InfoBytes Blog

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

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

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

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

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

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

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.