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On March 16, Kentucky Governor Steve Beshear signed into law H.B. 470, a bill which amends the Kentucky Mortgage Licensing and Regulation Act to exempt from the state’s mortgage loan originator licensing requirement a person (i) who originates a dwelling-secured mortgage loan, (ii) who is exempted by an order of the Commissioner of the Kentucky Department of Financial Institutions, and (iii) whose exemption would not run afoul of the mortgage loan originator registration requirements set forth under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008. H.B. 470 becomes effective June 8, 2011.
On March 15, the Virginia Assembly enacted legislation expanding the acceptance of electronic signatures. The new law provides that financial disclosure forms, lobbyist registration statements, and notary applications for recommission may be signed by electronic signature.
On March 4, the U.S. Court of Appeals for the Ninth Circuit affirmed a debtor’s judgment against a debt collector under the federal Fair Debt Collection Practices Act (FDCPA), the Montana Unfair Trade Practices and Consumer Protection Act and state tort claims of malicious prosecution and abuse of process. McCollough v. Johnson, Rodenburg & Lauinger, No. 09-35767 (9th Cir. Mar. 4, 2011). The plaintiff debtor’s delinquent credit card account was sold by the credit issuer to a debt buyer. The debt buyer brought a state court action to recover on the debt but dismissed the action after the debtor asserted in response that the statute of limitations had run. The debt buyer then retained a debt collection law firm, Johnson, Rodenburg & Lauinger (JRL), to pursue the action, which it did until it was instructed to dismiss the suit several months later based on it being time barred. The debtor brought an action against JRL in federal court. The district court granted partial summary judgment on the FDCPA claims and the debtor won the other claims at trial. In affirming the ruling of the district court, the Ninth Circuit found that JRL’s defense of bona fide error as to the FDCPA action failed as a matter of law. The court held that JRL erred by relying without verification on its debt buyer client’s representation that the statute of limitations was extended and by overlooking contrary information in its electronic file. "JRL thus presented no evidence of procedures designed to avoid the specific errors that led to its filing and maintenance of a timebarred collection suit" against the debtor, the court concluded. The court also upheld summary judgment on the debtor’s claim that JRL violated the FDCPA by pursuing unauthorized attorneys’ fees. The FDCPA prohibits "[t]he collection of any amount . . . unless such amount is expressly authorized by the agreement creating the debt or permitted by law." JRL’s presentment of generic evidence that all credit cardholder agreements provide provisions for attorneys’ fees was found to be insufficient to defeat summary judgment. The court also concluded that: false requests for admission of JRL in the underlying action violated the FDCPA; the district court did not abuse its discretion in allowed testimony from other consumers relating to JRL; and, that the district court properly allowed the jury’s $250,000 award for actual damages due to the emotional distress of the plaintiff, who years earlier had suffered a head injury and suffered from mixed personality disorder and multiple other afflictions, including post-traumatic stress disorder.
A settlement was reached in a class action suit against CitiMortgage, Inc. in the Superior Court for the State of California, County of Los Angeles. In Rounds v. CitiMortgage, Inc., No. BC386656 (Cal. Super. Ct., Feb. 24, 2011) plaintiff alleged, among other things, that CitiMortgage allowed the assessment of excessive premiums in its lender placed insurance (LPI) program on California properties, purportedly in violation of California’s Unfair Competition Law, Business and Professions Code Section 17200, et seq. The settlement applies to California borrowers of CitiMortgage who paid premiums on LPI between March 4, 2004 and August 10, 2010 and whose insurance was not cancelled without charge to the borrower. The settlement provides for, among other things, a payment by CitiMortgage in a sum not to exceed $2,000,000 for settlement class members making valid claims, attorneys’ fees, costs and an incentive award to plaintiff. CitiMortgage agreed to permit each settlement class member to make a claim for payment of up to $95. With respect to CitiMortgage’s LPI program, from February 24, 2011, the date of the judgment granting final approval of the settlement, and for two years thereafter CitiMortgage agreed to maintain a rate of commissions on the placement of LPI to an affiliate of not more than 12%, and a fee in the amount of $.038 for tracking compliance with insurance obligations.
On February 24, a California court of appeals affirmed a trial court’s decision to award damages against a mortgage lender for breach of fiduciary duty and misrepresentation, where the loan officer for the lender acted as a mortgage broker. Smith v. Home Loan Funding, Inc., 2d Civ. No. B219372 (Super. Ct. No. 56-2007-00306-CU-BT-SIM) (Ventura County) (Cal. 2d Dist. Ct. App. February 24, 2011). Home Loan Funding, Inc. (HLF) provided residential mortgage loans, funding most directly, but also brokering some loans to other lenders. The plaintiff, Tonya Smith, contacted Anthony Baden, a loan officer for HLF, requesting a home equity line of credit. Baden indicated to her that he was a mortgage broker. Baden contacted Smith later and told her he "shopped the loan" with other lenders but could not obtain one for her because of her low credit scores. Baden then suggested that Smith refinance her existing loan and told her "he would shop the best loan" for her. Smith agreed but told Baden she did not want a loan with a prepayment penalty. Baden assured her via email that there would be no prepayment penalty on the new loan. At the time Smith signed the loan documents, she was unaware that the new loan, which was made by HLF as direct lender, had a prepayment penalty rider and an interest rate margin that was 1.2% higher than the margin Smith could have qualified for. The trial court had ruled that Baden and HLF acted as loan brokers and breached their fiduciary duty to Smith. The court awarded Smith $21,908 in damages for the prepayment penalty and $72,187.17, which is the present value of the difference in the margins over the 30-year life of the loan. The court also awarded Smith $26,342.50 in attorney fees against HLF. Upon review, the Court of Appeal found award of damages on the prepayment penalty to be inconsistent with damages on a 30-year loan that is not likely to be refinanced and struck those damages. The court affirmed the lower court judgment and damage award in all other respects.
On February 10, the Supreme Court of California reversed a Court of Appeal decision that a ZIP code does not constitute personal identification information under The Song-Beverly Credit Card Act of 1971 (Credit Card Act), instead finding that a ZIP code is part of a person’s address, which does constitute personal identification information. Pineda v. Williams-Sonoma Stores, Inc., No. S178241 (Cal. Feb. 10, 2011). In Pineda, the plaintiff was asked for and provided her ZIP code while paying for purchases with her credit card at one of Defendant’s stores, and the ZIP code was recorded. The plaintiff alleged asking for and recording her ZIP Code during a credit card transaction violated the Credit Card Act, which prohibits businesses from requesting "personal identification information" during a credit card transaction. The trial court and Court of Appeal disagreed, finding that a ZIP code, without more, does not constitute personal identification information. The Supreme Court, however, reversed the lower courts, finding that personal identification information, which includes a cardholder’s address, is intended to include all components of the address, and a ZIP Code is commonly understood to be a component of an address. The Supreme Court further stated that the Court of Appeal’s interpretation would create inconsistency and permit retailers to obtain indirectly what they are clearly prohibited from obtaining directly, since such information could be used to locate a cardholder’s complete address or telephone number.
On February 10, a judge in the United States Bankruptcy Court for the Eastern District of New York concluded, in dicta, that the Mortgage Electronic Registration System (MERS) lacks authority under New York law to assign interests in mortgages among its members. In re Agard, No. 810-77338 (Bankr. E.D.N.Y. Feb. 10, 2011). The issue arose on a mortgage servicer’s motion to lift the automatic stay in order to foreclose on the home of a Chapter 7 debtor. In such a situation, only a secured creditor (or a servicer acting on its behalf) has standing to seek to lift the stay. The debtor argued that the servicer lacked standing because the assignment of the security interest to the purported creditor, accomplished through the MERS system, was invalid. The court did not need to confront that issue to resolve the case, as it held that a prior state court judgment, which could not be challenged in federal court under the Rooker-Feldman and res judicata doctrines, had sufficiently established the servicer’s status as a secured creditor. Nevertheless, the court proceeded to consider the MERS issue in order to establish a "precedential effect" on the many other pending cases questioning whether an "entity which acquires its interests in a mortgage by way of assignment from MERS, as nominee, is a valid secured creditor with standing to seek relief from the automatic stay," notwithstanding the questionable precedential effect of the lengthy analysis in dicta. The court concluded that the servicer had failed to establish that the alleged creditor was the rightful holder of the Note or of the Mortgage, either of which was sufficient to defeat standing. With respect to the Note, the court determined that there was no evidence of either the creditor’s physical possession of the Note or of a valid written assignment because there was no proof that an assignment according to MERS’s standard processes had actually taken place. With respect to the Mortgage, the court’s dicta concluded that the servicer had failed to show a valid assignment from the original lender to the current creditor for several reasons:
- First, a note and mortgage are not "inseparable," as MERS "admits that the very foundation of its business model as described herein requires that the Note and Mortgage travel on divergent paths."
- Second, the mortgage documents themselves, which referred to MERS as the lender’s "nominee" or as the "mortgagee of record," were insufficient to give MERS the authority to transfer the Mortgage because the law affords those statuses very limited powers. However, this defect could have been cured had the lender executed a document clearly authorizing MERS to act as its agent for purposes of transferring the Mortgage.
- Third, the MERS membership rules, to which all of the relevant institutions have agreed, do not contain any explicit reference to an agency relationship and "do not grant any clear authority to MERS to take any action with respect to the mortgages held by MERS members, including but not limited to executing assignments."
- Fourth, the agency relationship claimed by MERS constitutes an "interest in real property" because it would authorize MERS as agent to assign the Mortgage. Therefore, the New York statute of frauds requires the agency relationship be committed to writing, but "none of the documents expressly creates an agency relationship or even mentions the word ‘agency.’"
- Finally, MERS’s claim that, in addition to being the mortgagee’s agent, it possesses the rights of the mortgagee itself by virtue of its designation as "mortgagee of record" is "absurd, at best."
In sum, the court’s dicta concluded that "MERS’s theory that it can act as a ‘common agent’ for undisclosed principals is not support[ed] by the law." Thus, notwithstanding the court’s recognition that "an adverse ruling regarding MERS’s authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States," it would have held that the servicer lacked standing to lift the stay and proceed with foreclosure but for the prior state court judgment.
On February 7, the U.S. Bankruptcy Court for the District of Oregon allowed a wrongful foreclosure claim to proceed based in part on plaintiff’s allegation that not every transfer of the loan was recorded in the land records. McCoy v. BNC Mortgage, Inc. et al., No. 10-06224 (Bankr. D. Or. Feb. 7, 2011). In McCoy, plaintiff received a mortgage loan secured by a deed of trust naming MERS as the "Beneficiary." According to the allegations in plaintiff’s complaint, the beneficial interest in the loan was sold several times, and was eventually securitized into a mortgage-backed security. According to plaintiff, none of the transfers was recorded in the county land records. Plaintiff eventually defaulted on the loan and, after the substitute trustee issued a notice of default, filed a chapter 7 bankruptcy petition. The assignee of the deed of trust was granted relief from the automatic stay to foreclose and plaintiff was discharged. Simultaneous with the discharge, plaintiff filed a chapter 13 bankruptcy, despite having been "informed by the court that he [was] ineligible for a discharge of debts due to the discharge received in the previously filed chapter 7 case." The assignee was again granted relief from the stay. Plaintiff then filed a lawsuit for wrongful foreclosure and to quiet title in state court. The lawsuit was removed from state court to federal court and then transferred to the bankruptcy court, where the assignee moved to dismiss both claims. The court dismissed the quiet title claim, which was based on the allegation that plaintiff no longer owed any money on the loan because his obligation was paid by "income from the trust, credit default swaps, TARP money, or federal bailout funds," because it was based on "conclusory legal allegations." The court allowed the wrongful foreclosure claim to proceed, however, finding that plaintiff’s allegations state a plausible claim that the assignee did not satisfy Oregon’s non-judicial foreclosure requirements. According to the court, the Oregon non-judicial foreclosure requirements were not met because - according to the allegations in the complaint - MERS was not a beneficiary as defined by the Oregon foreclosure statute (regardless of how it was defined under the deed of trust) and because not every transfer of the beneficial interest in the loan was recorded. The court noted in dicta, however, that Oregon’s judicial foreclosure statute allows for foreclosures where not every transfer has been recorded.
On February 1, an Illinois state appellate court concluded that the Illinois Collection Agency Act permits an assignee of an account to sue in its own name to collect on the account, but the assignee must prove a valid assignment in order to do so. Unifund CCR Partners v. Shah, No. 1-10-0855, 2011 WL 477725 (Ill. App. Ct. Feb. 1, 2011). In this case, the plaintiff, an assignee of the account, sued to collect on a defaulted credit card debt. The defendant moved to dismiss, arguing that the plaintiff could not prove a valid assignment because the plaintiff could not produce one document that included all of the information required under section 8b of the Illinois Collection Agency Act (i.e., the account information, the consideration paid for the assignment, and the effective date of the assignment). The circuit court denied the motion to dismiss, but certified two questions for the appellate court to review, (i) does an assignee for collection of a debt only have standing to sue in its own name; and (ii) can a plaintiff properly plead that an assignment exists using multiple documents?
Answering the first question, the court relied on two statutes, one which provides that an assignee and owner of a non-negotiable chose in action may sue in his or her own name, and a second in the Collection Agency Act which permits an account to be assigned to a collection agency in order to enable collection of the account in the agency’s name as assignee. The court found that the specific statute in the Collection Agency Act is broad enough to encompass not just assignees who take complete ownership of an account, but assignees who take legal title for the purposes of collection while the creditor retains a beneficial interest and equitable title.
To address the second question, the court recited the rule in the Collection Agency Act that permits an agency to bring suit only when "the assignment is manifested by a written agreement, separate from and in addition to any document intended for the purpose of listing a debt with a collection agency." The court found that the phrase "written agreement" signifies a term that refers to the parties’ entire bargain in written form, and not just a single document. Therefore, an assignment must be manifested in a written contract, but such contract can include or incorporate all or part of other instruments or documents by reference. As such, a valid assignment can be established through multiple documents, as long as the documents include the required information under section 8b. The court did add that the Collection Agency Act’s provision specifying a written contract must prove the existence of an assignment is not broad enough to permit a valid assignment to be proven by affidavit.
On January 10, the U.S. District Court for the District of Maine held that a plaintiff could not state a cause of action for either negligent or intentional infliction of emotional distress against a servicer or trustee in a mortgage foreclosure action. James v. GMAC Mortg. LLC, No. 2.09-cv-84 (D. Me. Jan. 10, 2011). In James, the mortgage originator allegedly understated the amount that the borrower owed on his mortgage payments by $32 per month in the required federal disclosure forms. Over a year later, the loan servicer notified the borrower that his loan was in default. Although the borrower tendered a check to remedy the default, the check lacked any information to identify the borrower or the loan, and the servicer returned the check and foreclosed on the mortgage. The magistrate judge rejected the borrower’s argument that the relationship between a homeowner and a mortgagor or servicer is a "special relationship" that could form the basis of a negligent infliction of emotional distress claim. The court also held that a minor error in the required mortgage payments, failure to cash a check that lacked identifying information, actual foreclosure, and force placing insurance were not "so extreme and outrageous as to exceed all possible bounds of decency" and that these actions could not sustain a claim for intentional infliction of emotional distress.