Online lender Quicken Loans Inc. sued California in federal court Tuesday, challenging a state law that prevents lenders from charging interest until the day before a mortgage is officially recorded.
The Livonia, Mich., company claimed federal law, which allows interest to be charged as soon as loan funds go into escrow, takes precedence over the state statute. It was the same argument that Wells Fargo & Co. made this month in a lending-practices dispute with the California Department of Corporations.
The Quicken suit, filed in U.S. District Court in Sacramento, names as a defendant the state's corporations commissioner, Demetrios A. Boutris. It seeks a decree that federal law preempts state law governing mortgage interest payments, and asks the court to order Boutris to stop enforcing the state law.
An analysis by the state Senate Finance Committee in 2000 found that borrowers typically ask for funds to be deposited into escrow the day before a home loan is scheduled to close because most county recorders record loans at 8 a.m. In such cases, lenders would start getting interest immediately.
However, it sometimes takes days or weeks for title companies and county personnel to record mortgages, "a process that is outside the control of the lender," said William Emerson, Quicken Loans' chief executive.
The state's law creates "in effect an interest-free loan" until the mortgage is recorded, he said.
Boutris threatened last week to pull Wells Fargo's lending license because the bank was failing to comply with the state lending law. In its own federal lawsuit, Wells Fargo has asked the U.S. District Court in Sacramento to rule that federal lending law takes precedence.
Quicken Loans is a former unit of software firm Intuit Inc.
Quicken Loans made $160 million worth of residential loans in California during the fourth quarter of 2002, according to DataQuick, ranking it No. 115 in the state.
Times staff writer Jesus Sanchez contributed to this report.