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Financial Services Law Insights and Observations


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  • Vermont Adopts Third Party Loan Servicer Licensing Law

    State Issues

    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

    State Issues

    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

  • California Federal Court Denies Class Cert in Dispute Alleging Predatory Lending, Deceptive Sales Tactics

    On April 23, the U.S. District for the Southern District of California denied a motion for class certification in a dispute alleging predatory lending and deceptive sales tactics against a mortgage lender. Buckley v. Countrywide Home Loans, Inc., No. 09-0064, 2010 WL 1691451 (S.D. Cal. Apr. 23, 2010). The lawsuit alleges that the lender and its affiliate engaged in a practice of predatory lending and used deceptive sales tactics in connection with their issuance of residential mortgage loans throughout the state of Washington, in violation of Washington’s Consumer Protection Act (WCPA). The borrower moved to certify a class of thousands of similarly-affected Washington homeowners. After finding that the putative class met the threshold requirements of numerosity, commonality, typicality, and adequacy of representation, the court found that the class did not meet the predominance requirement under Federal Rule of Civil Procedure Rule 23(b). The court reasoned that individualized factual questions about the lenders’ various representations during the lending process would predominate over the common issues, such that the parties were not best served through a single action. As a result, the court did not certify the class.

  • Arizona Enacts Legislation Regulating Reverse Mortgages

    State Issues

    On April 23, Arizona Governor Jan Brewer signed into law H.B. 2242, a bill that imposes several substantive requirements on borrowers and loan originators of reverse mortgage loans. With respect to mortgage loan originators, the law sets out a number of requirements throughout the lending process. First, prior to accepting a borrower application, loan originators must (i) provide the borrower with a list containing several housing counseling agencies, and (ii) collect certification of counseling from the borrower. Next, at least 10 days prior to closing, loan originators must inform borrowers that their liability under a reverse mortgage is limited and explain to borrowers their rights, obligations, remedies with respect to (i) temporary absences from the home, (ii) the consequence of late payments and payment defaults, and (iii) all conditions requiring satisfaction of the reverse mortgage obligation. Finally, before closing, loan originators must disclose (i) all costs charged by the originator, specifying which charges are required and which charges are discretionary, (ii) all terms and provisions with respect to insurance, repairs, alterations, payment of taxes, default reserve, delinquency charges, foreclosure proceedings, anticipation of maturity and any additional and secondary liens, (iii) the projected total cost of the reverse mortgage based on the projected total future loan balance for at least two projected loan terms, and (iv) any interest rate or other fees that the originator will charge during the period between when the reverse mortgage is due and payable and when repayment is made in full. In addition, the law prohibits loan originators from assessing prepayment penalties and requiring borrowers to purchase life insurance (or similar product) as a condition for obtaining the reverse mortgage loan. Finally, the law requires borrowers to obtain counseling from a U.S. Department of Housing and Urban Development-approved housing counselor within six months of applying for a reverse mortgage.

  • North Carolina Approves New Foreclosure Prevention Rules

    State Issues

    On April 22, the North Carolina Rules Review Commission announced new rules aimed at reducing and delaying foreclosures by non-depository mortgage servicers licensed by the North Carolina Office of the Commissioner of Banks (NCCOB). Rule 702 requires a licensed mortgage servicer to promptly and clearly respond to homeowner requests for assistance. Specifically, a licensed mortgage servicer must (i) acknowledge a borrower’s loss mitigation request within 10 business days after the request, (ii) respond to borrower’s loss mitigation request within 30 business days after the receipt of a complete application, and (iii) provide certain information in final responses denying loss mitigation requests. Rule 703 requires a mortgage servicer to halt foreclosure efforts pending consideration of a request by the homeowner for assistance; however, the rule enumerates several exceptions. For example, foreclosure efforts may proceed if the mortgage servicer has provided a final response regarding loss mitigation within the last 12 months and reasonably believes that the current loss mitigation request was not made in good faith. While the rules apply only to non-bank mortgage servicers, in its press release the NCCOB indicated that it hopes that bank servicers will adopt similar procedures. The rules take effect June 1, 2010. 

  • West Virginia Federal Court Rejects HOLA Preemption of Certain State Law Claims Pertaining to Late Charges

    State Issues

    On April 19, the U.S. District Court for the Northern District of West Virginia held that the Home Owner’s Loan Act (HOLA) does not preempt certain state law claims pertaining to late charges made by a federal thrift. Padgett v. OneWest Bank, FSB, No. 3:10-cv-08, 2010 WL 1539839 (N.D.W. Va. Apr. 19, 2010). In a prior bankruptcy, the plaintiff borrower and his lender filed an agreed order treating the borrower as current and moving his one month arrearage to the end of his loan obligation. The defendant, a federal thrift, acquired that lender and allegedly began to treat the borrower as one month late, charging him late fees and reporting his account as delinquent. The borrower sued the federal thrift for, among other things, violations of the West Virginia Consumer Credit and Protection Act (WVCCPA) and breach of contract for the alleged assessment of late charges and for defamation for the alleged improper credit reporting. The federal thrift argued that HOLA preempted the borrower’s claims, however, the court denied the motion to the extent it sought to preempt the borrower’s WVCCPA and breach of contract claims based on the late charges. According to the court, these claims were not preempted because they did not seek to regulate the terms of the loan agreement – an action that HOLA would preempt – but instead sought to hold the federal thrift to the terms of that agreement. The court also denied the federal thrift’s motion with respect to the claims of defamation. Relying on In re Ocwen Loan Servicing, LLC Mortg. Servicing Litig., 491 F.3d 638 (7th Cir. 2007), the court held that the “common law claim of defamation is ‘a good example of [a] claim that the [HOLA] does not preempt,’” noting that HOLA does not deprive a defamed consumer his basic state common law remedy. According to the court, “prohibiting . . . federal savings banks from defaming consumers certainly has no more than an incidental effect on lending operations.”

  • Hawaii Enacts Legislation Prohibiting Requirement for Foreclosure Buyer to Use Particular Vendors

    State Issues

    On April 19, Hawaii Governor Linda Lingle signed into law S.B. 2910, a bill providing that a foreclosing or acquiring mortgagee may not require a buyer to purchase title insurance or escrow services from a particular vendor in connection with a judicial foreclosure or foreclosure by power of sale. The bill provides that a buyer may agree to use a title insurer or an escrow agent recommended by the foreclosing or acquiring mortgagee if the buyer is first provided with written notice of his or her right to make an independent selection of title insurance or escrow services. The bill becomes effective July 1, 2010.

  • Maryland Enacts Foreclosure Mediation Law

    State Issues

    On April 13, Maryland Governor Martin O’Malley signed a law (H.B. 472) giving homeowners the right to mediate foreclosure with a neutral third party and requiring lenders to conduct loss mitigation analyses before foreclosing home loans. The law applies to 1-4 family residential properties occupied as the borrower’s primary residence and is effective July 1, 2010.

    Under the law, a lender must offer a loss mitigation application to a borrower in connection with the statutory notice of intention to foreclose; if mitigation is denied, the homeowner can request foreclosure mediation from the Maryland Office of Administrative Hearings. The lender cannot file for foreclosure until at least 45 days after the notice of intent to foreclose is sent to the borrower with the required loss mitigation application. Following completion of the loss mitigation analysis, the lender cannot foreclose for 30 days. If the borrower requests mediation, the lender cannot foreclose until at least 15 days after mediation.

    The law also creates a Housing Counseling and Foreclosure Mediation Fund that will be funded with fees imposed under the new law (the law sets a $300 foreclosure filing fee supplement for lenders and a $50 mediation request fee for property owners). The fund will (i) support housing counselors, (ii) provide legal assistance to homeowners trying to avoid foreclosure, (iii) support nonprofit housing counseling agencies, (iv) help the state advise homeowners facing financial difficulties, and (v) assist in funding the cost of foreclosure mediation.

  • California Federal Court Holds FTC Holder Rule Does Not Require Lenders, Creditors to Provide Holder Notice; NBA Preempts Certain California UCL Claims

    State Issues

    On April 12, the U.S. District Court for the Northern District of California held that (i) the Federal Trade Commission’s (FTC) Holder Rule does not require lenders or creditors to include the FTC Holder Notice in consumer credit contracts when the seller has failed to do so, and (ii) the National Bank Act (NBA) preempts certain California Unfair Competition Law (UCL) claims in connection with the failure for a national bank to include the FTC Holder Notice. Kilgore v. Keybank, N.A., Case No. C-08-2958, 2010 WL 1461577 (N.D. Cal. Apr. 12, 2010). In this putative class action, the defendant bank was the partner and preferred lender for an educational institution that became bankrupt. The borrowers alleged that they took out loans from the bank to pay for tuition but were unable to complete their studies because the institution declared bankruptcy. The borrowers brought six claims under the UCL and sought to enjoin the bank from collecting on the loans. The borrowers alleged that its service contracts with the educational institution and the promissory notes with the bank were both consumer credit contracts and omitted the Holder Notice, which the borrowers argued was required. The court first held that the bank was not required to provide the Holder Notice because it was the lender, not a seller, in the transaction. The court reasoned that the Holder Rule imposes obligations only on sellers: “[a]lthough a seller violates the Holder Rule by taking a consumer credit contract – or by accepting proceeds of a purchase money loan made pursuant to a contract – that omits the notice, the same cannot be said of a lender or creditor.” The court also dismissed the borrowers’ fraud claim because it did not properly plead that the bank breached a duty to disclose, as required by the UCL. Next, the court held that the NBA and Office of the Comptroller of the Currency (OCC) regulations preempted several remaining UCL claims against the bank. The court concluded that enjoining the lender from enforcing the notes, based on alleged violations of the UCL, because the borrowers would have had a defense to payment if the Holder Notice had been included, would contravene OCC regulations by allowing the plaintiffs to use state law to alter the terms of credit in the bank’s promissory notes. As stated by the court, “[p]laintiffs’ theory would deploy the UCL to require [the national bank] to comply with a federal regulation that does not itself require [the national bank’s] compliance. Abiding by the Holder Rule would directly affect the terms of credit extended by [the national bank], infringing on a power that national banks are meant to exercise free from state authority.”

  • U.S. Supreme Court Holds Federal Law Restricts State Authority to Limit Availability of Class Actions

    State Issues

    On March 31, the U.S. Supreme Court ruled that state laws barring class actions cannot override the Federal Rules of Civil Procedure (FRCP), which determine when a class action lawsuit may be filed in federal court. Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., No. 08-1008, 2010 WL 1222272 (U.S. Mar. 31, 2010). At issue was a New York state law that does not allow class actions that seek a penalty as part of the remedy and its conflict with FRCP Rule 23, which does not impose this restriction; thus, the FRCP and New York state law conflicted as to whether the class action in this case could proceed. The case turned on whether the New York rule was “substantive,” and would therefore apply to federal courts considering cases based on diversity jurisdiction, or “procedural,” and would therefore infringe upon the FRCP to the extent that the state and federal rules conflicted. The lower federal courts held that the state rule controlled and dismissed the suit for lack of jurisdiction, reasoning that Rule 23 is only a procedural rule and that the New York law limiting the remedy is substantive. In a 5-4 decision, the U.S. Supreme Court reversed and remanded, holding that, because the New York law and Rule 23 were directly contradictory and both seek to determine whether a class action lawsuit may be filed in federal court, the New York law did not override Rule 23. Justice Scalia, writing for the court, stated that “Rule 23 unambiguously authorizes any plaintiff, in any federal civil proceeding, to maintain a class action if the Rules’ prerequisites are met. We cannot contort its text, even to avert a collision with state law that might render it invalid.” While a majority of justices held that the New York rule may not bar this particular class action, the opinion was splintered on the issue of whether federal procedural rules would always trump state procedural rules in diversity cases.


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