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A divided state Supreme Court handed the financial services industry a major victory Monday by invalidating an Oakland ordinance that regulated predatory lending practices in the home mortgage market. The 4-3 majority held that a similar state law approved by the governor in 2001 pre-empted the city’s ordinance, which had been adopted eight days earlier. “The provisions of [the state law] ‘are so extensive in their scope that they clearly show an intention by the Legislature to adopt a general scheme for the regulation of’ predatory lending tactics in home mortgages,” Justice Janice Rogers Brown wrote. She was joined by Justices Marvin Baxter, Kathryn Mickle Werdegar and Ming Chin. In a sharp dissent, Chief Justice Ronald George said legislators had argued long and hard about whether to include language in the state law that spelled out its relationship to local ordinances, but chose not to as part of a compromise to ensure the legislation’s passage. “The majority’s assertion that the Legislature’s silence on pre-emption was inadvertent, or that the Legislature believed that express pre-emption language was unnecessary, is simply untenable,” George wrote. Justices Joyce Kennard and Carlos Moreno concurred. The case had been closely watched by major lenders, which feared that other cities would follow suit and produce possibly hundreds of separate regulations all over the state. Los Angeles had already adopted its own ordinance — which it immediately put on hold pending the outcome of this case — and similar laws are under attack in other states. Oakland’s ordinance was aimed at protecting low-income homeowners targeted by unethical mortgage lenders in the so-called subprime home mortgage market. Chief Justice George noted in his dissent that the predatory practices were “particularly aggravated” in Oakland because of a high number of minority and low-income homeowners and the pressures of gentrification. “Because of the local, varying nature of the problem,” he wrote, “this is not a case in which having differing local standards is wholly illogical.” George also said the local ordinance didn’t undermine the state goals of providing protection to low-income homeowners. “To the contrary,” he wrote, “the ordinance grants borrowers additional rights not afforded under state law, such as restrictions on prepayment penalties, mandatory credit counseling and the opportunity to present defenses to secondary buyers of their mortgages if the borrowers have been victimized by predatory lending practices. “Far from subverting [the state law],” he held, “the ordinance furthers the stated goal of the state legislation.” Justice Brown, however, dismissed that argument, saying that the state’s interest in uniformity transcends the concerns of a particular city. The dissent’s approach, she wrote, “would mean that any city which claimed to experience a disproportionate number of foreclosures, or instances of securities fraud, could simply write its own measures regardless of any confusion these competing measures may foster.” Oakland City Attorney John Russo, who couldn’t be reached for comment, issued a statement expressing the city’s disappointment. “We couldn’t agree more with Chief Justice George’s dissenting opinion,” he said. “If the court won’t allow us to protect our most vulnerable citizens, it’s time for the state Legislature to provide some legislation with real protections.” Burlingame lawyer Steven Williams, a Cotchett, Pitre, Simon & McCarthy partner who shared oral argument with Russo in November, said the opinion “marks a shift” in the court’s view of relationships between cities and the state. Previously, he said, local governments could enact ordinances unless there was a clear intent that state law pre-empted. “There’s no doubt that fact isn’t here,” he said, adding that the ruling could let the state pre-empt local regulations in areas as diverse as liquor, drugs, prostitution and gangs. Mark Kenney, a partner in San Francisco’s Severson & Werson who argued the case for the American Financial Services Association, called Monday’s ruling “fairly momentous.” “The secondary market which was so important in making loans available to the historically underserved,” he said in a prepared statement, “just won’t tolerate an unpredictable mess of local regulation.” The ruling is American Financial Services Association v. City of Oakland, 05 C.D.O.S. 845.

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