Supreme Court hands consumers a big victory (we hope)

In a typically close 5-4 decision, the Supreme Court has ruled that national banks (those that choose to be regulated by various agencies of the federal government) cannot simply ignore state consumer laws as they have been for many years.

You can read the details of the decision — which was written by the court’s most outspoken conservative justice and supported by the court’s four liberal justices — in other media.   I want to focus on the potential impact for consumers.

The decision means that banks can no longer ignore state laws on discrimination and lending practices.  It is not definite on other consumer matters, but many observers feel that the ruling will also force national banks to obey state consumer protection laws.

I have an example that illustrated what this can mean.  In a case I handled years ago at the Consumer Assistance Council, a divorced single mom had bought a house when her credit was poor and paid 11% interest.  24 months later her credit had improved and she decided to sell her house and move to another one at a lower interest rate.

Under Massachusetts law (where we both live), banks cannot charge a prepayment penalty if you sell your house after 12 months and pay off the old mortgage.  But she had gotten the loan from a national bank and did not use a lawyer so she did not know that the bank’s contract provided for prepayment penalties for any sale sooner than 3 years!

She did not find this out until she got to the closing.  The movers were taking her stuff out of the house; the new people were moving in the next day; and she needed to settle this sale in order to buy the house she was moving into that day.

The prepayment penalty was more than 10% of the mortgage she was trying to pass off:  $15,000!!!  She had no choice but to pay it.

At first the bank blew me off, but I persisted and in the end, the bank refunded two thirds of the penalty, even though they did not have to.

I hope that this ruling means that national banks will have to conform to state law in the future, and we will not have to depend on their good will.    Until we find that out, I recommend you ask any bank you do business with if they are nationally chartered or state chartered, and if they conform to your state’s banking laws.

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