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Michigan Toughens Mortgage Fraud Laws
On October 20, Michigan enacted several new laws aimed at enhancing the state's ability to pursue mortgage fraud and related criminal activity. The centerpiece of the legislative package (SB 43) amends state law, effective January 1, 2012, to create the felony crime of mortgage fraud. The new crime involves knowingly and intentionally engaging in any one of the several acts listed in the law, or conspiring to violate those provisions, including: (i) making a false statement or misrepresentation concerning a material fact or deliberately concealing or failing to disclose a material fact during the mortgage lending process; (ii) filing or causing to be filed with the register of deeds of any state county any document involved in the mortgage lending process that the filer knows to contain deliberate material misstatement, misrepresentation, or omission; or (iii) failing to disburse funds in accordance with the settlement or closing statement for a mortgage loan. In addition, Michigan enacted legislation (HB 4462) to criminalize forgery of a mortgage document, as well as a bill (SB 252) to increase penalties applicable to notaries public who violate the Notary Public Act while notarizing a document used in a mortgage transaction or otherwise involving an interest in real property. Finally, the state increased, from six to ten years, the statute of limitations for false pretenses involving real property, mortgage fraud, or forgery or uttering and publishing of an instrument affecting interest in real property (SB 251). To review the various pieces of enacted legislation, please access the following links: SB 43; SB 251; SB 252; HB 4462.
First Circuit Rules that Stores Should Pay Shoppers' Mitigation Costs for Losing Payment Card Numbers
On October 20, the U.S. Court of Appeals for the First Circuit kept alive a case by holding that, in Maine, customers may bring negligence and implied contract claims against merchants that lose or fail to protect their payment card data and that those customers may recover their reasonably-incurred costs to mitigate the impact of the data loss. Anderson v. Hannaford Bros. Co., No. 10-2384, (1st Cir. Oct. 20, 2011). In Anderson, a class of consumer-plaintiffs sued the defendant-grocery store chain after the defendant admitted that hackers broke into its computer system and stole millions of its customers' credit and debit card numbers. The district court initially granted the defendant's motion to dismiss the case. The appeals court reversed the dismissal in part - disagreeing principally with one aspect of the district court's reasoning. Both courts agreed that a jury may reasonably find that the defendant impliedly agreed to protect consumers' payment card data and that the defendants may therefore be liable for negligence and for breach of an implied contract if they failed to do so. Nevertheless, the district court found that the plaintiffs' damages - costs to avoid liability for unauthorized charges - were unforeseeable and therefore not recoverable. The appeals court disagreed and held that, under Maine law, incidental costs expended in good faith to mitigate the harm caused by the data loss are recoverable, including costs to replace the cards and purchase fraud insurance.
Massachusetts' Highest Court Upholds Dismissal of Purchaser's Try Title Action Because of Defects in Underlying Foreclosure
On October 18, the Massachusetts Supreme Judicial Court held that a homeowner who purchased a property from a foreclosing lender could not establish that he held record title to a property because of defects in the underlying foreclosure. Bevilacqua v. Rodriguez, Slip Op. SJC-10880 (Mass. Oct. 18, 2011). As a result, the Court upheld the Land Court's decision dismissing a try title action (quiet title action) brought by the homeowner. The alleged defect in the underlying foreclosure sale was the failure of the foreclosing party to show that it was a valid assignee of the mortgage prior to commencing the foreclosure proceeding. In January 2011 the Court held in U.S. Bank Nat'l Ass'n v. Ibanez that a foreclosing party is required to show that it was the holder of the relevant mortgage at the time of the publication of notice and at the time of the foreclosure sale, pursuant to an effective assignment. In Ibanez the court noted that "[a] plaintiff that cannot make this modest showing cannot justly proclaim that it was unfairly denied a declaration of clear title." Despite the urging of amici to reconsider the Ibanez holding, the court refused to do so, extending the Ibanez standard to a homeowner who purchases from a foreclosing party that cannot make the requisite showing. The court did, however, note that the try title action should have been dismissed without prejudice so as to not prevent the homeowner "from bringing other actions regarding title to the property."
West Virginia Federal Court Holds That A State Debt Collection Law Is Not Preempted Under Dodd-Frank
On October 13, the U.S. District Court for the Southern District of West Virginia held that the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or Act) did not preempt provisions of the West Virginia Consumer Credit and Protection Act (WVCCPA) that regulate debt collection activities. Cline v. Bank of America, N.A., Case No. 2:10-1295 (S.D. W. Va. Oct. 13, 2011). Plaintiff's complaint alleged that national bank defendant harassed him in violation of the WVCCPA in order to collect on a motorcycle loan. Defendant moved for a judgment on the pleadings, arguing that the WVCCPA was preempted by the National Bank Act (NBA) and a preemption regulation promulgated by the Office of the Comptroller of the Currency (OCC). The court noted that Dodd-Frank amended the NBA by providing that a state consumer financial law is preempted if in accordance with Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996), the state law prevents or significantly interferes with the exercise of a national bank power. The court stated that the preemption standard set forth in Barnett Bank is whether the state law (i) imposes an obligation on a national bank in direct conflict with federal law or (ii) is an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. The court also noted that the OCC amended its preemption regulation pursuant to Dodd-Frank to clarify that its focus is no longer on whether a state law obstructed, impaired, or conditioned a national bank power or more than incidentally affected the exercise of that power, but whether the state law is preempted based on an application of Barnett Bank. The court next discussed whether the preemption provisions contained in Dodd-Frank applied to the instant case, because the Act provides that it does not alter or affect OCC regulations governing the applicability of state law to any contract entered on or before July 21, 2010. The court concluded that this Dodd-Frank provision was intended only to preserve existing contracts by national banks, and not to protect national banks from state consumer protection laws. Therefore, the Dodd-Frank preemption provisions applied to the instant action. The court then found that Dodd-Frank's preemption provisions only concerned state consumer financial laws, and that if a state law is not a state consumer financial law, the state law is not preempted by the NBA.* The court held that the state law protects West Virginia residents from unfair and abusive collection practices, and thus is not a consumer financial law. Accordingly, the court concluded that none of plaintiff's claims were preempted. The court then analyzed whether plaintiff's claims were preempted under the OCC's amended regulation. The court stated that the OCC's new regulation tied preemption to Barnett Bank, and that in this case, the West Virginia law did not impose an obligation on defendant in direct conflict with federal law or stand as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. The court thus denied defendant's motion.
California Amends Mortgage Loan Originators Licensing Provisions
On October 4, California amended provisions under the California Finance Lenders Law regarding mortgage loan originator licensing. The amendments include the following: (i) allowing the possibility that applicants who have an expunged or pardoned felony conviction can obtain a license, although the underlying crime, facts, or circumstances can be considered when determining whether to issue a license; (ii) authorizing a person exempt from the provisions of the California Finance Lenders Law to apply to the Commissioner of Corporations for an exempt company registration for the purpose of sponsoring one or more individuals required to be licensed under the SAFE Act if specific requirements are met; (iii) requiring an exempt person to comply with all rules and orders that the Commissioner deems necessary to ensure compliance with the federal SAFE Act and pay an annual registration fee; and (iv) authorizing a licensed mortgage originator who is an insurance producer for an insurer that is registered to do business in the state, to originate loans on behalf of exempt persons, or on behalf of a licensed financial lender that originates loans for a single exempt person.
Ninth Circuit Allows Class Recovery of Cumulative Damages Under FDCPA and California Rosenthal Act
On September 23, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court's decision granting summary judgment to a class of plaintiffs for violations of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692e (FDCPA) and California's Rosenthal Act, Cal. Civ. Code § 1788, et seq., and a jury's award of statutory damages under both statutes. In Gonzales v. Arrow Financial Services, No. 10-55379 (Sept. 23, 2011 9th Cir.), Mr. Gonzales, on behalf of himself and a class of plaintiffs, alleged that defendant Arrow Financial Services, a debt buyer and collector, violated the FDCPA and Rosenthal Act when it sent nearly identical letters to 40,000 California residents implying that failure to repay certain debts it was attempting to collect could result in its reporting negative information to credit reporting agencies about those consumers. The Ninth Circuit affirmed the district court's ruling that the letters were "false, deceptive, or misleading" because, in fact, the debts were too old to be legally reported under the FDCPA's limit on reporting debts more than seven years old. After granting summary judgment on these facts, the district court held a jury trial to determine damages. The jury awarded cumulative damages for the FDCPA and the Rosenthal Act, allowing the lead plaintiff and class members to recovery equal amounts under each act for the violations. Defendant argued that the Rosenthal Act does not allow class actions and, even if it did, recovery should not be allowed under both it and the FDCPA. The court rejected these arguments. First, it held the Rosenthal Act was amended in 1999 to allow class actions. Second, it explained that the jury's award was consistent with the Rosenthal Act's intention that its remedies be "cumulative and . . . in addition to" remedies of other laws, and with the FDCPA's express language and deterrent purpose. Affirming the district court decisions, the court summarized that "letters, which misleadingly implied that [defendant] had the ability to report obsolete debts to credit bureaus, and impliedly threatened to make such reports, violated [the FDCPA]," and that "the Rosenthal Act's remedies are cumulative, and available even when the FDCPA affords relief."
California Appeals Court Affirms Decision Requiring Recordation of Assignment for a Mortgage but not Deed of Trust
On September 11, the California Court of Appeals for the Second Appellate District affirmed a lower court's ruling that California Civil Code §2932.5 does not apply when the power of sale is conferred in a deed of trust rather than a mortgage. Calvo v. HSBC Bank USA, N.A., No. BC415545 (Cal. Ct. App. 2011) The plaintiff received a loan, not from the defendant, that was secured by a deed of trust against her residence and was recorded on September 1, 2006. In 2008, a substitution of trustee and notice of default was recorded by the defendant purporting to be the assignee of the loan. The substitution of trustee did indicate that an assignment had occurred, however, no actual assignment of deed of trust was recorded. The defendant assignee bought the plaintiff's residence at the foreclosure sale. The plaintiff then sued, alleging that the defendant violated California law by initiating the foreclosure proceeding under the deed of trust without recording the assignment of the deed of trust. The court held that it has been established since 1908 that under §2932.5, an assignment for the beneficial interest in a debt that was secured by real property required recordation if the assignee wanted to exercise the power of sale only for a mortgage and not for a deed of trust. The court noted that this holding has never been reversed or modified in any reported California decision in the 100 years since. Plaintiff contended that in the modern era, no difference exists between a mortgage and a deed of trust. The court responded that California case law does not support that interpretation and that other statutes allowed parties to initiate foreclosure on behalf of the defendant irrespective of the recording of an assignment of deed of trust.
California District Court Allows Missouri Resident to Advance Class-Action Disability Claim Linked to Online Identity Verification
On September 7, in Earll v. eBay Inc., No. 5:11-cv-00262-JF (N.D. Cal., Sept. 7, 2011) the U.S. District Court for the Northern District of California ruled that a Missouri resident could proceed with a putative class action claim against eBay, challenging its web-based identity verification system under California's civil rights and disability laws, notwithstanding that she lived out-of-state. The hearing-impaired plaintiff originally alleged that the defendant's automated, phone-based seller verification system discriminated against the deaf in violation of the Americans with Disabilities Act (ADA) and California's Unfair Competition Law(UCL), but later sought to amend her complaint to remove the UCL claim and add a claim under the state's Unruh Civil Rights Act (Unruh). The court held that public policy favored allowing the plaintiff to pursue California state law claims where eBay had sought transfer of the case from Missouri and California and, in doing so, had relied upon a forum selection clause in its user agreement providing that the agreement was governed by California law. The court also held that while the ADA was limited to actual physical spaces, the Unruh and the state's Disabled Persons Act apply to websites as a kind of business establishment and accommodation, and that no "nexus to physical [places] need be shown." Because the plaintiff did not plead sufficient facts to assess whether a standard implicated under either state law was met, the court ordered the plaintiff to file an amended complaint within 30 days.
Iowa Federal Court Holds That State Electronic Funds Transfer Law Is Preempted
On August 29, the U.S. District Court for the Southern District of Iowa held that a state statute regulating state bank electronic funds transfers (EFTs) was preempted with respect to how a national bank could provide services to those state banks. U.S. Bank N.A. v. Schipper, Case No. 4:10-cv-00064 (S.D. Iowa Aug. 29, 2011). In this case, U.S. Bank provided EFT services to Iowa state-chartered banks and sought a declaration that the State regulators could not enforce the Iowa Electronic Transfer of Funds Act against the national bank or any other financial institution engaging in business with the national bank. The District Court agreed, finding that the OCC has specified that national banks may provide to other financial institutions any service the bank may perform for itself, including EFT services without qualification or reservation. Furthermore, the Court held that the Iowa statute, while not directly enforceable against a national bank, does significantly impair the bank's ability to exercise its federally granted powers. The Court issued a permanent injunction, prohibiting the state regulatory agencies from enforcing the state statutory sections at issue against U.S. Bank or any entity to which U.S. Bank provides the EFT-related services. Importantly, the Court also stated that the Dodd-Frank Act adopted the same standard applied by the U.S. Supreme Court in its 2007 Watters v. Wachovia decision, and that it did not materially alter the standard for preemption the Court must apply. The court thus issued a permanent injunction.
NJ Supreme Court Applies State Consumer Fraud Act to Post-Foreclosure Judgment Forbearance Agreement
In Gonzalez v. Wilshire Credit Corp., No. 065564 (N.J. Aug. 29, 2011) a unanimous New Jersey Supreme Court held that a post-foreclosure judgment forbearance agreement qualified as a stand-alone extension of credit under the New Jersey Consumer Fraud Act (CFA), which provides a private cause of action to consumers subjected to "any unconscionable commercial practice . . . in connection with the sale or advertisement of any merchandise or real estate, or with the subsequent performance" thereof, including the extension of consumer credit. After obtaining a judgment for foreclosure, the defendant mortgage servicer entered into an agreement with plaintiff mortgagor whereby the defendant agreed to refrain from proceeding with the sheriff's foreclosure sale in exchange for a lump sum, up-front payment and a series of monthly paymentsthat included various fees to reinstate the loan and bring it current. Noting that the CFA, a remedial statute, was intended to be "flexible enough to combat newly packaged forms of fraud," the New Jersey Court ruled that a post-judgment forbearance agreement may be reviewed for unconscionable practices relating to both origination and execution as "a lender or its servicing agent cannot use unconscionable practices" in "fashioning and collecting" any loan. The court rejected the defendant's argument that applying the CFA to work-out agreements would discourage servicers from negotiating such forbearance agreements and lead to increased loss of homes, noting application of the CFA had not chilled extensions of credit in other industries. The court opined that "[t]hose businesses dealing with the public fairly and honestly . . . have nothing to fear" from the CFA. The court, was, however, careful to note that its holding was limited to the applicability of the CFA to post-foreclosure judgment agreements involving stand-alone extensions of credit and did not extend to settlement agreements in general.