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Eleventh Circuit Reverses Dismissal of FDCPA Claim Involving MERS
On March 30, the Eleventh Circuit Court of Appeals reversed the dismissal of a FDCPA claim stemming from a communication to the plaintiff that erroneously identified MERS Corp. as the plaintiff’s creditor. Shoup v. McCurdy & Candler LLC, No. 10-14619, 2012 WL 1071196 (11th Cir. Mar. 30, 2012). The plaintiff obtained a mortgage from America Wholesale Lender. MERS was the grantee acting as the lender’s nominee under the mortgage contract. After the plaintiff defaulted, MERS’s law firm sent an initial communication letter described as an attempt to collect a debt and identifying MERS as the “creditor on the above referenced loan.” The mortgagee filed suit under the FDCPA, alleging that MERS is not a creditor and that by falsely stating so, the law firm committed a FDCPA violation. The district court granted the defendant law firm’s 12(b)(6) motion to dismiss, concluding that MERS was a creditor and that even if it was not, the purported violation was harmless. In its reversal, the Eleventh Circuit reasoned that the FDCPA makes clear that (i) “any false representation” in the collection of a debt is a violation of the statute, (ii) a “creditor” under the statute would not include MERS in this instance, because MERS was not owed a debt, and (iii) any failure to comply with the law subjects the violator to actual and statutory damages.
Fair Housing Groups File First REO Complaint
Last week we posted about plans by the National Fair Housing Alliance and certain of its member organizations to file administrative complaints and/or lawsuits against multiple financial institutions for alleged discriminatory practices with regard to real estate owned (REO) properties in violation of the Fair Housing Act. Yesterday, the first such complaint was filed with the Department of Housing and Urban Development. The filing triggers a process through which HUD will now conduct its own investigation of the issues presented. The complaint is based on an NFHA report released earlier this month, which overlooks key considerations with regard to servicer management of REO properties. In announcing this complaint, NFHA indicated another will be filed next week. Servicers should expect several additional complaints in the coming weeks and months.
Federal Court Approves Multi-Party Mortgage Servicing Settlement
On April 5, the U.S. District Court for the District of Columbia approved the consent orders that comprise the previously announced settlement of various government probes, including investigations and inquiries by numerous federal regulators and 49 state Attorneys General, into alleged mortgage-related violations by five large mortgage servicers.
Ohio Amends Ability to Repay Mortgage Rules
Last month, the Ohio Attorney General’s office finalized amendments to that state’s “ability to repay” rules adopted under the Ohio Consumer Sales Practices Act. Under that Act, it is unconscionable for a lender to, among other things, (i) engage in a pattern or practice of providing consumer transactions to consumers based predominantly on the supplier’s realization of the foreclosure or liquidation value of the consumer’s collateral without regard to the consumer’s ability to repay the loan in accordance with its terms, and (ii) enter into a consumer mortgage transaction knowing there was no reasonable probability of payment of the obligation by the consumer. Effective March 30, 2012, the Act’s two new rules (available here and here) provide a safe harbor for certain loans. A consumer will be considered to have an ability to repay and to have a reasonable probability of payment under the provisions identified above if the lender is offering a fully-amortizing fixed-rate refinance loan that (i) has the same or lesser interest rate as the rate of the consumer's current loan, (ii) has the same or lesser principal amount as the consumer's current loan, and (iii) does not extend the payoff date of the consumer's current loan.
West Virginia Removes Mortgage Licensing Exemption, Creates Procedure for Abandoned Personal Property Following Foreclosure
On April 2, West Virginia Governor Tomblin signed into law Senate Bill 336 and Senate Bill 360, both effective June 8, 2012. Senate Bill 336 eliminates an exemption under the states residential mortgage licensing requirement. Prior to the change, mortgage lenders and brokers operating under the regular supervision and examination for consumer compliance by an agency of the federal government were exempt from having to obtain a state license. Those entities now must obtain a license and comply with related state laws. Federally insured depository institutions remain exempt from the licensing requirements. Senate Bill 360 creates a procedure to deem personal property abandoned following the transfer of real property by tax sale or foreclosure. The law requires the purchaser of the real property to provide 30 days notice to the former owner, after which unclaimed personal property will be deemed abandoned.
Senators Offer FHFA Suggestions for HARP Program Adjustments
On March 30, Senate Banking Committee Democrats, led by Chairman Tim Johnson, sent a letter to Acting Director of the Federal Housing Finance Agency, Edward DeMarco, suggesting changes to the Home Affordable Refinance Program (HARP) to facilitate additional refinancings. In their letter, the Senators endorsed policy changes suggested in a January 2012 Federal Reserve Board white paper, including (i) reducing or eliminating remaining loan-level price adjustments for HARP refinances where Fannie Mae and Freddie Mac already carry the credit risk on the original mortgage, (ii) streamlining the financing process for borrowers with loan-to-value ratios below 80 percent, and (iii) more comprehensively reducing putback risk in order to remove disincentives for servicers to refinance. The letter was in response to a request for suggestions that Mr. DeMarco made during a February 28, 2012 Senate Banking Committee hearing.
Washington Enacts New Short Sale and Foreclosure Protections, Adds Escrow Licensing Exemption
On March 29, Washington enacted House Bill 2614, which took effect immediately and created new borrower protections. The bill requires mortgagees that intend to permit a short sale of a residential property to provide written notice to the borrower that it is either waiving or reserving its right to collect the full debt. Mortgagees that reserve the right to collect must initiate a court action to collect within three years of the short sale. House Bill 2614 also amends provisions ofWashington’s Foreclosure Fairness Act, including, among other things, (i) to allow meetings with the borrower to discuss foreclosure avoidance options to be conducted by phone, if the borrowers agrees, (ii) to alter the foreclosure mediation procedures, (iii) to extend the time period for a trustee’s sale, and (iv) to change beneficiary reporting requirements. Lastly, the bill creates a process to rescind a trustee sale under certain circumstances.
Also on March 29, Washington, through Senate Bill 6218, amended its escrow licensing requirements to clarify that attorneys are not required to obtain a license, provided that (i) the escrow transactions are performed by either the lawyer while engaged in the practice of law or any employee of the law practice under direct supervision of the lawyer, (ii) all escrow transactions are performed under a legal entity that is publicly identified and operated as a law practice, and (iii) all escrow funds are deposited to, maintained in, and disbursed from a trust account in compliance with rules enacted by the Washington Supreme Court regulating the conduct of lawyers. These changes take effect June 7, 2012.
Florida Federal District Court Holds Creditor Vicariously Liable for a Servicer's TILA Violation
On March 19, the U.S. District Court for the Southern District of Florida determined that a mortgage loan creditor can be held vicariously liable under TILA for the loan servicers alleged failure to properly respond to a borrowers request for information. In Khan v. Bank of New York Mellon, No. 12-60128-CIV, 2012 WL 1003509 (S.D. Fla. Mar. 19, 2012) the borrowers sued their creditor for their servicers failure to respond to the borrowers TILA request for information about the identity of the owner of the note. The creditor moved to dismiss the complaint, arguing that as the creditor of the mortgage loan at issue, it cannot be vicariously liable for the servicers TILA violation. The creditor further argued that while TILA imposes an obligation on servicers to provide information about the owner of the loan to the borrower upon request, it also absolves servicers of any liability where the servicers are not also owners of the obligation. Borrowers, however, have a private cause of action under TILA against any creditor for a failure to comply with certain TILA requirements, including the obligation to provide the loan owners information to the borrower. The court reasoned that, because TILA expressly absolves the servicer of liability under these circumstances, if there is no vicarious liability for the creditor, the provision allowing a private right of action would be without effect. The court, therefore, denied the motion to dismiss, determining that Congress intended to make creditors vicariously liable for a servicers failure to provide information to the borrower upon request.
Housing Groups Plan Multiple Fair Housing Act Complaints, Release Report on REO Property Maintenance
According to reports, the National Fair Housing Alliance and several of its member organizations (collectively NFHA) indicated this week that they plan to take legal action against multiple financial institutions for alleged discriminatory practices with regard to real estate owned (REO) properties in violation of the Fair Housing Act. The NFHA promised that it will file administrative complaints with the U.S. Department of Housing and Urban Development and/or legal complaints in federal courts. The first such complaint could be filed as early as next week. The anticipated complaints will be based on the results of an investigation conducted by the NFHA concerning the practices of several lenders and investors responsible for maintaining and marketing REO properties in African-American and Latino neighborhoods.
According to a report that was released on April 4, the investigation covered more than 1,000 REO properties in nine metropolitan areas including Atlanta, Baltimore, Dallas, Dayton, Miami/Fort Lauderdale, Oakland, Philadelphia, Phoenix and Washington, DC. The investigation claims to have revealed that, among other things, REO properties in predominantly minority neighborhoods are 42 percent more likely to have maintenance problems and are 33 percent less likely to have a “For Sale” sign than properties in predominantly White neighborhoods. The report suggests that the poor maintenance practices and other alleged neglect can result in properties being vacant for longer periods and can increase the likelihood that a property eventually will be purchased by an investor at a discounted price, as opposed to an owner-occupier. NFHA maintains that these alleged practices violate the Fair Housing Act and HUD’s implementing regulations and leave those neighborhoods in “crisis.” The NFHA report also makes several policy recommendations. The report offers recommendations for financial institutions to (i) enhance their vendor selection and oversight, (ii) better market and sell properties, and (iii) make REO data more transparent. The NFHA also (i) urges federal regulators, including the CFPB, to conduct a major nationwide investigation into REO practices, (ii) proposes a policy to make REO properties available exclusively to owner-occupants and non-profit organizations prior to offering them more broadly, and (iii) suggests further development of lease-purchase programs for REO properties.
CFPB Issues Guidance On Loan Originator Compensation
In response to questions it has received from loan originators and their firms seeking to comply with compensation rules issued under TILA Regulation Z, the CFPB today issued Bulletin 2012-02. The Bulletin states that employers of loan originators may make contributions to employees’ qualified profit sharing, 401(k), and stock ownership plans (qualified plans) out of a profit pool derived from loan originations. The Federal Reserve Board previously had indicated that any compensation—even contributions to a qualified retirement plan—to a loan originator that derived from the profits of mortgage loan originations was “problematic” and likely prohibited by Regulation Z.
While the Bulletin expands the ability of lenders to contribute to their employees’ qualified plans, the Bulletin does not provide guidance about other types of profit-sharing arrangements, noting that such issues are “fact-specific.” According to the Bulletin, the CFPB will address these and other loan originator compensation issues in more detail in a proposed rule, which it plans to release in the “near future.” Under the Dodd-Frank Act, the CFPB is required to finalize loan originator compensation rules by January 21, 2013, and these rules must take effect by January 21, 2014.
Pursuant to rules issued by the Federal Reserve Board in September 2010 that became effective April 6, 2011, loan originators may not receive, either directly or indirectly, compensation that is based on any terms or conditions of a mortgage transaction, subject to certain limited exceptions. Commentary issued as part of that rulemaking describes compensation to include salaries, commissions, and annual or periodic bonuses, while covered transaction terms and conditions include the interest rate, loan-to-value ratio, or prepayment penalty. Moreover, compensation may not be tied to proxies for such transaction terms, such as credit scores.
In July 2011, administration of TILA Regulation Z was transferred to the CFPB, and employers have since been expressing their concern to the CFPB and asking for clarification. This CFPB guidance, issued almost exactly one year after the loan originator compensation rules became effective, signals a shift from the Federal Reserve's guidance, and employers should now be able to make contributions to qualified plans, even if the contributions derive from mortgage-origination profits. Originators and their employers also should look for the CFPB’s planned loan origination compensation rule, which may provide further clarification and guidance on these issues, but likely also will provide new general requirements for originator compensation.