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Ciolino v. Seterus, Inc.

United States District Court, N.D. Illinois, Eastern Division

August 16, 2016

PATRICK CIOLINO, on behalf of himself and a class of similarly situated individuals, Plaintiff


          MATTHEW F. KENNELLY United States District Judge

         Patrick Ciolino claims that his mortgage servicer, Seterus, Inc., was required to terminate his private mortgage insurance by a specific date but did not do so. He has sued Seterus for violation of the Homeowners Protection Act (HPA or the Act), 12 U.S.C. §§ 4902-4904 (count one of the complaint), breach of contract (count two), and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA), 815 ILCS 505 (count three). Seterus asserts that the HPA preempts Ciolino's breach of contract and ICFA claims and has moved to dismiss counts two and three of the complaint. In the alternative, Seterus contends that Ciolino has otherwise failed to state a breach of contract or ICFA claim. For the reasons stated below, the Court concludes that the HPA preempts Ciolino's state law claims and grants Seterus's motion to dismiss on that basis.


         On June 7, 2007, Marquette Bank extended to Ciolino a mortgage loan, secured by his home, with a principal balance of $226, 800. In connection with the loan, Ciolino was required to purchase, and did purchase, private mortgage insurance (PMI). With his PMI purchase, Ciolino received the required PMI disclosure form, which outlined his PMI cancellation rights and responsibilities under the HPA. That disclosure form notified Ciolino that his PMI policy would automatically terminate on the date his principal balance was scheduled to reach 78 percent of the original value of the property. The original value of Ciolino's property was $252, 000, and his principal balance was scheduled to reach 78 percent of that amount on August 1, 2011.[1]

         In 2011, Seterus began servicing Ciolino's loan, and in February of that year, Ciolino and Seterus entered into a permanent loan modification agreement. Ciolino alleges that Seterus modified the terms of the original loan without obtaining a new appraisal and that the modification increased the principal balance from $219, 064.84 to $220, 091.27. According to Ciolino, the modification did not significantly change the loan-to-value ratio for his loan or provide a new amortization schedule. He asserts, however, that if Seterus had properly calculated the automatic PMI termination date based on the loan modification, he would have been entitled to a new automatic termination date, which would have been on some date in late 2013.[2]

         Under the HPA, a mortgagor's requirement to make PMI payments in connection with a residential mortgage transaction "shall terminate . . . on the termination date" if the mortgagor is current on his payments. 12 U.S.C. § 4902(b). The "termination date" is the date on which the principal balance of the mortgage is first scheduled to reach 78 percent of the original value of the property securing the loan. Id. § 4901(18). If a mortgagor and mortgagee (or holder of the mortgage) agree to a loan modification, "the cancellation date, termination date, or final termination shall be recalculated to reflect the modified terms and conditions of such loan." Id. § 4902(d). Following termination of PMI, the mortgagor may not be required to make any more premium payments, and the servicer must return any unearned PMI premium no later than 45 days after termination. Id. § 4902(e)-(f). Once the PMI has been terminated, the servicer must notify the mortgagor in writing, within 30 days of termination, that the PMI has terminated and that he no longer has PMI and owes no further premium, payments, or other fees in connection with the PMI. Id. § 4904(a). If, however, the servicer determines that a mortgage did not meet the requirements for PMI termination, it must provide written notice, within 30 days of the scheduled termination date, of the grounds relied on to make that determination. Id. § 4904(b).

         Ciolino alleges that Seterus failed to terminate his PMI policy on either the original termination date of August 1, 2011 (or May 1, 2012) or on any newly calculated date (such as sometime in late 2013). In addition, he avers that Seterus never notified him of a newly calculated PMI termination date or of his rights to automatic PMI termination pursuant to a newly calculated date. According to Ciolino, Seterus's failure to terminate the PMI or to provide him with the appropriate notifications violated the HPA. Ciolino also contends that the PMI disclosure form that he was provided became part of a contract between him and Seterus, a contract that he claims Seterus violated by failing to terminate PMI at the proper time. Ciolino also asserts that, by failing to comply with the HPA, Seterus engaged in unfair acts and practices in violation of the ICFA.

         The HPA contains an express preemption clause, which provides:

With respect to any residential mortgage or residential mortgage transaction consummated after the effective date of this chapter . . . the provision of this chapter shall supersede any provisions of the law of any State relating to requirements for obtaining or maintaining private mortgage insurance in connection with residential mortgage transactions, cancellation or automatic termination of such private mortgage insurance, any disclosure of information addressed by this chapter, and any other matter specifically addressed by this chapter.

12 U.S.C. § 4908(a)(1). "Protected State laws"-laws concerning PMI requirements enacted before or within two years after July 29, 1998 (the date the HPA was adopted) by a state that had PMI requirements in effect before January 2, 1998-are not preempted by the HPA unless they are inconsistent with the Act. Id. § 4908(a)(2)(A), (C). A protected state law that requires earlier PMI termination or the disclosure of more information, earlier disclosure, or more frequent disclosures is not considered inconsistent with the HPA. See Id. § 4908(a)(2)(B).

         Seterus argues that Ciolino's breach of contract and ICFA claims are expressly preempted because they are based on state laws "relating to requirements for obtaining or maintaining [PMI] in connection with residential mortgage transactions." Id. § 4908(a)(1). Ciolino responds that his claims are based on state laws of general application that do not provide any specific guidance concerning PMI and that, in any event, courts do not find preemption in cases like this where the state laws at issue impose no additional obligations but merely provide plaintiffs with additional remedies to address conduct prohibited by federal law. As discussed below, the Court agrees with Seterus that Ciolino's state law claims are based on laws "relating to" the HPA's requirements and are therefore preempted.


         Seterus has moved to dismiss Ciolino's state law claims under Federal Rule of Civil Procedure 12(b)(6). In determining whether these claims are preempted, therefore, the Court accepts the allegations in Ciolino's complaint as true and draws reasonable inferences in his favor. See Healy v. Metro. Pier & Exposition Auth., 804 F.3d 836, 838 (7th Cir. 2015).

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