Banking transactions are subject to numerous rules, both at the state and federal level. This case involves application of federal statutory law and state common law to a deal that went sour.
The borrowers had a longstanding relationship with the bank and borrowed $100,000 to build a cabin on the borrower’s acreage. At the time, the acreage was already mortgaged to another lender so the bank paid the balance due on the mortgage to obtain a first lien. Also, the bank deducted from the $100,000 to be loaned to the borrowers slightly over $12,000 to pay off a previous loan the borrowers had with the bank. The result was that the borrowers received less than $100,000 for construction of their cabin. In a separate transaction entered into a couple of years later, the borrowers thought that they were merely renewing old loans instead of creating a new loan (as the bank maintained). The borrowers sued on the basis that the loan papers didn’t clearly itemize all charges imposed on the borrower and otherwise failed to comply with the requirements of federal law for a HUD-1 form because it stated that their previous loans were merely being renewed. They also claimed that the bank negligently misrepresented the loan transaction, based on Iowa common law. The trial court granted summary judgment for the bank on both claims.
On appeal, the Iowa Court of Appeals affirmed. On the federal claim, the court noted that earlier court opinions had held that an individual does not have a private right of action to bring a case under the particular provision of the Real Estate Settlement Procedures Act that the borrowers claimed the bank violated. As for the state tort claim, the court held that the tort of negligent misrepresentation didn’t apply because the borrowers weren’t harmed in their relations with third parties. All that was involved was a banking transaction between the borrower and the bank. Sturm v. Peoples Trust & Savings Bank,713 N.W.2d 1 (Iowa Sup. Ct. 2006).