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Illinois Law Requires Notice of Right to Seek Foreclosure Counseling; Creates 30-Day Grace Period
On April 5, Illinois Governor Pat Quinn signed SB 2513, an omnibus bill containing provisions requiring mortgage lenders to notify borrowers in default for 30 days or more of the borrower’s right to seek housing counseling, which will provide a 30-day grace period during which the mortgage lender may not initiate foreclosure proceedings. The bill does not apply to borrowers who have sought relief under any bankruptcy law. Counseling will be either free or cost a very small amount that will not create a hardship for the borrower, and will be provided by non-profit housing counseling agencies that are both HUD approved and recognized by the Illinois Department of Financial and Professional Regulation. Counseling will aim to result in a “sustainable workout loan plan” (Plan) approved by both the mortgage lender and the counselor to permit the lender to remain in a home. The Plan may include, but is not limited to (i) temporary suspension of payments, (ii) lengthened loan term, (iii) lowered or frozen interest rate, (iv) principal write down, (v) repayment plan to pay the existing loan in full, (vi) deferred payments, or (vii) refinancing into a new, affordable loan. The Plan must be agreed upon in writing by both the lender and borrower, and it will remain in effect so long as the mortgagor is compliant with its terms. The bill is effective immediately.
First Circuit Holds State Law Claims Insufficient to Defeat HOLA Preemption Defense
On April 3, the U.S. Court of Appeals for the First Circuit upheld the denial of a plaintiff’s state law claims in a case involving default interest charged on a credit card. Yeomalakis v. Federal Deposit Insurance Corporation, No. 08-1444, 2009 WL 884936 (1st Cir. Apr. 3, 2009). The plaintiff’s credit card issuer, Washington Mutual Bank (WaMu), charged an increased annual percentage rate (APR) on unpaid credit card balances on accounts where the holder defaulted. The increased rate was charged as of the first day of the billing cycle in which the default occurred. James Yeomalakis brought suit against WaMu to challenge this practice. The plaintiff claimed that WAMU (i) imposed an illegal penalty by retroactively increasing the APR and (ii) engaged in unfair and deceptive acts and practices in violation of Mass. Gen. Law ch. 93A, § 2, alleging that the retroactive increases were unfair and had not been adequately disclosed. The district court granted WaMu’s motion to dismiss the claims on the basis that both counts were preempted by the Home Owners’ Loan Act of 1933 (HOLA) and various regulations promulgated under HOLA, based on preemption of state interest rates (which includes penalties) and disclosures. On appeal, the plaintiff failed to make any plausible arguments as to why the penalty claim would not be preempted, and, further, the plaintiff provided no clear chapter 93A claim that would avoid preemption. The court of appeals indicated that the plaintiff could have alleged state contractual claims (that the card agreement did not permit the “retroactive” increase in APR) and/or state fraud claims, which may not be preempted by HOLA. However, the court pointed out that it is not the job of the court to provide arguments for a party that has not provided them, and the court upheld the lower court’s dismissal of the claims.
Arkansas Amends Fair Mortgage Lending Act
On April 1, Arkansas Governor Mike Beebe signed HB 1881, a bill that amends the Arkansas Fair Mortgage Lending Act. In general, the bill amends the Act’s definitions, surety bond requirements, license application procedures, reporting requirements, prohibited activities, and penalties. Specifically, the bill revises the statutory definition of “mortgage loan” to mean “a loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, reverse mortgage, or other equivalent consensual security interest encumbering” either (i) a “dwelling,” as defined by the Truth in Lending Act or (ii) residential real estate that is constructed or intended to be constructed as a dwelling. The bill also removes a licensing exemption for persons who only broker, make, or service nonresidential mortgage loans. Regarding licensee duties, the bill requires the inclusion of the full name, address, and telephone number of the licensee in all solicitations and advertisements. The bill also requires the unique identifier of a person soliciting or originating a mortgage loan to be clearly shown on all mortgage loan application forms, solicitations, advertisements, business cards, websites, and related documents.
Minnesota Federal Court Dismisses Putative Class Action Against Lender
On March 31, the U.S. District Court for the District of Minnesota dismissed a putative state-wide class action involving claims of breach of contract, unlawful and deceptive trade practices, breach of fiduciary duties, and unjust enrichment against a residential mortgage lender. Weller v. Accredited Home Lenders, Inc., No. 08-2798 (D. Minn. March 31, 2009). In support of these claims, the plaintiffs alleged, among other things, that (i) the defendant failed to provide them with a statutory disclaimer indicating that they were not plaintiffs’ agent, (ii) the defendant failed to notify them that they qualified for a lower rate of interest than the rate they were charged, and (iii) the defendant was liable for the closing agent’s failure to provide certain disclosures. The court granted the defendant’s motion to dismiss. The court rejected the plaintiffs’ breach of fiduciary duty claim, holding that the failure to provide the “non-agency disclosure” required by Minnesota law “does not, on its own, make a residential mortgage originator a fiduciary as a matter of law.” The court also rejected the plaintiffs’ unlawful and deceptive trade practices (UDAP) claims, holding that the plaintiffs failed to plead alleged misrepresentations with the specificity required by F.R.C.P. Rule 9(b). Allowing plaintiffs 30 days to file an amended complaint to re-plead their UDAP claims, the court provided the plaintiffs with guidance on the types of allegations that would survive future dismissal. For example, to satisfy the Minnesota statute on which they relied, rather than merely allege that they were charged a higher rate of interest than they qualified for, the plaintiffs would have to allege that they were placed in a lower “investment grade,” and specify the grade in which they were placed and the grade they should have received. The court also reminded the plaintiffs that, if they were to successfully level claims against the defendant about the closing agent’s alleged failure to provide certain disclosures, they would have to allege with specificity how the closing agent was the defendant’s agent (such as by citing provisions of the Lender’s Instructions). BuckleySandler LLP represented defendant Accredited Home Lenders, Inc. in this action.
Kansas Governor Signs Bill Amending State Mortgage Law, Safeguarding Personal Financial Information
On March 27, Kansas Governor Kathleen Sebelius signed SB 240, a bill that amends Kansas state mortgage law to reflect compliance with the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) and to impose requirements regarding the protection of personal consumer financial information. The bill implements the mandate of the SAFE Act by providing for the licensing of all mortgage loan originators under the Nationwide Mortgage Licensing System. The bill also prohibits certain conduct, including (i) earning a fee or commission through “best efforts” to obtain a loan when no loan is actually obtained, (ii) the solicitation, advertisement, or entering into a contract for specific rates, points, or other financing terms that are not actually available at the time of the offer, and (iii) making any payment, threat or promise to influence to any person in connection with a residential mortgage loan, including an appraiser. The bill further provides for data security measures to protect against the potential misuse of personal consumer financial information. To this effect, (i) every licensee and any assignee or servicer of a consumer credit transaction, and every person required to file notification, must have written policies and procedures “reasonably designed” to protect against the misuse of personal information, (ii) before discontinuing business, a licensee must arrange for the keeping of required books and records for a specified period, and (iii) any records required to be retained may be electronically preserved. Such electronic records must (i) permit “immediate” location of the record, (ii) be able to be copied, printed, or faxed, and (iii) be maintained using policies and procedures to “reasonably safeguard” the records from loss or alteration. The bill becomes effective upon its publication in the Kansas Statute Book.
Virginia Implements SAFE Act Requirements, Tightens Restrictions on Mortgage Lenders and Brokers
On March 27, Virginia Governor Timothy M. Kaine signed a series of bills to carry out the requirements of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) and to tighten restrictions on mortgage lenders and mortgage brokers. To implement the SAFE Act, Virginia’s legislature enacted HB 2031, which requires mortgage loan originators to obtain a license from the State Corporation Commission through the Nationwide Mortgage Licensing System and Registry. The bill also establishes licensing procedures and criteria, including requirements for bonding, background checks, education, testing, continuing education, investigations, examinations, reporting, payment of annual fees, license suspension and revocation, and fines. Governor Kaine also signed three bills pertaining to mortgage lenders and mortgage brokers. HB 2030 repeals sections of the Code of Virginia that required mortgage lenders and brokers (i) to conduct background checks on certain employees and (ii) to ensure that their employees are properly trained in applicable state and federal mortgage lending laws and regulations. HB 1776 requires mortgage brokers to use “reasonable skill, care, and diligence” when securing a mortgage loan that will be in the best interests of the applicant, and creates a private right of action by borrowers for violations of this provision. Finally, HB 2262 prohibits mortgage brokers, lenders and originators from using any “deception, fraud, false pretense, false promise, or misrepresentation” in connection with a mortgage loan transaction. The bill also authorizes the Attorney General to enforce this provision by imposing civil penalties (up to $2,500 per violation) and restitution damages. Additionally, the bill removes the exemption for mortgage lenders from the Virginia Consumer Protection Act. All four bills are effective July 1, 2009; HB 2031’s loan originator licensing requirements do not take effect until July 1, 2010.
Kentucky Attorney General Issues Opinion on Mortgage Recordation
On March 20, Kentucky Attorney General Jack Conway issued an opinion concluding that the Kentucky County Clerk does not have the authority to refuse to file amended mortgages. The opinion letter clarifies that the relevant Kentucky statute (KRS 382.300) does not require a document to be titled “mortgage” or a “mortgage amendment” to be recorded.
Utah Enacts Financial Institutions Loan Originator Licensing Act
On March 20, Utah Governor Jon M. Huntsman, Jr. signed House Bill 286 (the Bill), which amends the Utah Consumer Credit Code, as well as mortgage lending and servicing provisions, to address the regulation of consumer and residential mortgage loans. The Bill establishes the Financial Institutions Loan Originator Licensing Act, which, among other things, creates loan originator licensing triggers, an application process, bonding requirements, education requirements, and a process for challenging information in the nationwide database. In addition, the Bill clarifies (i) the requirements for filing notifications, and (ii) provisions related to a lender, broker, or servicer of a mortgage loan
South Dakota to License Mortgage Lenders, Brokers and Loan Originators Via NMLS
On March 16, South Dakota Governor M. Michael Rounds signed House Bill 1060 (the Bill), which allows for the licensing of mortgage lenders, brokers, and loan originators through the Nationwide Mortgage Licensing System (NMLS) and provides standards for information sharing by the South Dakota Division of Banks. Among other things, the Bill provides the NMLS application procedures applicable to mortgage lenders, brokers, and loan originators.
Wyoming Enacts Mortgage Loan Originator Licensing and Registration
On March 12, Wyoming Governor Dave Freudenthal signed HB 169, a bill that modifies the Wyoming Residential Mortgage Practices Act and Uniform Consumer Credit Code to provide for mortgage loan originator licensing and registration. Among other things, the bill details (i) the initial application process, (ii) pre-licensing education, (iii) testing requirements, (iv) the renewal process, and (v) continuing education requirements. While the bill goes into effect July 1, 2009, loan originators have until July 1, 2010 to register or obtain licensure.