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Financial Services Law Insights and Observations

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  • Maryland Enacts Reverse Mortgage Loan Legislation

    State Issues

    On May 20, Maryland Governor Martin O’Malley signed into law S.B. 878, a bill setting forth requirements applicable to reverse mortgage loan lenders and arrangers of financing. Among other things, the bill:

    • Requires reverse mortgage loan lenders and arrangers of financing to comply with certain federal laws and regulations governing federally-insured home equity conversion mortgage loans;
    • Prohibits reverse mortgage loan lenders and arrangers of financing from conditioning the origination of a reverse mortgage loan upon a borrower’s purchase of an annuity, long-term care policy, or other related financial or insurance product. However, a reverse mortgage loan borrower may be required to purchase title, hazard, and/or flood insurance, as well as any other financial or insurance product that is required for reverse mortgage loans insured under federal law; and
    • Requires reverse mortgage loan lenders and arrangers of financing, upon receipt of a reverse mortgage loan application from a prospective borrower, to provide a borrower with a written checklist of reverse mortgage loan-related issues that a borrower should discuss with a counseling agency.

    The bill applies to reverse mortgage loans applied for on or after October 1, 2010.

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  • Minnesota Law Amends Requirements for Reverse Mortgages, Foreclosure Notices

    State Issues

    On May 19, Minnesota Governor Tim Pawlenty signed SF 2430, a bill that amends reverse mortgage loan and foreclosure notice requirements. Regarding reverse mortgage loans, the law:

    • Provides for a seven-day “cooling off” period subsequent to a borrower’s written acceptance of a reverse mortgage. During the period, a borrower cannot be required to proceed with or close the reverse mortgage. The law requires lenders to provide notice of this period to borrowers, and the period cannot be waived;
    • Provides that a lender that fails to make required loan advances and fails to cure an actual default after notice forfeits any right to repayment for reverse mortgages that are not federally insured. Once forfeiture has occurred, the mortgage may then be declared null and void by a court;
    • Prohibits making the purchase of insurance, annuities, or related products a condition of obtaining, or obligation of, a reverse mortgage loan, as well as prohibits lenders from receiving compensation for providing referrals for these services; and
    • Requires lenders to provide at least 3 independent housing counseling agencies to the applicant. Lenders must receive and maintain (for the duration of the mortgage) certification from the applicant that the applicant received the required counseling.

    Regarding foreclosure notice requirements, the bill provides borrowers new “redemption rights” and requires a “results of sale” notice. In addition to prescribing the content of the notices, the bill provides a private right of action to recover damages and attorneys’ fees and costs for violations of the “notice of results of foreclosure sale” requirements. The notice requirements become effective August 1, 2010 and apply to notices delivered on or after that date.

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  • Colorado Governor Signs Bill on Refund Anticipation Loans

    State Issues

    On May 19, Colorado Governor Bill Ritter signed HB 10-1400, a bill that creates protections for Colorado consumers seeking refund anticipation loans (RALs). RALs are loans made based on a borrower’s anticipated income tax refund. The bill establishes the Refund Anticipation Loan Act (RAL Act), under which:

    • Individuals offering tax refund loan services must be employed directly by an electronic return originator;
    • Loan facilitators must provide specific oral, written and posted disclosures that communicate, among other things, (i) a schedule of fees and example interest rates for different loan amounts up to $5,000, (ii) the duration, amount, applicable fees and interest rates associated with the anticipated tax refund loan, and (iii) procedures for making a complaint about the tax refund loan; and
    • A willful violation of the RAL Act is a misdemeanor punishable by a $500 fine and/or imprisonment for up to one year.

    The RAL Act becomes effective August 11, 2010.

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  • Wisconsin Enacts Payday Lending Reform; Prohibits Motor Vehicle Title Loans

    State Issues

    On May 18, Wisconsin Governor Jim Doyle signed SB 530, a bill that increases the regulation of payday loans and bans motor vehicle title loans. The law tightens existing payday loan restrictions by (i) capping maximum loan amounts, (ii) limiting rollover loans at one-per-customer, (iii) prohibiting the accrual of interest after the maturity date, (iv) establishing a customer rescission period, (v) prohibiting wage garnishments, and (vi) placing a ceiling on the number of lenders permitted in any given area. The law also bans all motor vehicle title loans; in this regard, Governor Doyle exercised a partial veto by striking a provision that would have permitted such loans in limited circumstances. The bill becomes law on January 1, 2011.

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  • Minnesota Passes SAFE Act Legislation

    State Issues

    On May 14, Minnesota Governor Tim Pawlenty signed SF 2510, an omnibus bill including provisions to effect the requirements of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). The bill requires mortgage loan originators to (i) register with the Nationwide Mortgage Licensing System (NMLS), (ii) complete pre-license testing and education, (iii) submit to fingerprinting for the purpose of a criminal history background check, and (iv) pass a qualified written exam developed by the NMLS. The law becomes effective July 31, 2010. Unless a later date is approved by the Secretary of the U.S. Department of Housing and Urban Development, the licensing requirement provisions will also become effective on July 31, 2010.

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  • Ninth Circuit Rejects Use of California UCL to Interpret FTC Act

    State Issues

    On May 14, the U.S. Court of Appeals for the Ninth Circuit held that the California Unfair Competition Law (UCL) was not necessary to interpret a claim brought by the Federal Trade Commission (FTC) under the FTC Act. F.T.C. v. Neovi, Inc., No. 09-55093, 2010 WL 1930229 (9th Cir. May 14, 2010). In this case, the FTC brought an action under section 5(a) of the FTC Act against defendants that managed a website that created and delivered unverified checks at the direction of registered users. On appeal, the court considered whether the FTC had made the requisite showing of harm, i.e., that the website caused consumers a substantial injury that was not avoidable or outweighed by countervailing benefits. Agreeing with the district court, the Ninth Circuit found that the FTC met its burden and that the website was responsible for the injury at issue, reasoning that it "created and controlled a system that facilitated fraud and that the company was on notice as to the high fraud rate." In reaching this decision, the court refused to consider case law interpreting the California UCL (Cal. Business & Professions Code § 17200) to determine whether the FTC’s showing of causation was sufficient. Although it acknowledged that the “common practice for states with consumer protection statutes modeled on the FTC Act [is] to rely on federal authority when interpreting those statutes,” it found that “the reverse is not the case[,]” because doing so would "create a sea of inconsistent rulings." Thus, the court found that the FTC Act permits a finding of direct harm based on the theory that the harm was a “predictable consequence of those actions.” 

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  • Virginia Federal Court Dismisses Note-Splitting Claims in Foreclosure Case

    State Issues

    On May 13, the U.S. District Court for the Eastern District of Virginia rejected “splitting the note” and “illegal gambling” claims regarding credit default swaps on, and the securitization of, a mortgage loan. Ruggia v. Wash. Mutual, No. 1:09-cv-1067, 2010 WL 1957218 (E.D. Va. May 13, 2010). InRuggia, the plaintiff borrower obtained a mortgage and the note was subsequently transferred several times over. When the plaintiff eventually defaulted on the note, the substitute trustee moved to foreclose. The plaintiff responded by filing a suit alleging that the foreclosing entity lacked power to enforce the deed securing the note because the various transfers that followed the original mortgage had effectively split the note from the underlying deed. Relying on state law regarding negotiable instruments, the court ruled that the security instruments run with the note upon assignment and, as such, the subsequent transferees could foreclose. In this regard, the court added that the securitization did not split the note from the security instrument. The court also dismissed as frivolous the plaintiff’s claims that the purchase of credit default swaps on his note violated state law prohibiting illegal gambling.

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  • California Court of Appeal Reverses Trial Court Decision Holding That State Law Requiring Disclosures on Convenience Checks is Preempted

    State Issues

    On May 12, the California Court of Appeal reversed a trial court decision that had found that a state law requiring certain disclosures when offering convenience checks was preempted by the National Bank Act (NBA) and regulations promulgated by the Office of the Comptroller of the Currency (OCC). Parks v. MBNA America Bank, N.A., G040798, 2010 WL 1885983 (Cal. Ct. App. May 12, 2010). In Parks, the plaintiff brought a putative class action alleging that the defendant bank failed to affix certain disclosures to its convenience checks in violation of California law. Based on the Ninth Circuit’s decision inRose v. Chase Bank USA, NA, 513 F.3d 1032 (9th Cir. 2008), the trial court found that the NBA and OCC regulations preempt state laws requiring such disclosures and dismissed the case. Taking a narrower view of preemption and rejecting the Ninth Circuit’s analysis in Rose, the California Court of Appeal reversed. It found that the NBA precluded only those laws that forbid or significantly impair the exercise of power by national banks. The court concluded that the California law did not forbid the use of convenience checks and that, on the limited factual record, it was unclear whether the law significantly impaired the practice, thus necessitating remand. On remand, it instructed the trial court that the California law could only be considered preempted if the bank could establish that it significantly impaired its use of free checks. Likewise, the court held that OCC regulations interpreting the NBA did not preempt the California law. Although the regulations expressly preempted state laws such as the one at issue, the court found that they were invalid because they represented an overbroad interpretation of the NBA.

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  • Georgia Increases Mortgage Closing Fees

    State Issues

    On May 12, Georgia Governor Sonny Purdue signed into law H.B. 1055, a bill that, among other things, amended the Georgia Residential Mortgage Act (GRMA) by increasing the Georgia Residential Mortgage fee from $6.50 per loan to $10.00 per loan. Under the GRMA, borrowers must pay a fee to a designated collecting agent whenever closing a loan subject to the GRMA, regardless of whether the loan is closed by a mortgage broker or mortgage lender licensee or registrant. The change became effective May 12.

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  • New York Federal Court Holds Homeowners Protection Act Preempts State Deceptive Trade Practices Claim

    State Issues

    On May 11, the U.S. District Court for the Southern District of New York (SDNY) dismissed a borrower’s claim against a service lender upon finding that that the New York Deceptive Trade Practices Act (DTPA) was preempted by the Federal Homeowners Protection Act (HPA). Fellows v. CitiMortgage, Inc., 07 Civ. 2261, 2010 WL 1857243 (S.D.N.Y. May 11, 2010). The lawsuit alleged that the lender wrongfully refused to cancel private mortgage insurance (PMI) and failed to give adequate disclosures about PMI cancellation rights, each in violation of the DTPA. In dismissing this claim, the SDNY ruled that the DTPA was expressly preempted by the HPA and characterized the lawsuit as an attempt to “use the New York DTPA to impose requirements for PMI cancellation and disclosure that are not required by the HPA.” The court also dismissed a related contract claim that proceeded on the theory that the lender’s conduct violated terms of the Fannie Mae Servicing Guide (which the borrower had claimed was incorporated by reference into the mortgage) after failing to see any mention of the guide within the “four corners” of the mortgage at issue.

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