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Financial Services Law Insights and Observations

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  • Rhode Island Passes Law Regulating Title Insurance Companies

    State Issues

    On June 12, Rhode Island enacted H 7709, the "Rhode Island Title Insurers Act," which becomes effective January 1, 2011. Among other things, the law (i) establishes minimum capital and surplus requirements for title insurers, (ii) sets certain asset and reserve requirements, (iii) requires prior written approval for title insurers to deviate from certain business diversification standards, (iv) establishes guidelines for policyholder treatment, (v) prohibits rebates and fee splitting, (vi) establishes rate and form filing procedures, and (vii) establishes penalties for violations of the law.

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  • New York State Court Holds HOLA/FIRREA Do Not Preempt Cause of Action by New York Attorney General Regarding Appraisal Practices

    State Issues

    On June 8, the Supreme Court of New York, Appellate Division (First Department) affirmed that the Home Owner’s Lending Act (HOLA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) do not preempt the enforcement of Uniform Standards and Professional Appraisal Practice standards under state law. People of the State of New York v. First American Corp., 2010 NY Slip Op 04868, 2010 WL 2266832 (N.Y. Sup. Ct. June 8, 2010). The New York Attorney General claimed that the defendants engaged in fraudulent, deceptive and illegal business practices by allegedly permitting residential real estate appraisers to be influenced by a nonparty bank to increase real estate property values on appraisal reports for the purpose of inflating home prices. The defendants moved for dismissal, asserting that HOLA and FIRREA impliedly place the responsibility for oversight of appraisal management companies on the Office of Thrift Supervision (OTS). The defendants also asserted that the New York Attorney General lacked standing to bring these claims. Regarding the preemption issue, the court relied in part on an October 25, 2004 OTS opinion letter requiring thrifts using agents to perform activities such as appraisals to enter into written agreements acknowledging OTS’s statutory authority to take enforcement action against such agents. Noting the absence of such an agreement, the court concluded that the applicable federal statutes, regulations, and guidelines did not preempt or preclude the Attorney General from pursuing the action. The court further concluded that the Attorney General had standing to bring suit, rejecting the defendants’ argument that the Attorney General’s action was actually a federal cause of action characterized as a state law claim.

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  • Florida Federal Court Holds NBA Preempts State Law Barring Check Cashing Fees

    State Issues

    On June 4, the U.S. District Court for the Middle District of Florida held that the National Bank Act (NBA) and Office of the Comptroller of the Currency (OCC) regulations preempt a Florida law prohibiting check cashing fees. Baptista v. JP Morgan Chase Bank, No. 6:10-cv-139, 2010 WL 2342436 (M.D. Fla. June 4, 2010). In this putative class action, the defendant bank charged the plaintiff a fee for cashing a check at the bank because she was a non-account holder. The plaintiff sued, claiming unjust enrichment and arguing that Fla. Stat. § 655.85 forbids banks from cashing checks at less than par value. The court granted the bank’s motion to dismiss, finding that § 655.85 only forbids check-cashing fees on bank-to-bank transactions, and, thus, does not apply to the plaintiff. The court additionally held that the NBA and OCC regulations would preempt the statute’s prohibition on check cashing fees even if § 655.85 applied to the plaintiff. The court reasoned that the Florida check cashing fee statute conflicts with OCC regulations that (i) authorize national banks to charge their customers non-interest charges and fees, and (ii) provide that the establishment and amounts of non-interest charges and fees are business decisions made at their discretion. Ruling on whether the non-account holder was a “customer” under the relevant OCC regulations, the court added that OCC interpretive letters define “customer” as any party that obtains a product or service from the bank; thus, the plaintiff was a “customer” because she received check cashing services, even if she was a non-account holder. The court also dismissed the plaintiff’s claim for unjust enrichment, finding that the claim sought damages from the bank for exercising federally-authorized powers, and, thus, was preempted.

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  • California State Court Holds HOLA Does Not Preempt California Statute Pertaining to the Obligations of Lenders Prior to Issuing a Notice of Default

    State Issues

    On June 2, the California Court of Appeal held that Cal. Civil Code Section 2923.5, which is known as the Perata Mortgage Relief Act (PMRA) and prescribes the procedures that a lender must follow prior to filing a notice of default, provides for a limited private right of action and that the Home Owners’ Loan Act (HOLA) and Office of Thrift Supervision (OTS) regulations do not preempt the PMRA. Mabry v. Sup. Ct. of Orange Cty., G042911, 2010 WL 2180530 (Cal. Ct. App. June 2, 2010). In Mabry, the plaintiff borrower obtained a restraining order against the defendants (including the lender, a subsidiary of a federal thrift) to prevent the foreclosure of the borrower’s home. The trial court subsequently vacated the restraining order and held that (i) HOLA and OTS regulations preempted the PMRA, (ii) the PMRA does not provide a private right of action, and (iii) tender was required to enjoin the foreclosure proceedings.

    After the borrower filed a writ proceeding, the Court of Appeal stayed the foreclosure and scheduled an order to show cause. The appellate court first held that the PMRA provides a limited private right of action for a borrower to obtain postponement of an impending foreclosure (i.e., until a lender complies with the requirements of the PMRA) and that a borrower is not required to tender to exercise this right. The appellate court next held that HOLA and OTS regulations do not preempt the PMRA. The court stated that the burden on federal thrifts to assess a borrower’s financial condition and to explore alternatives to foreclosure “might arguably push the [PMRA] out of the permissible category of state foreclosure law and into the federally preempted category of loan servicing or loan making,” but that there must be evidence of such a burden for a court to make that finding. On the limited record of this case, the court determined that HOLA did not preempt the PMRA.

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  • Illinois Law Requires Illinois Courts to Stay Mortgage Foreclosure Proceedings Against Combat Military Personnel

    State Issues

    On June 1, Illinois Governor Pat Quinn signed into law HB 3762, a bill that requires an Illinois court to stay for 90 days foreclosure proceedings against a mortgagor who is a servicemember of the military on active duty and has been deployed to a combat (or combat support) posting within the previous 12 months. The stay is not automatic and must be requested by the servicemember. The bill takes effect January 1, 2011. 

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  • Vermont Enacts Mediation Requirement for Foreclosures

    State Issues

    On May 29, Vermont Governor Jim Douglas signed HB 590, a bill establishing a mediation program for mortgage foreclosure actions involving loans subject to federal Home Affordable Modification Program (HAMP) guidelines. The law requires a court to refer a foreclosure case to mediation whenever the mortgagor enters an appearance or requests mediation within four months after judgment is entered. The court may, for good cause, shorten the four month period or, alternatively, decline to order mediation upon finding that the mortgagor is attempting to delay the case. Mediation is not required if the mortgagee files a motion detailing its compliance with the applicable HAMP requirements. During the mediation period, the law requires the mortgagee to consider available foreclosure preventions tools, “including reinstatement, loan modification, forbearance, and short sale, and the calculations, assumptions, and forms established by the HAMP guidelines.” A mortgagee must produce documentation of its consideration of these options, as well as any pooling or servicing agreements, if applicable, to the mortgagor. The cited provisions take effect July 1, 2010.

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  • Massachusetts Bankruptcy Court Upholds Validity of TILA/CCCDA Disclosures, Waiver

    State Issues

    On May 28, the U.S. Bankruptcy Court for the District of Massachusetts held that (i) the use of a reduction feature to calculate the Annual Percentage Rate (APR) provided for an adjustable rate mortgage (ARM) loan does not violate the disclosure requirements of the Massachusetts Consumer Credit Cost Disclosure Act (CCCDA), the Massachusetts analog to the federal Truth in Lending Act (TILA), by failing to reflect that subprime borrowers would be more likely to be delinquent in their payments, and (ii) the waiver of TILA/CCCDA claims, even after the initial rescission period, is valid if the waiver is knowing and voluntary and communicated in a clear and conspicuous manner. In re DiVittorio, Adversary Proceeding No. 09-1089, 2010 WL 2204167 (Bankr. D. Mass. May 28, 2010). In this case, the debtor plaintiff brought suit seeking rescission of his loan through a bankruptcy court adversary proceeding, alleging that the defendant lender violated the CCCDA by providing an inaccurate APR on the Truth in Lending Disclosure Statement (TIL Disclosure). The debtor’s ARM interest rate was subject to a performance-based rate reduction feature by which the debtor would qualify for a reduced rate if he timely made the first two years of payments. In disclosing the APR in the TIL Disclosure, the lender used the reduced interest rate that the debtor would have been entitled to under the rate reduction feature, thereby assuming that he would timely make the first two years of payments. The debtor alleged that the APR stated on the TIL Disclosure was numerically inaccurate because it was calculated using the reduction feature, which did not take into account that subprime borrowers would be more likely to be delinquent in their payments. The debtor had previously signed a waiver of any claims against the lender in connection with the making, closing, administration, collection, or the enforcement of the loan documents. The lender moved to dismiss the debtor’s claims and additionally moved for summary judgment.

    On the motion to dismiss, the bankruptcy court held that the CCCDA generally requires disclosures to reflect the terms of the legal obligation between the parties and, in the absence of exact information, to be based on the best information reasonably available at the time the disclosure is provided. The court reasoned that all disclosures are premised on what the parties obligate themselves to do, and to assume otherwise would render every disclosure an estimate and preclude any meaningful disclosure. Because the lender had the exact information regarding the debtor’s legal obligation to make timely payments, resorting to the best information reasonably available (e.g., the debtor’s contention that subprime borrowers were less likely to repay), was unnecessary.

    On the motion for summary judgment, the lender argued, among other things, that the debtor’s written waiver prohibited any loan origination claims. However, the debtor argued that it is not permissible to waive the right of rescission after the expiration of the initial three-day rescission period. The court held that the provisions in TILA and the CCCDA applicable to waiver of the right to rescind before the initial three-day rescission period do not apply to the extended right of rescission. The court noted that judicial review of a waiver or release, at a minimum, requires that it is knowing and voluntary. Here, the debtor argued that his waiver was not "knowing" because he was unaware that he had a CCCDA claim due to the lender’s concealment of the "true" APR. The court disagreed, finding that the debtor’s possession of the loan documents put him on inquiry notice of his purported CCCDA claims and his right to rescind. Further, by specifically referencing claims arising in connection with the making, closing, administration, collection, or the enforcement of the loan documents, the waiver should have compelled him to investigate the possibility of such claims. The court noted that it was significant that the debtor executed the waiver as part of a loan modification after eight months of negotiations, during which the debtor was represented by counsel. As such, the court found that the debtor’s execution of the waiver was knowing and voluntary. Further, the court acknowledged that TILA and the CCCDA require any waiver to be clearly and conspicuously disclosed, as distinct from general waivers of "any and all claims." The court found that the debtor’s waiver satisfied this burden because it expressly referenced claims arising in connection with the loan documents.

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  • Oklahoma Amends Mortgage Licensing Act; Adds Exemption for Depository Institutions

    State Issues

    On May 28, Oklahoma Governor Brad Henry signed HB 2831, a law that amends the Oklahoma Mortgage Licensing Act (MLA). The law will:

    • Expressly exempt depository institutions and their subsidiaries from registering under the MLA; 
    • Require all applicants for a mortgage loan originator license to be sponsored by a licensed mortgage broker. The Oklahoma Commission on Consumer Credit will establish regulations regarding the sponsors of mortgage loan originators; and
    • Modify the administrative procedures provided by the MLA by creating a Hearing Examiner to consider alleged MLA violations and to propose findings to the Administrator of Consumer Credit, who retains the power to issue final agency orders.

    The amendments take effect July 1, 2010.

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  • Florida Law Expands Regulation of Consumer Debt Collection

    State Issues

    On May 27, Florida Governor Charlie Crist approved SB 2086, a bill that amends the current statute regulating Florida consumer debt collection agencies. Specifically, the new law will:

    • Enable the Florida Office of Financial Regulation (OFR) to more thoroughly investigate collection agencies through expanded subpoena power;
    • Authorize the OFR to issue cease and desist orders and direct collection agencies to take corrective action; 
    • Grant the OFR discretion to promptly respond to a certified consumer complaint (currently, the OFR must wait for five certified complaints to accumulate within a 12-month period before taking action); 
    • Empower the Florida Attorney General to take action for debt collection violations in response to a certified consumer complaint; 
    • Require debt collection agencies to maintain books and records necessary to determine compliance with the debt collection provisions; and
    • Increase the cap on administrative fines (from $1,000 to $10,000) for both out-of-state agencies operating without proper registry and for registered agencies.
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  • Colorado Creates Board of Mortgage Loan Originators to Regulate Mortgage Companies

    State Issues

    On May 26, Colorado Governor Bill Ritter, Jr. signed a bill (H.B. 10-1141) that (i) creates a new state mortgage regulatory division, the Board of Mortgage Loan Originators, and (ii) establishes registration deadlines for mortgage loan originators and mortgage companies via the Nationwide Mortgage Licensing System (NMLS). The law establishes a new licensing category of “mortgage company,” defined as entities that take residential mortgage loan applications or offer or negotiate the terms of a residential mortgage loan. The new law exempts from mortgage company licensing requirements banks, savings associations, subsidiaries owned and controlled by a bank or savings association, employees of bank or savings association or its subsidiaries, credit unions, and employees of credit unions. Mortgage companies will be overseen by the newly-created Board of Mortgage Loan Originators, which will, among other things, have the authority to impose fines and deny license applications or renewals. Mortgage companies, as well as individual mortgage loan originators, must be licensed via NMLS by January 1, 2011.

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