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On August 12, the Maine Supreme Judicial Court held that Mortgage Electronic Registration Systems, Inc. (MERS) - the "nominee" for the lender under the mortgage - was not the proper party to commence a foreclosure action against delinquent borrowers. MERS, Inc. v. Saunders, No. 09-640, 2010 ME 79 (ME Sup. Jud. Ct. Aug. 12, 2010). In this case, the plaintiffs executed a residential mortgage that named MERS as a nominee for the lender. After the plaintiffs defaulted on their loan, MERS filed a complaint seeking to foreclose. The plaintiffs opposed, arguing that MERS lacked standing because it could not show that it was the holder of the mortgage. The Supreme Judicial Court agreed, holding that, because MERS was a "nominee" for the lender and not a "mortgagee," it lacked standing to foreclose on the mortgage under Maine law. However, the court also held that the substitution of the bank for MERS during the foreclosure proceedings was proper. Nonetheless, the court found that the lower court’s grant of summary judgment on the foreclosure proceeding was improper because the record did not establish what property owned by the borrowers actually secured the mortgage.
Massachusetts Regulator Issues 43 Cease-And-Desist Orders to Mortgage Loan Originators in Violation of Massachusetts SAFE Act Law
On August 9, the Massachusetts Division of Banks announced the issuance of 43 temporary cease-and-desist orders against licensed mortgage loan originators in Massachusetts for failing to meet requirements for licensure under Massachusetts’ Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) compliance law. Under the law, mortgage loan originators licensed after July 31, 2009 had until July 31, 2010 to meet the new licensing requirements, while mortgage loan originators licensed prior to July 31, 2009 must pass the required state and national test by October 31, 2010 and must submit fingerprints for a national criminal background check by December 31, 2010.
On August 2, the Commissioner of the New Jersey Department of Banking and Insurance (the Department), issued Bulletin 10-17, which provides guidance on how mortgage lending entities should comply with both amended federal regulations governing Good Faith Estimate (GFE) and HUD-1/HUD-1A Settlement Statements and New Jersey’s settlement disclosure requirements which require broader disclosures than included in the amended federal forms. New Jersey regulations currently permit lenders to rely on U.S. Department of Housing and Urban Development (HUD) disclosure forms to meet New Jersey disclosure requirements provided lenders also disclose whether certain settlement service fees are refundable, and how to receive such a refund. The newly amended HUD forms, however, provide less information regarding broker and banker fees than New Jersey requires, and lenders are forbidden by HUD from modifying the HUD forms to meet state disclosure requirements. According to Bulletin 10-17, until the Department revises its regulations the Department will no longer permit lenders to rely on the HUD disclosure forms to meet New Jersey disclosure requirements. Instead, lenders must create a "New Jersey Disclosures Form" which lists all applicable origination and settlement fees referenced in N.J.A.C. 3:1-16.2, totaled by category and matching the amounts listed on the GFE, and identifying which fees are refundable and the terms and conditions for such refund. Lenders cannot attach the New Jersey form to any HUD form, nor refer to the New Jersey form as a supplement or addendum to a HUD form. New Jersey Disclosure Forms must be signed, dated, and maintained in the licensee’s mortgage files.
On July 23, Illinois Governor Pat Quinn signed HB 5735, a bill requiring courts to set aside judicial sales of real estate under certain circumstances. Under the law, if a mortgagor can prove prior to confirmation of the sale that he or she had applied for assistance under the Home Affordable Modification Program (HAMP), and that the judicial sale materially violated HAMP’s procedural requirements, then the court must set the sale aside. The bill is effective immediately.
On July 22, the U.S. Court of Appeals for the Fifth Circuit affirmed a decision by a Texas district court finding that the terms of an adjustable rate home equity loan did not violate the Texas Constitution. Cerda v. 2004-EQR1 L.L.C., No. 09-50619, 2010 WL 2853651 (5th Cir. July 22, 2010). In response to a foreclosure proceeding, the plaintiff borrowers in Cerda alleged that the terms of a 2002 home equity loan refinance violated the Texas Constitution because (i) it was issued in violation of a mandated waiting period of 12 days between submission of an "application" and closing, (ii) it called for monthly payments that were not "substantially equal," and (iii) it required the payment of fees in excess of a 3% cap. The district court rejected these arguments and, following a bench trial, granted judgment to the defendants. The Fifth Circuit affirmed in all respects. First, the court held that an oral application, which the borrowers indisputably made over the telephone more than 12 days before the loan closed, was sufficient to commence the required waiting period. Second, with respect to the Texas Constitution’s requirement that scheduled payments on home equity loans be "substantially equal" in amount, the Fifth Circuit recognized that the provision was "in some tension with" a separate provision explicitly permitting "variable rate[s] of interest." The Fifth Circuit reconciled the provisions by holding that, in combination, the provisions merely required that home equity loans fully amortize - i.e., that installments extinguish principal and interest over the life of the loan - and, in addition, that there be no final, "balloon" payment. Because the plaintiffs’ loan comported with these requirements, the Fifth Circuit held that the "substantially equal" provision had not been violated. Third, the Fifth Circuit held that the loan did not exceed a 3% cap on fees, reasoning that the yield spread premium on the loan was not a "fee" because it was paid by the lender - not the borrower - to the broker, and that discount points are properly considered to be interest rather than a fee subject to the cap. As the Fifth Circuit noted, its rulings were based on the Texas Constitution as of 2002. Since that time, certain provisions at issue in this case have been amended.
On July 21, the U.S. Court of Appeals for the Ninth Circuit held that a plaintiff properly alleged claims under the Truth in Lending Act (TILA) and the California Unfair Competition Law (UCL) because the use of the term "fixed" to describe an annual percentage rate (APR) along with an enumeration of three specific exceptions may have been misleading to a consumer when the APR was also subject to change for other reasons. Rubio v. Capital One Bank, No. 08-56544, 2010 WL 2836994 (9th Cir. July 21, 2010). In Rubio, the plaintiff consumer applied for and received a credit card pursuant to a direct-mail solicitation from the defendant bank in 2004. The solicitation’s "Schumer Box," as required by federal law, described the credit card’s APR as a "fixed rate of 6.99%." A paragraph below the Schumer Box stated that the APR was subject to increase in the case of (i) a failure to make a payment when due, (ii) an overlimit account, and/or (iii) a returned payment. When the consumer received her credit card, she also received a Cardholder Agreement that contained a reservation of the right of the bank to "amend or change any part" of the agreement "at any time." While none of the three enumerated conditions occurred, three years later the consumer received notice from the bank that her APR would increase. The consumer subsequently filed suit against the bank, alleging violations of TILA and the UCL and asserting a breach of contract claim.
In concluding that the bank’s disclosure was misleading under TILA, the Ninth Circuit relied in part on a study conducted by the Federal Reserve Board, which found that consumers "frequently assume that a rate that is labeled ‘fixed’ cannot be changed for any reason." Based in part on the same study, the Federal Reserve Board recently promulgated revisions to Regulation Z, which, as of July 1, 2010, bar the use of the term "fixed" in the Schumer box in certain circumstances. While those regulations did not apply retroactively to this case, the Ninth Circuit found them persuasive in determining that the disclosure at issue should be viewed as misleading. The Ninth Circuit reasoned that a reasonable consumer could conclude that the APR was "’unchangeable’ except for the three exceptions" listed next to the Schumer box and that it was, thus, reasonable for a consumer to conclude that the three enumerated conditions tied to the Schumer box were identified "precisely because they were the only reasons that the APR could change." The Ninth Circuit further held that the misleading nature of the disclosure as measured under TILA’s standards was sufficient to state a claim under the UCL.
On July 8, the Michigan Supreme Court struck down rules issued by the state’s Commissioner of Financial and Insurance Regulation (Commissioner) banning the use of credit reports to determine automobile and homeowners insurance premiums, a practice known as “insurance scoring.”Ins. Inst. of Mich. v. Comm’r, Fin. & Ins. Servs., 2010 WL 2696342, No. 137400 (Mich. Jul. 8, 2010). The court held that the Commissioner’s rules were contrary to Michigan’s Insurance Code, which allows insurers to establish premium discount plans and rating systems based on factors that reasonably reflect an insurer’s anticipated reduction in losses, and, thus, exceeded the statutory scope of the Commissioner’s rule-making authority. The court based its determination largely on evidence in the record indicating that individuals with higher insurance scores pose a lower risk of loss to the insurer. Based on that evidence, the court found that there was “little difference between providing a discount for anti-lock brakes, for example, and providing a discount based on high insurance scores.” The court separately rejected an argument by the Commissioner that credit reports are unreliable and, therefore, their use violates an Insurance Code prohibition on “unfairly discriminatory” rates. In the course of its opinion, the court also noted that the Michigan Legislature had at one time considered legislation that would ban the use of credit scores in insurance underwriting. However, this legislation was abandoned by the Legislature after the governor made clear her intention to veto the legislation.
The Mississippi legislature recently enacted legislation (H.B. 223) amending Mississippi’s Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) compliance legislation. The bill generally amends certain definitions and exemptions, as well as changes the licensing process. Most notably, H.B. 223 amends the definition of “mortgage loan originator” to include individuals who take residential mortgage loan applications or (rather than and) who offer or negotiate terms of a residential mortgage loan. The bill adds definitions for “taking an application for a residential mortgage loan” and “offering or negotiating a residential mortgage loan.” Furthermore, the bill exempts from the SAFE Act compliance legislation institutions regulated by the Farm Credit Administration, certain licensed lenders, and certain mortgage loan servicers.
Washington State Supreme Court Holds HOLA Does Not Preempt Allegation of Impermissible Reconveyance Fees
On June 24, the Washington Supreme Court held that the Home Owners’ Loan Act (HOLA) and Office of Thrift Supervision (OTS) regulations do not preempt a borrower’s claim challenging fax and notary fees to secure the reconveyance of title when the claim is based on the terms of a deed of trust. McCurry v. Chevy Chase Bank, F.S.B., No. 81896-7, 2010 WL 2521772 (Wash. June 24, 2010). InMcCurry, the borrowers, who sued on behalf of two similarly situated classes, conveyed a deed of trust to the lender. The payoff statement included a $20 fax fee and a $2 notary fee. The borrowers argued that the deed of trust did not permit such fees, thereby resulting in the lender’s unjust enrichment, and that the charging of the fees violated the Washington Consumer Protection Act (WCPA). The lender moved to dismiss on the grounds that HOLA and OTS regulations preempted state laws that dictate the type and nature of loan-related fees a lender can charge. The Washington Supreme Court, sitting en banc, noted that whether the lender was precluded from charging fax and notary fees under the terms of the deed of trust was a matter of contract law. The court concluded that state contract law requires the parties to adhere to the terms of their contracts, and the effect this has on lending operations is “unintended, ancillary, and subordinate to the purpose of the contract law,” and is therefore “incidental.” As such, the court ruled in favor of the borrowers, finding that neither the WCPA nor state contract law was preempted by federal regulations.
On June 21, Illinois Governor Pat Quinn signed HB0537, which amends the Illinois Consumer Installment Loan Act by placing a cap on interest rates, introducing income-based repayment measures, eliminating balloon payments and pre-payment penalties, and expanding the monitoring of licensed lenders. Under the new provisions, the interest rate on loans over $4,000 will be capped at 36% and the interest rate on certain loans under $1,500 will be capped at 99%. Moreover, the interest rate that may be charged on the unpaid balance of a delinquent account on small consumer loans will be capped at 18% per year. Lenders are prohibited from making small consumer loans that would result in a monthly payment exceeding 22.5% of the borrower’s gross monthly income. Lenders also may not condition the extension of credit on the consumer’s agreement to repay the loan using preauthorized electronic fund transfers. Finally, the bill requires certain information pertaining to small consumer loans to be entered into a state-wide electronic database. The amendments become effective March 21, 2011.
- Daniel R. Alonso to moderate an interactive roundtable at the Latin Lawyer and GIR Connect: Anti-Corruption & Investigations Conference
- APPROVED Checkpoint Webcast: You have license renewal questions, we have answers
- Jonice Gray Tucker to discuss “Fintech trends” at the BIHC Network Elevating Black Excellence Regional Summit
- Jeffrey P. Naimon to discuss "Truth in lending” at the American Bar Association National Institute on Consumer Financial Services Basics
- Daniel R. Alonso to discuss anti-money-laundering at FELABAN Spanish-language webinar “Perspective for banks: LAFT, FINCEN, OFAC, Cryptocurrency”
- Daniel R. Alonso to discuss "What’s new in BSA/AML compliance?" at the Institute of International Bankers Regulatory Compliance Seminar
- Marshall T. Bell and John R. Coleman to speak at 2021 AFSA Annual Meeting
- Jon David D. Langlois to discuss "Regulatory update: What you need to know under the new boss; It won’t be the same as the old boss" at the IMN Residential Mortgage Service Rights Forum (East)
- Daniel R. Alonso to discuss internal investigations at the Institute of Internal Auditors of Argentina Spanish-language webinar
- Benjamin B. Klubes to discuss “Creating a Fantastic Workplace Culture”
- John R. Coleman and Amanda R. Lawrence to discuss “Consumer financial services government enforcement actions – The CFPB and beyond” at the Government Investigations & Civil Litigation Institute Annual Meeting
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute
- Jonice Gray Tucker to discuss “Regulators always ring twice: Responding to a government request” at ALM Legalweek