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Texas Finance Commission Adopts New Rules Regarding Mortgages and Consumer Credit
On December 30, the Finance Commission of Texas published two sets of rules impacting (i) mortgage lenders and servicers, (ii) credit access businesses, and (iii) debt management companies. The first set of rules reorganizes mortgage-related regulations to republish as Chapter 76 all regulations previously published as Chapter 79 of the Texas Administrative Code. This set of rules also establishes certain new regulations as Chapter 79 to implement SB 17 regarding residential mortgage loan servicers. Among the new rules are those to establish registration and bonding requirements for servicers.
The second set of rules includes two that implement HB 2594 and HB 2592, which require the Commission to establish licensing for credit access businesses that provide payday loans or title loans, and to design new consumer notice disclosure and notice requirements for such firms. These regulations, among other things, set up a process for provisional licenses and a transition period to allow businesses to continue operating while obtaining a full license. Another rule sets new requirements related to standard payoff statement forms for mortgage servicers responding to requests from title insurance companies. Finally, this set of rules revises credit counseling standards for debt management service providers to remove certain obsolete language.
For a copy of the rules as proposed, click here.
FTC Obtains Agreement from Payment Processor to Prohibit Use of New Payment Method
On January 5, the FTC announced a settlement with a payment processor and two of its principals that will prohibit the company from using a new payment method, through which accounts were debited without account-holder consent. The FTC alleged that the company actively promoted the method as a way to avoid scrutiny associated with other payment methods, and ignored red flags - such as payment-rejection rates exceeding 80 percent - that its merchant customers were seeking to defraud account-holders. As a result, according to the FTC, consumers incurred significant costs, including for overdraft fees. In addition to banning the use of this payment process, the settlement requires, among other things, that the company monitor client return rates and investigate rates exceeding 2.5 percent.
Final FCPA Enforcement Action for 2011 Provides Useful Benchmarks for Anti-corruption Compliance Program Reviews
On December 29, Deutsche Telecom and Magyar Telekom settled FCPA enforcement matters with the US DOJ and SEC for a combined sanction exceeding $95 million. Part of the resolution recited specified minimum compliance program elements that Magyar Telekom is required to institute. BuckleySandler's most recent FCPA Update describes the settlement fully and links to a list of these anti-corruption program elements, which are useful for counsel structuring a corruption risk assessment or compliance program review.
Florida AG Seeks to Advance Unfair and Deceptive Foreclosure Case
On December 30, Florida Attorney General Pam Bondi (AG) filed a motion in the Fourth District Court of Appeal seeking to advance the state's investigation into whether certain law firms engaged in misconduct while foreclosing on Florida homeowners. In April, the appeals court ruled that the AG did not have authority to subpoena records from one of the law firms under investigation. The state cannot appeal that decision to the Florida Supreme Court unless it is certified as an issue of great public importance. Therefore, the AG has asked the Fourth District to certify to the state supreme court as such an issue the question of whether the creation of invalid assignments of mortgages by a law firm and subsequent use of such documents to foreclose constitutes an unfair and deceptive practice under Florida law that may be investigated by the AG.
Tenth Circuit Confirms MERS Has Authority to Foreclose
Recently, the U.S. Court of Appeals for the Tenth Circuit affirmed separate lower court rulings that Mortgage Electronic Registration Systems, Inc. (MERS) had authority to foreclose under Utah law even though the notes at issue had been sold by the original lenders and securitized. Commonwealth Property Advocates v. Mortgage Elec. Reg. Sys, Inc., Nos. 10-4182, 10-4193, 10-4215, 2011 WL 6739431 (10th Cir. Dec. 23, 2011). In each of the underlying cases, the deed of trust contained the usual language naming MERS as the "nominee" for both the original lender and the lender's "successors and assigns," and providing MERS with authority "to foreclose and sell the Property" on behalf of those entities. The plaintiff (a firm that acquired title to each of the properties from delinquent borrowers) based its challenge to MERS' authority to foreclose on a Utah statute providing that the "transfer of any debt secured by a trust deed shall operate as a transfer of the security therefor." Utah Code Ann. § 57-1-35. According to the Plaintiff, the statute meant that sale and securitization of the notes deprived "original 'nominees,' such as MERS," of any right to exercise any power under the deeds of trust absent authorization by the new owners of the debt, i.e., the security-holders. The Tenth Circuit, relying on prior Utah and federal-court decisions, rejected that argument. It held that the statute merely codifies the well-established rule that a lender's transfer of a note also transfers that lender's interest in the associated security instrument. The statute in no way impacted MERS' explicit authority under the deeds of trust to continue to act as the "nominee" of each successive buyer of the note and to foreclose on each such buyer's behalf.
Indiana Department of Financial Institutions Adopts Emergency Rule on Mortgage Lender and Originator Licensing
On December 15, the Indiana Department of Financial Institutions (DFI) adopted an emergency rule updating Title 750, Article 9 of the Indiana Administrative Code (IAC), which regulates mortgage lenders and originators. First, the amendments expanded the stated purpose of Title 750, Article 9 to conform the regulation of mortgage lending practices not only to state and federal laws, rules and regulations but also to policies and guidance from state and federal authorities. Second, non-profit organization employees who exclusively originate mortgages are exempt from state educational, testing, background or licensing standards and requirements unless otherwise required by the Consumer Financial Services Bureau. Third, the rule amended the IAC to specify that an expunged criminal conviction is not considered, for licensing purposes, a conviction resulting in an automatic denial or revocation of a mortgage lender or originator's license; however, the DFI director may still consider the underlying crime or facts of that expungement for licensing eligibility. Fourth, the rule revised Article 9's revocation and suspension provisions so that they are uniform with all state consumer credit laws. Finally, the rule made changes to Article 9's pre-licensing testing, licensing qualification and renewal and regulatory reporting provisions.
Connecticut Supreme Court Confirms MERS Assignee Has Standing to Foreclose
On December 13, the Connecticut Supreme Court held that state law conferred standing on the holder of a promissory note to foreclose on a borrower and that a mortgage naming Mortgage Electronic Registration Systems, Inc. (MERS) mortgagee, as nominee of the original lender, was valid. RMS Residential Properties, Inc. v. Miller, No. SC 18746, 2011 WL 6033011 (Conn. Dec. 13, 2011). The borrower executed a promissory note to the lender and conveyed a mortgage deed to MERS as nominee of the lender. After the borrower failed to make a single payment, the mortgage was assigned to the plaintiff RMS, which also became holder of the promissory note before it commenced the foreclosure action. In affirming the trial court's grant of summary judgment in favor of the plaintiff, the Court rejected the borrower's argument that the plaintiff lacked standing as a mere holder of the note. The Court also rejected the borrower's contention that the mortgage was void because MERS was not the original lender or the party secured by the mortgage. The Court found that the mortgage made clear that the lender named MERS mortgagee and that to hold such mortgages void would frustrate the intentions of both mortgagors and mortgagees.
California Court Refuses to Certify Class Against Payday Lenders
On December 12, the U.S. District Court for the Southern District of California denied a motion for class certification by a putative class of Spanish-speaking borrowers in a suit brought against payday lenders. Stone v. Advance America, Cash Advance Centers, Inc., No. 08-1549, 2011 WL 6151636 (S.D. Cal. Dec. 12, 2011). Plaintiffs allege, among other things, that the lenders violated the California Deferred Deposit Transaction Law by failing to disclose borrower rights and written loan agreements in Spanish, the language that the borrowers allegedly principally used during loan negotiations. Relying on the U.S. Supreme Court's decision earlier this year in Wal-Mart v. Dukes, 131 S. Ct. 241 (2011), the district court held that the proposed class does not satisfy the commonality element required to certify a class of plaintiffs under Federal Rule of Civil Procedure 23(a)(1)(2). The court found that the dissimilarities in the proposed class "'impeded the generation of common answers'" because evaluating whether Spanish was principally used would require determining on a case-by-case basis each potential class member's use of Spanish during the loan process. The court concluded that such an inquiry is necessarily fact intensive and not conducive to class treatment.
New York Appeals Court Holds State Appraisal Laws Not Preempted
On November 22, the New York Court of Appeals ruled in Cuomo v. First American Corporation, No. 184, 2011 WL 5838482 (N.Y. Nov. 22, 2011) to affirm two lower court rulings and allow the state attorney general to pursue state law claims against an appraiser. The court held that New York state laws regulating appraisal practices are not preempted by federal laws, including the Home Owner's Loan Act (HOLA) and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). In its complaint, the state alleges that a title company illegally inflated appraisal reports for a lender with which it did a substantial volume of business, in violation of the state's Executive Law and Consumer Protection Act, as well as state common law. Arguing alternatively that federal law occupied the entire field of real estate appraisals, or that New York's regulations obstructed the lenders ability to finance real estate transactions, the appraiser moved to dismiss and lost. On appeal to the Appellate Division, the appraiser abandoned the second theory regarding conflict, but the lower court decision holding no preemption still was affirmed. The Court of Appeals agreed, holding that "FIRREA governs the regulation of appraisal management companies and explicitly envisioned a cooperative effort between federal and state authorities." Moreover, the court found "no basis to conclude that HOLA itself or federal regulations promulgated under HOLA preempt" state common or statutory law claims. Those regulations do not explicitly list appraisal laws as a type of preempted state law, and to the contrary provide that state laws that only incidentally affect lending operations of federal savings associations are not preempted. According to the court, authority to pursue the appraisal company under state law would, at most, incidentally affect the institutions lending operations. One judge dissented from the majority opinion and argued that federal guidance on preemption creates conflicts in that some mortgage-related state laws are preempted, e.g. those regarding mortgage processing, under HOLA.
MERS' Foreclosures in Michigan Validated
On November 16, the Michigan Supreme Court upheld foreclosures by advertisement by the Mortgage Electronic Registration System, Inc. (MERS) in Michigan. Residential Funding Co. LLC v. Saurman, No. 143178-9, 2011 WL 5588929 (Mich. Nov. 16, 2011). In the cases underlying the appeal, the borrowers' mortgages named MERS as nominee for the lender with the right to foreclose under the power of sale. The borrowers defaulted on their loans and MERS foreclosed. Facing eviction, the borrowers argued that MERS was not entitled to foreclose because it lacked an interest in the debt, i.e., the note. The district courts rejected this argument, and the circuit courts affirmed. The Court of Appeals granted borrowers leave to appeal and, in a two-to-one decision, held that MERS did not have authority to foreclose and that MERS' foreclosures in Michigan were void. The Court of Appeals held that an interest in the mortgage alone did not confer an interest in the note because "the indebtedness, i.e., the note, and the mortgage are two different legal transactions providing two different sets of rights." This purported separation of the mortgage and note meant that MERS lacked an ownership interest in the debt, and therefore did not have authority to foreclose. The entities initiating eviction sought leave to appeal to the Michigan Supreme Court, which, in lieu of granting leave, reversed the judgment of the Court of Appeals. In its two-page ruling, the Michigan Supreme Court clarified that,
MERS' status as an "owner of an interest in the indebtedness" does not equate to an ownership interest in the note. Rather, as recordholder of the mortgage, MERS owned a security lien on the properties, the continued existence of which was contingent upon the satisfaction of the indebtedness. This interest in the indebtedness - i.e., the ownership of legal title to a security lien whose existence is wholly contingent on the satisfaction of the indebtedness - authorized MERS to foreclose by advertisement . . . .
The Michigan Supreme Court also held that the Court of Appeals' conclusion was "inconsistent with established legal principles governing Michigan's real property law," including that "the mortgage and the note are to be construed together."
The Court of Appeals decision had been the basis for several lawsuits-including class actions and at least one lawsuit by a county register of deeds-in Michigan courts seeking to prevent or void foreclosures. Certain class action suits pending in federal court were stayed pending the decision of the Michigan Supreme Court.