InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Delaware law provides financial relief to federal employees impacted by shutdown
On January 23, the Delaware Governor signed HB 2, effective immediately, to provide federal workers residing in the state a “temporary suspension of judicial and administrative proceedings in Delaware” if the worker’s ability to pay certain obligations are affected by a government shutdown. Under the act, furloughed federal workers may apply to a court or administrative agency “for a temporary stay, postponement, or suspension regarding any payment of rent, mortgage, tax, fine, penalty, insurance premium, judgment, or other civil obligation or liability.” The length of the temporary stay may be for the covered period (defined as the period that begins on the date the shutdown started and ends on the date 30 days after the date on which the shutdown ended) and 90 days thereafter, or for any part of that period. The court may also set installment payment terms and amounts “as is considered reasonable.”
Among other things, HB 2 also (i) prohibits the lapse, termination or forfeiture of the health, life, disability, or motor vehicle insurance policy of a federal worker without a court order; (ii) places limits on the maximum interest rate that can be imposed on debts incurred before the shutdown to six percent, and states that the interest rate limit applies to debts related to “a mortgage, trust deed, or other security in the nature of a mortgage” during the covered period and 90 days thereafter, but only applies during the covered period for all other obligations or liabilities; and (iii) provides the Attorney General with the power to enforce the act’s provisions, and allows courts to impose civil penalties of up to $10,000 per violation, with wilful violations to be assessed daily.
District Court dismisses non-borrower action against mortgage servicer
On January 11, the U.S. District Court for the Northern District of Mississippi granted a mortgage servicer’s motion to dismiss a lawsuit with prejudice brought by a homeowner’s widow alleging violations of, among other claims, TILA, RESPA, and FDCPA, for failing to include a credit-life-insurance provision in the loan note. According to the opinion, the plaintiff sued the mortgage servicer and mortgage originator after her husband passed and the servicer initiated foreclosure proceedings. The plaintiff argued that her husband, who was the sole borrower, and the mortgage originator had an oral agreement to include a credit-life-provision in the mortgage loan note but the originator failed to include it. The mortgage servicer moved to dismiss the action arguing, among other things, that the plaintiff lacked standing to bring the action. Upon review, the court agreed with the mortgage servicer, determining that the plaintiff lacks standing under TILA, RESPA, and the FDCPA because she was neither an “obligor” nor “borrower” on the loan even though she was identified as a “borrower” on the Deed of Trust. Moreover, the court rejected the plaintiff’s alternative claim that she is a third-party beneficiary with standing to sue under the laws, finding that no valid contract existed as to the credit-life-insurance policy and therefore, the plaintiff could not claim to be a beneficiary of a non-existent contract. The court also dismissed the plaintiff’s other state law and fraud claims, finding she failed to provide sufficient facts to make the claims plausible.
6th Circuit holds elements of Michigan foreclosure process are collection efforts under FDCPA
On January 11, the U.S. Court of Appeals for the 6th Circuit held that a debt collector should not allow the essential elements of a Michigan foreclosure to proceed after receiving a dispute letter under the FDCPA. According to the opinion, in September 2016, a debt collector sent a notice to a mortgage debtor informing the homeowner it intended to foreclose on the property, and two weeks later it began the Michigan state foreclosure process. After the process began, and within 30 days of receiving the debt collection notice, the mortgage debtor sent a certified dispute letter to the collector, challenging the validity of the debt. After receiving the dispute letter, the debt collector posted a foreclosure notice on the property and published notices in the newspaper. The debt collector never sent the mortgage debtor a verification of the debt. The mortgage debtor filed suit against the debt collector alleging violations of, among other things, the FDCPA. The district court granted summary judgment for the debt collector, holding that as a matter of law, the FDCPA did not require that the debt collector verify the debt and that it had “cease[d] collection of the debt” pursuant to the statute. The mortgage debtor appealed, arguing the district court (i) erred in its decision to end discovery and consider summary judgment, and (ii) erred in its interpretation of the FDCPA and its finding that the collector ceased collection efforts.
On appeal, the 6th Circuit rejected the mortgage debtor’s arguments that summary judgment was granted while there were outstanding discovery motions, concluding the debtor provided no evidence the debt collector failed to comply with discovery requests and noted that most of the motions were filed after discovery period expired. As for the FDCPA appeal, the court reversed the district court’s decision, concluding that, as a matter of law, the debt collector was required to intervene and stop the foreclosure actions that were put into motion prior to receiving the dispute letter. The appellate court agreed with the debtor that the newspaper advertisement and posted notice are necessary elements of the Michigan foreclosure process and therefore constituted “collection activity” under the FDCPA. Regardless of whether the debt collector personally took any actions after receiving the dispute letter, the appellate court concluded the debt collector had the responsibility to cancel any elements of the Michigan foreclosure process until it obtained sufficient verification of the debt.
District Court approves class action settlement over threatening collection letters
On January 10, the U.S. District Court for the Southern District of West Virginia approved an $861,000 class settlement resolving allegations that a bank violated the West Virginia Consumer Credit Protection Act by falsely threating “legal action” in the collection of foreclosure fees. According to the complaint, the bank, in an attempt to collect foreclosure and attorney’s fees, sent letters to consumers stating “notice of pending litigation,” misrepresenting that a legal proceeding had been filed, when no filings had occurred. The settlement covers any West Virginia automobile or home loan consumer who received one of three specified letters since 2012 and 2013, and awards the plaintiffs’ attorneys one-third of the cash settlement. The three lead plaintiffs will each receive $5,000 “in recognition of service to the class.”
9th Circuit: Fannie Mae is not a consumer reporting agency under the FCRA
On January 9, the U.S. Court of Appeals for the 9th Circuit held that Fannie Mae is not a “consumer reporting agency” under the FCRA and therefore is not liable under the law. According to the opinion, homeowners attempted to refinance their current mortgage loan two years after completing a short sale on their prior mortgage. While shopping for the refinance, lenders used Fannie Mae’s Desktop Underwriting (DU) program to determine if the loan would be eligible for purchase by the agency. Three of the eight DU findings showed the loan would be ineligible due to a foreclosure reported for the homeowners within the last seven years, which was not true. The homeowners sued Fannie Mae alleging the agency violated the FCRA for inaccurate reporting. On cross motions for summary judgment, the lower court determined that Fannie Mae was liable under the FCRA for furnishing inaccurate information because the agency “acts as a consumer reporting agency when it licenses DU to lenders.”
On appeal, the 9th Circuit reviewed whether Fannie Mae was a consumer reporting agency under the FCRA and noted that the agency must “regularly engage[] in . . . the practice of assembling or evaluating” consumer information, which Fannie Mae argues it does not do. Specifically, the agency asserts that it simply provides software that allows lenders to evaluate consumer information. The appeals court agreed, concluding that Fannie Mae created the tool but the person using the tool is the person engaging in the act. The court reasoned, “[t]here is nothing in the record to suggest that Fannie Mae assembles or evaluates consumer information.” Moreover, the court noted, if Fannie Mae were found to be a consumer reporting agency, it would be subject to other FCRA duties to borrowers, which “would contradict Congress’s design for Fannie Mae to operate only in the secondary mortgage market, to deal directly with lenders, and not to deal with borrowers themselves.”
Fannie Mae updates foreclosure time frames and compensatory fee requirements
On December 19, Fannie Mae issued SVC 2018-10, which describes policy changes to foreclosure time frames and compensatory fee requirements. Specifically, Fannie Mae has revised the maximum number of allowable days within which routine foreclosure proceedings are to be completed in twenty jurisdictions, with some increasing and some decreasing (a complete list available here). Fannie Mae is also replacing the monthly compensatory fee process with a process that focuses on identifying and resolving root causes of the failure to comply with foreclosure time frames. Under the new process, compensatory fees will be assessed if, after a chronic compliance issue is identified and a performance improvement plan is instituted, the servicer still does not meet the terms of the performance plan. The announcement includes a compensatory fee calculation chart and notes that fees will be applied based on the unpaid principal balance of the mortgage loan, the applicable pass-through rate, the length of the delay, and any additional costs that are directly attributable to the delay. The policy changes are effective January 1, 2019.
Foreclosure firm and affiliates agree to DOJ settlement resolving FCA allegations
On December 4, the U.S. Attorney for the Southern District of New York announced that a New York foreclosure law firm and its wholly-owned affiliates—a process server and a title search company (defendants)—have agreed to pay $4.6 million to resolve False Claims Act allegations claiming that between 2009 and 2018 the defendants systematically generated false and inflated bills for foreclosure-related and eviction-related expenses and caused those expenses to be paid by Fannie Mae. The settlement also resolves claims arising from the same misconduct pertaining to eviction-related expenses that were submitted to and ultimately paid by the Department of Veterans Affairs (VA). The DOJ alleges that the process server and title search company both added “additional charges to the costs charged by independent contractors and otherwise took actions that increased costs and expenses,” which were then submitted by the law firm for reimbursement. According to the DOJ, “[l]awyers are not above the law. For years, the [law firm] submitted bills to Fannie Mae and the VA that contained inflated and unnecessary charges. This Office will continue to hold accountable those who seek to achieve profits by fraudulent conduct.” The DOJ states that Fannie Mae’s Servicing Guide requires “all foreclosure costs and expenses be ‘actual, reasonable, and necessary,’ and that foreclosure law firms ‘must make every effort to reduce foreclosure-related costs and expenses in a manner that is consistent with all applicable laws.’”
The DOJ further notes that the defendants agreed to pay an additional $1,518,000 to resolve separate False Claims Act claims pursued by the whistleblower.
Rhode Island Department of Business Regulation adopts mortgage foreclosure disclosure amendments
On October 1, the Rhode Island Department of Business Regulation adopted amendments to its regulations relating to mortgage foreclosure disclosure notices and mediation conference obligations. The amendments—which are effective as of September 28—require entities and individuals regulated by the Rhode Island Division of Banking and non-exempt mortgagees to comply with the outlined foreclosure provisions. The provisions, among other items, (i) require use of the notice of pending foreclosure form; (ii) require provision of notice of mediation conferences to all mortgagors prior to initiating a foreclosure, in the specified manner; and (iii) outline qualifications for the mediation coordinator responsible for issuing certificates of compliance.
Utah Supreme Court reverses foreclosure ruling, states OCC interpretation of “located” is reasonable
On October 5, the Utah Supreme Court revisited a 2013 decision in which it held that federal law does not preempt Utah state law that limits the ability of national banks to foreclose on real property in the state. In a unanimous opinion, the court wrote that it was overruling its “clearly erroneous” decision in a case stemming from a borrower’s challenge to the validity of a nonjudicial foreclosure sale of her Utah home by a Texas-based national bank. According to the opinion, the borrower argued that the sale of her home at auction was invalid because Utah state law “does not permit a bank to act as a trustee on a trust need.” Fannie Mae, which won the auction, secured an eviction order and argued that under the National Bank Act (NBA), the bank had the authority to conduct the sale. The court, however, reversed the eviction order after deciding that the bank did not have the authority under Utah law to act as a trustee under a deed of trust.
In overruling its 2013 decision, the court held that whether a national bank has the authority to act as a trustee to foreclose on property in Utah depends on the OCC’s regulation implementing the NBA, not on Utah state law. According to the OCC’s interpretation of Section 92a of the NBA, a bank is located in the state where it “accepts the fiduciary appointment, executes the documents that create the fiduciary relationship, and makes discretionary decisions regarding the investment or distribution of fiduciary assets.” Previously, the court had found this interpretation to be unreasonable and not entitled to Chevron deference. However, when reconsidering the issue, the court determined that the OCC had the authority to implement the NBA and that the agency’s interpretation of the word “located” was reasonable. “Whatever located means, Congress has instructed that a state has to permit a national bank to act as a fiduciary if institutions that compete with the national bank in the state where it is located can act as a fiduciary,” the court wrote. “This expresses a federal intent to clomp into an area of traditional state concern.” The question, however, remained whether the bank performed its actions in a fiduciary capacity in Texas—a point on which the two parties to the litigation disagreed. “Because the district court has not had the opportunity to address this issue and because of the potential need for factual findings, we remand for the district court to consider this argument,” the opinion stated.
DOJ settles with Washington state foreclosure trustee for alleged SCRA violations
On September 27, the DOJ announced a settlement with a Washington state foreclosure services company resolving allegations that the company violated the Servicemembers Civil Relief Act (SCRA) by foreclosing on homes owned by servicemembers without first obtaining the required court orders. As previously covered by InfoBytes, in November 2017, the DOJ filed a complaint in the Western District of Washington alleging its investigation into the company’s practices uncovered at least 28 unlawful non-judicial foreclosures. The DOJ initiated the investigation following the same court’s dismissal of a private SCRA action brought by a veteran on the ground that it was time-barred.
Under the settlement, each affected servicemember may receive up to $125,000, with a total payout by the company of up to $750,000. The DOJ notes that the company ceased operations in December 2017 and was placed into receivership in March.