InfoBytes Blog

1st Circuit holds homeowners who defaulted on an allegedly unlicensed mortgage loan cannot escape time bars for their claims

On August 23, the U.S. Court of Appeals for the 1st Circuit held that homeowners who defaulted on a refinance loan on their Massachusetts property could not void the transaction or enjoin their property’s foreclosure sale. The appellate court determined that the homeowners’ claims that the lender violated the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act, the Truth in Lending Act, and the Massachusetts consumer protection statute were all time-barred. The homeowners argued that the statute of limitations never began to run because the lender was not licensed to lend money in the state, making the original note and mortgage “akin to forgeries and thus ‘void ab initio,’” but the court held that there was “no authority for this unusual proposition.” The court also refused to toll the limitations period under the doctrine of fraudulent concealment, which requires the plaintiff “to make a threshold showing of due diligence,” because the homeowners filed their claims more than five years after they retained counsel and ten years after they granted the mortgage at issue.

Courts Appellate First Circuit Mortgages Licensing FDCPA RESPA TILA

8th Circuit rules Fannie Mae, Freddie Mac net worth sweep payments acceptable under FHFA statutory authority

On August 23, the U.S. Court of Appeals for the 8th Circuit affirmed a lower court’s dismissal of claims brought by shareholders of Fannie Mae and Freddie Mac (GSEs) against the GSEs’ conservator, the Federal Housing Finance Agency (FHFA), alleging that FHFA exceeded its powers under the Housing and Economic Recovery Act (HERA) and “acted arbitrarily and capriciously” when it entered an agreement with the Treasury Department requiring the GSEs to pay their entire net worth, minus a small buffer, as dividends to the Treasury every quarter.  In so holding, the 8th Circuit joined the 5th, 6th, 7th, and D.C. Circuits, each of which has previously “rejected materially identical arguments” presented by other GSE shareholders. (See previous InfoBytes coverage on the 5th Circuit decision here.) The shareholders sought an injunction to set aside the so-called “net worth sweep,” asserting that “HERA’s limitation on judicial review does not apply when FHFA exceeds its statutory powers under the Act . . . [and] that the net worth sweep exceeds, and is antithetical to, FHFA’s statutory powers.” However, the appellate court agreed with the lower court and found, among other things, the net worth sweep payments to be acceptable because HERA “grant[s] FHFA broad discretion in its management and operation of Fannie and Freddie” and permits, but does not require, the agency “to preserve and conserve Fannie’s and Freddie’s assets and to return [them] to private operation.”  The court also noted that HERA “authorize[d] FHFA to act ‘in the best interests’ of either Fannie and Freddie or itself,” thus affording FHFA more discretion than common law conservators.   Finally, the appellate court held that HERA’s anti-injunction provision, which states that “no court may take any action to restrain or affect the exercise of powers or functions of the [FHFA] as a conservator or a receiver,” also precludes enjoining the Treasury Department from participating in the net worth sweep because doing so would “restrain or affect” FHFA.

Courts Appellate Eighth Circuit GSE Fannie Mae Freddie Mac FHFA Single-Director Structure

Appellants petition 5th Circuit for en banc hearing of CFPB constitutionality challenge

On August 13, two Mississippi-based payday loan and check cashing companies (appellants) filed an unopposed petition for initial hearing en banc with the U.S. Court of Appeals for the 5th Circuit regarding a challenge to the constitutionality of the CFPB’s single director structure. In April, the 5th Circuit agreed to hear the appellant’s interlocutory appeal, and now the appellants request the appeals court move straight to an en banc panel, stating “if [the] appeal is heard under the normal panel process, [the] Court will likely be asked to rehear that panel’s decision en banc, as occurred in the D.C. Circuit’s PHH case.” (covered by a Buckley Sandler Special Alert here.) The appellants cite to the July decision by the 5th Circuit ruling the FHFA’s single director structure violates Article II of the Constitution (previously covered by InfoBytes here) and note that a petition for rehearing en banc has already been filed in that case. The appellants suggest coordination in scheduling the potential en banc arguments should the court accept both petitions, arguing that the decision would “guarantee that the Fifth Circuit speaks with one voice regarding the constitutionality of these agencies’ structures.”

Courts Fifth Circuit Appellate Federal Issues CFPB PHH v. CFPB CFPB Succession Dodd-Frank FHFA Single-Director Structure

National bank petitions for cert in 9th Circuit preemption decision

On August 14, a national bank filed a petition for writ of certiorari with the U.S. Supreme Court requesting review of the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law that requires the bank to pay interest on mortgage escrow funds is not preempted by federal law. As previously covered by InfoBytes, the 9th Circuit held that the Dodd-Frank Act of 2011 essentially codified the existing National Bank Act preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson. In May, a panel of three judges on the U.S. Court of Appeals for the 9th Circuit denied the petition for an en banc rehearing. In its petition, the bank argues that the appeals court decision warrants further review “because it creates significant uncertainty about whether national banks must comply with similar laws in other states” and whether other state banking laws also apply to national banks. The petition argues the uncertainty is exacerbated by the fact that the appellate court “disregarded and refused to enforce longstanding OCC regulations.” The bank contends that the 9th circuit interpreted the decision in Barnett incorrectly, and when a state law limits “a national bank’s federal authority to set the terms for their products and services, it is preempted by the National Bank Act.”

Courts U.S. Supreme Court Writ of Certiorari Ninth Circuit Appellate Escrow Mortgages National Bank Act

California Supreme Court says loans not subject to state interest rate caps may still be unconscionable

On August 13, the Supreme Court of California held that interest rates on consumer loans of $2,500 or more could be considered unconscionable under Section 22302 of California’s Financial Code, notwithstanding Section 22303’s maximum interest rate cap for loans under $2,500. The U.S. Court of Appeals for the 9th Circuit asked the Supreme Court of California to address Section 22302’s application to higher cost consumer loans. In the class action that is before the 9th Circuit, consumers alleged that a lender violated the “unlawful” prong of California’s Unfair Competition Law (UCL) with an unsecured $2,600 loan carrying an APR between 96 percent and 136 percent and argued the product is “unconscionable” under Section 22302. To resolve this question, the California Supreme Court held that unconscionability is a “flexible standard” that includes the larger context surrounding the contract. The court held that, although Section 22303 specifies interest rate limitations on loans under $2,500, it does not affect whether a loan in excess of $2,500 is unconscionable, and a court may consider a loan’s interest rate in determining that a loan above this threshold violates Section 22302.

State Issues Courts Usury Consumer Finance Installment Loans Ninth Circuit Appellate

3rd Circuit rules student loan servicer must comply with CID

On August 13, in a divided opinion that is not precedential, the U.S. Court of Appeals for the 3rd Circuit affirmed a lower court’s decision to grant a petition filed by the CFPB to enforce a civil investigative demand (CID) issued to a student loan servicer, rejecting arguments that the scope of the Bureau’s investigation was too broadly defined. The Notification of Purpose in the CID at issue named the entirety of the servicer’s business operations, without identifying any specific conduct, when the CFPB sought records to determine whether the servicer’s practices violated federal consumer financial laws. The servicer objected to the Notification of Purpose and petitioned the Bureau to set aside or modify the CID because it did not adequately “state the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.” The appellate court held that the servicer’s “contention rests on the flawed assumption that the CFPB could not investigate all of [the servicer’s] conduct,” and that, moreover, “[n]othing prohibits the CFPB from investigating the totality of [the servicer’s] business activities, and courts have previously enforced administrative subpoenas regarding conduct that is coextensive with the recipient’s business activity.”

Courts Third Circuit Appellate CFPB Student Lending CIDs

7th Circuit reverses district court, holds settlement with debt collector moots claims against law firm

On August 13, the U.S. Court of Appeals for the 7th Circuit vacated a district court’s decision, holding that a consumer who settled with a debt collector is not entitled to pursue Fair Debt Collection Practices Act statutory damages claims against the debt collector’s law firm. Under the single recovery for a single injury principle, a consumer can only obtain one recovery for a single injury “regardless of how many defendants could be liable for that single injury, or how many different theories of recovery could apply to that single injury.” In this instance, the consumer settled the claim with the debt collector for $5,000 plus release of the consumer’s original debt. The consumer later sued the debt collector’s law firm, spending over $69,000 on attorneys’ fees to argue that the law firm filed suit to collect the debt in the wrong court. While the district court ordered the law firm to pay the attorneys’ fees to the consumer, the 7th Circuit reversed, holding that the settlement with the creditor rendered the consumer’s claim against the law firm moot and thus the consumer could not recover attorneys’ fees or costs.

Courts Seventh Circuit Appellate FDCPA Debt Collection

7th Circuit says inspection company that left door hangers is not a debt collector

On August 10, the U.S. Court of Appeals for the 7th Circuit affirmed a lower court’s ruling that a company (defendant) that performed inspections for a mortgage servicer is not a “debt collector” under the Fair Debt Collection Practices Act (FDCPA) and was not liable for claims brought by a putative class of homeowners. According to the opinion, the defendant entered into a contract with the mortgage servicer to perform inspections to determine whether properties were still occupied for homes with defaulted mortgage payments of 45 days or more if the servicer was unable to contact the homeowner directly. When performing the inspections, the defendants left door hangers on the plaintiffs’ properties containing instructions to contact the mortgage servicer, which the plaintiffs claimed violated the FDCPA's disclosure requirements, including the requirement to disclose the creditor’s name, the amount owed, and that the debtor can dispute the debt. However, the lower court ruled—and the appellate court affirmed—that the defendant was not a “debt collector” for purposes of the FDCPA. The court found that the activities did not constitute direct debt collection because the door hangers did not demand payment and did not reference the underlying debt. The court also held that the defendant was not engaged in “indirect” debt collection, agreeing with the characterization of the lower court that the activities were more akin to those of a “messenger” than those of an “indirect” debt collector.

Courts Seventh Circuit Appellate Mortgages Mortgage Servicing Debt Collection

5th Circuit affirms dismissal of automatic stay violation claim on grounds of judicial estoppel

On July 27, the U.S. Court of Appeals for the 5th Circuit affirmed a district court’s decision following a bench trial to dismiss plaintiffs’ allegations that a bank violated an automatic stay imposed during one of the plaintiff’s (debtor) bankruptcy schedules when it took foreclosure action, holding that the plaintiffs were barred by judicial estoppel from pursuing claims because the debtor failed to amend his bankruptcy schedules to disclose a quitclaim deed for his mortgage or note a change in his financial status. In this case, the debtor filed a Chapter 13 bankruptcy, but failed to list the address or creditor information for a property in which he had entered into an equity sharing agreement with his son. When the son signed a quitclaim deed conveying the property to the debtor, the deed was recorded but not listed on the bankruptcy schedules.

According to the appellate court, the debtor failed to “disclose an asset to a bankruptcy court, but then pursue[d] a claim in a separate tribunal based on that undisclosed asset” when it filed a lawsuit against the bank for wrongful foreclosure. The doctrine of judicial estoppel requires that three elements be met: (i) “the party against whom estoppel is sought has asserted a position plainly inconsistent with a prior position”; (ii) “a court accepted the prior position”; and (iii) "the party did not act inadvertently.” The court held the first two elements were met by the plaintiff’s failure to amend his bankruptcy schedules to disclose the quitclaim deed or his legal action against the bank. The court noted, however, the debtor’s actions were not inadvertent because he was aware of the inconsistency and had a motive to conceal the asset. The appellate court specifically noted the motive to conceal was “self-evident” because the debtor’s failure to disclose his changed financial status had the potential to provide a financial benefit to the debtor. The appellate court further held that the district court did not abuse its discretion in denying plaintiffs' motion for a new trial, and that, moreover, the plaintiffs failed to show that the district court abused its discretion when it chose to exclude several of their exhibits.

Courts Appellate Fifth Circuit Mortgages Bankruptcy Foreclosure

2nd Circuit holds NCUA lacks standing to bring derivative suit against two national banks regarding RMBS claims

On August 2, the U.S. Court of Appeals for the 2nd Circuit held that the National Credit Union Administration (NCUA) lacked standing to bring a suit against two national banks on behalf of trusts created by the agency that held residential mortgage-backed securities (RMBS). According to the opinion, in 2009 and 2010, NCUA took control of five failing credit unions, including ownership of certificates the credit unions held in RMBS trusts. NCUA then transferred the certificates into new trusts and a financial institution was appointed, pursuant to an Indenture Agreement, as Indenture Trustee. NCUA subsequently brought derivative claims on behalf of the trusts against two national banks, trustees of the original RMBS trusts. In affirming the lower court’s dismissal of the claims, the appellate panel found that the NCUA did not have derivative standing to sue on behalf of the trusts because the trusts had granted the right, title, and interest to their assets, including the RMBS trusts, to the Indenture Trustee. The 2nd Circuit reasoned that therefore only the Indenture Trustee possesses the claims, and the NCUA did not have the right to sue on behalf of the Indenture Trustee under the Indenture Agreement.

Courts Second Circuit Appellate RMBS Standing Securities