In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 03-3474
THOMAS W. MCCARTHY,
Plaintiff-Appellant,
v.
OPTION ONE MORTGAGE CORPORATION
and BNC MORTGAGE, INC.,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 01 C 3935—Joan B. Gottschall, Judge.
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ARGUED FEBRUARY 20, 2004—DECIDED APRIL 6, 2004
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Before FLAUM, Chief Judge, and BAUER and MANION,
Circuit Judges.
FLAUM, Chief Judge. Plaintiff Thomas McCarthy sued
BNC Mortgage, Inc. (“BNC”), his former mortgage lender,
and BNC’s servicer, Option One Mortgage Corporation
(“Option One”), alleging that they violated the Illinois
Interest Act, 815 ILCS 205/4, et seq., by assessing him a
prepayment penalty when he paid off his mortgage early.
The district court denied McCarthy’s motion for summary
judgment and granted summary judgment to the defen-
2 No. 03-3474
dants on the basis that the Alternative Mortgage
Transaction Parity Act, 12 U.S.C. §§ 3801, et seq. (“Parity
Act”), preempts the Illinois Interest Act. For the reasons
stated herein, we affirm the judgment of the district court.
I. Background
After entering into a sales contract for a house in
Waukegan, Illinois, Thomas and Sharon McCarthy applied
for a mortgage loan. Because the McCarthys’ credit report
included several adverse notations, their mortgage broker
advised them to apply for an adjustable rate mortgage loan.
A loan of this type in the amount of $145,800.00 was
executed between BNC and the McCarthys. Option One was
designated as servicer of the loan. The McCarthys’ loan
included a prepayment charge if they paid off the loan
within two years of its execution. The McCarthys paid off
the loan in March 2001, just over one year after the loan
was executed. A prepayment charge of $6,376.39 was as-
sessed.
Thomas McCarthy filed a one-count complaint in federal
district court, alleging that the prepayment charge violated
the Illinois Interest Act. The district court had jurisdiction
under 28 U.S.C. § 1332 because the parties to this action
are citizens of different states and the amount in contro-
versy exceeds $75,000. The district court granted summary
judgment in favor of the defendants based on evidence that
the Parity Act preempts the application of the Illinois
Interest Act to this case and that the Illinois Interest Act
does not apply to servicers such as Option One. McCarthy
appeals the decision of the district court.
II. Discussion
Responding to “increasingly volatile and dynamic changes
in interest rates,” Congress passed the Parity Act as Title
No. 03-3474 3
VIII of the Garn-St. Germain Depository Institutions Act in
1982. 12 U.S.C. § 3801(a)(1). Interest rate volatility had
impaired the ability of housing creditors to provide consum-
ers with fixed-term, fixed-rate credit secured by residential
property. To better meet consumer demand for credit
secured by real property, the Parity Act authorizes non-
federally chartered housing creditors to offer alternative
mortgages in accordance with federal regulations. Alterna-
tive mortgages are mortgages in which the interest rate or
finance charge may be adjusted or renegotiated, the debt
maturity date may be shortened, or other variations
uncommon to traditional fixed-rate, fixed-term transactions
are involved. 12 U.S.C. § 3802(1).1
Although federally chartered lenders were previously
permitted to issue alternative mortgages, many states had
laws prohibiting state-chartered lenders from providing this
type of credit. The Parity Act’s purpose is to “eliminate the
discriminatory impact that those [state] regulations have
upon nonfederally chartered housing creditors and provide
them with parity with federally chartered institutions.” 12
U.S.C. § 3801(b). Indeed, the Parity Act provides equal
opportunity for state-chartered lenders to offer alternative
mortgages as long as they comply with federal regulations.
If compliance is achieved, state regulations are preempted
by the Parity Act to the extent that they block state lenders
from extending credit on terms permitted under federal
regulations. See Ill. Ass’n of Mortgage Brokers v. Office of
Banks and Real Estate, 308 F.3d 762, 768 (7th Cir. 2002);
Nat’l Home Equity Mortgage Ass’n v. Face, 239 F.3d 633,
636 (4th Cir. 2001); Shinn v. Encore Mortgage Servs., Inc.,
96 F. Supp. 2d 419, 423 (D. N.J. 2000). To trigger preemp-
tion, lenders must comply with regulations governing
federal savings and loan associations, promulgated by the
1
The McCarthys’ loan from BNC is considered an alternative
mortgage.
4 No. 03-3474
Office of Thrift Supervision (“OTS”). 12 U.S.C. § 3803(a)(3).
The compliance standard is satisfied if a transaction is in
“substantial compliance” with the relevant regulations. 12
U.S.C. § 3803(b)(1).
OTS regulates prepayment penalties and authorizes state
housing creditors, like their federal counterparts, to charge
prepayment penalties to consumers. 12 C.F.R. § 560.220;
Shinn, 96 F. Supp. 2d at 423. In contrast, the Illinois
Interest Act prohibits prepayment penalties for loans with
an annual percentage rate that exceeds 8%. 815 ILCS
205/4(a). As this provision is in direct conflict with the
Parity Act, the Illinois Interest Act’s prohibition of pre-
payment penalties is preempted if a non-federal housing
creditor elects to be governed by and complies with federal
law.
As preemption is an affirmative defense, it is the de-
fendants’ burden to establish that BNC substantially
complied with the OTS regulations. In this case, summary
judgment is appropriate because the defendants have
met their burden by demonstrating that BNC is a housing
creditor and that it substantially complied with the reg-
ulations identified as applicable by OTS in 12 C.F.R.
§ 560.220: 12 C.F.R. §§ 560.33 [late charges], 560.34
[prepayments], 560.35 [adjustments to home loans], and
560.210 [disclosures for variable rate transaction].2
A housing creditor is defined as “any person who reg-
ularly makes loans, credit sales, or advances secured by
interest in [residential real estate properties],” and who is
licensed under applicable state law. 12 U.S.C. § 3802(2).
BNC made 4,884 adjustable rate mortgage loans in the year
2
OTS changed the regulations applicable to non-federal housing
creditors effective July 1, 2003; 12 C.F.R. § 560.220 now identifies
only §§ 560.35 and 560.210 as applicable for state housing
creditors.
No. 03-3474 5
2000, thus qualifying as a person who regularly makes
mortgage loans. BNC holds an Illinois Residential Mortgage
License. Accordingly, BNC qualifies as a housing creditor.
McCarthy disputes that BNC substantially complied with
issuing the requisite disclosures mandated by § 560.210.
Specifically, McCarthy contends that he was not given a
Consumer Handbook, as required by 12 C.F.R. § 226.19(b).
However, BNC demonstrated substantial compliance with
this provision by presenting evidence of (1) procedures in
place to ensure compliance with OTS regulations with
respect to the Handbook, (2) a cover letter indicating that
the Handbook was mailed to McCarthy, and (3) signed
acknowledgments of receipt by McCarthy. As previously
explained, the defendants do not need to prove that McCar-
thy actually received the Handbook, but rather that BNC
substantially complied with the regulation. The evidence
presented by the defendants with respect to the Handbook,
particularly the detailed procedures followed by BNC to
ensure the that Handbooks are sent to each borrower, is
sufficient to show substantial compliance. Besides, evidence
of regular office procedures and customary practices of a
sender gives rise to a presumption of delivery and this
Court has rejected the notion that this type of evidence may
be rebutted by a mere denial of receipt. See Godfrey v.
United States, 997 F.2d 335, 338 (7th Cir. 1993). Accord-
ingly, McCarthy’s mere assertion of non-receipt is insuffi-
cient to raise a genuine issue of fact as to BNC’s substantial
compliance with 12 C.F.R. § 226.19(b).
McCarthy does not present any evidence to dispute BNC’s
substantial compliance with respect to the other OTS
regulations. Rather, McCarthy primarily argues that the
evidence establishing substantial compliance with these
regulations was submitted in violation of Fed. R. Civ. P.
26(a)’s mandatory disclosure requirements. Specifically,
McCarthy disputes witness affidavits and an OTS opinion
letter that were submitted in response to his motion for
6 No. 03-3474
summary judgment. Although McCarthy raised the Hand-
book issue in response to the defendants’ motion to dismiss,
he waited until the close of discovery to raise new theories
of how the defendants failed to satisfy the OTS regulations.
He then sought to bar the defendants from presenting
evidence pertaining to the newly raised issues. As McCar-
thy explained in his brief, his “litigation strategy was to
stand back and see if Defendants would come forward with
. . . evidence.” App. Brief, p. 27. Following this tactic,
McCarthy did not make any requests for documents, serve
any interrogatories, or take any depositions during discov-
ery.
While parties may pursue their litigation strategies of
choice, they must be prepared to accept the attendant risks.
In this case, the risk that the district court would deny
McCarthy’s requests to exclude evidence materialized. It is
well-settled that district courts enjoy broad discretion in
controlling discovery. See Leffler v. Meer, 60 F.3d 369, 374
(7th Cir. 1995). A district court’s exercise of discretion on
discovery matters will only be reversed upon a showing of
a clear abuse of discretion. Id. Rule 37 of the Federal Rules
of Civil Procedure restrains courts from excluding relevant
testimony when a party’s failure to disclose a witness is
substantially justified or harmless. Fed. R. Civ. P. 37(c)(1);
see Sherrod v. Lingle, 223 F.3d 605, 612 (7th Cir. 2000). In
denying the defendants’ motion to dismiss, the district court
stated that McCarthy’s “only response to defendants’ claim
of preemption is that defendants . . . failed to provide him
with either the [ARM Booklet] or a suitable substitute.”
McCarthy v. Option One Mortgage Corp., No. 01 C 3935,
2001 WL 1826284, at *2 (N.D. Ill. Feb. 11 2001). In light of
the fact that some issues were not disputed until summary
judgment, the defendants failure to initially disclose some
evidence appears to have been substantially justified.
Accordingly, the district court did not abuse its discretion
by not excluding the disputed evidence.
No. 03-3474 7
Lastly, McCarthy contends that BNC failed to dem-
onstrate substantial compliance with § 560.35, which re-
quires that any index used for interest rate adjustments
must be “a national or regional index.” 12 C.F.R.
§ 560.35(d)(2). McCarthy contends that the defendants have
failed to show that LIBOR, the index that BNC uses to
adjust interest rates, is a national or regional index. To the
contrary, as explained in an OTS opinion letter submitted
by the defendants, OTS has found that LIBOR qualifies as
a national or regional index for the purposes of § 560.35(d).
McCarthy argues that an agency opinion letter such as this
one has no legal force. Surely, however, we may consider
OTS’s interpretation of its own regulation as persuasive
authority. In the absence of any evidence indicating that
LIBOR is not a national index, we conclude that the OTS
opinion letter sufficiently demonstrates BNC’s substantial
compliance with § 560.35.
In sum, as no issue of material fact exists as to BNC’s
status as a housing creditor and its substantial compliance
with all four OTS regulations, summary judgment was
properly granted in favor of the defendants. Since we con-
clude that McCarthy’s claim under the Illinois Interest Act
is preempted by the Parity Act, we need not address the
defendants’ argument that the Illinois Interest Act does not
apply to loan servicers.
III. Conclusion
We AFFIRM the district court’s grant of summary judg-
ment to the defendants and denial of summary judgment to
the plaintiff.
8 No. 03-3474
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—4-6-04