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Key Parts of California "Homeowner Bill of Rights" Signed Into Law
On July 11, California Governor Jerry Brown signed into law two bills (AB 278 and SB 900) that form part of the state’s proposed “Homeowner Bill of Rights.” Effective January 1, 2013, the two substantively identical bills will (i) codify a number of protections similar to those contained in the Multistate Servicer Settlement between 49 state attorneys general, the Federal Government, and the nation’s five largest mortgage servicers announced in February, (ii) amend the mechanics of California’s foreclosure processes, and (iii) provide borrowers with new private rights of action. Several other parts of the Homeowner Bill of Rights remain pending, as described in a fact sheet prepared by the California Attorney General.
Special Alert Update: Portions of California's "Homeowner Bill of Rights" Signed Into Law
As an update to a development we reported last week, on July 11, California Governor Jerry Brown signed into law two bills that form part of the state's proposed "Homeowner Bill of Rights." Effective January 1, 2013, the two substantively identical bills will (i) codify a number of protections similar to those contained in the Multistate Servicer Settlement between 49 state attorneys general, the Federal Government, and the nation’s five largest mortgage servicers announced on February 9, (ii) amend the mechanics of California’s foreclosure processes, and (iii) provide borrowers with new private rights of action. Several other parts of the Bill of Rights remain pending, as described in a fact sheet prepared by the California Attorney General.
Sixth Circuit Holds Foreclosure Filing Before Transfer of Mortgage and Note May Violate FDCPA
On June 26, the U.S. Court of Appeals for the Sixth Circuit concluded that a misrepresentation of the creditors name in a foreclosure action may constitute a false representation actionable under Section 1692e of the FDCPA. Wallace v. Washington Mut. Bank, F.A., No. 10-3694, 2012 WL 2379664 (6th Cir. June 26, 2012). In Wallace, a law firm allegedly brought a foreclosure action before the firms bank client received an assignment of the mortgage and transfer of the promissory note. The borrower contended that the law firm violated the FDCPA in foreclosing on behalf of the bank before the transfer and assignment occurred. The district court dismissed the case, holding that the failure to record an assignment before filing a foreclosure action is not a deceptive practice under the FDCPA. The Sixth Circuit disagreed and reversed, holding that the borrowers allegations were sufficient to support a claim of material misrepresentation that would confuse or mislead an unsophisticated consumer.
Massachusetts Supreme Judicial Court Rules That Lenders May Foreclose Without Possessing Mortgage Note, But Only In Certain Circumstances
On June 22, the Massachusetts Supreme Judicial Court held that lenders do not need to be in physical possession of a mortgage note to foreclose on a property, but that they must establish that they are acting on behalf of the noteholder. Eaton v. Federal Nat’l Mortgage Ass’n, No. SJC-11041, 2012 WL 2349008 (Mass. June 22, 2012). The lower court had preliminarily enjoined defendant Fannie Mae from evicting the plaintiff following a foreclosure sale; that court interpreted the term “mortgagee,” as used in Massachusetts’ statutes, to refer to a person holding both the mortgage and the mortgage note. At the time of the foreclosure, the foreclosing party held only the mortgage. Reversing the lower court, the Supreme Judicial Court found that the term “mortgagee” refers to a person who (i) holds the mortgage, and (ii) either physically holds the mortgage note or acts on behalf of the mortgage note holder. Recognizing that it was common prior practice to interpret the term “mortgagee” as requiring possession of only the mortgage, the court held that its new interpretation of “mortgagee” should be given only prospective effect.
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.
FHFA Announces Multiple New Policy Initiatives
On June 15, the FHFA published a Notice of Proposed Rulemaking regarding state and local Property Assessed Clean Energy (PACE) programs, as required by a preliminary injunction issued by the Northern District of California in a lawsuit challenging the FHFA’s direction to Fannie Mae and Freddie Mac not to purchase mortgages subject to first-lien PACE obligations, and to the Federal Home Loan Banks to limit exposure to first-lien PACE programs. Under the PACE programs, local governments provide property-secured financing to property owners for the purchase of energy-related home improvement projects. The FHFA believes such financing arrangements present safety and soundness concerns. Several states challenged the FHFA actions in court. While most of the cases were dismissed, California succeeded in forcing the FHFA to conduct a formal rulemaking on the issue. Comments on the proposed rule are due by July 30, 2012.
On June 18, the FHFA announced an initiative to supplement fraud reporting by the entities it supervises. Under the Suspended Counterparty Program, Fannie Mae, Freddie Mac, and the Federal Home Loan Banks are required to notify the FHFA whenever an individual or company with whom they do business is adjudicated to have engaged in fraud or other financial misconduct. The FHFA also will consider information it receives from other government sources. Based on the reported information, the FHFA will make a determination as to whether the individual or business will be suspended from doing business with the supervised entities. The new program takes effect August 15, 2012.
On June 19, the FHFA published a Notice and Request for Comment regarding a proposed new rating system to be used in conducting safety and soundness examinations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The proposal seeks to implement a single risk-focused examination system for all three entities that would be similar to the “CAMELS” rating system used by federal prudential regulators for depository institutions. The FHFA is accepting comments on the proposed system through July 19, 2012.
Fannie Mae Announces Private Transfer Fee Covenant Policy, Revises Loan Modification Agreement
On June 19, Fannie Mae issued the Selling Guide Announcement SEL-2012-05, which states that effective July 12, 2012, Fannie Mae will not purchase or securitize mortgages on properties encumbered by private transfer fee covenants that were created on or after February 8, 2011, with some exceptions. The policy follows a rule finalized by FHFA on March 16, 2012 that prohibits Fannie Mae and Freddie Mac from purchasing or investing in any properties or securities backed by such mortgages. In light of the new policy, mortgages on affected properties must be purchased by Fannie Mae as whole loans no later than July 13, 2012, or must be delivered no later than July 13, 2012 into MBS pools with issue dates of July 1, 2012 or later. The policy requires lenders to establish their own policies and procedures to ensure compliance. On June 20, Fannie Mae published a Servicing Notice to advise servicers to begin using a new Loan Modification Agreement that was updated to include a line for the date of the lenders signature. The new form must be used for all Trial Period Plans beginning on or after September 1, 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.
Fourth Circuit Holds West Virginia Consumer Credit and Protection Act Statute of Limitations Begins to Run on Acceleration Date
On May 31, the U.S. Court of Appeals for the Fourth Circuit held that the one-year statute of limitations under the West Virginia Consumer Credit and Protection Act (WVCCPA) begins to run on the date the loan is accelerated, and not the date the loan is scheduled to mature. Delebreau v. Bayview Loan Servicing, LLC, No. 11-1139, 2012 WL 1949371 (4th Cir. May 31, 2012). At issue was whether the borrowers claim under the WVCCPA, alleging the servicer improperly added fees to their account, was time barred by the WVCCPAs one-year statute of limitations, which runs from the due date of the last scheduled payment of the agreement of the parties. The servicer argued that the due date of the last scheduled payment of the agreement was the loan acceleration date declaring the entire loan amount due. The borrowers contended that it was the loan maturity date designated in the loan documents, which in this case was twenty-three years after the acceleration date. Affirming the district courts judgment, the court held that the acceleration date was the operative date, reasoning that no further payments were scheduled after that date. Therefore, the borrowers claims were dismissed as time barred.