COA: "Loan Discount Fees" Are Not Interest Fees and Are Thus Not Preempted by Depository Institutions Deregulation and Monetary Control Act

Yesterday the COA affirmed a trial court's holding that a state bank's charging of "loan discount fees" where no discount was actually given to borrowers was unfair and deceptive, and that this claim was not preempted by the federal Depository Institutions Deregulation and Monetary Control Act because loan discount fees were not usury fees. The case is Bumpers v. Community Bank of Northern Virgina.

Plaintiff borrowers took out a loan with the defendant bank and claimed that loan closing, origination, and underwriting fees they were charged were excessive, and that they were charged a loan discount fee for a loan that did not have a discounted interest rate.

The COA ruled on several issues appealed by the bank. First, the COA upheld the order for partial summary judgment on the issue of liability for UDTP, affirming the trial court's order that the bank's practice of charging a loan discount fee without providing a loan with a discounted interest rate was unfair and deceptive. The Court reasoned that the facts showed that the borrowers were "charged for a product [a loan discount] that was never delivered," and "this type of systematic overcharging constitutes" an UDTP.

The COA further held that the Depository Institutions Deregulation and Monetary Control Act(DIDA), a federal statute designed in part to preempt state law usury claims against out-of-state banks, did not exempt the bank from the borrowers' claim related to the loan discount fees. The COA reasoned that the borrowers' claims were not claims for usury, but were related to the charging of fraudulent discount rate fees where no discount was given, and under DIDA, “interest” does not broadly encompass any and all fees connected with a loan.

The COA also found that there was a genuine issue of material fact on the issue of whether the closing fees were excessive and thus constituted an UDTP. The COA based this finding on the testimony of the borrowers' certified real estate specialist testified that closing fees should not exceed $400 but could theoretically rise to $1500 based on an attorney's hourly rate. The fees charged to borrowers were around $1200, so a jury could determine that they were not excessive.