, at p. 1252.) As discussed above, the Ordinance provides added protections for its citizens that will not result in uncertainty or confusion, and absent a clearly evident legislative intent I believe the Ordinance is not preempted.
I would affirm the judgment of the Court of Appeal, upholding the validity of Oakland’s antipredatory lending ordinance.
Kennard, J., and Moreno, J., concurred.
For convenience, like the majority opinion, I shall refer to the relevant state statute as “Division 1.6,” and the relevant local legislation as the “Ordinance.”
Because the majority concludes that the Ordinance is invalid in its entirety, I do not reach the question whether some individual provisions of the local enactment may be inconsistent with Division 1.6 and for that reason preempted by that legislation.
The subprime mortgage market is a market providing credit access to borrowers who might not qualify for traditional financing, such as those with impaired credit, limited income, or high debt-to-income ratios.
HUD reports that in 1993, there were 80,000 subprime refinance loans reported under the Home Mortgage Disclosure Act. By 1998, this number had increased by more than 900 percent to 790,000. “The magnitude and speed of the increase in subprime lending alone— almost 1000% in just five years—creates a critical need for greater scrutiny and concern. While the rapid growth of subprime lending may, on the surface, appear to be good news for higher-risk borrowers, behind the numbers there is some evidence that some portion of subprime lending is occurring with borrowers whose credit would qualify them for conventional loans. Subprime lending may expose borrowers to higher up-front fees and interest rates than they would bear if they had obtained prime loans.” (HUD Rep., supra, http://www.hud.gov/library/bookshelfl8/pressrel/subprime.html.)
HUD also analyzed the prevalence of subprime loans in five urban areas (Atlanta, Philadelphia, New York, Chicago, and Baltimore), concluding that a study of the five cities “gives a good sense that the trends identified above are consistent at the metropolitan level.” (HUD Rep., supra, http://www.hud.gov/libraryAookshelfl8/pressrel/subprime.html.)
Of course, as the majority acknowledges, Oakland is not the only municipality seeking to regulate in this field. Los Angeles also recently enacted an Ordinance regulating predatory lending practices. (L.A. Mun. Code, ch. XVIII, art. 1, § 181.07, subd. (B).)
Moreover, the Legislature was aware that historically, the subject of subprime lending has not been addressed by existing regulation. A bill analysis stating the purposes of Assembly Bill No. 489 states that “[t]he licensing laws under which subprime lenders operate predate the development of the subprime market and therefore did not envision the types of problems that have arisen in this market. In fact many real estate loans are specifically exempted from consumer protections in these laws.” (Assem. Com. on Appropriations, Analysis of Assem. Bill No. 489 as amended May 1, 2001, p. 3.)
Although the majority does not reach the point, I note that AFSA also argues that because the Ordinance does not apply to federally chartered lenders, it is preempted by Civil Code section 1916.12, which creates a mechanism for the state to respond to changes in federal lending laws by adopting conforming changes in the regulation of state lenders. I agree with the Court of Appeal that Civil Code section 1916.12 does not preempt the Ordinance. Section 1916.12 does not evidence a legislative intent to preempt and does not mandate absolute parity in the treatment of federal and state lenders at either the state or municipal level, and thus does not preempt the Ordinance.