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  • Ninth Circuit Holds Higher Education Act Preempts Claims Against Student Loan Servicer

    State Issues

    On January 25, the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s decision that the Higher Education Act (HEA) preempted California’s business, contract, and consumer protection laws in a putative class action challenging certain Sallie Mae loan servicing practices. Chae v. SLM Corp., No. 08-56154, 2010 WL 253215 (9th Cir. Jan. 25, 2010). In Chae, Sallie Mae serviced various educational loans that the plaintiffs originated with from several lenders. The plaintiffs alleged that Sallie Mae violated California law by (i) using the “daily simple interest” or “simple daily interest” method to calculate interest, (ii) charging late fees, and (iii) setting the first repayment date on certain loans within 60 days while also charging interest during that period, so as to “deceptively increase[] the cost and life span of the loan.” The Ninth Circuit concluded that express preemption and conflict preemption barred the claims of the putative class. According to the court, the plaintiffs’ allegations were prohibited, in part, by the express preemption provision of the HEA. The court held that the remaining claims were preempted because they conflicted with congressional purposes and objectives to promote the funding of student loans. The court noted that the plaintiffs are not left without redress. It explained that the Department of Education (DOE) has the power to initiate informal compliance procedures against a third-party servicer that is the subject of a complaint, file a civil suit again the servicer, impose civil penalties, or terminate the servicer’s participation in the student loan program.

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  • California Federal Magistrate Judge Grants Class Certification in TILA Case Against Mortgage Broker

    State Issues

    On January 22, a California federal magistrate judge granted class certification in a case against a California mortgage broker accused of fraud (based on concealment of relevant facts) and of violating the federal Truth in Lending Act (TILA) and California’s Unfair Competition Law. Lymburner v. U.S. Fin. Funds, Inc. No. C-08-00325 (N.D. Cal. Jan. 22, 2010). The plaintiff, who obtained an IndyMac Bank 5-year fixed payment adjustable rate mortgage from the defendant mortgage broker in November 2006, alleged that the loan closing documents omitted certain information regarding interest rates and the applicability of negative amortization. In certifying the class, the judge determined that there was a class of as many as 121 borrowers, all with common issues of fact regarding disclosures in the loan documents. The court rejected the defendant’s argument that the claims of the proposed class were not “typical” because the availability of rescission would have to be examined individually for each class member. Additionally, the court found that there were common questions of law and fact predominant among the class members because (i) regarding the TILA claim, there was only one version of the loan documents, and (ii) regarding the fraud claim, the allegations regarded the disclosures on the loan documents of all of the class members – not individual representations made about the disclosures. Additionally, the court rejected the defendant’s argument that the plaintiff’s claims were subject to an “unclean hands” defense because the plaintiff misstated her income on the loan application. The court reasoned that the presence of this possible defense was not a basis to deny class certification.

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  • California Federal Court Dismisses Suit Challenging Rejection of Modification Request

    State Issues

    On January 20, the U.S. District Court for the Northern District of California dismissed various state law claims challenging a lender’s refusal to refund a $750 fee it charged to consider a loan modification request that it eventually denied. Stevens v. JPMorgan Chase Bank, N.A., No. 09-03116 (N.D. Cal. Jan. 20, 2010). In the case, plaintiff contacted defendant to obtain a loan modification. According to plaintiff’s allegations, defendant responded that plaintiff would “likely” qualify and that the “only obstacle” would be a subsequent appraisal of the property that did not support the value of the loan. Defendant allegedly charged plaintiff $750 to cover the cost of an appraisal, title search and processing. When the appraisal indicated that the value of the home was substantially lower than the amount of the loan, defendant denied the modification request and refused to reimburse the $750 fee. Plaintiff sued, asserting various state law claims, including violations of the California Unfair Competition Law (UCL), false advertising, fraud, negligent misrepresentation, and breach of the implied covenant of good faith and fair dealing. Each of the claims was based on the alleged representation that plaintiff was “likely” to qualify for a loan modification. Plaintiff also pointed to a report issued by the U.S. Department of Treasury (Treasury), which indicated that defendant had approved modifications for only 20% of its loans, suggesting that the statement that a modification was “likely” was fraudulent, misleading, and unfair and deceptive. The court dismissed each claim, but permitted the plaintiff leave to amend. According to the court, the complaint failed to state any claim because, among other things, it did not allege that defendant guaranteed a loan modification or that the fee would be reimbursed. The court also found that the nationwide modification statistics in the Treasury’s report were irrelevant to the possible success of plaintiff’s individual loan modification.

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  • Second Circuit Holds New York Champerty Statute Not a Bar to Trust’s Lawsuit Against Loan Originator

    State Issues

    On January 11, the U.S. Court of Appeals for the Second Circuit held that a trust’s acquisition of rights to sue a loan originator for breach of a loan purchase agreement did not violate the New York Champerty Statute, and therefore was not barred by the affirmative defense of champerty. Trust for the Certificate Holders of the Merrill Lynch Mortg. Investors, Inc., v. Love Funding Corp., No. 07-1050-cv, 2010 WL 59276 (2nd Cir. Jan. 11, 2010). In this case, a trust sued the originator of a defaulted mortgage for breach of the representations and warranties made in the loan purchase agreement. The lawsuit came after the trust reached a settlement with the entity that purchased the loan from the originator and assigned it to the trust. As part of the settlement, the trust acquired the rights of the assignor as against the originator. In the instant case, despite having granted summary judgment in favor of the trust on its claims of breach of contract, the district court found that the trust’s claims were barred by the New York champerty statute because “the Trust’s primary purpose in accepting the Assignment was to buy a lawsuit against [the originator].” The trust appealed and the Second Circuit certified questions about the New York champerty statute to the New York Court of Appeals. In response, the New York Court of Appeals clarified that the champerty statute “does not apply when the purpose of an assignment is the collection of a legitimate claim,” and therefore “if a party acquires a debt instrument for the purpose of enforcing it, that is not champerty simply because the party intends to do so by litigation.” According to the New York Court of Appeals, “if, as a matter of fact, the Trust’s purpose in taking assignment of [the assignor’s] rights under the [originator’s loan purchase agreement] was to enforce its rights, then, as a matter of law, given that the Trust had a preexisting proprietary interest in the loan, it did not violate [the New York champerty statute].” Accepting the New York Court of Appeals’ answer, and noting that, even before the prior settlement, “the Trust had a significant interest in the repayment of the [defaulted loan],” the Second Circuit held that the evidence on the record did not allow, as a matter of law, for a finding that the assignment was champertous. Accordingly, the Second Circuit reversed the judgment of the district court and remanded the case for entry of judgment in favor of the trust.

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  • Texas Court of Appeals Upholds 3% Cap On All Lenders’ Fees on Home Equity Loans

    State Issues

    On January 8, the Texas Court of Appeals upheld a trial court’s ruling that "fees" that are considered "interest" under Texas usury law are subject to the 3% fee cap for home equity loans contained in the Texas constitution. Texas Bankers Ass’n. v. Ass’n. of Community Organizations for Reform Now, No. 03-06-00273-CV, 2010 WL 4587 (Tex. App. Jan. 8, 2010). The case arose after the Finance Commission of Texas and the Credit Union Commission of Texas (collectively, the Commissions) issued a rule interpreting Article 16, section 50(a)(6)(E) of the Texas Constitution. This section restricts the total amount of fees, other than interest, that can be charged on home equity loans to 3%. In interpreting the section, the Commissions stated that the term “interest” mirrored the definition of interest in Texas usury laws. As a result, the Commissions’ regulations permitted certain types of fees to avoid the 3% cap. The Association of Community Organizations for Reform Now (ACORN) challenged the Commissions’ interpretation under the Texas Administrative Procedures Act, arguing that it contradicted the Constitutional provision’s plain meaning. Instead, ACORN advocated a strict definition of interest that would include only the amount of interest described in the promissory note and would exclude fees. Both the trial court and the Texas Court of Appeals agreed. In upholding the lower court, the Court of Appeals reasoned that the Commissions’ interpretation (i) would render the Constitutional cap meaningless, because it would exclude nearly all fees charged by lenders, and (ii) conflicted with legislative intent. As a result, the court affirmed the invalidation of the regulations.

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  • Lawsuits Allege Banks Did Not Maintain “Commercially Reasonable” Data Security Systems

    State Issues

    Recently, data security breaches at banks in Texas and Maine have resulted in two separate lawsuits (see here and here) alleging that the banks did not maintain “commercially reasonable” data security systems. PlainsCapital Bank v. Hillary Mach. Inc., No. 4:09-cv-00653 (E.D. Tex. Dec. 31, 2009). Patco Constr. Co. Inc. v. People’s United Bank, No. 2:09-CV-00503 (D. Maine Feb. 2, 2010). In PlainsCapital, a Texas bank approved an $800,000 transfer request from the account of a machining company. The transfer was discovered to be fraudulent and, though the bank was able to recover nearly three-quarters of the transferred funds, the machining company sent a letter to the bank arguing that the bank was liable for the remaining funds, because it failed to maintain “commercially reasonable security measures” in its internet banking system. Shortly after receiving the letter, the bank filed a complaint in the Eastern District of Texas seeking a declaratory judgment that its security measures are “commercially reasonable” within the meaning of §§ 4A-201 and 4A-202 of the Uniform Commercial Code (UCC). In Patco, a construction company sued a Maine bank after the bank allowed a fraudulent transfer of $588,581 from the company’s account. In its complaint, the construction company alleged, among other things, (i) that the bank failed to maintain “commercially reasonable” data security, as required by § 4-1204 of Maine’s version of the UCC, because the bank employed single factor user authentication, instead of multi-factor user authentication as recommended by the Federal Financial Institutions Examination Council’s online banking security standards guidance, and (ii) set an unreasonably low threshold for the challenge question for authentication of customer passwords. In its answer, the bank argued that the construction company was contributorily negligent because it failed to perform daily monitoring of its account, as required by its eBanking agreement and Automated Clearing House transfer of funds contract with the bank.

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  • Pennsylvania Department of Banking Issues Reverse Mortgage Policy

    State Issues

    The Pennsylvania Department of Banking (the Department) recently issued a policy statement to provide guidance to licensees regarding the proper conduct of making, originating or servicing reverse mortgage loans and to inform licensees of the proper use of, and risks associated with, reverse mortgage loans. Because most reverse mortgages are marketed to elderly consumers, the Department’s policy addresses concerns that these consumers may be victimized by poor advice or outright fraud. The Department is also concerned that licensees may not be fully cognizant of the propriety of, and the necessary practices required to protect consumers who use, reverse mortgage loans. And the Department is particularly concerned about the special financial risks associated with proprietary reverse mortgage loans because they are not insured by the Federal government and are not required to follow the standards and requirements mandated by the Federal Housing Administration to obtain Federal insurance. The areas addressed by the policy statement are (i) the financial strength of the licensee lender, (ii) the content of reverse mortgage loan agreements, (iii) the procedures regarding reverse mortgage loan origination, (iv) the consequences of a reverse mortgage loan for a non-borrower spouse, (v) conflicts of interest, (vi) a prohibition on offering unsuitable reverse mortgage loans, (vii) servicing obligations, (viii) an applicant’s mental capacity, and (ix) power of attorney. There are no new regulatory requirements as a result of the policy statement. 

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  • Georgia Supreme Court Holds Corporations May Not Be Directly or Vicariously Liable Under Law Limiting Notary Fees

    State Issues

    The Supreme Court of Georgia recently held that a statute limiting fees for providing notarial services applies to notaries public, but does not apply directly or vicariously to corporations employing notaries public. Anthony v. American General Financial Services, Inc., 2010 WL 2553586, No. S10Q0203 (Ga. June 28, 2010). The plaintiffs sought to recover a $350.00 notary fee charged by the defendant lender to refinance a mortgage loan that allegedly exceeded the statutory maximum permitted by OCGA § 45-17-11(b). The court first found that corporations employing notaries public are not directly liable under the statute because the relevant statutory text makes it "clear that consumers were directly protected against ‘notary publics,’ not anyone else[,]" and also because "a corporation cannot serve as a notary public." The court next found that a corporation may not be held vicariously liable for the acts of a notary public employed by the corporation because a notary acting in his or her official capacity is a public officer, and the private employer has no control over the performance of his or her notarial duties. The court did find, however, that a corporation may be held liable where it "procures or otherwise qualifies as a party to or participant in such a violation by a[] notary." Other holdings by the court were that (i) a private civil cause of action does not arise under OCGA § 45-17-11 against a corporation employing notaries public to recover notarial fees paid in excess of, and without notice of, the statutorily-prescribed maximum notary fee, (ii) recovery under a breach of contract claim for notarial fees paid in excess of, and without notice of, the statutorily-prescribed maximum notary fee when the actual fee charged was clearly specified in the contract as being "reasonable and necessary" is not barred by the voluntary payment doctrine, and (iii) the statutes of limitations on claims of fraud and on claims of money had and received are not tolled when notarial fees are collected in excess of, and without notice of, the statutorily-prescribed maximum notary fee when the actual fee charged was clearly specified in the contract as being "reasonable and necessary." 

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  • Michigan Amends Mortgage Loan Originator Surety Bond Requirements

    State Issues

    Recently, Michigan enacted Senate Bill 1525 to modify the surety bond requirements for mortgage loan originators. The bill allows a mortgage company to submit one surety bond to cover all of the company’s individual mortgage loan originators, based on the principal amounts of loans originated by all loan originators. Previously, individual bonds for each loan originator were required. The bill is effective immediately.

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  • Sixth Circuit Finds State Debt Collection Laws Not Preempted by National Bank Act

    State Issues

    On December 14, the U.S. Court of Appeals for the Sixth Circuit, in a plaintiff-garnishors’ lawsuit alleging a defendant bank had improperly garnished funds to satisfy certain service fees, affirmed the dismissal of plaintiffs’ claims (2-1) and held: (i) the National Bank Act ("NBA") does not preempt general state debt collection laws, including laws regulating banks’ rights to collect debts, but (ii) on the other hand, the NBA’s grant of authority to banks to charge and collect fees preempted plaintiffs’ specific state-based conversion claim. See Read Monroe Retail, Inc. v. RBS Citizens, N.A., No. 07-4263 (6th Cir. Dec. 14, 2009). The Court also vacated the district court’s characterization of service fees as setoffs, further holding that the doctrine of setoff "applies only when banks use customers’ funds to satisfy an ‘independent contract’ and external debt to the bank." In dissent, the minority argued that the garnishment law at issue was one of general applicability that only incidentally affects national banks and thus, the NBA should not preempt plaintiffs’ claims.

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