Stern v. Norwest Mortgage

Stern v. Norwest Mortgage, Inc., Nos. 82412, 82512 cons.
(10/23/97)


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slip opinion is being made available prior to the Court's
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final decision of the Court. The official copy of the
following opinion will be published by the Supreme Court's
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Docket Nos. 82412, 82512 cons.--Agenda 23--May 1997.
STEPHEN STERN et al., Appellants and Cross-Appellees,
v. NORWEST MORTGAGE, INC., Appellee and Cross-
Appellant.
Opinion filed October 23, 1997.

JUSTICE MILLER delivered the opinion of the court:
Stephen Stern and his wife, Catherine Harth
(plaintiffs), filed a class action in the circuit court
of Cook County against Norwest Mortgage, Inc.
(defendant). Plaintiffs claimed that defendant violated
the Mortgage Escrow Account Act (Escrow Act) (765 ILCS
910/1 et seq. (West 1992)) and the Consumer Fraud and
Deceptive Business Practices Act (Fraud Act) (815 ILCS
505/2 (West 1992)). The circuit court granted defendant's
section 2--615 motion to dismiss (735 ILCS 5/2--615 (West
1992)), finding that the Escrow Act did not prevent
defendant from charging an "escrow waiver fee." On
appeal, the appellate court reversed and remanded as to
defendant's right to impose an escrow waiver fee. 284
Ill. App. 3d 506, 510-12. The panel, however, affirmed as
to plaintiffs' failure to state a cause of action under
the Fraud Act. 284 Ill. App. 3d at 512-13. Both parties
filed petitions for leave to appeal. We granted leave to
appeal on both petitions (155 Ill. 2d R. 315),
consolidated the cases and now affirm the decision of the
appellate court.

I. BACKGROUND
In July 1992, plaintiffs obtained a mortgage loan
from defendant in order to purchase a house in Chicago.
Under the Escrow Act, plaintiffs had the option of
pledging an interest-bearing time deposit with the
mortgage lender in lieu of the lender's establishing an
escrow account in order to cover the payment of
anticipated taxes. Defendant informed plaintiffs that
they would be assessed an "escrow waiver fee" equal to
0.25% of the principal amount of the loan if they chose
to pledge an interest bearing time deposit. This amount
equalled $492.50. Plaintiffs exercised this option and
pledged a certificate of deposit with defendant because
it was less costly than maintaining an escrow account.
In June 1993, plaintiffs brought a class action
against defendant alleging that defendant violated the
Escrow Act (765 ILCS 910/1 et seq. (West 1992)) and the
Fraud Act (815 ILCS 505/2 (West 1992)). The Escrow Act
provides in relevant part: "In 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). Plaintiffs claimed that
defendant's practice of charging an escrow waiver fee
when a borrower elected to pledge an interest-bearing
time deposit violated section 6 of the Escrow Act.
Further, plaintiffs claimed defendant misrepresented the
provisions of the Escrow Act in violation of the Fraud
Act (805 ILCS 505/2 (West 1992)).
Claiming that plaintiffs failed to state a claim
upon which relief could be granted, defendant filed a
section 2--615 motion to dismiss. On April 6, 1995, the
trial court granted defendant's motion to dismiss.
Plaintiffs appealed.
On appeal, the appellate court affirmed in part and
reversed and remanded in part. 284 Ill. App. 3d at 513.
First, the court reversed the trial court by finding that
charging a fee for the waiver of an escrow account is
contrary to the plain language and purpose of the Escrow
Act. 284 Ill. App. 3d at 510. The court also rejected
defendant's arguments that the Escrow Act, as construed
by the plaintiffs, was preempted by federal law and
unconstitutionally vague. 284 Ill. App. 3d at 510-12.
Second, the appellate court affirmed the trial court's
decision that the plaintiffs failed to state a cause of
action under the Fraud Act. 284 Ill. App. 3d at 512-13.

II. ANALYSIS
We begin our analysis with the Escrow Act. In
construing the Escrow Act, we must ascertain and give
effect to the intent of the legislature. Varelis v.
Northwestern Memorial Hospital, 167 Ill. 2d 449, 454
(1995). When possible, the intention of the legislature
should be determined from the language of the statute.
Nottage v. Jeka, 172 Ill. 2d 386, 392 (1996). Besides
examining the language of an act, a court should look to
the evil that the legislature sought to remedy or the
object it sought to attain in enacting the legislation.
Castaneda v. Illinois Human Rights Comm'n, 132 Ill. 2d 304, 318 (1989). In the present case, we must determine
whether the Escrow Act, in light of the purpose for which
the legislature passed the Act, prohibits the imposition
of an escrow waiver fee when a borrower elects to pledge
an interest-bearing time deposit in lieu of establishing
an escrow account for the payment of anticipated taxes.
As stated above, section 6 states: "In 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). The plain language of
section 6 clearly provides a borrower with a right to
choose between two options. The borrower may elect to
pledge an interest-bearing time deposit to cover payment
of future anticipated taxes. If the borrower does not
elect this option, the mortgage lender can establish an
escrow account to cover these payments. There is no
provision in section 6 of the Escrow Act which allows for
substitution of a third option or conditions to be placed
on whichever of the two options the borrower elects.
Before passage of the Escrow Act, most standard
mortgage loans required the borrower to make monthly
deposits into an escrow account to cover future taxes and
other anticipated expenditures. Lenders were under no
obligation to pay the borrower interest on the funds in
the escrow account; thus, lenders received the benefit of
the funds deposited by the borrower in the escrow
account. In passing the Escrow Act, the legislature
sought to give borrowers the benefit of their early
payments of taxes by allowing them to pledge interest-
bearing time deposits as opposed to having lenders
establish escrow accounts.
The legislature clearly wanted the borrower to have
the right to pledge an interest-bearing time deposit
instead of establishing an escrow account. If a mortgage
lender is allowed to charge an escrow waiver fee when a
borrower exercises that right, the lender would be able
to effectively take away a right given the borrower by
the legislature. We do not believe that the legislature
would have provided a benefit to borrowers only to give
the lender a means to reduce or eliminate this benefit.
It is evident that the legislature intended for borrowers
electing to pledge an interest-bearing time deposit to
retain the proceeds from that deposit. It is also evident
that the legislature intended to provide only two options
to secure the payment of anticipated taxes. We believe
that a lender cannot charge an escrow waiver fee when the
borrower pledges an interest-bearing time deposit because
such a fee is inconsistent with the language of the
statute and the legislative intent to provide a benefit
to the borrower.
Having determined that the Escrow Act does not allow
defendant to charge an escrow waiver fee should plaintiff
elect to pledge an interest-bearing time deposit, we must
next determine whether that portion of section 6
prohibiting escrow waiver fees is preempted by federal
law.
The supremacy clause of the United States
Constitution states that "the 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, cl. 2. Congress'
purpose " `is the ultimate touchstone' of pre-emption
analysis." Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516, 120 L. Ed. 2d 407, 422, 112 S. Ct. 2608, 2617
(1992), quoting Malone v. White Motor Corp., 435 U.S. 497, 504, 55 L. Ed. 2d 443, 450, 98 S. Ct. 1185, 1190
(1978). "Congress' intent to preempt State law may be
manifested `by express provision, by implication, or by
a conflict between federal and state law.' " Busch v.
Graphic Color Corp., 169 Ill. 2d 325, 335 (1996), quoting
New York State Conference of Blue Cross & Blue Shield
Plans v. Travelers Insurance Co., 514 U.S. 645, 654, 131 L. Ed. 2d 695, 704, 115 S. Ct. 1671, 1676 (1995).
When reading the Escrow Act to include a prohibition
against escrow waiver fees, defendant claims that the
federal Depository Institutions Deregulation and Monetary
Control Act of 1980 (DIDMCA) (12 U.S.C. sec. 1735f--7a
(1994)) preempts the Escrow Act. DIDMCA states in
relevant part: "The provisions of the constitution or the
laws of any State expressly limiting the rate or amount
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" made after March 31, 1980, and secured
by a first lien on residential real property. 12 U.S.C.
sec. 1735f--7a(1) (1994).
We must initially determine whether the Escrow Act's
prohibition of an escrow waiver fee falls under the
purview of DIDMCA. In the present case, defendant charged
plaintiffs a "one-time service fee" equal to 0.25% of the
total principal amount of the loan upon plaintiffs'
election to pledge an interest-bearing time deposit in
lieu of defendant establishing an escrow account. If the
section 6 prohibition of this fee expressly limits the
rate or amount of interest, discount points, finance
charges, or other charges of the mortgage loan, federal
law may preempt the section.
Under regulations promulgated pursuant to section
501 of DIDMCA, the Federal Home Loan Bank Board defined
the contours of the federal regulatory scheme: "Nothing
in this section preempts limitation in state laws on
prepayment charges, attorneys fees, late charges or other
provisions designed to protect borrowers." 12 C.F.R. sec.
590.3(c) (1997). As stated above, the legislature passed
the Escrow Act with the intent to provide borrowers with
the monetary benefit mortgage lenders had traditionally
received from escrow accounts. This measure was clearly
designed to protect borrowers; thus, DIDMCA does not
preempt the Escrow Act.
Our decision is supported by an examination of the
purpose behind passage of DIDMCA. In the late 1970s,
interest rates increased above the level lenders could
legally charge under state usury laws. To spur the home
mortgage market and encourage home sales, Congress passed
DIDMCA and eliminated interest rate ceilings on first
mortgages. Congress' aim in enacting DIDMCA had
"particular emphasis on state usury laws which restrict
interest rates to below-market levels and result in
artificial disruptions in the supply of home-loan
mortgage funds." (Emphasis in original.) Grunbeck v. Dime
Savings Bank of New York, FSB, 74 F.3d 331, 339 (1st Cir.
1996). It is clear that DIDMCA is not meant to preempt
situations like the present case. Defendant cannot show
that the prohibition of escrow waiver fees falls under
the purview of DIDMCA.
Defendant additionally argues that if section 6 of
the Escrow Act is read to prohibit escrow waiver fees,
the Escrow Act is unconstitutionally vague. A statute
violates the due process clauses of the United States
Constitution or the 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,
265-66 (1995).
Here, our decision is based on the language of
section 6 and the purpose behind the passage of the
Escrow Act. That defendant may have reasonably believed
that the imposition of escrow waiver fees was not
prohibited by the Escrow Act is not sufficient to render
the statute unconstitutional for vagueness. The fact that
a statute might be susceptible of misapplication does not
necessarily make it unconstitutional. Stein v. Howlett,
52 Ill. 2d 570, 580 (1972). We do not find section 6 of
the Escrow Act to be so indefinite and uncertain that we
cannot determine the intention of the legislature. We
reject defendant's argument that section 6 of the Escrow
Act is void for vagueness.
Finally, defendant argues that the prohibition of
escrow waiver fees by the appellate court is a
legislative act that violates the separation of powers
doctrine by reading a prohibition into the statute. It is
the function of the judiciary to determine what the law
is and to apply statutes to cases. See In re Marriage of
Cohn, 93 Ill. 2d 190, 204 (1982); People v. Nicholls, 71 Ill. 2d 166, 179 (1978). Here, we are merely construing
section 6 of the Escrow Act and applying it to the
present case--there is no violation of the separation of
powers doctrine.
Having determined that charging an escrow waiver fee
violates section 6 of the Escrow Act, we must next
determine whether defendant violated the Fraud Act by
charging this fee to plaintiffs. Section 2 of the Fraud
Act states:
"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).
In the present case, we find that defendant's action
of charging plaintiffs an escrow waiver fee when
plaintiffs elected to pledge an interest-bearing time
deposit was not intended to deceive or defraud plaintiffs
or be unfair to plaintiffs. Further, defendant did not
conceal, suppress, or omit any material fact with the
intent that plaintiffs would rely on such action.
Defendant, in this case, merely made an honest mistake
concerning the interpretation of a statute that had yet
to be construed. While we have found that defendant's
action of charging an escrow waiver fee was prohibited
under the Escrow Act, we do not believe that the
defendant's actions in this case violated the Fraud Act.
See Lee v. Nationwide Cassel, L.P., 174 Ill. 2d 540, 550-
51 (1996).

III. CONCLUSION
For the foregoing reasons, we find that section 6 of
the Escrow Act prohibits a lender from charging an escrow
waiver fee when the borrower elects to pledge an
interest-bearing time deposit in lieu of the lender's
establishing an escrow account to cover payment of
anticipated taxes. Further, prohibiting such a fee is not
federally preempted by DIDMCA and is not
unconstitutionally vague or a violation of the separation
of powers doctrine. Additionally, we find that plaintiffs
have failed to state a cause of action under the Fraud
Act. We therefore affirm the appellate court's decision
that defendant violated the Escrow Act and affirm the
decision that plaintiffs have failed to state a cause of
action under the Fraud Act.

Affirmed.

JUSTICE HARRISON, concurring in part and dissenting
in part:
Contrary to the majority, I believe that plaintiffs
stated a cause of action under section 2 of the Consumer
Fraud Act (815 ILCS 505/2 (West 1992)) as well as the
Escrow Act (765 ILCS 910/1 et seq. (West 1992)). In
affirming the dismissal of plaintiffs' consumer fraud
claim, my colleagues assert that defendants did not
intend to deceive plaintiffs, but merely made an honest
mistake. The majority makes these assertions as if the
facts had been fully litigated and are now beyond
question. What is puzzling about this approach is that
the case has not yet gone to trial. We are still at the
pleading stage, and the matter is before us in the
context of a motion to dismiss under section 2--615 of
the Code of Civil Procedure (725 ILCS 5/2--615 (West
1994)).
A section 2--615 motion to dismiss attacks only the
legal sufficiency of the complaint. Urbaitis v.
Commonwealth Edison, 143 Ill. 2d 458, 475 (1991). When
the legal sufficiency of a complaint is challenged by a
section 2--615 motion, all well-pleaded facts in the
complaint are taken as true, and the reviewing court must
determine whether the allegations, when construed in the
light most favorable to plaintiff, are sufficient to
establish a cause of action upon which relief may be
granted. Connick v. Suzuki Motor Co., 174 Ill. 2d 482,
490 (1996). A complaint should not be dismissed for
failure to state a cause of action unless it clearly
appears that no set of facts can be proved under the
pleadings which will entitle the plaintiff to recover.
Bryson v. News America Publications, Inc., 174 Ill. 2d 77, 87 (1996).
To state a cause of action under section 2 of the
Consumer Fraud Act, a plaintiff must allege: (1) a
deceptive act or practice by defendant; (2) defendant's
intent that plaintiff rely on the deception; and (3) that
the deception occurred in the course of conduct involving
trade and commerce. Connick, 174 Ill. 2d at 501. There is
no basis for holding that plaintiffs' complaint fails to
meet these requirements.
Under the Consumer Fraud Act, "unfair or deceptive
acts or practices" are defined to include the use or
employment of any
"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 ***." 815 ILCS 505/2 (West
1992).
In the matter before us, there is no dispute that escrow
requirements were an important part of plaintiffs'
mortgage transactions with Norwest Mortgage and were
therefore material. Plaintiffs clearly allege that the
company misrepresented or concealed, suppressed or
omitted those requirements by failing to give notice to
plaintiffs, as required by law, that they could avoid
escrow without payment of a fee and by supplying
plaintiffs with information about escrow accounts that
was inconsistent with the law. The company obviously
intended consumers such as plaintiffs to rely on its
misrepresentations, suppressions, and omissions, and the
consumers did so rely. According to the complaint,
consumers paid the fee the company demanded even though
the fee was illegal and the company had no right to
collect it.
To suggest that there was no deception or unfairness
under these circumstances, as the majority does, requires
a view of honesty and justice I do not share and cannot
comprehend. If plaintiffs' allegations are true, as we
must assume them to be, what the company did here was to
extract money from consumers by violating the law. Under
any sensible construction, such conduct falls squarely
within the ambit of the Consumer Fraud Act.
My colleagues attempt to justify the company's
behavior on the grounds that the company did not intend
to deceive plaintiffs but "merely made an honest
mistake." Slip op. at 7. Unlike Lee v. Nationwide Cassel,
L.P., 174 Ill. 2d 540 (1996), however, no unsettled
principles of law were involved here and no legitimate
claim could be made that the defendant's conduct was
lawful. Under the facts alleged in this case, defendant's
conduct was clearly improper and illegal.
In any case, there is no "honest mistake" defense to
a claim brought under the Consumer Fraud Act. Although
the point has never been squarely addressed by our court,
the appellate court has consistently and repeatedly held
that even innocent or negligent misrepresentations are
actionable. See, e.g., Sohaey v. Van Cura, 240 Ill. App.
3d 266, 291 (1992), aff'd & remanded, 158 Ill. 2d 375
(1994); Smith v. Prime Cable, 276 Ill. App. 3d 843, 856
(1995); Griffin v. Universal Casualty Co., 274 Ill. App.
3d 1056, 1065 (1995); Warren v. LeMay, 142 Ill. App. 3d
550, 566 (1986). Under the Act, the good or bad faith of
the defendant is irrelevant. Harkala v. Wildwood Realty,
Inc., 200 Ill. App. 3d 447, 453 (1990). Accordingly, an
intent to deceive is not necessary to a finding of unfair
or deceptive conduct within the meaning of the statute.
People ex rel. Hartigan v. Stianos, 131 Ill. App. 3d 575,
578-79 (1985); Warren, 142 Ill. App. 3d at 566. The
majority has no basis in the law for holding otherwise.
For the foregoing reasons, I would allow plaintiffs
to proceed with their claim under the Consumer Fraud Act.
In all other respects I concur.