InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Missouri Governor Signs Loan Originator Registration Bill
On July 8, Missouri Governor Jay Nixon signed the “Missouri Secure and Fair Enforcement for Mortgage Licensing and Residential Mortgage Brokers Licensing Act” (the Act) (HB 382). Among other things, the Act sets forth a scheme for registering residential mortgage loan originators and substantially amends the regulations applicable to residential mortgage brokers. Under the Act, loan originators must register with the Nationwide Mortgage Licensing System (NMLS) and must satisfy new pre-licensing and continuing education requirements. For residential mortgage brokers, the Act requires licensure via the NMLS. In addition, the Act limits the number of exemptions available to licensure and modifies the method for calculating requisite surety bonds. Finally, the Act increases the amount of civil penalties from $5,000 to $25,000 per violation. The Act became effective July 8, however, the Act’s loan originator licensing provisions do not take effect until July 31, 2010.
Connecticut Bill Creates Restrictions for Nonprime Home Loans, High Cost Home Loans; Establishes Residential Mortgage Fraud as Criminal Offense
On July 7, Connecticut Governor M. Jodi Rell signed SB 949, “An Act Concerning Mortgage Practices.” The bill, among other things, establishes residential mortgage fraud as a criminal offense in Connecticut. The bill also amends the definition of “nonprime home loans” and prohibits or restricts a lender from offering nonprime home loans with certain terms and conditions (i.e., negative amortization, default rate increases, excessive late fees and acceleration clauses). Finally, under the bill, a high cost home loan cannot provide for an increase in the interest rate after default or provide for default charges in excess of five per cent of the amount in default. The bill becomes effective October 1, 2009.
California Bill Amending Solicitation Disclosures Becomes Effective on July 1
On July 1, California SB 1461, a bill that amends the advertising rules for companies licensed with the California Department of Real Estate, becomes effective. The bill applies to all residential and commercial mortgage companies licensed with the California Department of Real Estate. Pursuant to the bill, such entities must disclose the applicable license number on certain solicitations intended to be the “first point of contact” with consumers (e.g., business cards, stationary, and other materials designed to solicit the creation of a professional relationship between the licensee and a consumer). The bill clarifies that “first point of contact” excludes electronic media or print advertisements and “for sale” signs.
Additional States Enact SAFE Act Legislation
Several states recently amended applicable state law to reflect compliance with the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). Texas, Connecticut, Nevada, and South Carolina all enacted legislation that implements the SAFE Act by providing for the licensing of all mortgage loan originators under the Nationwide Mortgage Licensing System. In addition to technical amendments, the bills prescribe loan originator requirements relating to licensing, prior and continuing education, testing, minimum net worth, and surety bond coverage. Connecticut SB 948 also, among other things, requires lenders to enter into a previously optional foreclosure mediation program with borrowers after July 1, 2009. Unless the mediation period is not required, is unavailable, has expired, or has been otherwise terminated, no judgment of strict foreclosure or foreclosure by sale can be entered prior to July 1, 2010. Most provisions of Connecticut SB 948 become effective July 31, 2009, with licensure required by April 1, 2010. South Carolina SB 673 becomes effective January 1, 2010, except that the definition of “mortgage loan originator” does not include an individual servicing a mortgage loan until July 31, 2011. Texas HB 10 becomes effective September 1, 2009. Nevada AB 523 became effective June 8, 2009, with licensure required by October 1, 2009.
Additional States Enact SAFE Act Legislation
Arizona, Delaware, and Hawaii each recently passed bills reflecting compliance with the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008, which requires states to implement a sufficient regulatory system for licensing and supervising mortgage loan originators. Arizona HB 2143, Delaware SB 73, and Hawaii SB 1218 (which was enacted over the veto of Hawaii Governor Linda Lingle) each require mortgage loan originators to (i) submit to fingerprinting for the purpose of a criminal history background check, (ii) complete at least twenty hours of pre-licensing education, (iii) receive a passing score on a qualified written test developed by the Nationwide Mortgage Licensing System, and (iv) complete at least eight hours of annual continuing education. Arizona HB 2143 also amends certain definitions and exemptions applicable to the licensing of mortgage loan originators. Licensure under all three bills is required as early as July 31, 2010.
Pennsylvania Governor Signs Two Bills Amending State Mortgage Law
On June 29, Pennsylvania Governor Edward G. Rendell signed SB 170 and HB 985 to amend Pennsylvania mortgage law. SB 170 prohibits a mortgage broker or mortgage originator from being or designating the sole recipient of communications from a lender or servicer to a consumer. HB 985 prohibits mortgage companies from bringing a cause of action for damages against employees who report illegal activity or take part in an investigation, hearing or inquiry against the company. Both bills become effective August 28, 2009.
Oregon Legislation Limits Negative Amortization Loans; Requires Multi-Lingual Disclosures
On June 26, Oregon Governor Ted Kulongoski signed H.B. 2188, a bill that amends the Oregon Mortgage Lender Law. Under the new law, mortgage bankers, mortgage brokers, and loan originators may not negotiate or make, or offer to negotiate or make, a negative amortization loan without regard to the borrower’s repayment ability at the time the loan is made. Also, under the new law, mortgage bankers, mortgage brokers, and loan originators that advertise or otherwise solicit business and conduct transactions substantially in a language other than English are required to provide the borrower with certain materials in the language in which the parties conducted the transaction.
California Court Holds Class Action Waiver with Opt-Out Provision in Cardholder Agreement Unenforceable
On June 19, the California Court of Appeals held that a class action waiver with an opt-out provision contained in an arbitration provision of a cardholder agreement is procedurally unconscionable. Duran v. Discover Bank, No. B203338, 2009 WL 1709569 (Cal. Ct. App. Jun. 19, 2009). Previously in this case, the lower court held that the class action waiver in the defendant bank’s credit card agreement was unconscionable, and therefore unenforceable, under California law. On appeal, the defendant challenged the finding of procedural unconscionability, arguing that (i) the contract was not a contract of adhesion because the contract contained an opt-out provision, and (ii) Delaware law, not California law, should govern the dispute. The court first held that opt-out provisions do not automatically render contracts nonadhesive under California law. The court reasoned that a class action waiver might not sufficiently explain the disadvantages of the arbitration agreement compared to litigation, thus potentially preventing a consumer from making an “authentic informed choice” about whether to opt-out. In this case, the court found that the agreement did not sufficiently explain (i) the disadvantages of consenting to the arbitration and class waiver provisions, (ii) the costs of arbitration, and (iii) the “practical consequences” of a class action waiver. In addition, the court held that California law governed the dispute, reasoning that, even though Delaware has a substantial relationship to the dispute and class action waivers are enforceable under Delaware law, (i) the enforcement of the waiver would “contravene a fundamental policy of California,” and (ii) California has a materially greater interest than Delaware as to the enforceability of the class action waiver at issue. As a result, the court affirmed the lower court’s finding that the class action waiver provision of the agreement was procedurally unconscionable under California law.
Massachusetts Attorney General Settles with Lender for $10 Million
On June 9, Massachusetts Attorney General Martha Coakley announced a $10 million settlement agreement with Fremont Investment & Loan and its parent Fremont General Corporation (Fremont) to resolve a lawsuit against the lender. The lawsuit, first filed in 2007, alleged that Fremont engaged in unfair and deceptive loan origination and sales conduct, and that it made risky loans that it knew were designed to fail. As part of the settlement, Fremont agreed not to foreclose upon loans deemed “unfair” without certain protections for borrowers and not to originate “unfair” loans in Massachusetts. The settlement makes permanent the protections against foreclosure of “presumptively unfair” loans, which Massachusetts courts had previously enforced against Fremont (reported in Special Alert Mass Supreme Court Upholds Fremont Preliminary Injunction).
Maine Bans Collecting Data of Minors for Marketing Purposes Without Parental Consent
On June 2, Maine Governor John Baldacci signed into law an Act making it an illegal and unfair trade practice for a person or company “to knowingly collect or receive health-related information or personal information for marketing purposes from a minor without first obtaining verifiable parental consent of that minor’s parent or legal guardian.” Maine PUBLIC Law, Chapter 230 LD 1183, Item 1. Under the law, persons and entities cannot collect a minor’s (i) first name, or first initial, and last name, (ii) home or other address, (iii) social security number, (iv) driver’s license number or state identification number, and/or (v) any additional related personally identifiable information. Such personal information, however, may be obtained with “verifiable parental consent,” which is defined as “any reasonable effort” to ensure that a parent or guardian authorizes and receives notice of the collection, use and/or disclosure of the minor’s personal information. The law carries civil penalties of between $10,000 and $20,000 for an initial violation and at least $20,000 for subsequent violations.