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  • District Court dismisses most of trust insurer’s settlement suit, allows breach of contract claim to proceed

    Courts

    On July 16, the U.S. District Court for the Southern District of New York dismissed the majority of the claims brought by the insurer of a trust against a national bank acting as trustee of the securitization trust. The claims accused the bank of breaching its responsibilities as trustee for residential mortgage-backed securities (RMBS) that were allegedly backed by bad loans, and the court’s dismissal left only a claim for breach of contract against the bank “for failing to correctly account for recoveries” to proceed. The insurer commenced the action against the bank asserting, among other claims, that the “unreasonably low settlement” the bank agreed to in a separate action the bank had taken against the mortgage lender seeking damages for the lender’s alleged breach of representations and warranties with respect to 87 percent of liquidated loans, would breach the bank’s obligations to the trust’s beneficiaries. According to the insurer, the bank initiated a “wasteful” trust instruction proceeding in Minnesota state court and agreed to stay an ongoing New York state lawsuit against the mortgage lender for over a year and a half.

    The court noted, however, that the insurer’s complaint “does not allege any non-speculative ‘concrete or imminent’ injury sufficient to confer standing with respect to the breach of contract and breach of fiduciary claims based on [the bank’s] acceptance of the settlement,” and subsequently dismissed the insurer’s claims that the bank’s acceptance of an “unreasonably low settlement” violated contractual and fiduciary duties owed to the trust as trustee, noting that any harm depends on whether the Minnesota court approves the settlement agreement. Moreover, the court stated that “[i]t is too speculative to assume that [the bank] would have obtained a favorable outcome in the New York action or that rejecting the stay would have strengthened [the bank’s] bargaining position.” Additionally, the court dismissed the insurer’s request for declaratory judgment that the bank must account for and distribute recoveries—“amounts received from defaulted mortgage loans that have already been liquidated”—under the pooling agreement, finding that the issue as it relates to past recoveries is addressed in the breach of contract claim, and all other instances are conditioned on the Minnesota court’s approval of the settlement agreement and are therefore hypothetical. However, the court did find that the insurer adequately pled a claim for breach of contract against the bank pertaining to its accounting of recoveries. The court noted that the insurer’s complaint sufficiently alleged damages and outlined the bank’s alleged failure to correctly “write up” the recoveries as laid out in the pooling agreement, and how this affected the timing and amount of payouts the insurer was required to make.

    Courts Mortgages RMBS

  • 9th Circuit: Law firm owner liable for restitution from mortgage relief scheme

    Courts

    On July 16, the U.S. Court of Appeals for the 9th Circuit affirmed summary judgment in favor of the FTC in an action alleging two attorneys controlled or participated in a mortgage relief scheme, which falsely told consumers they could join “mass joinder” lawsuits that would save them from foreclosure and provide additional financial awards. In September 2017, the district court granted summary judgment against both defendants, concluding that the defendants knowingly deceived consumers when they falsely marketed that consumers could expect to receive $75,000 in damages or “a judicial determination that the mortgage lien alleged to exist against their particular property is null and void ab initio” if they agreed to join mass joinder lawsuits against their mortgagors. The operation resulted in over $18 million in revenue from the participating consumers.

    On appeal from one defendant, the 9th Circuit agreed with the district court, determining the FTC provided “sufficient undisputed facts to hold [the defendant] individually liable for injunctive relief at summary judgment.” Specifically, the appellate court agreed that the FTC sufficiently proved three separate legal entities, one of which the defendant was the co-owner and corporate officer, “operate[d] together as a common enterprise,” which violated the FTC Act and Mortgage Assistance Relief Services Rule with their mortgage relief operation. Moreover, the appellate court determined that the defendant was “at least recklessly indifferent to [the other entities’] misrepresentations,” based on his knowledge of previous schemes operated by the other owners and reliance on a non-lawyer’s assurance that the marketing materials had been “legally approved,” making him “jointly and severally liable for restitution for the corporation’s unjust gains in violation of the FTC Act.”

    Courts Ninth Circuit Appellate FTC Act Mortgages FTC

  • FDIC proposes to relax disclosure requirements under Securitization Safe Harbor Rule

    Agency Rule-Making & Guidance

    On July 16, the FDIC approved a proposal revising certain provisions of the Securitization Safe Harbor Rule (rule). The current rule mandates that documents governing a securitization must disclose information regarding the securitized financial assets on a financial asset or pool level and on a security level that, at minimum, complies with Regulation AB, whether or not the transaction is an issuance covered by the regulation. The proposal would eliminate the requirement that securitization documents comply with Regulation AB, where Regulation AB by its terms would not apply to the issuing transaction. According to a statement by Chairwoman, Jelena McWilliams, the proposal “would remove one potential obstacle that [insured depository institutions] face in providing mortgage credit to homeowners.” FDIC Director Gruenberg dissented from the approval of the proposal.

    Comments on the proposal will be due within 60 days after publication of the proposal in the Federal Register.

    Agency Rule-Making & Guidance FDIC Mortgages Securities

  • District Court orders mortgage company founder to pay $500,000 FIRREA fine in mortgage fraud suit

    Courts

    On July 10, the U.S. District Court for the Northern District of Illinois ordered the founder and president of a mortgage company to pay $500,000 in a suit brought under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The suit accused the defendant of allegedly submitting fraudulent certifications certifying he was not under criminal indictment in order to participate in HUD’s Federal Housing Administration mortgage insurance program. (Certification is necessary to participate in the FHA program.) In 2016, the defendant appealed to the 7th Circuit that the district court’s ruling—which originally ordered approximately $10 million in treble damages and $16,500 in penalties under the FCA—had been held to the wrong causation standard. In 2017, the appellate court issued an opinion referring to the U.S. Supreme Court’s ruling in Universal Health Services, Inc. v. U.S. ex rel. Escobar, holding that in this matter, the district court had improperly relied on a “but for” causation standard for FCA liability, and had failed to adequately develop whether the defendant’s “falsehood was the proximate cause of the government’s harm.”

    On remand, the district court found that the government's losses were not proximately caused by the defendant’s form certifications, and thus failed to satisfy the proximate cause standard for damages in a FCA suit. The district court ordered the defendant to pay $500,000 for making false statements to HUD in violation of FIRREA. “Half a million dollars is a substantial sum of money, and it reflects the seriousness of [the defendant’s] wrongdoing over a series of years, as well as the fact that there is no good-faith explanation for his actions,” the court stated. The court further elaborated that “[a]t the same time, [the fine] also reflects that [the defendant’s] conduct, while serious, does not put him within the worst class of FIRREA violators.”

    Courts False Claims Act / FIRREA Mortgages HUD

  • Delaware authorizes participation in multi-state automated licensing system

    On June 27, the Delaware Governor signed HB 199, which, among other provisions, authorizes the Delaware State Bank Commissioner to participate in a multi-state automated licensing system that will assist in the facilitation of the application and licensing process for mortgage loan brokers, licensed lenders, mortgage loan originators, money transmitters, check cashers, and motor vehicle sales finance companies. The new legislation also permits the State Bank Commissioner to share information collected and maintained with other participating states “for the purpose of licensing, regulating, or supervising that same applicant or licensee under a statute similar to this chapter, if that state could have obtained that same information directly from the applicant or licensee under its own law.” The amendments become effective immediately.

    Licensing State Issues State Legislation Mortgages

  • Alaska amends provisions regarding mortgage licensing exemptions

    On June 28, the Alaska governor signed HB 104, which provides limited exemptions from the state’s licensing requirements for qualifying mortgage lenders, mortgage brokers, and mortgage loan originators. Specifically, the amended exemptions include (i) bona fide nonprofit organizations, as well as employees acting as mortgage loan originators for public or charitable purposes; (ii) individuals operating as registered mortgage loan originators on behalf of exempt depository institutions and their subsidiaries, or institutions regulated by the Farm Credit Administration; (iii) certain sellers who self-finance five or fewer sales and are in compliance with the Act’s requirements; and (iv) employees of exempt federal, state, or local government agencies. Section AS 06.60.015(b)(4) is retroactively effective July 1, 2008. Sections 2, 6, and 7 are effective immediately, with the remainder of HB 104 taking effect January 1, 2020.

    Licensing State Issues State Legislation Mortgages

  • VA updates fee guidance for IRRRLs

    Agency Rule-Making & Guidance

    On June 28, the Department of Veterans Affairs (VA) issued Circular 26-19-17, which provides new funding fee guidance to lenders and servicers concerning Interest Rate Reduction Refinancing Loans (IRRRLs). The new guidance, effective immediately, requires, among other things, that: (i) a Certificate of Eligibility (COE) be obtained for IRRRLs to ensure the funding fee exemption information is up to date at the time of closing; (ii) lenders ask active duty servicemembers if they have a pre-discharge claim pending, and, if so, contact the Regional Loan Center to request assistance in obtaining a proposed or memorandum rating in the event the servicemember is eligible for a funding fee exemption; and (iii) if a lender or servicer is notified by the VA or the veteran of an overpayment of a funding fee, such lender initiate a refund request in the Funding Fee Payment System (FFPS) within three business days.

    Agency Rule-Making & Guidance Department of Veterans Affairs Refinance Fees Mortgages IRRRL

  • Legislation eliminates VA conforming loan cap

    Federal Issues

    On June 25, President Trump signed HR 299, the “Blue Water Navy Vietnam Veterans Act of 2019.” Among other changes, the bill (i) adjusts the loan fees applicable to the Department of Veterans Affairs’ (VA) home loan guaranty program by providing a new loan fee table; and (ii) eliminates the program limit on the guaranty amount, which is based on the Freddie Mac conforming loan limit determined under section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act. The bill will allow VA borrowers to borrow above the conforming loan limit, currently set at $484,350, for loans guaranteed on or after January 1, 2020.

    Federal Issues Freddie Mac FHFA Department of Veterans Affairs Mortgages

  • Texas approves temporary authority to act as a registered mortgage loan originator

    State Issues

    On June 10, the Texas governor signed SB 2330, which provides, among other things, for a federally-registered mortgage loan originator (MLO) who does not hold a state license to have temporary authority to act as a state-licensed MLO for a period not to exceed 120 days while their state MLO license application is pending. Subject to certain conditions, a federally-registered MLO who becomes employed by an entity that is licensed or registered in Texas for mortgage loan origination may temporarily act as a state-licensed  MLO in the state before their license is issued for up to 120 days if (i) the individual was registered in the Nationwide Mortgage Licensing System and Registry as a loan originator within one year of the state application; or (ii) is licensed by another state or governmental jurisdiction to engage in mortgage loan origination. The bill is effective on November 24.

     

    State Issues Mortgage Licensing Licensing Mortgages State Legislation NMLS

  • 11th Circuit: Motion to reschedule foreclosure does not violate RESPA

    Courts

    On June 11, the U.S. Court of Appeals for the 11th Circuit affirmed the dismissal of a RESPA action against a mortgage servicer, concluding that rescheduling a foreclosure sale is not a violation of Regulation X’s prohibition on moving for an order of foreclosure sale after a borrower has submitted a complete loss-mitigation application. According to the opinion, a consumer’s home was the subject of an order of foreclosure, and the mortgage servicer subsequently approved a trial loan-modification plan for a six-month period. The servicer filed a motion to reschedule the foreclosure sale so that the sale would not occur unless the consumer failed to comply with the modification plan during the trial period. The consumer filed suit, alleging that the servicer violated Regulation X––which prohibits loan servicers from moving for an order of foreclosure sale after a borrower has submitted a complete loss-mitigation application––because the servicer rescheduled the foreclosure sale instead of cancelling it. The district court dismissed the action.

    On appeal, the 11th Circuit agreed with the district court, concluding that the consumer failed to state a claim for a violation of Regulation X. The appellate court reasoned that Regulation X does not prohibit a servicer from moving to reschedule a foreclosure sale as that motion is not the same as the “order of sale,” a substantive and dispositive motion seeking authorization to conduct a sale at all, as referenced in Regulation X. Moreover, the appellate court argued that the consumer’s interpretation of the prohibition is inconsistent with the consumer protection goals of RESPA because it would disincent loan servicers from offering loss-mitigation options and helping borrowers complete loss-mitigation applications, if a foreclosure sale has already been scheduled. Lastly, the appellate court noted that the motion to reschedule is consistent with the CFPB’s commentary that, “[i]t is already standard industry practice for a servicer to suspend a foreclosure sale during any period where a borrower is making payments pursuant to the terms of a trial loan modification,” rejecting the consumer’s argument that the servicer should have cancelled the sale altogether.

     

    Courts Appellate Eleventh Circuit RESPA Regulation X Foreclosure Loss Mitigation Mortgage Modification Mortgages

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