InfoBytes Blog

Eighth Circuit Holds State Law Claims Regarding Document Preparation Fees is Preempted for Federal Savings Associations

On October 20, the U.S. Court of Appeals for the Eighth Circuit affirmed a district court finding that state laws purporting to restrict lenders from charging document preparation fees are preempted by Office of Thrift Supervision (OTS) regulations issued under the Home Owners’ Loan Act. Casey v. Federal Deposit Ins. Corp., No. 09-1096, 2009 WL 3349950 (8th Cir. Oct. 20, 2009). In Casey, the initial claim was brought by seven homeowners against four lenders that were all federal savings associations (FSAs). The homeowners claimed that the FSAs’ practice of charging fees for the preparation of loan documents violated two Missouri laws–one prohibiting the unlicensed practice of law, and another prohibiting fraudulent conduct in commerce. The FSAs moved for dismissal of the claims based on preemption of the Missouri laws by OTS regulations. Under Section § 560.2(b) of the OTS regulations, among the types of preempted state laws are those purporting to impose requirements regarding “loan-related fees, including, without limitation, initial charges.” The homeowners argued that, because the Missouri state laws ”[made] no mention of lending,” they “necessarily fall[] outside the scope of the § 560.2(b) examples,” and are preempted only if they “purport[] to regulate or otherwise affect” credit activities without regard to § 560.2(b). The court concluded that “a state law that either on its face or as applied imposes requirements regarding the examples listed in § 560.2(b) is preempted. A generally applicable state law that imposes no such requirements will not be preempted if, as applied, it ‘only incidentally affect[s] the lending operations of [FSAs] or [is] otherwise consistent with the purposes of [§ 560.2(a)].” In dismissing the homeowners’ claims, the Eighth Circuit stated that the Missouri laws at issue, as applied, would impose requirements regarding loan-related fees and were thus preempted by § 560.2(b) of the OTS regulations.

California Passes Slate of Mortgage Laws

On October 11, in addition to S.B. 36, California Governor Arnold Schwarzenegger signed into law a collection of bills designed to protect the interests of California homebuyers.

• A.B. 260, among other things, (i) prohibits “steering” borrowers into higher-priced loans that are more risky than lower-interest, fixed-rate loans for which the borrower had actually qualified, (ii) bans negative amortization loans where the loan gets larger the longer the borrower holds the loan, and (iii) establishes strict caps on prepayment penalties. A.B. 260 also imposes a fiduciary duty for all mortgage brokers and banks acting as mortgage brokers, and prohibits lenders and brokers from making false or misleading statements relative to the terms of a subprime loan. 

• A.B. 329 requires reverse mortgage lenders to provide additional, clear information to senior consumers interested in reverse mortgage products. Among its specific provisions are requirements that a lender provide a prospective borrower with (i) a list of at least ten HUD-approved reverse mortgage counseling agencies, and (ii) a written checklist of issues to discuss with the reverse mortgage counselor. 

• A.B. 957 prohibits the seller of certain foreclosed residential real property from conditioning the sale of such property on a buyer’s purchase of title insurance from a particular insurer or title company and/or escrow services from a particular provider. The bill took immediate effect, and remains in effect until January 15, 2015. 

• A.B. 1160 provides that a lender that negotiates a mortgage loan primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean is required to deliver to the borrower a specified form in that same language. The form, to be created by the Department of Corporations and the Department of Financial Institutions, will provide a summary of the terms of the loan contract or agreement. A.B. 1160 becomes effective July 1, 2010, or 90 days after the Department of Corporations and the Department of Financial Institutions create the specified form, whichever is later.

• S.B. 237 requires appraisal management companies to register with the California Office of Real Estate Appraisers, and provides that an appraisal management company is prohibited from improperly influencing or attempting to improperly influence an appraisal. 

• S.B. 239 makes it a felony to commit fraud in connection with a mortgage loan application, where the value of the fraud meets the threshold for grand theft under California law (currently, $400).

California Enacts Law Prohibiting Up-Front Fees for Foreclosure Relief Services

On October 11, California Governor Arnold Schwarzenegger signed into law S.B. 94, a bill that, until January 1, 2013, prohibits any person who offers to perform residential mortgage loan modifications or other forms of mortgage loan forbearance for compensation paid by a borrower from (i) demanding or receiving any pre-performance compensation, (ii) requiring any security as collateral for final compensation, or (iii) taking a power of attorney from a borrower. A violation of these prohibitions constitutes a misdemeanor or is subject to specified fines. The new law does not apply to certain actions taken by a person who offers loan modification or other loan forbearance services for a loan owned or serviced by that person, including, but not limited to, collecting principal, interest, or other charges under the terms of a loan before the loan is modified, including charges to establish a new payment schedule for a non-delinquent loan. The new law also requires any person who offers to perform residential mortgage loan modifications or other forms of mortgage loan forbearance, as specified, for compensation paid by a borrower, to provide a specified 14-point bold type statement regarding loan modification fees, and makes a violation of this prohibition a misdemeanor or subject to specified fines. Lastly, the new law adds to the California Finance Lenders Law a prohibition on making a materially false or misleading statement or representation to a borrower about the terms or conditions of that borrower’s loan, when making or brokering a loan. The new law became effective immediately upon signing.

The court evaluated each of the plaintiff’s claims in the context of a motion to dismiss filed by the defendant and a motion for leave to file a second amended complaint filed by the plaintiff. With respect to the plaintiff’s claims that the defendant violated FCRA’s adverse action provisions by furnishing inaccurate credit information concerning the plaintiff to CRAs and by failing to notify the plaintiff of the adverse action, the court held that the plain language of FCRA expressly reserves the right to enforce FCRA’s adverse action provisions to state and federal agencies. However, the court explained that FCRA does provide a private right of action with respect to § 1681-2(b), which sets forth a furnisher of information’s duty to reinvestigate disputed information upon receipt of a notice of dispute from a CRA. Accordingly, the court dismissed each of the plaintiff’s FCRA claims, with the exception of the plaintiff’s claim stated pursuant to § 1681s-2(b).

Additionally, the court did not dismiss the plaintiff’s claim that the defendant violated the CCCRA by providing information concerning the plaintiff to CRAs that the defendant knew or should have known was inaccurate, holding that FCRA does not preempt a plaintiff’s private right of action to enforce the CCCRA. However, the court dismissed the plaintiff’s claim that the defendant violated the CCCRA by failing to notify her that it had reported negative information to CRAs, noting that the defendant, as an insurance company, was expressly exempt from the requirement. Finally, the court found that the plaintiff’s allegation of defamation with malice overcame FCRA’s qualified preemption of state law defamation claims.

North Carolina Identity Theft Legislation Becomes Effective

On October 1, the operative provisions of North Carolina SB 1017, an Act enhancing protections available to victims of identity theft, went into effect (SB 1017 was initially reported in InfoBytes, Aug. 7, 2009). In general, the Act creates new legal obligations for credit reporting agencies (CRAs), creditors, businesses, and credit monitoring services. Under the Act, CRAs must notify a North Carolina consumer who requests a security freeze that, in order to obtain a freeze from another CRA, he or she must make a separate, individual request to that CRA because only it can obtain the consumer authorization necessary to freeze its own files. The Act also mandates that CRAs lower their response times to a consumer’s request to add or remove a freeze. With respect to creditors, the Act prohibits any communication about a debt to a CRA during the pendency of a consumer’s application for an award from the North Carolina Crime Victims Compensation Fund. The Act also requires credit monitoring services to notify consumers that they have the right to one free credit report per year before charging the consumer a fee to obtain or monitor the consumer’s credit report on behalf of the consumer.

Connecticut “Debt Negotiation” License Required For Certain Activities Performed on Behalf of Connecticut Debtors

Effective October 1, the Connecticut Department of Banking will require licensure for “debt negotiation” - including loan modification, short sales or foreclosure rescue activities - performed on behalf of Connecticut debtors. Persons triggering debt negotiation licensure must license a corporate or “main office,” as well as all branch locations where debt negotiation will occur. The application process requires, among other things, the submission of forms as drafted by the Department, licensing fees, and surety bond and personal forms for “control persons.” Connecticut law exempts from the debt negotiation licensing requirements (i) an attorney admitted to practice in Connecticut, when engaged in such practice, (ii) certain banks and credit unions (however, subsidiaries of such institutions other than operating subsidiaries of federal banks and federally-chartered out-of-state banks are not exempt from licensure), (iii) licensed Connecticut debt adjusters, while performing debt adjuster services, (iv) individuals performing “debt negotiation” under court order, and (v) a “bona fide nonprofit organization.”

Texas Federal Court Finds FCRA Does Not Completely Preempt State Law

On September 29, the U.S. District Court for the Southern District of Texas held that the Fair Credit Reporting Act (FCRA) did not completely preempt a borrower’s state law claims against a mortgage servicer. Ortiz v. National City Home Loan Services Inc., Civ. No. H-09-2033, 2009 WL 3255088 (S.D. Tex. Sept. 29, 2009). In this case, the defendant servicer deducted a portion of the borrower’s monthly mortgage payment to cover required insurance on the borrower’s property, thereby resulting in a shortage in the borrower’s Promissory Note obligation. As a result of the shortage, the servicer filed foreclosure proceedings against the borrower. Subsequently, the borrower alleged that the servicer damaged his credit by wrongfully reporting to credit reporting agencies that there was a delinquency in the mortgage payments and claimed violations of the Texas Deceptive Trade Practices – Consumer Protection Act, as well as claims of slander of credit and wrongful foreclosure. The defendant servicer attempted to remove the proceedings to federal court by arguing that the borrower’s state law claims were totally preempted by FCRA and, thus, gave rise to federal question jurisdiction. The court held that (i) FCRA only preempts state law claims when the relevant state law conflicts with FCRA and that no such conflict exists between FCRA and the relevant Texas law, and (ii) in any event, preemption is merely an affirmative defense that is not a basis for removal. 

Connecticut State Banking Commissioner Sets Maximum Fees for Debt Negotiators

On September 28, the Connecticut State Banking Commissioner issued a maximum fee schedule for “debt negotiation” - including loan modification, short sales or foreclosure rescue activities - performed on behalf of Connecticut debtors (the licensure requirement for debt negotiators was reported in InfoBytes, Sept. 25, 2009). Under the schedule, a debt negotiator may charge as much as $50 for an initial or set-up fee and as much as $8 for monthly service fees for each creditor listed on a debt negotiation contract; the total service fee chargeable to a debtor cannot exceed $40. The aggregate fees, including the initial and service fees, charged by a debt negotiator cannot exceed 10 percent of the amount by which the consumer’s debt is reduced. Finally, a debt negotiator of secured debt, including Short Sales and Foreclosure Rescue Services, cannot charge more than $500 for debt negotiation services involving secured debt, and such a fee is collectable only upon the successful completion of the debt negotiation services (i.e., the fee cannot be collected up-front).

Maine Federal Court Finds Maine Data Collection Law Likely Violates First Amendment

On September 9, the U.S. District Court for the District of Maine held that a recently passed Maine Act requiring parental consent for the collection of health-related information from a minor is likely overbroad and thus could violate the First Amendment. Maine Independent Colleges Ass’n v. Baldacci, No. CV-09-396 (D. Me. Sept. 9, 2009). As reported in InfoBytes, Aug. 7, 2009, the Act makes 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.” On August 26, four plaintiffs, including the Maine Independent Colleges Association, challenged the constitutionality of the law, scheduled to take effect on September 12, 2009. On September 9, the court issued a stipulated order of dismissal by both parties. According to the dismissal order, the Maine Attorney General “has committed not to enforce” the Act, and the Maine legislature will reconsider the statute. The dismissal order further notes that the private right of action availed under the Act “could suffer from the same constitutional infirmities.”

California Bill Proposes Prohibition of Advance Fees for Loan Modification Consultant

On September 9, A.B. 764, a bill to prohibit certain loan modification consultants from receiving fees in advance of modifying a loan, was enacted by the California legislature and is currently pending approval by Governor Arnold Schwarzenegger. The proposed bill would prohibit any person performing loan modification services from claiming, demanding, charging, receiving, collecting or contracting for a fee from a borrower under a loan modification agreement until the terms of the loan have been modified. However, real estate brokers would be exempt from the fee prohibition to the extent that they comply with the provisions of the law. In addition, the bill would further exempt licensed residential mortgage lenders and servicers from the fee prohibition. Among other things, the bill would also prohibit certain advertisements that may be deemed misleading to prospective borrowers. Under the bill, violations of the statute would carry the following penalties: (i) for individuals, a maximum fine of $20,000 and/or imprisonment for up to 12 months; and (ii) for corporations, a maximum fine of $60,000. The bill includes a sunset provision of January 1, 2013.

North Carolina Law to Increase Requirements for Collection Agencies, Debt Buyers in Foreclosure Actions

On September 9, North Carolina Governor Bev Perdue signed SB 974, the “North Carolina Consumer Economic Protection Act,” (the Act) which pertains to debt collection and mortgage foreclosure practices. Under the Act, the Clerk of Court who presides over foreclosure hearings has the authority to continue hearings regarding a foreclosure for up to 60 days. In making this determination, the Clerk of Court may consider (i) whether the debtor was offered an opportunity to resolve the foreclosure through forbearance, loan modification, or other commonly accepted resolution plan, (ii) whether there was actual responsive communication with the debtor (e.g., telephone conferences or in-person meetings), (iii) whether the debtor has indicated that he or she has the intent and ability to make payments under a foreclosure resolution plan, and (iv) whether there were “good faith voluntary resolution efforts” to avoid a foreclosure. Further, under the Act, a collection agency that is or is acting on behalf of a “debt buyer,” as defined by the Act, cannot attempt to collect on a debt (e.g., bring suit or initiate an arbitration proceedings) (i) if such actions would be barred by the statute of limitations, (ii) without first giving the debtor written notice of the intent to file a legal action at least 30 days in advance of filing, and (iii) without valid documentation that the debt buyer is the owner of debt and that there has been “reasonable verification” of the amount of the debt. The Act also amends requirements for (i) materials that must be part of and attached to complaints against certain debt collection entities, (ii) prerequisites to entering a default or summary judgment against a debtor, (iii) materials required for setting forth a party’s obligation to pay attorneys’ fees for services rendered to an assignee or a debt buyer, and (iv) the percentage of the principal balance of the loan which must be posted by an appealing party opposing a foreclosure. Finally, the Act increases certain civil penalty amounts that may be imposed against debt collection agencies from $100-$2,000 to $500-$4,000 per incident. The Act becomes effective October 1, 2009 and applies to foreclosures initiated, debt collection activities undertaken, and actions filed on or after October 1, 2009.