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D.C. Circuit Reinstates Challenge to HUD Reverse Mortgage Regulations
On January 4, the U.S. Court of Appeals for the District of Columbia held that two widowed spouses have standing to pursue allegations that a HUD regulation defining conditions under which it would insure a reverse mortgage agreement contradicted the governing statute, and in doing so made it easier for lenders to foreclose on homes occupied by surviving spouses. Bennett v. Donovan, No. 11-5288, 2013 WL 45879 (D.C. Cir. Jan. 4, 2012). The surviving spouses, neither of whom were legal borrowers under the reverse mortgages entered into by their spouses, sought declaratory relief that HUD’s regulations requiring that the mortgage be due and payable in full if a borrower dies and the property is not the principal residence of at least one surviving borrower violated the Administrative Procedure Act because the rule is inconsistent with the governing statute. The statute protects “homeowners,” as opposed to “borrowers,” from displacement and defines “homeowner” to include “spouse of the homeowner.” The district court held that the spouses lacked standing to sue HUD because relief for their injuries depended solely on the lenders’ decision whether to foreclose. The appellate court held, however, that in situations like those at issue here, it is within HUD’s power to provide complete relief to the lenders and borrowers, and therefore such relief is likely, as opposed to speculative, and as such is sufficient to establish standing. Though it limited its holding to the standing issue, the court added that it was “puzzled” by HUD’s attempt to justify a rule that appears to contradict the governing statute. Further, the court outlined potential relief that HUD could provide, explaining that HUD could accept assignment of the mortgage, pay off the balance of the loans to the lenders, and then decline to foreclose against the spouses. The court reinstated the case and remanded for further proceedings.
NCUA Files Another Major MBS Suit
On January 4, the NCUA announced another major mortgage-backed securities lawsuit. Similar to prior suits, the NCUA alleges on behalf of three insolvent corporate credit unions that a mortgage securitizer violated federal and state securities laws in the sale of $2.2 billion in mortgage-backed securities to the credit unions. In this case, the NCUA is suing a securities firm for alleged wrongdoing by companies the defendant later acquired. The NCUA complaint alleges the acquired firms made numerous misrepresentations and omissions of material facts in the offering of the securities sold to the failed corporate credit unions, and that underwriting guidelines in the offering documents were “systematically abandoned.” The NCUA argues that these actions caused the credit unions to believe the risk of loss was low, when, in fact, the opposite was true. When the securities lost value, the NCUA claims, the credit unions were harmed and forced into insolvency.
OCC Extends Deadline for Application of Lending Limits Rule
On January 4, the OCC issued a final rule that extends until July 1, 2013 the temporary exception for the application of its lending limits rule to certain credit exposures. In June 2012, the OCC issued an interim final rule to implement Dodd-Frank Act revisions to the statutory definitions of loans and extensions of credit for lending limit purposes to include certain credit exposures arising from a derivative transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities borrowing transaction. That interim rule gave institutions until January 1, 2013 to comply, and the OCC extended that date to April 2013 through a recent bulletin. The instant rule extends the date once more and explains that, without the extension, institutions that wish to use an internal model method to determine credit exposure for derivative transactions and securities financing transactions may not have sufficient time to develop, receive approval for, and implement such a model.
Senators Ask Regulators to Halt Bank Payday Lending
On January 2, a group of Democratic Senators sent a letter to the Federal Reserve Board, the FDIC, and the OCC seeking action to stop banks from making payday loans. The letter cites the agencies’ “long history of appropriately prohibiting . . . banks from partnering with non-bank payday lenders,” but claims that several banks are currently making payday loans directly to their customers. The products at issue are actually deposit advance loans, which the Senators claim are structured the same as traditional payday loans and put customers in a cycle of debt. The Senators call on the regulators to take “meaningful regulatory action” in response to the problem as they present it, but stop short of identifying specific banks or outlining potential federal legislation.
Ohio Creates Temporary Loan Originator License
Last month, Ohio enacted a bill, S.B. 333, to allow the Division of Financial Institutions to offer a transitional loan originator license to assist an originator licensed by another state to transition to employment with an Ohio-regulated firm. The new license allows a transitioning out-of-state originator to originate loans on a temporary basis—120 days—while the originator completes the requirements of obtaining a state-issued annual license. A transitioning originator must have a sponsor that meets certain criteria and must pay a fee as set by the state regulator. In addition, the law directs the state regulator to adopt regulations allowing an originator from a federally regulated institution to obtain a temporary state license after federal law is changed to allow such transitional licenses. The CFPB has interpreted current federal law to prohibit such transitional licenses.
Fourth Circuit Holds State Auto Debt Cancellation Requirements Not Preempted for Certain Assigned Loans
On December 26, the U.S. Court of Appeals for the Fourth Circuit held that federal law does not preempt Maryland’s debt cancellation requirements for an auto retail installment sales contract (RISC) when a national bank is the assignee, and not the originator, of the loan. Decohen v. Capital One, N.A., No. 11-2161, 2012 WL 6685767 (4th Cir. Dec. 26, 2012). In this case, a dealer sold and financed a used vehicle and subsequently assigned the loan to a national bank. The financing included a charge for a debt cancellation agreement in the RISC, which under the Maryland Credit Grantor Closed End Credit Provisions (CLEC) requires a lender to cancel any remaining loan balance when a car is totaled and insurance does not cover the full loss. After the buyer totaled his car and was left with a loan balance, he sought to enforce the debt cancellation agreement. In dismissing the case, the district court held, in relevant part, that the agreement at issue was a "debt cancellation contract" covered by the National Bank Act, and that because such contracts are governed by federal law and regulations, including regulations regarding debt cancellation agreements, state regulation of such contracts is preempted. The district court also found that the purchaser failed to state a claim for breach of contract because the bank did not agree to cancel the remaining debt. The appeals court disagreed and held that because the OCC regulations regarding debt cancellation agreements apply only to agreements entered into by national banks, “the CLEC provisions regarding debt cancellation agreements are not expressly preempted by federal law when the agreements are part of credit contracts originated by a local lender and assigned to a national bank.” The court also held that the purchaser stated a claim for breach of contract because the parties voluntarily elected to be governed by the CLEC in the RISC, which cannot be undone by assignment of the loan. The court vacated the district court’s judgment and remanded the case for further proceedings.
Eleventh Circuit Holds Management Company Collecting HOA Fees Exempt from FDCPA
Recently, the U.S. Court of Appeals for the Eleventh Circuit held that a management company collecting debts for a homeowners association was exempt from the FDCPA because collecting the unpaid assessments was incidental to the company’s bona fide fiduciary obligations. Harris v. Liberty Cmty. Mgmt., Inc., No. 11-14362, 2012 WL 6604518 (11th Cir. Dec. 19, 2012). In Harris, a homeowners association contracted with a management company to perform various tasks, including collecting past due assessments from homeowners. After warning the plaintiffs that their water service would be disconnected if they did not pay their outstanding association dues, the management company had their water service suspended. The plaintiffs asserted that the company was a debt collector under the FDCPA and violated the Act by terminating their water service. Under Section 1692a(6)(F)(i) of the FDCPA, an individual or entity is exempt from the Act when “collecting or attempting to collect any debt owed…another to the extent such activity is incidental to a bona fide fiduciary obligation.” The Eleventh Circuit held that the management company fell within this exemption. Because the company was the homeowners association’s agent, it owed a fiduciary duty to the association. The court also found that collecting the debts was “incidental” to the company’s fiduciary obligation, noting that the company did many other tasks for the association other than collect assessments, such as obtaining utilities, purchasing insurance, and assisting the association with its tax filings. In addition, the Eleventh Circuit affirmed the district court’s dismissal of the plaintiffs’ claims under the Georgia Fair Business Practices Act. The court explained that the management company’s decision to stop the water service after providing the plaintiff notice was not unfair or deceptive.
HUD Obtains First Settlement Under Rule Requiring Sexual Orientation and Gender Identity Equal Access
On January 2, HUD announced that a lender agreed to settle a claim that it refused to provide FHA financing to a lesbian couple. HUD noted that the agreement is the first enforcement action taken under a rule finalized in January 2012 that aims to provide equal access to housing, regardless of sexual orientation, gender identity, or marital status, including by prohibiting lenders from determining FHA-insured financing eligibility based on sexual orientation or gender identity. The lender denies the allegations, but HUD required the lender to pay $7,500 so the parties could avoid additional costs associated with the administrative proceedings. The agreement also requires the lender to update its fair lending training program to support compliance with the new rule.
President Signs Bill Enhancing Enforcement of the Military Lending Act
On January 2, President Obama signed H.R. 4310, the National Defense Authorization Act (NDAA) for Fiscal Year 2013, which includes provisions that enhance federal enforcement of the Military Lending Act (MLA). The MLA (i) caps the annual interest on certain loans to servicemembers at 36 percent, (ii) prohibits such loans from being secured with a personal check, debit authorization, car title, or wage allotment, and (iii) includes other servicemember protections related to the offering of consumer credit. The MLA generally covers short-term, small dollar loans, including payday, car title, and refund anticipation loans, but, pursuant to DOD regulations, excludes credit cards, overdraft loans, military installment loans, and all forms of open-end credit. By amending the MLA to state that the same regulators that enforce the Truth in Lending Act now have administrative authority to enforce consumer credit protections for servicemembers and their dependents under the MLA, the NDAA (Secs. 661-663) makes clear that the CFPB has enforcement authority under the MLA. Further, the bill gives the CFPB an opportunity to influence implementation of the MLA regulations, including their scope, by adding the CFPB to the list of agencies with which the DOD must consult regarding implementation of the MLA’s protections, and by requiring that such consultation occur at least every two years. These changes add new force to the MLA and provide additional legislative support for the CFPB and DOD to collaborate on servicemember protection issues. The CFPB and DOD already have collaborated on issues related to, for example, fraud protection and student lending. The bill also adds a civil liability section to the MLA, which permits private actions to obtain actual damages (but not less than $500 per violation), as well as punitive damages. Finally, the bill simplifies the definition of dependents protected under the MLA.
California Corrects Homeowner Bill of Rights Summary
On January 1, the California Department of Corporations reissued Release No. 65-FS regarding implementation of key parts of the Homeowner Bill of Rights that established new foreclosure requirements. Originally published on December 4, the new version clarifies certain requirements for mortgage servicers, and corrects the operative date of provisions enacted by AB 1599, a bill requiring translated summaries of notices of default and sale.