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Regulators Extend Foreclosure Review, Issue Financial Remediation Framework, Publish Status Report
On June 21, the OCC and the Federal Reserve Board announced that the deadline for borrowers to seek review of foreclosures under the Independent Foreclosure Review program has been extended through September 30, 2012. At the same time, the regulators released a Financial Remediation Framework that sets out specific recommendations for remediation of financial injury for servicing errors, depending on the type of error and whether the foreclosure was in progress or complete at the time of remediation. Independent consultants will use the Framework to recommend remediation for financial injury identified during the Independent Foreclosure Review. Each servicer will prepare its own remediation plan based on independent consultant recommendations, which must be approved by the federal banking regulators. Also on June 21, the OCC published its second interim report on the status of the Independent Foreclosure Review and actions required under the April 2011 consent orders.
Federal Agencies Announce New Mortgage-Related Policies to Support Military Homeowners
On June 21, the CFPB, the federal prudential banking regulators, and the FHFA announced new policies to support servicemember homeowners. The CFPB, the Federal Reserve Board, the FDIC, the NCUA, and the OCC issued joint guidance that identifies specific servicing practices deemed by regulators to present risks to servicemembers. For servicemember homeowners who have received Permanent Change of Station Orders, the guidance instructs servicers to maintain adequate policies and procedures disallowing the identified practices. The guidance also informs servicers that if an agency determines that a servicer has engaged in any acts or practices that are unfair, deceptive, or abusive, or that otherwise violate federal consumer financial laws, the agency will take appropriate supervisory and enforcement actions. Concurrent with the regulators’ announcement, the FHFA announced that military homeowners with Permanent Change of Station Orders and with Fannie Mae or Freddie Mac loans will be eligible to sell their homes in a short sale even if they are current on their mortgage. Under the new policy, Fannie Mae and Freddie Mac will not pursue a deficiency judgment or any cash contribution or promissory note from covered servicemembers for any property purchased on or before June 30, 2012.
Fannie Mae and Freddie Mac Update Servicing Requirements
On June 13, Freddie Mac published Bulletin 2012-13, which updates multiple servicing requirements in the Single-Family Seller/Servicer Guide. With regard to the state foreclosure timeline, the Bulletin (i) adds several circumstances in which the timeline will be extended for all foreclosure sales completed on or after January 1, 2012, (ii) revises the calculation for compensatory fees associated with exceeding a state foreclosure timeline, and (iii) alters the compensatory fee appeal process. With regard to certain operational procedures, the Bulletin (i) adds a time frame for reimbursement of taxes that were incurred and paid to a taxing authority for non-real estate owned expenses, (ii) allows wire transfers for REO-related remittances, and (iii) clarifies the time frame for submitting modification agreements to document custodians. The Bulletin also makes changes to the Guide related to unemployment forbearance, the quality right party contract performance standard, fraud prevention and reporting, and MERS Rule 14.
Also on June 13, Fannie Mae published Announcement SVC-2012-10, which updates its notice of data breach and incident response policy to require servicers to provide written notice to Fannie Mae of a data breach in addition to any reporting to consumers or state authorities required under applicable state law. A servicer also must request permission to use Fannie Mae’s name if it intends to refer to Fannie Mae in any notices sent to affected borrowers or regulatory agencies. On the same day, Fannie Mae also published Announcement SVC-2012-11, which updates and clarifies for all mortgages with a foreclosure sale date on or after January 1, 2012, (i) the maximum allowable foreclosure time frames for twelve jurisdictions, (ii) compensatory fee assessments and appeals, and (iii) the preferred method of foreclosure in Montana and Nebraska.
Eleventh Circuit Court of Appeals Finds that "Dunning" Notice Enforcing a Security Interest May Give Rise to FDCPA Claim
On May 1, the U.S. Court of Appeals for the Eleventh Circuit reversed and remanded a lower court’s dismissal of an FDCPA claim, finding that the contents of a “dunning” notice from the lender’s foreclosing law firm constitutes an attempt to collect a debt under the FDCPA. Reese v. Ellis, Painter, Rattertree & Adams, LLP, No. 10-14366, 2012 WL 1500108 (11th Cir. May 1, 2012). The borrowers received a letter and documents from the lender’s law firm demanding payment of the debt on the borrowers’ defaulted mortgage loan and threatening to foreclose on their home if they did not pay the outstanding debt. The borrowers filed a class action lawsuit against the law firm alleging that the communication violated the FDCPA. The district court dismissed the complaint for failure to state a claim under the FDCPA. On appeal, the court held that the borrowers’ obligation to pay off the promissory note, which the court distinguished from a security interest, represents a debt under the FDCPA. The court then rejected the law firm’s argument that the purpose of the letter and accompanying documents was not to collect a debt, but rather to inform the borrowers of the lender’s intent to enforce its security interest through possible foreclosure. The court determined that the documents at issue, which contained disclaimers such as “This law firm is acting as a debt collector attempting to collect a debt,” had a dual purpose of providing notice of foreclosure and collecting a debt. In so holding, the court noted that following the law firm’s reasoning would create a giant loophole in the FDCPA wherein the law only would apply to efforts to collect on unsecured debt and would permit collectors to “harass or mislead [secured] debtors without violating the FDCPA.”
State Law Update: Oklahoma, Georgia, New York
Oklahoma Updates Uniform Consumer Credit Code. On May 1, Oklahoma enacted House Bill 2742, which amends the state’s Uniform Consumer Credit Code. The bill increases the dollar threshold for transactions exempt from the Code from $45,000 to $50,000 and requires that the threshold be adjusted annually henceforth. With regard to mortgages particularly, the bill (i) expands the language required to be included in the disclosure statement, (ii) requires that the creditor mail the disclosure statement at least seven business days before the transaction, and (iii) requires the creditor to send a new statement at least three days before closing if the interest rate changes. It further requires that (i) a consumer cannot be charged any fee prior to receipt of the statement, except for a fee to obtain a credit report; and (ii) a consumer can waive the disclosure statement timing requirements. The law also increases the penalties for violations of the mortgage disclosure statement or right to rescind rules and requires that, within 30 days of the sale or transfer of a mortgage loan, the new creditor must notify the borrower that the loan has been transferred and provide contact and other relevant information.
Georgia Enacts Mortgage-Related Bills. On May 1, Georgia enacted two mortgage-related bills. House Bill 110 permits local jurisdictions to create vacant and foreclosed property registries and establishes uniform requirements for such registries. The law takes effect July 1, 2012. House Bill 237 expands the state’s mortgage fraud law to cover the foreclosure process.
New York Extends Temporary Mortgage Servicer Rules. On May 2, the New York Department of Financial Services published an extension of its emergency rules to implement the 2008 Mortgage Lending Reform Law. The rules will remain in effect through July 11, 2012, unless further extended or permanently adopted.
State Law Update: Recent Changes in Maryland, Minnesota, and Mississippi
Maryland Adds Foreclosure Registration Requirement, Authorizes Pre-file Mediation, Amends Mortgage Licensing. On May 2, Maryland Governor O’Malley signed House Bill 1373, which establishes a state foreclosed property registry. Foreclosure purchasers are required to (i) file an initial registration and pay a $50 registration fee for each foreclosed property within 30 days after a foreclosure sale, and (ii) file a final registration, with no additional fee, within 30 days after a deed transferring the title has been recorded. The law allows local jurisdictions to (i) enact laws that impose a civil penalty for failure to register under the new state requirement and (ii) collect from the foreclosure purchaser, as a charge on the property’s property tax bill, any costs associated with abating a nuisance on a registered property. The Governor also signed on May 2, House Bill 1374, which authorizes a secured party to offer to participate in pre-file mediation with a mortgagor or grantor to whom the secured party has delivered a notice of intent to foreclose. If the mortgagor or granter elects to participate, an order to docket or complaint to foreclose cannot be filed until the completion of the mediation. The bill also establishes a process through which a person with a secured interest in residential property that is in default can seek from a local jurisdiction a certificate of vacancy. If a certificate is not challenged by the record owner or occupant of the property the secured party can expedite the foreclosure process.
Finally, on the same date, Maryland enacted Senate Bill 546, which (i) requires a mortgage lender licensee to provide the commissioner with proof satisfying specified minimum net worth requirements within 90 days after the last day of the licensee’s most recent fiscal year and (ii) establishes a nonactive license status and process for licensees that cease to be employed by an approved financial institution.
Minnesota Amends Debt Collector Requirements. On April 23, Minnesota enacted House Bill 2335, which amends requirements for individual debt collectors and collection agencies. The bill (i) provides individual collectors additional time to report a change of contact information, (ii) sets requirements for a personnel screening process that a debt collection agency must follow in hiring and retaining individual collectors, and (iii) revises the list of past events that disqualify a person from registration as a debt collector. The final bill did not include a proposed revision that would have allowed individual debt collectors to remedy violations of the statute.
Mississippi Adds Protections for Bank Self-Assessments. On April 19, Mississippi enacted House Bill 1460 to grant privileged treatment to certain bank reports. The law takes effect July 1, 2012. Under the new law, reports reflecting voluntary self-assessments by banks, which are submitted to a bank regulator but not otherwise provided to third parties, will be considered privileged and not admissible in any legal or investigative action and are not subject to discovery in such actions. The law sets forth exceptions and circumstances under which the protections do not apply, including if a court determines that a report shows that a bank was not in compliance with a material provision of banking law, the bank did not initiate good-faith efforts to achieve substantial compliance within a reasonable time after the noncompliance was discovered, and the bank's failure to comply caused material harm to a bank customer or consumer.
State Law Update: Several States Alter Mortgage and Other Consumer Finance Laws
CSBS and NMLS Issue New Forms for Expanded Use of Registry. On April 16, the Conference of State Bank Supervisors and the National Mortgage License and Registry System (NMLS) issued new licensing forms to support the CSBSs previously announced plans to expand the use of NMLS to include nonbank, non-mortgage financial service providers. With the issuance of the new forms, the NMLS announced that 11 states have committed to requiring non-mortgage financial services institutions to begin using the NMLS this year, with Washington, Vermont, and Rhode Island as the most recent to provide transition plans. The other states include theDistrict of Columbia,Idaho,Louisiana,Maryland,Massachusetts,New Hampshire,Oklahoma,Tennessee, andPennsylvania. Nebraska Expands NMLS Use and Alters Mortgage Licensing. On April 5, Nebraska enacted Legislative Bill 965 to require and provide for the transition of the states manual licensing of installment loan companies to licensing through the NMLS. This change will take effect beginning January 2013. The law also amends the Residential Mortgage Licensing Act to, among other things (i) update and add certain exemptions for mortgage banker and mortgage loan originator licensing requirements, and (ii) adjust the powers of the Department of Banking and Finance to administer the mortgage banker and loan originator licensing process. Kentucky Enacts Numerous Bills Impacting Mortgages and Vehicle Finance. On April 11, Kentucky Governor Steve Beshear signed several bills impacting consumer lending. House Bill 417 makes a variety of amendments impacting motor vehicle installment contracts, including, among other things, (i) altering the form and required content of retail installment contracts, (ii) adjusting the permissible delinquency and collection charge on an installment in arrears for a period of 10 or more days, (iii) creating a safe harbor for retail installment contracts that satisfy the requirements of the Truth in Lending Act, and (iv) making various amendments regarding retail installment sales that are precomputed. House Bill 62 and House Bill 396 relate to foreclosures. The former requires a mortgage holder to file a deed in lieu of foreclosure with the county clerk within 45 days of the instrument's execution and allows for a penalty in the form of a violation of law for any mortgage holder who fails to do so. The bill also exempts filing deeds in lieu of foreclosures from the states transfer tax on property as well as the voluntary surrender under a mortgage in lieu of a foreclosure proceeding. The latter relates to an expedited sale mechanism for foreclosures involving vacant and abandoned real property and amends the offense of defrauding a secured creditor to add situations where collateral is intentionally damaged. Finally, House Bill 409, among other things, exempts from most laws and regulations applicable to mortgage loan companies and brokers persons other than natural persons that originate four or fewer mortgage loans per year and do not hold themselves out to be primarily in the mortgage loan business, while House Bill 533 prohibits private transfer fees. Oregon Establishes Foreclosure Mediation Process. On April 11, Oregon established a foreclosure mediation process when it enacted Senate Bill 1552. The law requires that a beneficiary (i) enter into mediation with a grantor for the purpose of negotiating a foreclosure avoidance measure and (ii) notify a grantor if they are not eligible for any foreclosure avoidance measure or if the grantor has not complied with the terms of a foreclosure avoidance measure. The new law details the form for notices required under the new process and establishes potential penalties for a beneficiary failing to comply with the new procedures. The bill took effect on April 11, with most of the new requirements becoming operative 91 days after the effective date. Maryland Alters Mortgage Licensing Exemptions, Expands Commissioners Enforcement Power. On April 10, Maryland enacted Senate Bill 302, which removes the mortgage licensing exemption for a person who makes three or fewer mortgage loans per calendar year and brokers no more than one mortgage loan per calendar year. The law also expands the authority of the Commissioner of Financial Regulation to investigate and enforce state law with regard to a subsidiary or affiliate of an institution over which the Commissioner has jurisdiction. The law becomes effective on January 1, 2013. Colorado Amends Foreclosure Law. On April 12, Colorado passed a law amending administrative procedures under its foreclosure law. Pursuant to Senate Bill 30, effective September 1, 2012 counties must (i) notify a homeowner during the foreclosure process that they may be due money if excess funds are obtained through the sale of their foreclosed property, (ii) attempt to locate the homeowner and notify them of excess funds obtained from the public auction of their foreclosed property, and (iii) turn excess funds over to the state treasurer if the homeowner cannot be located. The state will hold the funds in perpetuity, allowing a homeowner to claim the funds at any time. Under existing law, counties are not required to conduct any initial outreach and can retain for themselves any money not claimed within five years of the sale.
Florida Appeals Court Holds Servicer's Verified Allegation Insufficient to Establish Standing in Foreclosure Suit
On April 4, the District Court of Appeal for the Fourth District of Florida reversed a trial court decision requiring a commercial borrower to make payments to the servicer of a securitized trust pending a foreclosure action because the servicer did not properly plead standing. Elston/Leetsdale, LLC v. CWCapital Asset Management LLC, No. 4D11-3151, 2012 WL 1108531 (Fla. 4th DCA Apr. 4, 2012). In this case, the borrower executed a promissory note as evidence of a loan, and secured payment by executing a mortgage, security agreement, and an assignment of lease and rents. The lender assigned its rights to a trust company, which in turn assigned the rights to another trust, who is now the owner and holder of all the loan documents. The servicer for the trust filed a foreclosure action in its own name, alleging in the verified complaint that it was duly authorized by the trust to take all action to protect the interests of the trust. The servicer also sought continued payment pending the foreclosure action, which the trial court granted. The borrower challenged the servicer’s standing to bring suit on behalf of the trust, which the trial court rejected. The appeals court found that the servicer’s evidence in support of its standing, which was nothing more than its own allegations and affidavit, was insufficient. Instead the court noted that in other cases in which courts found that a servicer had established standing, the trustee joined the action or ratified the servicer’s commencement of the lawsuit through an affidavit. The appellate court reversed the trial court payment order and remanded for further proceedings.
Federal Reserve Offers Policy Guidance for REO Rental Programs
On April 5, the FRB released a policy statement that reiterates its general policy that banking organizations should make good faith efforts to dispose of foreclosed properties, also known as REO properties, as soon as practicable. However, under current market conditions, the FRB explains that banking organizations may hold and rent residential REO properties within legal holding-period limits without demonstrating continuous active marketing of the property for sale provided suitable policies and procedures are followed. The guidance offers risk management and compliance considerations for renting REO properties, as well as specific expectations for large-scale REO rental programs. The FRB release also points out that REO rental properties may meet the definition of community development under the Community Revitalization Act (CRA), and, if so, a banking organization would receive favorable CRA consideration.
Federal District Court in Florida Lacks Jurisdiction Over TILA and RESPA Claims After State Court Foreclosure Judgment
On April 2, the U.S. District Court for the Middle District of Florida dismissed an action brought by a borrower against her mortgage lender alleging violations of TILA and RESPA and seeking a declaratory judgment that the lender holds no interest in the property. Chipman v. US Bank, N.A., No. 10-cv-483, 2012 WL 1093144 (M.D. Fla. April 2, 2012). The borrower brought the pro se action alleging that a forensic audit revealed certain TILA violations. Upon discovering those violations, the borrower submitted two Qualified Written Requests, at least one of which was not acknowledged by the lender in the time frame established by RESPA. The borrower brought suit seeking a recession of the loan. The court dismissed the case, taking judicial notice of a final foreclosure judgment in state court and holding that the Rooker-Feldman doctrine applies. Applying that doctrine, the court found that it is precluded from reviewing the state court final foreclosure judgment because (i) the parties to the two actions are the same, (ii) the state court ruling was a final judgment on the merits, and (iii) the borrower could have raised the TILA and RESPA claims in the state court action.