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California Bankruptcy Court Denies Bank’s Request for Relief from Automatic Stay Because of Failure to Record Assignment of Deed of Trust Prior to Foreclosure

On April 11, the United States Bankruptcy Court for the Southern District of California held that a national bank was not entitled to relief from an automatic bankruptcy stay in order to proceed with a foreclosure-related action because the bank did not record its assignment of the deed of trust. In re: Eleazar Salazar, Bankruptcy No. 10-17456 (Bankr. Ct. S.D. Cal. Jan. 25, 2011). The original lender’s interest in the promissory note and a deed of trust executed by the debtor were later assigned to a national bank, but the bank did not record the assignment. The debtor defaulted on the note, leading the bank to conduct a non-judicial foreclosure on debtor’s property and to file an unlawful detainer action against the debtor in state court. The debtor filed for Chapter 13 bankruptcy the day before trial on the unlawful detainer action. The bank then moved in the bankruptcy court for relief from the automatic bankruptcy stay. The debtor challenged the bank’s motion, arguing that the foreclosure sale was defective because the bank did not record the assignment of its interest in the deed of trust as required by California Civil Code § 2932.5. The court concluded that the bank had to satisfy two requirements contained in § 2932.5 in order for the nonjudicial foreclosure to be valid: (i) the bank must have obtained an assignment of the right to be paid the mortgage debt, and (ii) the power of sale must have been recorded. The court found an endorsement in blank by the lender to be sufficient to meet the first requirement. However, the court found that the bank failed to record its assignment and, therefore, failed to comply with § 2932.5. The court rejected the bank’s arguments that the fact that MERS was a nominal beneficiary on the original deed of trust eliminated the need to record the assignment and that the MERS foreclosure process is an alternative to statutory foreclosure law because only the state legislature can change statutory requirements.

Massachusetts Supreme Court Analyzes Activities of National Title Vendor as Possible Unauthorized Practice of Law

On April 25, the Supreme Court of Massachusetts decided Real Estate Bar Association for Massachusetts v. National Real Estate Information Services, 459 Mass. 512 (Mass. 2011), which addressed claims of unauthorized practice of law in Massachusetts real estate conveyancing. The court concluded that certain real estate settlement activities undertaken by the defendants, National Real Estate Information Services (NREIS), did not constitute the unauthorized practice of law, but also stated that based on the record before the court, it could not determine whether other settlement activities constituted the unauthorized practice of law.  The court acknowledged the impossibility of a comprehensive definition of the practice of law, but stated "[t]he practice of law involves applying legal judgment to address a client’s individualized needs."

The plaintiffs, the Real Estate Bar Association for Massachusetts (REBA), an association of real estate lawyers, sued the defendants, a real estate settlement services provider and title insurance agency, on the grounds that the defendants engaged in the unauthorized practice of law.  The defendants described the activities as facilitating mortgage transactions for its lender clients, services it claims are "managerial, administrative, clerical or ministerial."

Mortgage transactions are conveyancing transactions in Massachusetts. Conveyancing, according to the Black’s Law Dictionarydefinition cited by the Court, is the act or business of drafting and preparing legal instruments, especially those that transfer an interest in real property. However, the Court rejected the notion that "conveyancing" is a unitary, indivisible activity. "Many of the discrete services and activities that may fall within the penumbra of modern conveyancing do not qualify as the practice of law."

Among the activities held not to be the practice of law in this decision are: (i) conducting title examinations and preparing title abstracts, (ii) obtaining public records such as municipal lien certificates, property appraisals and flood reports, (iii) preparing HUD-1 settlement statements, (iv) reviewing mortgage loan documents to ensure valid execution, (v) delivering documents to the registry of deeds for recordation, (vi) disbursing mortgage loan proceeds, and (vii) issuing title insurance commitments and policies.

Activities that do constitute the practice of law include providing opinions or advice regarding marketability of title to real estate and drafting deeds to real property.

Activities that may or may not constitute the practice of law include clearing title defects and placing oneself as an intermediary between attorney and client or facilitating the relationship between attorney and client.

The Court reconfirmed the established practice in Massachusetts that an attorney must conduct real estate closings in the state. "As a matter of common and long-standing practice in the Commonwealth, an attorney must be involved in the closing or settlement of real property conveyances.... The closing is ... a critical step in the transfer of title and the creation of significant legal and real property rights. Because this is so, we believe that a lawyer is a necessary participant at the closing to direct the proper transfer of title and consideration and to document the transaction...." Moreover, the attorney must do more than simply appear at the closing; he or she must "play a meaningful role" in the closing because of his professional responsibility to ensure (1) that marketable title is conveyed, and (2) that the consideration for the conveyance is transferred.

Massachusetts Federal Court Denies Servicer Motion to Dismiss UDAP Claim for HAMP Violation

On April 4, a Massachusetts federal court denied a mortgage servicer’s motion to dismiss a complaint that the servicer’s failure to timely comply with a request for modification under the federal Home Affordable Modification Program (HAMP) gave rise to a violation under Massachusetts’ unfair and deceptive trade practices statute (Chapter 93A). Morris v. BAC Home Loans Servicing, L.P., No. 1:10-11572 (D. Mass. Apr. 4, 2011). In this case, plaintiffs alleged that the defendant violated Chapter 93A when it failed to evaluate or respond to the plaintiffs’ request for a modification under HAMP. The defendant moved to dismiss, arguing that HAMP does not provide for a private right of action and that, therefore, the plaintiffs had failed to state a claim. The court disagreed, reasoning that a violation of HAMP would be actionable under Chapter 93A if the violation was unfair or deceptive and that recovery under Chapter 93A would be compatible with the objectives and enforcement mechanisms of HAMP. However, the court found that the plaintiffs had failed to plead sufficient facts to make the showing that the defendant’s alleged violations of HAMP rose to the level of unfair or deceptive. As a result, the court denied the motion to dismiss, and instructed the plaintiffs to amend the complaint within 30 days.

Kentucky Adds Exemption to Mortgage Loan Originator Licensing Law

On March 16, Kentucky Governor Steve Beshear signed into law H.B. 470, a bill which amends the Kentucky Mortgage Licensing and Regulation Act to exempt from the state’s mortgage loan originator licensing requirement a person (i) who originates a dwelling-secured mortgage loan, (ii) who is exempted by an order of the Commissioner of the Kentucky Department of Financial Institutions, and (iii) whose exemption would not run afoul of the mortgage loan originator registration requirements set forth under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008. H.B. 470 becomes effective June 8, 2011.

Virginia Passes Law Regarding Electronic Signatures

On March 15, the Virginia Assembly enacted legislation expanding the acceptance of electronic signatures. The new law provides that financial disclosure forms, lobbyist registration statements, and notary applications for recommission may be signed by electronic signature. 

Ninth Circuit Upholds FDCPA Ruling Against Debt Collection Law Firm

On March 4, the U.S. Court of Appeals for the Ninth Circuit affirmed a debtor’s judgment against a debt collector under the federal Fair Debt Collection Practices Act (FDCPA), the Montana Unfair Trade Practices and Consumer Protection Act and state tort claims of malicious prosecution and abuse of process. McCollough v. Johnson, Rodenburg & Lauinger, No. 09-35767 (9th Cir. Mar. 4, 2011). The plaintiff debtor’s delinquent credit card account was sold by the credit issuer to a debt buyer. The debt buyer brought a state court action to recover on the debt but dismissed the action after the debtor asserted in response that the statute of limitations had run. The debt buyer then retained a debt collection law firm, Johnson, Rodenburg & Lauinger (JRL), to pursue the action, which it did until it was instructed to dismiss the suit several months later based on it being time barred. The debtor brought an action against JRL in federal court. The district court granted partial summary judgment on the FDCPA claims and the debtor won the other claims at trial. In affirming the ruling of the district court, the Ninth Circuit found that JRL’s defense of bona fide error as to the FDCPA action failed as a matter of law. The court held that JRL erred by relying without verification on its debt buyer client’s representation that the statute of limitations was extended and by overlooking contrary information in its electronic file. "JRL thus presented no evidence of procedures designed to avoid the specific errors that led to its filing and maintenance of a timebarred collection suit" against the debtor, the court concluded. The court also upheld summary judgment on the debtor’s claim that JRL violated the FDCPA by pursuing unauthorized attorneys’ fees. The FDCPA prohibits "[t]he collection of any amount . . . unless such amount is expressly authorized by the agreement creating the debt or permitted by law." JRL’s presentment of generic evidence that all credit cardholder agreements provide provisions for attorneys’ fees was found to be insufficient to defeat summary judgment. The court also concluded that: false requests for admission of JRL in the underlying action violated the FDCPA; the district court did not abuse its discretion in allowed testimony from other consumers relating to JRL; and, that the district court properly allowed the jury’s $250,000 award for actual damages due to the emotional distress of the plaintiff, who years earlier had suffered a head injury and suffered from mixed personality disorder and multiple other afflictions, including post-traumatic stress disorder.

CitiMortgage Reaches Settlement Agreement in Lender-Placed Insurance Class Action

A settlement was reached in a class action suit against CitiMortgage, Inc. in the Superior Court for the State of California, County of Los Angeles. In Rounds v. CitiMortgage, Inc., No. BC386656 (Cal. Super. Ct., Feb. 24, 2011) plaintiff alleged, among other things, that CitiMortgage allowed the assessment of excessive premiums in its lender placed insurance (LPI) program on California properties, purportedly in violation of California’s Unfair Competition Law, Business and Professions Code Section 17200, et seq. The settlement applies to California borrowers of CitiMortgage who paid premiums on LPI between March 4, 2004 and August 10, 2010 and whose insurance was not cancelled without charge to the borrower. The settlement provides for, among other things, a payment by CitiMortgage in a sum not to exceed $2,000,000 for settlement class members making valid claims, attorneys’ fees, costs and an incentive award to plaintiff. CitiMortgage agreed to permit each settlement class member to make a claim for payment of up to $95. With respect to CitiMortgage’s LPI program, from February 24, 2011, the date of the judgment granting final approval of the settlement, and for two years thereafter CitiMortgage agreed to maintain a rate of commissions on the placement of LPI to an affiliate of not more than 12%, and a fee in the amount of $.038 for tracking compliance with insurance obligations.

Court Rules Lender, Acting as Mortgage Broker, Breached Fiduciary Duty to Borrower

On February 24, a California court of appeals affirmed a trial court’s decision to award damages against a mortgage lender for breach of fiduciary duty and misrepresentation, where the loan officer for the lender acted as a mortgage broker. Smith v. Home Loan Funding, Inc., 2d Civ. No. B219372 (Super. Ct. No. 56-2007-00306-CU-BT-SIM) (Ventura County) (Cal. 2d Dist. Ct. App. February 24, 2011). Home Loan Funding, Inc. (HLF) provided residential mortgage loans, funding most directly, but also brokering some loans to other lenders. The plaintiff, Tonya Smith, contacted Anthony Baden, a loan officer for HLF, requesting a home equity line of credit. Baden indicated to her that he was a mortgage broker. Baden contacted Smith later and told her he "shopped the loan" with other lenders but could not obtain one for her because of her low credit scores. Baden then suggested that Smith refinance her existing loan and told her "he would shop the best loan" for her. Smith agreed but told Baden she did not want a loan with a prepayment penalty. Baden assured her via email that there would be no prepayment penalty on the new loan. At the time Smith signed the loan documents, she was unaware that the new loan, which was made by HLF as direct lender, had a prepayment penalty rider and an interest rate margin that was 1.2% higher than the margin Smith could have qualified for. The trial court had ruled that Baden and HLF acted as loan brokers and breached their fiduciary duty to Smith. The court awarded Smith $21,908 in damages for the prepayment penalty and $72,187.17, which is the present value of the difference in the margins over the 30-year life of the loan. The court also awarded Smith $26,342.50 in attorney fees against HLF. Upon review, the Court of Appeal found award of damages on the prepayment penalty to be inconsistent with damages on a 30-year loan that is not likely to be refinanced and struck those damages. The court affirmed the lower court judgment and damage award in all other respects.

Bankruptcy Court States - But Does Not Hold - That MERS Lacks Authority to Assign Mortgages

On February 10, a judge in the United States Bankruptcy Court for the Eastern District of New York concluded, in dicta, that the Mortgage Electronic Registration System (MERS) lacks authority under New York law to assign interests in mortgages among its members. In re Agard, No. 810-77338 (Bankr. E.D.N.Y. Feb. 10, 2011). The issue arose on a mortgage servicer’s motion to lift the automatic stay in order to foreclose on the home of a Chapter 7 debtor. In such a situation, only a secured creditor (or a servicer acting on its behalf) has standing to seek to lift the stay. The debtor argued that the servicer lacked standing because the assignment of the security interest to the purported creditor, accomplished through the MERS system, was invalid. The court did not need to confront that issue to resolve the case, as it held that a prior state court judgment, which could not be challenged in federal court under the Rooker-Feldman and res judicata doctrines, had sufficiently established the servicer’s status as a secured creditor. Nevertheless, the court proceeded to consider the MERS issue in order to establish a "precedential effect" on the many other pending cases questioning whether an "entity which acquires its interests in a mortgage by way of assignment from MERS, as nominee, is a valid secured creditor with standing to seek relief from the automatic stay," notwithstanding the questionable precedential effect of the lengthy analysis in dicta. The court concluded that the servicer had failed to establish that the alleged creditor was the rightful holder of the Note or of the Mortgage, either of which was sufficient to defeat standing. With respect to the Note, the court determined that there was no evidence of either the creditor’s physical possession of the Note or of a valid written assignment because there was no proof that an assignment according to MERS’s standard processes had actually taken place. With respect to the Mortgage, the court’s dicta concluded that the servicer had failed to show a valid assignment from the original lender to the current creditor for several reasons:

• First, a note and mortgage are not "inseparable," as MERS "admits that the very foundation of its business model as described herein requires that the Note and Mortgage travel on divergent paths."
• Second, the mortgage documents themselves, which referred to MERS as the lender’s "nominee" or as the "mortgagee of record," were insufficient to give MERS the authority to transfer the Mortgage because the law affords those statuses very limited powers. However, this defect could have been cured had the lender executed a document clearly authorizing MERS to act as its agent for purposes of transferring the Mortgage.
• Third, the MERS membership rules, to which all of the relevant institutions have agreed, do not contain any explicit reference to an agency relationship and "do not grant any clear authority to MERS to take any action with respect to the mortgages held by MERS members, including but not limited to executing assignments."
• Fourth, the agency relationship claimed by MERS constitutes an "interest in real property" because it would authorize MERS as agent to assign the Mortgage. Therefore, the New York statute of frauds requires the agency relationship be committed to writing, but "none of the documents expressly creates an agency relationship or even mentions the word ‘agency.’"
• Finally, MERS’s claim that, in addition to being the mortgagee’s agent, it possesses the rights of the mortgagee itself by virtue of its designation as "mortgagee of record" is "absurd, at best."

In sum, the court’s dicta concluded that "MERS’s theory that it can act as a ‘common agent’ for undisclosed principals is not support[ed] by the law." Thus, notwithstanding the court’s recognition that "an adverse ruling regarding MERS’s authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States," it would have held that the servicer lacked standing to lift the stay and proceed with foreclosure but for the prior state court judgment.

California Supreme Court Prohibits Businesses from Requesting and Recording Cardholder’s Zip Code

On February 10, the Supreme Court of California reversed a Court of Appeal decision that a ZIP code does not constitute personal identification information under The Song-Beverly Credit Card Act of 1971 (Credit Card Act), instead finding that a ZIP code is part of a person’s address, which does constitute personal identification information. Pineda v. Williams-Sonoma Stores, Inc., No. S178241 (Cal. Feb. 10, 2011). In Pineda, the plaintiff was asked for and provided her ZIP code while paying for purchases with her credit card at one of Defendant’s stores, and the ZIP code was recorded. The plaintiff alleged asking for and recording her ZIP Code during a credit card transaction violated the Credit Card Act, which prohibits businesses from requesting "personal identification information" during a credit card transaction. The trial court and Court of Appeal disagreed, finding that a ZIP code, without more, does not constitute personal identification information. The Supreme Court, however, reversed the lower courts, finding that personal identification information, which includes a cardholder’s address, is intended to include all components of the address, and a ZIP Code is commonly understood to be a component of an address. The Supreme Court further stated that the Court of Appeal’s interpretation would create inconsistency and permit retailers to obtain indirectly what they are clearly prohibited from obtaining directly, since such information could be used to locate a cardholder’s complete address or telephone number.