Stern v. Norwest Mortgage

                                           THIRD DIVISION
                                           September 30, 1996    













No. 1-95-1627

STEPHEN STERN and                   )  Appeal from the
CATHERINE HARTH,                    )  Circuit Court of           
                                    )  Cook County.
                                    )
     Plaintiffs-Appellants,         )
                                    )
          v.                        )
                                    )
NORWEST MORTGAGE, INC.,             )  Honorable
                                    )  Albert Green,
     Defendant-Appellee.            )  Judge Presiding.
     
     JUSTICE GREIMAN delivered the opinion of the court:
     Plaintiffs, Stephen Stern and his wife Catherine Harth,
(plaintiffs or Stern), filed a class action against defendant,
Norwest Mortgage, Inc. (defendant or Norwest), in the circuit
court of Cook County.  Plaintiffs allege that defendant (1)
violated the Illinois Mortgage Escrow Account Act (Act) (765 ILCS
910/1 et seq. (West 1992)) by charging them and others similarly
situated an "escrow waiver fee," and (2) misrepresented the
provisions of the Act in violation of the Illinois Consumer Fraud
and Deceptive Business Practices Act (Consumer Fraud Act). 815
ILCS 505/2 (West 1992).
     Defendant filed a motion to dismiss pursuant to section 2-
615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 1992))
in which it maintained that plaintiffs' complaint failed to state
a cause of action, because (1) the "escrow waiver fee" was
permitted by the Act, or, alternatively, (2) the Act was
preempted by federal law, and (3) plaintiffs' construction of the
Act renders it unconstitutionally vague.
     The trial court granted defendant's motion to dismiss and
plaintiffs appeal, raising issues as to whether: (1) the Act
permits a lender to charge an "escrow waiver fee" if a borrower
elects to post an interest-bearing time deposit (certificate of
deposit) with the lender instead of establishing a tax escrow
account; (2) Norwest violated the Consumer Fraud Act by
representing to plaintiffs that they were required to pay the
escrow waiver fee; (3) the Act is preempted by the federal
Depository Institutions Deregulation and Monetary Control Act of
1980 (DIDMCA) (12 U.S.C. sec. 1735f (1994)); and (4) plaintiffs'
construction of the Act renders it unconstitutionally vague.
     We reverse as to the defendant's right to impose an escrow
waiver fee and affirm on the failure to state a cause of action
under the Consumer Fraud Act. 
     The Act provides in relevant part:
               "When the mortgage is reduced to 65% of its
          original amount by payments of the borrower, timely
          made according to the provisions of the loan agreement
          secured by the mortgage, and the borrower is otherwise
          not in default on the loan agreement, the mortgage
          lender must notify the borrower that he may terminate
          such escrow account or that he may elect to continue it
          until he requests a termination thereof, or until the
          mortgage is paid in full, whichever occurs first." 765
          ILCS 910/5 (West 1992). 
     The Act further provides that at any time during the term of
the loan "[i]n lieu of the mortgage lender establishing an escrow
account or an escrow-like arrangement, a borrower may pledge an
interest bearing time deposit with the mortgage lender in an
amount sufficient to secure the payment of anticipated taxes."
765 ILCS 910/6 (West 1992).   
     In July of 1992, plaintiffs obtained a mortgage loan from
Norwest in order to purchase a single-family home in Chicago.
Plaintiffs chose to exercise the option of pledging a certificate
of deposit sufficient to cover the anticipated taxes.
     Norwest, however, informed plaintiffs that they would be
charged a "one-time service fee" equal to .25% of the principal
amount of the loan ($492.50) should they exercise this option.
Plaintiffs paid this charge and closed the transaction.  Soon
thereafter they brought a class action against Norwest.
     In reviewing motions to dismiss, this court determines the
matter de novo. Crespo v. Weber Stephen Products Co., 275 Ill.
App. 3d 638 (1995). The complaint may only be dismissed if there
are no set of facts that can be proven that state a cause of
action. Doe v. Calumet City, 161 Ill. 2d 374, 385 (1994). 
     The question before us is one of statutory interpretation.
The fundamental canon of construction is to ascertain and give
effect to the intention of the legislature. Varelis v.
Northwestern Memorial Hospital, 167 Ill. 2d 449, 454 (1995).
Courts will look first to the words of the statute; the language
used by the legislature being the best indication of legislative
intent. Kirwan v. Welch, 133 Ill. 2d 163, 165 (1989). To
determine the meaning of the statute, it must be read in its
entirety and should not be construed so as to render any of its
parts superfluous or meaningless. Kraft, Inc. v. Edgar, 138 Ill. 2d 178 (1990). When the statutory language is clear, no resort to
other tools of interpretation is necessary. Henry v. St. John's
Hospital, 138 Ill. 2d 533, 541 (1990). Moreover, courts should
not, under the guise of statutory construction, add requirements
or impose limitations that are inconsistent with the plain
meaning of the enactment. People ex rel. LeGout v. Decker, 146 Ill. 2d 389, 394 (1992).
     Norwest suggests that it can impose a waiver fee without
limitation; one that would be in excess of any interest that the
borrower might have expected to receive from his certificate of
deposit.  It is difficult to refer to the option granted by the
Act as a right if it can be so easily divested.  The defendant
has set the escrow waiver fee at .25% of the loan, which yields
almost $500.  This would represent the first five or six years of
interest that the borrower could expect to receive in interest
from his investment.  Under Norwest's interpretation, the fee
could be pegged higher, which would reduce the return to the
borrower even more markedly.
     By its action, Norwest's fee appropriates for itself the
very benefit conferred upon the borrower by the Act-- the return
earned upon the money held to ensure the payment of taxes.  The
right or option granted by section 6 of the Act is an illusory
right or option under the defendant's reading of the enactment. 
     Plaintiffs are correct that the Act seems a legislative
response to "widespread complaints (and litigation) concerning
the lender's abuse of escrow accounts." Passage of the Act
followed unsuccessful attempts by borrowers to alter the
traditional escrow arrangement. See, e.g., Sears v. First Federal
Savings & Loan Ass'n., 1 Ill. App. 3d 621 (1971) (plaintiff class
alleged that lender violated its duty as trustee and was unjustly
enriched by commingling escrowed funds and receiving a return on
investing the funds).
     Plaintiffs also cite the legislative history of the Act as
support for their interpretation, although we need refer to this
only where we determine that there is an ambiguity.
Representative Williams explained the bill as follows:
          "Essentially, what it does is it gives an option now to
          the borrower at the time of making the mortgage that
          they can set up a collateralized account in lieu of the
          Escrow for payment of the taxes, and they will receive
          interest on that collateral account that they do pledge
          and, also, provides that when a mortgage has been
          reduced to sixty-five percent, there will no longer be
          any need for the Savings and Loans to require the
          setting up of an Escrow."  79th Ill. Gen. Assem.,
          House Proceedings, June 19, 1995 (remarks of Repre-
          sentative Paul Williams) 
     From this we glean that one of the purposes behind the Act
was to allow the borrower to earn interest, as opposed to the
lender, which supports plaintiffs' claim that a waiver fee
frustrates this purpose -- simply by forcing the borrower to pay
the lender a fee which reduces the monetary benefit conferred by
the Act on the borrower and mitigating the loss of revenue
incurred by the lender.
     Legislative intent is derived from the language of the
statute, evaluated as a whole, with each provision construed in
connection with every other section. Bonaguro v. County Officers
Electoral Board, 158 Ill. 2d 391, 397 (1994). 
     The parties indulge in lengthy discussion of the rule of
expressio unius est exclusio alterius -- express mention and
implied exclusion. Where a statute enumerates certain conditions,
that enumeration implies the exclusion of all other things
although there are no negative words of prohibition. Department
of Corrections v. Illinois Civil Service Comm'n., 187 Ill. App.
3d 304, 309-10 (1989). However, we need not resort to tools of
statutory construction in light of our finding the Act
unambiguous. 
     Instead, we apply its "plain language" to conclude that the
charging of an escrow waiver fee runs contrary to the purpose
behind the Act -- to confer an economic benefit formerly reserved
for lenders on borrowers meeting certain express conditions.
Accordingly, we reverse the trial court's order of dismissal.
     Defendant offers two alternative arguments which, if
successful, would alter the above conclusion -- the Act is
preempted by federal law and is unconstitutionally vague.
     The supremacy clause of the United States Constitution
provides, in relevant part, that: "[T]he Laws of the United
States *** shall be the supreme Law of the Land; *** any Thing in
the Constitution or Laws of any State to the Contrary
notwithstanding." U.S. Const., art. VI. Whether a federal law is
preemptive of a state law depends upon Congress' purpose in
enacting the statute. National Commercial Banking Corp. of
Australia, Ltd. v. Harris, 125 Ill. 2d 448, 463 (1988). This
court must inquire whether Congress intended to preempt state
law. Harris, 125 Ill. 2d  at 463. To properly address this
inquiry, this court is guided by some well-established principles
articulated by the Supreme Court:
          "Absent explicit pre-emptive language, Congress'
          intent to supersede state law altogether may be
          inferred because '[t]he scheme of federal regulation
          may be so pervasive as to make reasonable the inference
          that Congress left no room for the States to supplement
          it,' because 'the Act of Congress may touch a field in
          which the federal interest is so dominant that the
          federal system will be assumed to preclude enforcement
          of state laws on the same subject,' or because 'the
          object sought to be obtained by federal law and the
          character of obligations imposed by it may reveal the
          same purpose.' [Citation.]
          Even where Congress has not completely displaced
          state regulation in a specific area, state law is
          nullified to the extent that it actually conflicts with
          federal law. Such a conflict arises when 'compliance
          with both federal and state regulations is a physical
          impossibility,' [citation], or when state law 'stands
          as an obstacle to the accomplishment and execution of
          the full purposes and objectives of Congress ***."     
          [Citation]. Fidelity Federal Savings & Loan Ass'n. v.
          de la Cuesta, 458 U.S. 141, 153, 73 L. Ed. 2d 664, 675,
          102 S. Ct. 3014, 3022 (1982).
     Defendant maintains that the Act, as interpreted by
plaintiffs, is preempted by the Depository Institutions
Deregulation and Monetary Control Act of 1980 (12 U.S.C. section
1735f-7a(1) (1994)) (the Deregulation Act), which provides in
relevant part:
               "The provisions of the constitution or laws of any
          State expressly limiting the rate of interest, discount
          points, finance charges or other charges which may be
          charged, taken, received, or reserved shall not apply
          to any loan, mortgage, credit sale or advance which is:
               (A) secured by a first lien on residential real
          estate property ***
               (B) made after March 31, 1980."         
     If the escrow waiver fee is one of the "other charges which
may be charged," then the State is powerless to regulate
limitations upon the lender in this regard.  However, in
interpreting this section, paragraph 3(c) of the Federal Home
Loan Bank Board regulations promulgated pursuant to section 501
of the Deregulation Act further defines the contours of the
federal regulatory scheme, providing:
               "Nothing in this section preempts limitation in
          state laws on prepayment charges, attorneys fees, late
          charges or other provisions designed to protect        
          borrowers." (Emphasis added.) 12 C.F.R. Sec. 590.3(c)
          (1996). 
     The Act's provision of the right to forego the traditional
escrow account is clearly "designed to protect borrowers" and is
not, therefore, preempted by the Deregulation Act.  This
conclusion is supported by brief examination of the history and
purpose behind the Deregulation Act.
     In the late 1970's, interest rates exceeded the levels
lenders could legally charge under state usury laws. Congress
responded by enacting the Deregulation Act, which eliminated
interest rate limits set by state usury laws with respect to
first mortgage real estate financing. Fidelity Financial
Services, Inc. v. Hicks, 214 Ill. App. 3d 398, 404 (1991). Given
the legislative intent of this Act and its interrelationship with
state statutes, it is appropriate to apply its prohibitions only
to those transactions clearly provided within its scope.
Fidelity, 214 Ill. App. 3d at 406. Finally, the creditor must
bear the burden of showing that the transaction at issue falls
within the scope of the Deregulation Act.  Fidelity, 214 Ill.
App. 3d at 406. Defendant cannot meet this burden. 
     By this holding, we do not suggest that a lender might be
prohibited from imposing a modest service charge related to the
actual cost of servicing a borrower's mortgage account where
there is a need to ascertain the payment of taxes, provided the
charge is rationally related to that end. The escrow-waiver fee
is not related to service, nor was it represented to be.         
     Alternatively, defendant argues that, as interpreted by
plaintiffs, section 6 of the Act is unconstitutionally vague. The
fourteenth amendment's due process clause "insist[s] that laws
give the person of ordinary intelligence a reasonable opportunity
to know what is prohibited, so that he may act accordingly."
Grayned v. City of Rockford, 408 U.S. 104, 108, 33 L. Ed. 2d 222,
227, 92 S. Ct. 2294, 2298-99 (1972). Additionally, in order to
prevent arbitrary and discriminatory enforcement, laws must
provide explicit standards for those who apply them. Grayned, 408 U.S.  at 108, 33 L. Ed. 2d  at 227, 92 S. Ct.  at 2299. A statute
violates due process under either or both the United States or
Illinois Constitution on the basis of vagueness "only if its
terms are so ill-defined that the ultimate decision as to its
meaning rests on the opinions and whims of the trier of fact
rather than any objective criteria or facts." People v. Burpo,
164 Ill. 2d 261, 266 (1995).
     The Act is a relatively straightforward statute. That a
prohibition against escrow waiver fees was not explicitly
mentioned does not cast doubt as to its constitutional validity.
Any "confusion" was interposed by defendant's attempt to 
frustrate the purpose of the Act, clearly a borrower-friendly
statute.
     Lastly, defendant maintains that no cause of action can be
brought under the Consumer Fraud Act. 815 ILCS 505/2 (West 1992).
Plaintiffs' complaint alleges that Norwest violated the Consumer
Fraud Act by (1) unlawfully requiring them to pay an opt-out fee
and (2) failing to inform them that Norwest's imposition of this
fee violated the Act. 
     Section 2 of the Consumer Fraud Act provides:
          "Unfair methods of competition and unfair or
          deceptive acts or practices, including but not limited
          to the use or employment of any deception, fraud, false
          pretense, false promise, misrepresentation or the
          concealment, suppression or omission of any material
          fact, with intent that others rely upon the
          concealment, suppression or omission of such material
          fact, *** are hereby declared unlawful whether any
          person has in fact been misled, deceived or damaged
          thereby." 815 ILCS 505/2 (West 1992).   
     We cannot say that plaintiffs have stated a cognizable cause
of action under the Consumer Fraud Act.  The parties have had a
legitimate disagreement over the implications of section 6 of the
Act.  While defendant has urged upon us a position with which we
do not agree, we cannot say that such a position is the result of
any "unfair or deceptive acts or practices" nor can the acts of
defendant be characterized as "fraud, false pretense, false
promise" or concealment of any material fact.  This is unlike the
culpable defendant in People ex rel. Hartigan v. Stianos, 131
Ill. App. 3d 575 (1985), who adopted a practice of charging
consumers sales tax in an amount in excess of the amount
authorized by law. Defendant there was well aware of the
appropriate tax levied on the transaction. The Consumer Fraud Act
prohibits deception, not error. Mackinac v. Arcadia National Life
Insurance Co., 271 Ill. App. 3d 138 (1995); People ex rel.
Hartigan v. Maclean Hunter Publishing Corp., 119 Ill. App. 3d
1049 (1983). Having made this statement, we do not reject or mean
to affect those cases which have properly stated that an innocent
misrepresentation can be actionable under the Consumer Fraud Act.
Dwyer v. American Express Co., 273 Ill. App. 3d 742 (1995);
Washington Courte Condominium Association-Four v. Washington-Golf
Corp., 267 Ill. App. 3d 790 (1994). 
     The plaintiffs rely upon Heastie v. Community Bank, 727 F. Supp. 1133 (N.D. Ill. 1990), where the seller required the
purchaser to execute a side agreement waiving her rights to
assert certain claims and defenses of which the seller was aware. 
This is hardly the instant case, where parties disagree about the
effect of an unconstrued statute.
     We do not believe that the assertion of lender's right to an
escrow waiver fee is a per se violation of the Consumer Fraud
Act.  Although the Consumer Fraud Act has loosened the
requirement of scienter (Roche v. Fireside Chrysler-Plymouth,
Mazda, Inc., 235 Ill. App. 3d 70 (1992)) and released the
claimant of the burden of showing reliance, there must be a claim
seated in deceptive acts rather than a reasonable difference of
opinion as to the meaning of an act of the Illinois General
Assembly.  If, the day after this opinion is spread of record,
defendant seeks to impose such a fee upon a borrower, a different
result would obtain.  By this, we do not mean that every deceiver
is like every dog, entitled to one bite.  We mean only that these
facts do not lend themselves to an action under the Consumer
Fraud Act.     
     In conclusion, we find the defendant's imposition of an
escrow waiver fee is prohibited by the Act, which is not
preempted by the Deregulation Act or unconstitutionally vague.
Further, we find that plaintiffs have failed to state a cause of
action under the Consumer Fraud Act.  Accordingly, we reverse the
order of the trial court dismissing plaintiffs' complaint as to
count I and affirm as to count II.
     Affirmed in part; reversed in part and remanded.
     TULLY, P.J., and GALLAGHER, J., concur.