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California Court of Appeal Reverses Trial Court Decision Holding That State Law Requiring Disclosures on Convenience Checks is Preempted
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.
Georgia Increases Mortgage Closing Fees
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.
New York Federal Court Holds Homeowners Protection Act Preempts State Deceptive Trade Practices Claim
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.
Arizona Enacts Legislation Requiring Lenders to Contact Certain Borrowers to Discuss Foreclosure Avoidance
On May 11, Arizona Governor Janice Brewer signed into law H.B. 2626, a bill requiring a lender to attempt to contact any borrower whose mortgage is secured by the borrower’s principal residence to discuss foreclosure avoidance options at least 30 days before the recording of a notice of trustee’s sale. The requirement applies only to those properties with a first deed of trust recorded between January 1, 2003 and December 31, 2008. Loans made, purchased, or serviced by a state or local public housing agency or authority, loans which are collateral for securities purchased by such agencies or authorities, certain de minimum lenders, as well as lenders that are in compliance with the U.S. Department of Treasury Home Affordable Modification Program, are exempt from the requirement. The bill becomes effective July 28, 2010.
Vermont Law Regulates Disclosures for Trigger Lead Solicitations
On May 10, Vermont Governor Jim Douglas signed HB 622, which will require increased disclosures for mortgage loan “trigger lead” solicitations. The legislation requires that solicitors disclose (i) that they are not affiliated with a consumer’s financial institution, (ii) that the financial institution did not supply the consumer’s personal or financial information, and (iii) who will be paid for the trigger lead. The bill authorizes financial institutions that are misrepresented through a trigger lead solicitation to bring an action against the solicitor for damages and attorneys’ fees. The law will take effect July 1, 2010.
Maryland Attorney General Settles with Payment Processing Company for Allegations It Failed to Properly Dispose of Consumer Information
On May 10, Maryland Attorney General Douglas Gansler announced a settlement with a payment processing company (MAP, LLC) and two of its officers for allegedly violating the Maryland Personal Information Protection Act by failing to take “reasonable” steps to protect consumer information when it discarded sensitive consumer information (e.g., Social Security Numbers, cancelled checks, etc.) in a public dumpster. According to the statement, no consumer information was actually compromised. Under the settlement, the company and officers (i) deny any liability, (ii) will take reasonable steps to dispose of the information (and will continue to take reasonable steps to dispose of consumer information in the future), and (iii) will pay a $20,000 penalty.
Texas Federal Court Declines to Exercise Jurisdiction over Real Estate Settlement Service Case
On May 10, the U.S. District Court for the Southern District of Texas granted a motion to remand a lawsuit alleging the payment of kickbacks in connection with real estate settlement services despite the warranty service provider’s allegations that the lawsuit brought claims under the federal Real Estate Settlement Procedures Act (RESPA). American Home Shield of Texas v. Texas, No. H-10-0808, 2010 WL 1903594 (S.D. Tex. May 10, 2010). In this long-running case, the State of Texas brought a lawsuit in 2007 in state court against American Home Shield of Texas (AHS) alleging that the company, a provider of home warranties, had been paying kickbacks to real estate brokers for promoting and selling its service. The state also alleged that AHS engaged in misleading and deceptive practices. The claims were brought under the Texas Deceptive Trade Practices-Consumer Protection Act, but no claims were brought by the state under RESPA, which also prohibits the payment of kickbacks. Two related class action lawsuits making similar allegations were subsequently filed against AHS in federal court in Alabama. The state filed an objection to the settlement of one of those cases, arguing, in part, that its lawsuit should prevent the settlement of claims against Texas residents. As part of its objection, the state made “scant and ambiguous references to RESPA,” but the state did not amend its complaint in the Texas state-court action to include RESPA allegations. AHS argued that the state’s references to RESPA, along with the allegation that RESPA is a substantial and embedded issue in the state-court action, were sufficient to give rise to federal question jurisdiction. The federal court disagreed and remanded the case to state court. The federal court noted that the state was not bringing claims directly under RESPA, even though it could have, nor was resolving an issue under RESPA necessary to resolve the state-law claims. Therefore, AHS had failed to establish federal subject-matter jurisdiction.
California Federal Court Certifies Class in Forced Placement Insurance Dispute
On May 10, the U.S. District Court for the Northern District of California certified a class of plaintiffs in a case involving the forced placement of homeowner’s insurance.Wahl v. American Security Insurance Co., No. C 08-00555, 2010 WL 1881126 (N.D. Cal. May 10, 2010). In Wahl, the plaintiff borrower entered a mortgage loan agreement that required her to maintain homeowner’s insurance. Her insurance policy provided that, if she failed to pay any premium, the insurer would notify her mortgage lender and servicer of a lapse in coverage “after 60 days from and within 120 days after” the due date. The borrower failed to pay a premium, and the insurer cancelled her policy and sent a notice of cancellation to the holder of her loan less than 30 days after the missed payment. The loan holder had a force placement contract with the defendant force placement insurer that provided for force placed coverage to become effective immediately upon a lapse in the borrower’s coverage. The loan holder twice notified the borrower that it had force placed coverage and that the coverage would be more expensive than insurance that she could independently obtain, but because the borrower did not purchase her own coverage, two years of coverage were force placed. The borrower alleged, on behalf of a putative class, that the insurer (i) breached the statutory duty to disclose, (ii) engaged in constructive fraud, and (iii) violated California’s Unfair Competition Law (UCL) by force placing insurance during the 60-day grace period afforded by the borrower’s insurance policy. The court granted class certification under the UCL, finding that the borrower sufficiently alleged that the insurer acted “unfairly” under the UCL’s (i) legislative intent test, because certain statutory language showed the legislature’s intent to prohibit coercion and restraint of trade in connection with insurance transactions, and (ii) balancing test, because the “societal utility” of immediately replacing the borrower’s coverage during the 60-day period was unclear. The court, however, granted the insurer’s motion for judgment on the pleadings on the breach of statutory duty to disclose and constructive fraud claims.
Vermont Adopts Third Party Loan Servicer Licensing Law
On May 8, Vermont Governor Jim Douglas signed SB 287, a bill that will require entities to secure a license to act as a third party loan servicer for loans to Vermont borrowers. The bill defines “third party loan servicer” as “a person who engages in the business of servicing a loan, directly or indirectly, owed or due or asserted to be owed or due another.” The bill exempts various parties from licensure, including certain depository institutions and licensed lenders that retain the servicing rights on a loan originally closed in the lender’s name and are subsequently sold (in whole or in part) to a third party. The bill (i) sets forth license application and suspension procedures, (ii) requires third party loan servicers to maintain segregated accounts for borrower funds, and (iii) establishes penalties for violations of the law. The bill also defines certain loan servicer activities that constitute an unfair and deceptive act or practice under the Vermont Consumer Fraud Act (e.g., using “unfair or unconscionable” means to service a loan). The bill becomes effective January 1, 2011.
Arkansas Increases Usury Limit
Arkansas residents recently voted to increase the maximum allowable rate of interest on all loans or other financing transactions entered into within the state. The maximum allowable rate, which is set out in the state constitution, had recently been below 6% per year. Fearful that such low rates chilled business in the state, the voters approved an amendment to the Arkansas constitution that raises the maximum lawful rate of interest for federally insured depository institutions to that which is set out at 12 U.S.C. § 1831u and 17% for all other institutions. The changes become effective January 1, 2011