Appeals Court to Take Fresh Look at National Bank Act Preemption

By Chris Bruce

A federal appeals court will hear argument in the fall on whether the National Bank Act overrides a West Virginia law that’s turned traditional mortgage payment practice on its head ( Powell v. Huntington Nat’l Bank , 4th Cir., 17-cv-01118, opening brief filed 3/31/17 ).

The case centers on a dispute over late fees in connection with a West Virginia law repealed by the state legislature in April. The law required banks to apply mortgage payments to the most current installment due under the loan agreement, instead of applying payments to the oldest delinquent amount.

Jeremy and Tina Powell, who refinanced their mortgage with Huntington National Bank, have appealed a district court ruling against them to the U.S. Court of Appeals for the Fourth Circuit, which will hear argument late in October.

Despite the law’s repeal, the case still matters for bankers and consumers because, in different ways, the court will be taking a fresh look at National Bank Act preemption from two different angles.

Fee Sparks Lawsuit

The case arose after the Powells missed their September 2012 payment. They sent a payment in October, but Huntington applied the payment received in October to the September installment — the oldest unpaid installment. The bank assessed the Powells a late fee, saying the loan was still delinquent. It charged other fees on several other payments, but waived those. According to Huntington National, federal law and regulations allow, encourage, or in some cases require national banks to apply mortgage payments to the oldest delinquent amount, and allow national banks to impose matching late charges.

The Powells sued, saying Huntington had no right to charge the late fee because it didn’t apply their payment to their current installment as required by Section 46A-3-112(3) of the West Virginia Consumer Credit and Protection Act (WVCCPA).

Huntington said the National Bank Act overrides their claim in two different ways, and Judge Thomas E. Johnston of the U.S. District Court for the Southern District of West Virginia agreed in part. He said the West Virginia law “significantly” interferes with powers granted by the National Bank Act, citing the Dodd-Frank Act’s codification of a 1996 U.S. Supreme Court ruling on that question.

However, although Huntington National said Section 85 of the National Bank Act provided another basis for preemption, Johnson disagreed. According to Johnson, although Section 85 preempts claims that state laws limit how much national banks can charge for interest and late fees (which the U.S. Supreme Court says are included in Section 85’s definition of interest), it doesn’t preempt the claim made by the Powells — that the late fees never should have been imposed at all.

Two Questions Raised

Both questions are now before the Fourth Circuit. The first is whether the West Virginia law “significantly interferes” with bank powers. The Powells argued that Dodd-Frank establishes a tougher standard for deciding when state consumer financial laws are preempted and whether a state law truly interferes with powers granted to national banks. Under that new standard, they said, their claim isn’t preempted. There’s no significant interference in this case, they said, because Huntington National can comply with the West Virginia law simply by modifying its software. In a June 12 brief, they said Section 46A-3-112(3) “barely qualifies as an inconvenience,” saying the bank’s systems already make adjustments for loans in other states that bar late charges once a defaulted loan has been accelerated.

Huntington National disagrees, saying Dodd-Frank didn’t make dramatic changes to federal preemption. The West Virginia law interferes with the bank’s power to match payments with installments, and clashes with federal rules aimed at keeping borrowers out of foreclosure, it said in a May 22 brief. “The West Virginia law interfered with federal banking powers in ways that go far beyond a requirement that the bank reprogram its computers,” it said.

Meanwhile, on the Section 85 question, Huntington said that portion of the district court decision “ignores the clear text of Section 85.” The district court, it said, made a distinction between challenging the amount of a late fee and challenging the imposition of a late fee — a distinction the bank said doesn’t exist in real terms. In effect, the bank said, the district court gave states a veto over national banks’ ability to charge late fees, saying that approach “would create a gaping hole in the regulatory system Congress enacted.”

Bank Groups Support

Huntington National has support from the American Bankers Association, the Consumer Bankers Association, the Financial Services Roundtable, the Ohio Bankers League, and the West Virginia Bankers Association, which filed a friend-of-the-court brief in the Fourth Circuit. Among other points, the brief echoed the bank’s argument with respect to Section 85, saying the district court’s approach creates “a significant loophole in preemption” that would allow state and local governments “to ban national banks from charging a fee, even though they cannot impose limits on such fees.”

Amanda R. Lawrence, a partner with Buckley Sandler in Washington who prepared the banking groups’ brief with co-partner Heather Russell, said the Section 85 question is important because the district court’s opinion “seems at odds with Supreme Court case law,” and could allow “creative pleading” to get around Section 85.

“It doesn’t make sense to say that a state can’t tell a national bank how much of a fee it can charge, but that same state can say that the national bank can’t charge a fee at all,” Lawrence told Bloomberg BNA.

Loren Allen, general counsel for the West Virginia Bankers Association, said the repeal of the statute took effect early in July. “It’s been a real point of frustration for financial institutions for some time,” he told Bloomberg BNA, referring to the West Virginia law.

The Fourth Circuit hasn’t yet set a specific date for argument, though the case is tentatively scheduled for argument sometime in the Oct. 24–Oct. 26 period.

Huntington National Bank didn’t respond to a request for comment on the case.

Huntington National Bank is represented by Megan Burns and John C. Lynch of Troutman & Sanders in Virginia Beach, and Robert A. Long Jr., and Andrew J. Soukup of Covington & Burling in Washington.

Jeremy and Tina Powell are represented by Patricia M. Kipnis and Jonathan R. Marshall in the Cherry Hill, N.J., and Charleston, W.Va., offices of Bailey & Glasser, and Scott Stapleton of Stapleton & Stapleton in Huntington, W.Va.

To contact the reporter on this story: Chris Bruce in Washington at

To contact the editor responsible for this story: Michael Ferullo at

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