Catholic University Law Review Volume 37 Issue 2 Winter 1988 Article 9 1988 Lock-In Laws: Adding More Patches to the Mortgage Lending Quilt Paul A. Mondor Follow this and additional works at: https://scholarship.law.edu/lawreview Recommended Citation Paul A. Mondor, Lock-In Laws: Adding More Patches to the Mortgage Lending Quilt, 37 Cath. U. L. Rev. 543 (1988). Available at: https://scholarship.law.edu/lawreview/vol37/iss2/9 This Symposium is brought to you for free and open access by CUA Law Scholarship Repository. It has been accepted for inclusion in Catholic University Law Review by an authorized editor of CUA Law Scholarship Repository. For more information, please contact [email protected]. LOCK-IN LAWS: ADDING MORE PATCHES TO THE MORTGAGE LENDING QUILT Lock-in, meaning a commitment by a mortgage lender to make a prospec- tive loan at a particular interest rate,' has only recently appeared in the home-mortgage-industry lexicon. Before the spring of 1986, lenders rarely offered lock-in agreements.2 Virtually no cases directly treated claims of breach of such lock-in agreements, although many breaches apparently oc- cuffed. In the summer of 1986,3 and even more so in the spring of 1987,' 1. This Comment uses "lock-in" to mean an agreement between a mortgage lender and a loan applicant, executed prior to loan approval, and made contingent upon the lender subse- quently committing to make the loan within a fixed period of time. During this period, the lender and borrower agree to lock in the current market interest rate, and in some cases, other terms and conditions for any future loan contract. Although borrowers may request lock-ins after loan approval, post-approval lock-ins seldom cause any problem. Lenders generally abide by such agreements because loan approval usually indicates that closing is imminent. With closing imminent at the time of the lock-in, lenders have less time and fewer reasons to back out. A lock-in differs from a floating application. In the latter, the parties refrain from setting the terms and conditions of any loan agreement they may enter into until closing, based on the prevailing market terms at that time. 2. Before 1986, lenders commonly would quote the current market rates at the time a borrower made application. But lenders never clearly intended such quotes as binding agree- ments. Rather, they tacitly meant only to inform the applicant of the current state of the market, with the unrealistic expectation that the applicant grasped all of the subtleties of the mortgage industry that could contribute to the failure of the loan to close as quoted. See, e.g., Mortgage Foreclosures and Other Current Mortgage Credit Issues: Hearings on H.J. Res. 656 and H.R. 3306 Before the Subcomm. on Housing and Community Development of the House Comm. on Banking, Finance, and Urban Affairs, 99th Cong., 2d Sess. 119 (1986) [hereinafter Mortgage Credit Issues Hearings] (statement of John M. Teutsch, Jr., Chairman and Chief Executive Officer, Rainier Financial Services Company, Seattle, Wash. and Vice President, Mortgage Bankers Association of America) ("At issue is whether the parties to such a commit- ment are bound to honor such a commitment."). In any case, problems rarely arose before the spring of 1986 because loans almost always closed at the quoted rate. The unprecedented volume of business resulting from the precipitous drop in interest rates at that time, at least in the views of most lenders, first triggered the crisis. Id.; see also id. at 117. Mr. Teutsch stated that "[t]here is no historical precedent for the current mortgage volume, and perhaps more importantly for the rapid upsurge in applications as interest rates decreased rapidly during March and April [of 1986]." Id.; see also id. at 128-29 (statement of Leonard Shane, Chair- man and President, Mercury Savings and Loan Association, Huntington Beach, Cal. and Chairman, Legislative Policy Committee, United States League of Savings Institutions). 3. In 1987, Representative Dean Gallo of New Jersey referred to the lock-in crisis of 1986 as "last summer's horror stories." 133 CONG. REC. E2267 (daily ed. June 4, 1987). 4. Representative Gallo stated that "[a]gain this spring, ... [i]nterest rates guaranteed to consumers for limited periods are going through the roof when, through no fault of the con- sumer, the closing is delayed beyond the 'guaranteed' lock-in period." Id. Catholic University Law Review [Vol. 37:543 borrowers, upset over having had lock-in agreements expire or dishonored by lenders, lodged extraordinary numbers of complaints with various state officials.5 Although a few consumers have recently sued lenders for reneging on lock-ins,6 the more significant developments arising out of the lock-in shock phenomenon have been legislative. Five states have enacted laws aimed at requiring home mortgage lenders to honor lock-in commitments. 7 Of poten- tially greater significance, Congress may act on the matter. The House of Representatives has one bill pending8 and, reportedly, the staff of Senate Banking Committee Chairman William Proxmire is preparing a parallel bill.9 A number of states have bills pending 0 and at least one state has achieved the same effect by regulation."1 This Comment examines the state and federal legislative trend against the general background of consumer credit law as it relates to home mortgage finance, and considers the ramifications of imposing one more layer of state and federal regulation upon lenders. This Comment notes the advantages of simplicity and uniformity available through a comprehensive federal law. As a background for the present trend in favor of lock-in laws, this Coin- 5. According to Representative Gallo, 2500 consumers in Maryland and 1300 in New Jersey experienced, and complained about, "mortgage rate shock." Id. 6. Eg., Precious, Would-Be Borrower Wins Suit Over Rejection of Application, Wash. Post, Aug. 22, 1987, at El, col. 1 [hereinafter Precious, Would-Be Borrower] (discussing lock- in case in Montgomery County, Md. Small Claims Court); see also Precious, Borrowers Awarded $50,000 in Damages, Wash. Post, Sept. 5, 1987, at El, col. 5 [hereinafter Precious, Borrowers Awarded $5,000] (Maryland Banking Commissioner awards $50,000 in damages to 17 borrowers upset over practices of single mortgage banking firm); Givens, Illinois Attorney General Sues MB Companies, Real Est. Fin. Today, June 19, 1987, at 32, col. I (Illinois Attor- ney General suing four major Chicago area mortgage lenders in part for breaching lock-in agreements). 7. These five states are Colorado, Connecticut, Maryland, Minnesota, and Washington. COLO. REV. STAT. §§ 38-38-111 to -114 (Supp. 1987); Act of Apr. 28, 1987, Pub. Act 87-73, 1987 Conn. Acts 93 (Reg. Sess.), reprinted in CONN. GEN. STAT. ANN. app. at 23 (West 1988); MD. FIN. INST. CODE ANN. §§ 12-501, 12-512 (Supp. 1987); MINN. STAT. ANN. § 47.206 (West Supp. 1988); WASH. REV. CODE ANN. § 19.146.030 (Supp. 1988). 8. Residential Mortgage Credit Fairness Act of 1987, H.R. 2609, 100th Cong., 1st Sess., 133 CONG. REC. H4261 (daily ed. June 4, 1987) [hereinafter H.R. 2609] (pending in House Committee on Banking, Finance, and Urban Affairs). 9. See Harney, Bill Would Eliminate "Lock-In Shock, " Wash. Post, June 6, 1987, at El, col. 1; Mortgage Bankers Association of America, Washington Report, May 19, 1987, at 1, col. 1. 10. Three such states are Arizona, California, and Pennsylvania. S. 1250, 38th Leg., Reg. Sess. (Ariz. introduced Feb. 4, 1987); S. 1120 and S. 1124, 1987-88 Leg., Reg. Sess. (Cal. introduced Mar. 5, 1987); S. 7, 171st Leg., Reg. Sess. (Pa. introduced Jan. 15, 1987); see also State Legislatures Continue Push to Regulate Mortgage Activities-Not Just Commitments, In- side Mortgage Fin., Aug. 7, 1987, at 6, col. 1 [hereinafter State Legislatures]. 11. See N.Y. COMP. CODES R. & REGS. tit. 8, pt. 38 (1987). 1988] Lock-in Laws ment examines the general area of consumer credit law, which historically had little to do with the area of home mortgage lending. 2 This examination includes a review of some of the theories of litigation upon which borrowers have founded actions against lenders, some that irate borrowers could use to enforce lock-in provisions. Next, this Comment considers the five state laws enacted to date and compares their provisions, particularly considering the effects on a lender doing business in at least two of those five states. Finally, this Comment analyzes the federal legislation in its currently proposed form, and considers the question of whether federal preemption of state lock-in laws, and/or state mortgage law generally, is likely or desirable. I. CONSUMER CREDIT, MORTGAGE CREDIT, AND FEDERALISM: THE BACKGROUND A. Legislative Background The history of consumer credit legislation, from the perspective of the state-federal relationship, reveals how the area of mortgage lending has grad- ually acquired a federal presence where once there was none. This evolution has occurred in three distinct periods: pre-1968, 1968 to 1980, and post- 1980. 1. Pre-1968: The Labyrinth Before 1968, the states alone regulated consumer credit.' 3 The pattern essentially consisted of a general usury law' 4 and an assortment of excep- tions especially geared to certain types of lenders, such as savings and loan associations.' 5 Other exceptions included loans with a principal amount be- low a certain ceiling, 16 and general exceptions to the usury law.' 7 These laws combined in a complex tangle of independent, noncomprehensive, and 12. Traditionally, the term "consumer credit" has meant transactions other than mort- gage loans (except, perhaps, second lien and other junior mortgages). See, e.g., B. CURRAN, LEGISLATIVE TRENDS IN CONSUMER CREDIT 14 (1965); R. ROHNER, THE LAW OF TRUTH IN LENDING, 6.01, at 6-3 (1984).