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Texas laws and not those of Utah govern home foreclosures in this state by Bank of America, a panel of the 10th Circuit Court of Appeals ruled on Wednesday.
The decision means that thousands of Utah homeowners who were foreclosed on by Bank of America will not be able to recover monetary damages based on the claim that those actions were illegal under Utah law.
In a separate opinion, Judge Carlos Lucero warned that the decision is a serious blow to state sovereignty and that regulations from the Office of the Comptroller of the Currency on which the court's decision was based "creates a race to the bottom in which national banks can chose to be governed by the state with the most bank-friendly rules."
Marcus Mumford, an attorney for homeowners, said he would review the decision for a possible further appeal. A spokesman for Bank of America declined comment.
A spokesman for the Utah Attorney General's Office, which had sided with the homeowners, said the opinion was under review and there would be no immediate comment.
The decision comes in a lawsuit that stemmed from a wave of foreclosures in Utah by Bank of America's ReconTrust, which is headquartered in Texas. Many of the foreclosures stemmed from BofA's 2008 purchase of Countrywide Financial, whose shoddy loan practices were exposed during the bursting of the housing bubble.
As many as 10,000 Utah homeowners were foreclosed on since 2001 by Bank of America, according to the proposed class action lawsuit filed in 2011. Under Utah law, a foreclosure that is not filed in court can only be carried out by a Utah attorney or title company.
ReconTrust is Bank of America's foreclosure arm and was the entity that foreclosed on Utah homeowners who had defaulted on their loans. The lawsuit sought awards to former homeowners as a result of the alleged violations of state law.
The legal action was originally filed in state court but removed to federal court, where Judge Ted Stewart ultimately dismissed it, ruling that under federal banking laws and regulations, ReconTrust is governed by the laws in the state where it is located and where it carries out certain operations leading to foreclosures — and that state is Texas.
A decision in another lawsuit by U.S. District Judge Bruce Jenkins and one by the Utah Supreme Court in a third case ruled that Utah law clearly governs foreclosures in this state.
In upholding Stewart's decision, Judges Jerome A. Holmes and Harris L. Hartz, joined by Lucero in a separate opinion, wrote that federal law says that national banks must obey laws in the state where they carry out their functions but doesn't specify which functions. To get around that ambiguity, the judges followed Stewart and turned to regulations of the Office of the Comptroller of the Currency that say that a bank is located in the state where documents initiating the foreclosure process are signed.
Since ReconTrust initiated the foreclosure process in Texas, that means the laws of that state also govern the company's foreclosures in Utah, Stewart said in a ruling upheld by the appeals panel.
The judges pointed out that the lawsuit and appeal had failed to argue that the OCC's regulations were an "unreasonable interpretation" of federal laws and they declined to consider that argument.
Lucero in a concurring opinion wrote that he reluctantly agreed with the decision only because the homeowners had failed to timely raise the issue of the reasonableness of the regulations. He argued the OCC rules are unreasonable and homeowners' late attempts to raise those issues should be considered.
"Such a serious degradation of state sovereignty ought not to be the result of a patently unreasonable regulatory decision," Lucero wrote.
"By allowing national banks to select which state's law it will follow regardless of the state in which it acts … grants them a material competitive advantage over state banks, which may not so choose," he wrote.