InfoBytes Blog

Ohio Federal Court Indicates Intent to Certify Question to Ohio Supreme Court to Resolve Applicability of Ohio Consumer Sales Practices Act to Servicers

On June 18, the U.S. District Court for the Northern District of Ohio stated its intent to certify to the Ohio Supreme Court the question of whether the Ohio Consumer Sales Practices Act (OCSPA) applies to mortgage loan servicers. Anderson v. Barclays Capital Real Estate, Inc., No. 3:09-cv-2335 (N.D. Ohio June 18, 2010). In Anderson, the plaintiff borrower asserted that the defendant, a mortgage servicer, violated the Real Estate Settlement Procedures Act (RESPA) and the OCSPA by allegedly misapplying the borrower’s mortgage loan payments and by allegedly failing to adequately respond to her qualified written request (QWR). The borrower also asserted common law claims for unjust enrichment and conversion. The servicer moved to dismiss all claims, challenging the sufficiency of the pleadings and specifically arguing that the OCSPA does not apply to mortgage servicers because they are not “suppliers,” nor were the servicer’s dealings with the borrower “consumer transactions” within the meaning of the OCSPA. With respect to the OCSPA claim, the court noted that there was no binding Ohio authority regarding whether the OCSPA applies to mortgage servicers and stated its intent to certify the question to the Ohio Supreme Court. With regard to the RESPA claim, the court found that the complaint sufficiently pled a breach of RESPA duties to survive a motion to dismiss by alleging a failure to adequately respond to a QWR. The court also ruled, however, that the borrower failed to adequately plead damages to state a RESPA claim, and therefore held its decision on the servicer’s motion to dismiss in abeyance to allow the borrower an opportunity to amend the complaint. The court also ruled that the borrower had sufficiently pled her common law claims to state plausible claims for relief to survive the motion to dismiss.

Utah Federal Court Extends "Complete Preemption" Doctrine to National Banking Act

On June 18, the U.S. District Court for the District of Utah issued a memorandum opinion explaining its June 11 order to vacate a preliminary injunction entered by a Utah state court, which had enjoined a defendant national bank and its trustee services company from conducting foreclosure sales in Utah (the order to vacate was reported in InfoBytes, June 18, 2010). Cox v. ReconTrust Co., N.A., No. 2:10-CV-492, 2010 WL 2519716 (D. Utah June 18, 2010). In Cox, the plaintiff, a borrower who was facing foreclosure, originally filed suit in state court claiming that the defendants, both national banks licensed under the National Banking Act (NBA), (i) were foreign companies not registered to transact business in Utah, (ii) were not qualified to act as trustees under Utah code, and (iii) violated the Real Estate Settlement Procedures Act (RESPA). Citing the federal claim under RESPA, the defendants removed the case to federal court. Thereafter, the borrower voluntarily dismissed her RESPA claim and moved for remand. Rejecting the motion for remand, the district court found that it retained original jurisdiction because the state law claims were subject to complete preemption under the NBA. The district court concluded that Congress intended for the NBA to exclusively control how national banks transact business nationwide and act as trustees and, thus, provided removal jurisdiction. This interpretation of the NBA also defeated the preliminary injunction because the NBA preempted the borrower’s state law claims that a national bank must be registered with Utah as a foreign corporation to foreclose on a property and must comply with Utah’s statutory requirements for trustees.

California Federal Court Finds No Private Right of Action Under HAMP, National Housing Act

On June 15, the U.S. District Court for the Eastern District of California held that the Home Affordable Modification Program (HAMP), the National Housing Act (NHA) and the California Perata Mortgage Relief Act (PMRA) do not create private rights of action. Zendejas v. Wholesale Mortgage Corp., No. 1:10-CV-00184, 2010 WL 2490975 (E.D. Ca. June 15, 2010). In Zendejas, the plaintiff debtors borrowed $220,500 from the lender to refinance their home mortgage. The debtors defaulted on the loan and requested a loan modification from the lender, who was a participant in HAMP. The parties were unable to come to an agreement on the loan modification due to the debtors decreasing income, and the property was subsequently foreclosed. The debtors brought suit, claiming the lender failed to offer them an acceptable loan modification or any other satisfactory options prior to foreclosure. More specifically, the debtors, in addition to various other claims, alleged the lenders failed to (i) conform to the provisions of HAMP, which require the lender to offer certain loan modification and foreclosure prevention services, (ii) comply with the notice requirements of the NHA, which required the lender to advise the debtors of any home ownership counseling they may be eligible for, and (iii) contact the debtors prior to default and foreclosure as required by the PMRA. The debtors also claimed that the failure to provide a loan modification constituted unfair or fraudulent business practices, in violation of California state law. The lenders rejected these claims and filed a motion to dismiss, which the court granted in its entirety. The court found that the debtors did not have standing to sue under HAMP, reasoning that HAMP does not create a private right of action. The court noted that a "borrower to a HAMP agreement would not be reasonable in relying on [it] as manifesting an intention to confer a right on him because the [HAMP] does not require a servicer to modify eligible loans." Likewise, the court stated that the NHA did not create a cause of action because the NHA gives a borrower no claim in the event that the lender "fail[s] to follow the statute or its implementing regulations." The court additionally found that California legislature did not intend to create a private right of action for borrowers for violations of the PMRA. Finally, the court rejected the state unfair or fraudulent business practice claim on the basis that no law required the lenders to provide a loan modification.

South Carolina Legislature Overrides Governor’s Veto of Bill Amending Mortgage Broker Licensing Requirements, Restricts Payday Lending by Supervised Lenders

On June 15, the South Carolina General Assembly overrode the veto of South Carolina Governor Mark Sanford in connection with H 3790, a bill including provisions to amend licensing requirements for mortgage loan originators that are independent contractors and prohibiting payday loans made by non-bank supervised lenders. The bill amends the South Carolina Mortgage Lending Act to require the licensure of an independent contractor who originates loans for and under the supervision of a mortgage broker licensee as a “qualified loan originator.” A qualified loan originator is subject to the requirements of a loan originator and cannot (i) be compensated based upon the terms of the loan originated (except for the amount of the principal balance), (ii) offer loans other than fixed-term, fixed-rate, fully amortizing mortgages, or (iii) handle borrower or other third-party funds in connection with the mortgage loan. The bill also excludes payday loans from the definition of “supervised loans,” defined as non-mortgage consumer loans in excess of 12% interest per year, and prohibits non-bank supervised lenders from making payday loans. The bill, however, does not amend South Carolina’s separate payday lending law. Initial violations of this prohibition are subject to fines while the third violation is subject to license revocation. In vetoing the bill, Governor Sanford objected to licensing independent contractors working under the supervision of a mortgage broker licensee differently than non-affiliated independent contractors and restricting consumer access to payday loans. The law becomes effective immediately.

Rhode Island Passes Law Regulating Title Insurance Companies

On June 12, Rhode Island enacted H 7709, the "Rhode Island Title Insurers Act," which becomes effective January 1, 2011. Among other things, the law (i) establishes minimum capital and surplus requirements for title insurers, (ii) sets certain asset and reserve requirements, (iii) requires prior written approval for title insurers to deviate from certain business diversification standards, (iv) establishes guidelines for policyholder treatment, (v) prohibits rebates and fee splitting, (vi) establishes rate and form filing procedures, and (vii) establishes penalties for violations of the law.

New York State Court Holds HOLA/FIRREA Do Not Preempt Cause of Action by New York Attorney General Regarding Appraisal Practices

On June 8, the Supreme Court of New York, Appellate Division (First Department) affirmed that the Home Owner’s Lending Act (HOLA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) do not preempt the enforcement of Uniform Standards and Professional Appraisal Practice standards under state law. People of the State of New York v. First American Corp., 2010 NY Slip Op 04868, 2010 WL 2266832 (N.Y. Sup. Ct. June 8, 2010). The New York Attorney General claimed that the defendants engaged in fraudulent, deceptive and illegal business practices by allegedly permitting residential real estate appraisers to be influenced by a nonparty bank to increase real estate property values on appraisal reports for the purpose of inflating home prices. The defendants moved for dismissal, asserting that HOLA and FIRREA impliedly place the responsibility for oversight of appraisal management companies on the Office of Thrift Supervision (OTS). The defendants also asserted that the New York Attorney General lacked standing to bring these claims. Regarding the preemption issue, the court relied in part on an October 25, 2004 OTS opinion letter requiring thrifts using agents to perform activities such as appraisals to enter into written agreements acknowledging OTS’s statutory authority to take enforcement action against such agents. Noting the absence of such an agreement, the court concluded that the applicable federal statutes, regulations, and guidelines did not preempt or preclude the Attorney General from pursuing the action. The court further concluded that the Attorney General had standing to bring suit, rejecting the defendants’ argument that the Attorney General’s action was actually a federal cause of action characterized as a state law claim.

Florida Federal Court Holds NBA Preempts State Law Barring Check Cashing Fees

On June 4, the U.S. District Court for the Middle District of Florida held that the National Bank Act (NBA) and Office of the Comptroller of the Currency (OCC) regulations preempt a Florida law prohibiting check cashing fees. Baptista v. JP Morgan Chase Bank, No. 6:10-cv-139, 2010 WL 2342436 (M.D. Fla. June 4, 2010). In this putative class action, the defendant bank charged the plaintiff a fee for cashing a check at the bank because she was a non-account holder. The plaintiff sued, claiming unjust enrichment and arguing that Fla. Stat. § 655.85 forbids banks from cashing checks at less than par value. The court granted the bank’s motion to dismiss, finding that § 655.85 only forbids check-cashing fees on bank-to-bank transactions, and, thus, does not apply to the plaintiff. The court additionally held that the NBA and OCC regulations would preempt the statute’s prohibition on check cashing fees even if § 655.85 applied to the plaintiff. The court reasoned that the Florida check cashing fee statute conflicts with OCC regulations that (i) authorize national banks to charge their customers non-interest charges and fees, and (ii) provide that the establishment and amounts of non-interest charges and fees are business decisions made at their discretion. Ruling on whether the non-account holder was a “customer” under the relevant OCC regulations, the court added that OCC interpretive letters define “customer” as any party that obtains a product or service from the bank; thus, the plaintiff was a “customer” because she received check cashing services, even if she was a non-account holder. The court also dismissed the plaintiff’s claim for unjust enrichment, finding that the claim sought damages from the bank for exercising federally-authorized powers, and, thus, was preempted.

California State Court Holds HOLA Does Not Preempt California Statute Pertaining to the Obligations of Lenders Prior to Issuing a Notice of Default

On June 2, the California Court of Appeal held that Cal. Civil Code Section 2923.5, which is known as the Perata Mortgage Relief Act (PMRA) and prescribes the procedures that a lender must follow prior to filing a notice of default, provides for a limited private right of action and that the Home Owners’ Loan Act (HOLA) and Office of Thrift Supervision (OTS) regulations do not preempt the PMRA. Mabry v. Sup. Ct. of Orange Cty., G042911, 2010 WL 2180530 (Cal. Ct. App. June 2, 2010). In Mabry, the plaintiff borrower obtained a restraining order against the defendants (including the lender, a subsidiary of a federal thrift) to prevent the foreclosure of the borrower’s home. The trial court subsequently vacated the restraining order and held that (i) HOLA and OTS regulations preempted the PMRA, (ii) the PMRA does not provide a private right of action, and (iii) tender was required to enjoin the foreclosure proceedings.

After the borrower filed a writ proceeding, the Court of Appeal stayed the foreclosure and scheduled an order to show cause. The appellate court first held that the PMRA provides a limited private right of action for a borrower to obtain postponement of an impending foreclosure (i.e., until a lender complies with the requirements of the PMRA) and that a borrower is not required to tender to exercise this right. The appellate court next held that HOLA and OTS regulations do not preempt the PMRA. The court stated that the burden on federal thrifts to assess a borrower’s financial condition and to explore alternatives to foreclosure “might arguably push the [PMRA] out of the permissible category of state foreclosure law and into the federally preempted category of loan servicing or loan making,” but that there must be evidence of such a burden for a court to make that finding. On the limited record of this case, the court determined that HOLA did not preempt the PMRA.

Illinois Law Requires Illinois Courts to Stay Mortgage Foreclosure Proceedings Against Combat Military Personnel

On June 1, Illinois Governor Pat Quinn signed into law HB 3762, a bill that requires an Illinois court to stay for 90 days foreclosure proceedings against a mortgagor who is a servicemember of the military on active duty and has been deployed to a combat (or combat support) posting within the previous 12 months. The stay is not automatic and must be requested by the servicemember. The bill takes effect January 1, 2011. 

Vermont Enacts Mediation Requirement for Foreclosures

On May 29, Vermont Governor Jim Douglas signed HB 590, a bill establishing a mediation program for mortgage foreclosure actions involving loans subject to federal Home Affordable Modification Program (HAMP) guidelines. The law requires a court to refer a foreclosure case to mediation whenever the mortgagor enters an appearance or requests mediation within four months after judgment is entered. The court may, for good cause, shorten the four month period or, alternatively, decline to order mediation upon finding that the mortgagor is attempting to delay the case. Mediation is not required if the mortgagee files a motion detailing its compliance with the applicable HAMP requirements. During the mediation period, the law requires the mortgagee to consider available foreclosure preventions tools, “including reinstatement, loan modification, forbearance, and short sale, and the calculations, assumptions, and forms established by the HAMP guidelines.” A mortgagee must produce documentation of its consideration of these options, as well as any pooling or servicing agreements, if applicable, to the mortgagor. The cited provisions take effect July 1, 2010.