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Financial Services Law Insights and Observations

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  • Arizona Supreme Court Holds Beneficiary Does Not Have to Prove Right to Foreclose

    Lending

    On May 18, the Arizona Supreme Court held that the beneficiary under a deed of trust need not prove the right to foreclose prior to initiating non-judicial foreclosure proceedings. Hogan v. Washington Mutual Bank, N.A., No. CV-11-0115, 2012 WL 1835540 (Ariz. May 18, 2012) (en banc). In Hogan, the borrower argued that the beneficiary could not foreclose without first proving the right to collect under the note. The court rejected this argument and stated that Arizona’s non-judicial foreclosure statute did not require the beneficiary to prove ownership of the note prior to foreclosure. The court also rejected the borrower’s argument that the trustee was required to comply with Arizona’s codification of the UCC because the Arizona UCC does not apply to liens on real property. Finally, the borrower claimed that the proper note-holder could later pursue a second collection for the same debt if the beneficiary was not entitled to prove ownership of the note. The court rejected this reasoning because Arizona law does not permit deficiency judgments against debtors with foreclosed residential property similar to that of the borrower (i.e., 2.5 acres or less). The court concluded by noting that the “[Arizona] legislature balanced the concerns of trustors, trustees, and beneficiaries in arriving at the current statutory process,” and to hold otherwise would upset the legislature’s purpose.

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  • Colorado Division of Real Estate Clarifies Mortgage Company Registration Exemptions

    Lending

    On May 22, the Colorado Division of Real Estate issued a position statement concerning exemptions from registration as a Mortgage Company. The position statement clarifies the applicability of an exemption to registration that is available to entities including wholesale lenders, private mortgage insurance companies that provide contract underwriting services, and lead generating companies.

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  • Tennessee Enacts Legislation Requiring Reasonable Basis to File Liens

    Lending

    On May 15, Tennessee enacted SB2980, a bill that established provisions relating to liens on real or personal property. Under the bill, it is a misdemeanor to knowingly prepare, sign, or file any lien or other document intended to encumber real or personal property without a reasonable basis for doing so. The bill becomes effective on July 1, 2012.

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  • Federal Reserve Establishes Securities Holding Companies Registration Procedures

    Securities

    On May 30, the Federal Reserve Board issued a final rule that establishes procedures for nonbank companies that own at least one registered securities broker or dealer to register for supervision by the Federal Reserve Board as a securities holding company (SHC). The Dodd-Frank Act eliminated supervision of SHCs by the SEC and provided SHCs with the ability to seek supervision by the Federal Reserve Board to satisfy the requirements of foreign regulators or foreign law that companies be subject to consolidated supervision in the United States. The final rule includes capital and financial condition requirements and specifies other information necessary for registration. Once registered, an SHC would be supervised and regulated as if it were a bank holding company. However, the restrictions on nonbanking activities in section four of the Bank Holding Company Act would not apply to the supervised SHC.

    Federal Reserve SEC

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  • Freddie Mac Announces Use of House Finance Agency Funds Eligible for Certain Relief Refinance Mortgages Payments

    Lending

    On May 24, Freddie Mac announced that, effective immediately, the use of “Hardest Hit Fund” (HFF) program funds by a state Housing Finance Agency may be applied to a Relief Refinance Mortgage if the funds do not result in a lien on the property and are used to (i) pay down or curtail the outstanding mortgage balance on a borrower’s existing loan at the time of refinancing, and/or (ii) pay closing costs, financing costs and prepaids/escrows. When HFF funds are used for these purposes, the mortgage file must contain documentation verifying the terms and conditions of the HHF funds, and the HHF funds must be reflected on the HUD-1. When repayment of funds is required, the verified payment generally must be included in the monthly debt payment-to-income ratio, unless the calculation of debt payment-to-income ratio is not required or repayment of funds is due only upon sale or default.

    Freddie Mac

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  • New York Thrift Charged with Mortgage Fraud by Manhattan District Attorney

    Lending

    On May 31, the Manhattan District Attorney’s Office (DA) announced charges against Abacus Federal Savings Bank (Bank) and nineteen of its former employees for their alleged involvement in a securities and mortgage fraud scheme from 2005 to 2010 that resulted in the sale of “hundreds of millions of dollars worth of fraudulent loans” to Fannie Mae. The DA charged the Bank with allegedly falsifying mortgage application documents, primarily for immigrants working in cash-only businesses, by inflating their income, assets, and job titles, as well as falsifying employment verifications and other income sources to meet investor guidelines to enable the Bank to sell loans to Fannie Mae. The Office of the Comptroller of the Currency, the Internal Revenue Service, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, and Office of the Inspector General provided assistance and cooperation with the investigation as part of their participation in the Residential Mortgage-Backed Securities Working Group.

    FDIC Fannie Mae OCC

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  • CFPB Delays Release of "Ability-to-Repay" Rule

    Lending

    On May 31, the CFPB announced that it has reopened the comment period for the proposed “ability-to-repay” rule that would require creditors to verify a consumer’s ability to repay prior to making a consumer credit transaction secured by a dwelling. The rule would also define a “qualified mortgage” that has a presumption of compliance with the ability-to-repay requirement. The CFPB is specifically seeking comments on new loan data provided to the CFPB by the Federal Housing Finance Agency. According to the CFPB, the loan data, which contains loan-level information on the characteristics and performance of all single-family mortgages purchased or guaranteed by Fannie Mae and Freddie Mac, can be used to analyze the impact of certain variables on a consumer’s ability to repay such as debt-to-income ratio. The CFPB is also seeking comments regarding the potential risk of litigation in connection with the proposed rule. The CFPB specifies that it has not reopened for comment any other aspect of the proposed rule. Comments are due by July 9, 2012. In its press release, the CFPB states that it expects to issue its final rule before the end of 2012. For more information on the proposed rule, see InfoBytes, Apr. 22, 2011.

    CFPB Freddie Mac Fannie Mae Qualified Mortgage

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  • Seventh Circuit Holds TCPA Prohibits Automated Calls to Cell Phones without Consent from Current Subscriber

    Courts

    On May 11, the U.S. Court of Appeals for the Seventh Circuit held that the Telephone Consumer Protection Act (TCPA) requires consent from a current cell phone subscriber to receive automated calls – even if a former subscriber to the same number had previously given consent to be contacted. Soppet v. Enhanced Recovery Company, LLC, No. 11-3819, 2012 WL 1650485 (7th Cir. May 11, 2012). The court affirmed a district court decision certifying a class of consumers who alleged that their cell phones were automatically dialed in violation of TCPA. The defendant debt collectors argued that it was not a violation of the TCPA to call a cell phone number if a previous subscriber to that number had given the consent required by the TCPA because the previous subscriber was the “intended recipient” of the call. The court rejected this argument because, even though the TCPA does not define who the “called party” is that must consent to be contacted, its use throughout the TCPA indicates that “called party" refers to the currently subscribed cell phone user, and not to any previous user.

    Privacy/Cyber Risk & Data Security

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  • U.S. Supreme Court Unanimously Rules That RESPA Does Not Prohibit Unearned, Unsplit Fees

    Lending

    On May 24, the U.S. Supreme Court unanimously held that section 8(b) of the Real Estate Settlement Procedures Act (RESPA) is violated only if a charge for settlement services is divided between two or more persons and that the section does not cover the collection of an unearned, unsplit fee by a single settlement service provider. Freeman v. Quicken Loans, Inc., No. 10-1042, 2012 WL 1868063 (U.S. May 24, 2012). Plaintiffs had alleged that their lender charged them loan discount fees but did not provide a lower interest rate in return. Plaintiffs claimed that charging these fees violated section 8(b) of RESPA, arguing that RESPA may be violated even when only one party receives an unearned fee and not only where a fee is split between two parties. Plaintiffs cited a 2001 HUD Policy Statement declaring that a settlement service provider may violate section 8(b) when it receives an unearned fee. The defendant lender countered that HUD’s interpretation should be afforded no deference. The Supreme Court, in an opinion written by Justice Antonin Scalia, held that section 8(b) “unambiguously covers only a settlement-service provider’s splitting of a fee with one or more other persons; it cannot be understood to reach a single provider’s retention of an unearned fee.” The Court struck down HUD’s interpretation, finding that HUD’s position “is manifestly inconsistent with the statute HUD purported to construe,” and that, because HUD’s Policy Statement “goes beyond the meaning that the statute can bear,” it was not necessary to determine whether HUD’s position was due Chevron deference. The Court’s opinion affirmed the underlying decision from the Court of Appeals for the Fifth Circuit and resolved a split among the judicial circuits. The Second, Third and Eleventh Circuits previously had held that section 8(b) did apply to unearned fees retained by a single person.

    U.S. Supreme Court

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  • RMBS Working Group Announces Web Site, Formation of Coordination Team

    Securities

    On May 24, the Residential Mortgage-Backed Securities (RMBS) Working Group announced the launch of a new web site to facilitate the reporting of RMBS fraud, as well as the formation of a coordination team “to facilitate various investigations underway around the country.” For more information on the RMBS working group, see InfoBytes, Jan. 27, 2012.

    RMBS

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