Ohio Supreme Court Decides A Defectively Executed Recorded Mortgage Acts As Constructive Notice to the World (Including Bankruptcy Trustees)

By: Chrissy Dunn Dutton

The Ohio Supreme Court recently issued its decision in In re Messer, Slip Opinion No. 2016-Ohio-510, holding that a defectively executed recorded mortgage acts as constructive notice of that mortgage to the world.

In the opinion, the Court decided the following two questions of state law, which were certified from bankruptcy court: (1) whether R.C. 1301.401 applies to all recorded mortgages in Ohio; and (2) whether R.C. 1301.401 acts to provide constructive notice to the world of a recorded mortgage that was deficiently executed under R.C. 5301.01.

The court unanimously answered yes to both questions.

R.C. 1301.401(A) and 1301.401(C) provide that the recording of certain documents with the county recorder is constructive notice “to the whole world of the existence and contents of [the] document as a public record and of any transaction referred to in that public record…” and that “[a]ny person contesting the validity or effectiveness of any transaction referred to in a public record is considered to have discovered that public record and any transaction referred to in the record” as of the date and time of recording.

R.C. 5301.01, which sets forth the requirements for a mortgage in Ohio, provides, in relevant part, that a mortgage shall be signed by the mortgagor and the signing shall be acknowledged by the mortgagor in front of an appropriate state official who shall certify the acknowledgement and subscribe the official’s name to the certificate of the acknowledgment.

The notary acknowledgment on the mortgage at issue was left blank, providing no indication as to whether the borrowers executed the mortgage in front of a notary. When the borrowers filed a Chapter 13 bankruptcy and a companion adversary proceeding, seeking to avoid the mortgage as defectively executed under R.C. 5301.01, the bankruptcy court determined that its interpretation of R.C. 1301.401 would be dispositive. However, finding no interpretation of that statute by any Ohio court, the bankruptcy court certified the questions of state law to the Ohio Supreme Court. In its order for certification to the Supreme Court, the bankruptcy judge noted that the borrowers may have been able to avoid the mortgage before O.R.C. §1301.401 was enacted. However, the court questioned whether O.R.C. §1301.401 changed this result.

The full impact of the decision remains to be seen, as the bankruptcy court has not yet issued a decision on whether the mortgage can be avoided in the underlying adversary proceeding. However the Supreme Court decision is likely dispositive of that issue. The finding that a recorded but defectively executed mortgage puts subsequent parties (including bankruptcy Trustees) on constructive notice is therefore likely to defeat avoidance actions typically brought under Sec. 544 of the U.S. Bankruptcy Code.

 

 

NINTH CIRCUIT DENIES CLASS CERTIFICATION TO BORROWERS IN LOAN MODIFICATION CASE

By: Louise Bowes Marencik

In Hanna Bernard, et al. v. CitiMortgage Inc., the Ninth Circuit held that a purported class of borrowers was not eligible for class certification in an action against CitiMortgage Inc. (“Citi”) because the individual issues related to their loan modification reviews were too numerous to justify certification under Fed. R. Civ. P. 23(b)(3). No. 13-57158 (Ninth Cir. March 2, 2016). The Plaintiffs’ brought claims for breach of contract and breach of good faith and fair dealing, wherein they claimed that Citi failed to provide timely decisions regarding permanent loan modifications to borrowers who had completed three-month trial modifications under the Home Affordable Modification Program, and also failed to honor promises to provide permanent modifications after the trial plans were completed.

The Court affirmed the United States District Court for the Central District of California’s decision that the individual issues outweighed the common issues in the purported class’ cases. Specifically, determining whether Citi’s loan modification decisions were untimely would require an inquiry into the specific facts of each borrower’s situation, including changes in income or incomplete documentation. The district court also determined that the Plaintiffs failed to provide sufficient support for their claim that class certification was justified in this case as required by Fed. R. Civ. P. 23(b)(1) because the Plaintiffs failed to adequately explain why the cases they cited supported their position that the cases could not be adjudicated individually. The Plaintiffs attempted to characterize their action as seeking declaratory relief for the first time on appeal, but the Court held that the Plaintiffs waived this issue by failing to raise it before the district court.  The Court’s decision constitutes a significant setback for the Plaintiffs, as the costs of litigating their individual cases may outweigh the amounts they could potentially recover.

California Supreme Court issues narrow holding that, post-foreclosure, borrowers have standing to assert wrongful foreclosure based on allegations that an underlying assignment is void

By: Shawnda M. Grady

On February 18, 2016, the California Supreme Court resolved a split in the Courts of Appeal and unanimously held that a mortgage loan borrower has standing to sue for wrongful foreclosure based on an allegedly void assignment.  Tsvetana Yvanova v. New Century Mortgage Corp. et al., Case No. S218973 (Cal. Feb. 18, 2016).   The Court followed the reasoning in Glaski v. Bank of America, 218 Cal.App.4th 1079 (2013), which held that foreclosure itself is sufficient prejudice for standing purposes.  The Yvanova opinion did not extend to pre-foreclosure claims, did not address whether a borrower must allege tender to state a cause of action for wrongful foreclosure, did not address what facts render an assignment void, and explicitly limited its ruling to void – not voidable – mortgage assignments.  Three additional cases currently pending before the California Supreme Court, which have not yet been briefed, also address a homeowner’s standing to assert a claim for wrongful foreclosure and have the potential to expand the Yvanova ruling.

Background
Plaintiff-borrower Tsvetana Yvanova sued her mortgage lender, New Century Mortgage Corporation (“New Century”), and others for various foreclosure-related causes of action, with a single cause of action for quiet title remaining in her second amended complaint.  Yvanova alleged that in 2006, she obtained a $483,000 loan from New Century, for which she provided a deed of trust as security.  In 2007, New Century filed for bankruptcy and was liquidated in August 2008.  In December 2011, the servicer, on behalf of New Century, executed an assignment transferring the Deed of Trust to Deutsche Bank National Trust Company (“Deutsche Bank”) as trustee for a securitized trust.  The closing date for the securitized trust was in January 2007.  In August 2012, Western Progressive LLC recorded (1) a substitution of trustee, substituting itself for Deutsche Bank, and (2) a notice of trustee’s sale.  On September 14, 2012, the property was sold at public auction by Western Progressive LLC to a third party.

Yvanova alleged the December 2011 Assignment of the Deed of Trust from New Century to Deutsche Bank was void because:  (1) New Century lacked authority to transfer the Deed of Trust in 2011, because its assets were transferred to the bankruptcy trustee in 2008, and (2) the investment trust was closed in 2007, four years before the assignment.  The superior court sustained defendants’ demurrer without leave to amend.

The Court of Appeal affirmed the judgment, concluding that Yvanova could not state a claim for quiet title, because Yvanova had not alleged tender of the amount due.  The Court of Appeal also determined that Yvanova could not, on the facts alleged, amend her complaint to state a claim for wrongful foreclosure.  The Court of Appeal reasoned that, as a third party unrelated to the assignment at issue, Yvanova was not affected by any alleged deficiencies in the assignment and, therefore, lacked standing to enforce the terms of the agreements allegedly violated.  In so ruling, the Court of Appeal declined to follow the holding of Glaski.  Yvanova petitioned for review before the California Supreme Court, which granted review on August 27, 2014.  Yvanova v. New Century Mortg. Corp., 331 P.3d 1275 (Cal. 2014).

California Supreme Court Decision
In Yvanova,  California Supreme Court limited its review to the following:  “In an action for wrongful foreclosure on a deed of trust securing a home loan, does the borrower have standing to challenge an assignment of the note and deed of trust on the basis of defects allegedly rendering the assignment void?”  Yvanova, 331 P.3d at 1275.  The Court found in the affirmative, following the reasoning in Glaski, supra,  and rejecting the holding in Jenkins v. JPMorgan Chase Bank, N.A., 216 Cal.App.4th 497 (2013), to the extent that those cases addressed a borrower’s standing to assert a post-foreclosure claim of wrongful foreclosure based on a void assignment.  Specifically, the Court found that an entity foreclosing following a void assignment of the deed of trust, as opposed to a merely voidable assignment, acts without legal authority to do so.  Under such circumstances, a borrower has standing to state a claim for wrongful foreclosure, because he or she has suffered the loss of ownership of the property.

The Court explicitly noted that its holding was limited to the issue of standing in post-foreclosure cases.  The Court did not determine whether the defects alleged by Yvanova would render an assignment void, and declined to address what facts must be alleged to demonstrate a void assignment.  The Court further declined to extend its analysis of prejudice beyond the standing context.

Additional Cases Pending Review
Three additional cases remain pending before the California Supreme Court that also address a borrower’s standing to challenge foreclosure based on allegations of a void assignment:  Boyce v. TD. Service Company, 352 P.3d 390 (Cal. 2015) (post-foreclosure action); Keshtgar v. U.S. Bank, 334 P.3d 686 (Cal. 2014) (pre-foreclosure action); Mendoza v. JP Morgan Chase Bank, 337 P.3d 493 (Cal. 2014) (post-foreclosure action).  In each of these cases, the plaintiff asserted a wrongful foreclosure claim, alleging the assignment of the subject deed of trust was void because it was reportedly transferred into a securitized trust after the trust’s closing date; in Keshtgar and Medoza, the plaintiffs also challenged the authority of the individual who executed the assignment to do so.  In each of the three cases, the Court of Appeal declined to follow Glaski v. Bank of America, 218 Cal.App.4th 1079 (2013) and instead followed the reasoning in Jenkins, supra, holding that the borrowers had no standing.  The Supreme Court deferred briefing in each of these three cases pending the Court’s disposition of Yvanova, and no further orders have been issued.

Although borrowers may attempt to rely on Yvanova to assert wrongful foreclosure claims based on allegedly void assignments, the limitations of the Court’s holding in Yvanova still permit defendants to challenge the borrower’s failure to tender, whether the underlying facts regarding the assignment render it void and whether the borrower has sufficiently alleged prejudice as an element of wrongful foreclosure.  It is not yet clear whether the Court’s anticipated disposition of Boyce, Keshtgar, and Mendoza will extend to these issues or clarify the Yvanova holding.

 

CFPB Takes Action Against Auto Seller Financing, Construes Failure to Negotiate as Hidden Finance Charge

By: Todd C. Smith

On January 21, 2016, The CFPB (the “Bureau”) issued Consent Order Y King S Corp., d/b/a Herbies Auto Sales, finding various violations of the Truth in Lending Act, 15 U.S.C. §§ 1601 et seq., and Regulation Z, 12 C.F.R. Part 1026; and the Consumer Financial Protection Act of 2010 (CFPA), 12 U.S.C. §§ 5531, 5536. (2016-CFPB-0001 (Jan. 16, 2016).) Among other violations, the Bureau found that Herbies Auto Sales (“Herbies) failed to accurately disclose the finance charge and annual percentage rate for financing agreements, as well as certain costs and discounts that should have been construed as finance charges. Cash purchasers were notably exempt from many of these costs. The Bureau also found that Herbies took unreasonable advantage of consumers, who were unable to protect their interests in selecting and obtaining financing for used car purchases.

Herbies’ sales practices also drew condemnation by the Bureau, which found purchasers’ ability to meaningfully comparison shop frustrated by Herbies’ policy of not disclosing the sale price of a vehicle until after credit purchasers had agreed to buy the car chosen for them, based on Herbies’ calculation of the monthly payment each credit purchaser could bear.

While the majority of the remedial portion of the Consent Order appears narrowly applicable to Herbies—including the requirement that Herbies obtain a signed acknowledgment of receipt of specific disclosures relating to the sale price and finance terms of future sales— the Bureau’s most significant determination may be its decision to construe the gap in average purchase price between cash and credit purchasers as a hidden finance charge in the form of a discount offered to cash purchasers. This decision to hold Herbies responsible for the disparity in bargaining power between cash and credit buyers may prove more significant to other targets of the Bureau’s enforcement activity going forward. It remains to be seen whether the Bureau will extrapolate its findings to other contexts outside of used car sales, in which cash and credit are used for consumer purchases.

New York Appellate Court Affirms that Default Letter Did Not Accelerate Mortgage Debt

By:      Alexander J. Franchilli

The New York Supreme Court, Appellate Division, Third Department, recently held that a 2007 default letter demanding payment of all past due amounts under a mortgage did not accelerate borrowers’ mortgage debt and therefore did not trigger the six-year statute of limitations to bring a foreclosure action. Goldman Sachs Mortg. Co. v. Mares, 23 N.Y.3d 444, 445 (3d Dep’t 2016). Consequently, the Third Department held that the plaintiff’s action, which was commenced in 2014, was not time-barred. Id.

In Mares, the foreclosing plaintiff moved for summary judgment striking defendants’ answer, and the defendants, two borrowers under the mortgage, cross-moved for summary judgment alleging that the action was time-barred. Id. When the lower court denied borrower’s cross-motion, the borrowers appealed. Id.

On appeal, the borrowers argued that plaintiff’s action was untimely because the debt was accelerated by a demand letter, triggering the six-year statute of limitations to foreclose. Id., see also CPLR 213(4). The Third Department rejected borrowers’ argument, explaining that “[w]here, as here it is alleged that the debt was accelerated by demand, that fact must be communicated to the mortgagor in a clear and unequivocal manner.” Id. Notably, the Third Department held that the following language “falls far short of providing clear and unequivocal notice” to borrowers that the entire mortgage debt was being accelerated:

Failure to pay the total amount past due, plus all other installments and other amounts becoming due hereafter . . . on or before the [30th] day after the date of this letter may result in acceleration of the sums secured by the mortgage.

Id. (emphasis added in original). Instead, the Third Department found that the demand letter was “nothing more than a letter discussing a possible future event.” Id. (citing Pidwell v. Duvall, 28 A.D3d 829, 831, 815 N.Y.S.2d 754 (3d Dep’t 2006)).

This decision highlights the importance of the language of default letters, while clarifying the legal standard for assessing the statute of limitations in mortgage foreclosure actions. Mare is also significant because it defeats the borrowers’ bars’ recent attempts to argue that the statute of limitations has expired based on default letters sent to borrowers.

Florida Statutory Requirement for a Notice of Assignment Is Not a Condition Precedent to Foreclosure

By: Alen H. Hsu

Florida’s Second District Court of Appeal (“Second District Court”) recently held that a lender’s failure to provide written notice of assignment of a debt to a borrower as required by Section 559.715, Florida Statutes (2012) (“Section 559.715”), does not bar a foreclosure suit. Brindise v. U.S. Bank Nat. Ass’n, 2D14-3316, 2016 WL 229572, (Fla. 2d DCA 2016). In Brindise, the borrower took out a loan from Countrywide Home Loans, Inc., and the loan was subsequently acquired by U.S. Bank National Association (“U.S. Bank”) via an assignment of the promissory note. Borrower stopped making mortgage payments in 2010, and U.S. Bank instituted a foreclosure action and sought a money judgment for the accelerated principal amounts due on the promissory note, together with any deficiency after sale, interest, and attorney’s fees.

After conclusion of a non-jury trial, U.S. Bank obtained final judgment of foreclosure. Borrower appealed and argued that all foreclosure actions are attempts to collect debt under Florida’s Consumer Collection Practices Act (“FCCPA”), and because of this, Section 559.715, which is part of the FCCPA, is a condition precedent to foreclosure. Borrower further argued that U.S. Bank failed to plead or prove this issue at trial which barred foreclosure.

Section 559.715 states in pertinent part that, “the assignee must give the debtor written notice of such assignment as soon as practical after the assignment is made, but at least 30 days before any action to collect the debt.”

The Second District Court, in interpreting Section 559.715, rejected borrower’s argument for several reasons. First, Section 559.715 does not contain any language that makes a written notice of assignment a condition precedent to a lawsuit. The Second District noted that the legislature knows how to condition the filing of a lawsuit on a prior occurrence; it has done so, for example, in statutes related to libel and slander actions and condominium associations. Second, Section 559.715 was enacted for the purpose of allowing the consolidation of all claims by various creditors against a particular debtor. Section 559.715 does not apply to the mortgage foreclosure context, in which a single note holder seeks to foreclose on a single mortgage and note. Lastly, the FCCPA prohibits egregious debt collection practices and the borrower, in this matter, did not demonstrate how the filing of a foreclosure suit implicates such concerns.

Thus, the Second District Court held that the failure to provide written notice of assignment of a debt under Section 559.715 does not bar a foreclosure. In other words, Section 559.715 does not create a condition precedent to the institution of a foreclosure, regardless of whether a foreclosure action is an attempt to collect a consumer debt under the FCCPA. In light of the number of foreclosure cases pending in Florida, the Second District, however, certified this issue to the Florida Supreme Court as a question of great public importance. Accordingly, lenders and servicers should monitor this decision, which if reversed, could alter the landscape of foreclosure law in Florida.

Laches Defense Cannot Be Raised at Deficiency Judgment Hearing in Connecticut

By:  Adam Swanson

The Connecticut Appellate Court recently held that the limited purpose of a deficiency judgment hearing in a mortgage foreclosure action precludes re-litigating the underlying debt.  TD Bank, N.A. v. Doran, No. 37001, 2016 WL 116449 (Conn. App. Ct. Jan. 19, 2016).  Thus, borrowers were precluded from raising the defense of laches to prevent entry of a deficiency judgment.  In TD Bank, the foreclosing plaintiff obtained judgment of strict foreclosure fifteen months after commencing its action, even though the lawsuit was uncontested.  Title to the property vested with plaintiff on October 8, 2013.  Two years after commencement and eight months after title vested, plaintiff proceeded to a hearing on its motion for deficiency judgment.  Evidence showed a $150,000 decline in the value of the collateral in the sixteen-month period between commencement and the vesting of title with plaintiff.  At the hearing for deficiency judgment, borrowers argued that no deficiency judgment should enter because plaintiff was guilty of laches, a defense borrowers had raised in pleadings, but not litigated in the liability phase.  Borrowers argued that they were prejudiced by a $150,000 decline in property value and that had plaintiff not delayed, likely no deficiency judgment would have entered.  The Connecticut Appellate Court rejected borrowers’ argument, and held that the limited purpose of the deficiency judgment hearing is to fix the value of the property as of the date title vests with the foreclosing plaintiff to determine the deficiency.  Further, the Appellate Court explained that “defenses, such as laches, that ‘could have been raised during the foreclosure proceedings may not be raised in the deficiency hearing.’”  TD Bank, N.A. v. Doran, No. 37001, 2016 WL 116449, at *4 (Conn. App. Ct. Jan. 19, 2016).  Thus, it was proper to enter a $167,022.23 deficiency judgment, including accrued interest and up to $150,000 for the reduction in value of the collateral over the sixteen-month period.

This decision recognizes significant protections for servicers conducting business in Connecticut.  However, the Appellate Court did not preclude laches from tolling interest for unreasonable delays in foreclosure proceedings altogether and limited that defense to being raised at the time a foreclosure judgment enters.  Accordingly, servicers should remain vigilant to prevent unreasonable delays in Connecticut foreclosure proceedings.

Texas Statute Provides Clarity for Unilateral Rescission of Acceleration

By: Joshua A. Huber

In Texas, lenders must foreclose a deed of trust lien within four (4) years of acceleration,[i] and there is little dispute regarding what actions are required to “accelerate” a loan for purposes of the statute of limitations.[ii] Whether, and how, a lender can unilaterally “decelerate” a loan – that is, rescind a prior acceleration – was far less clear and generated extensive litigation in Texas by borrowers who, as a result of a delay in the foreclosure process, claimed that their lenders were time-barred from enforcing their lien rights.[iii]

Recent legislation now provides clarity on this issue. Texas House Bill 2067, effective September 1, 2015 and codified as Section 16.038 in the Texas Civil Practice and Remedies Code, makes clear that servicers may unilaterally rescind a prior valid acceleration, thereby avoiding the four (4) year statute of limitations. As recently noted by the Fifth Circuit, “[t]he new statute provides a specific mechanism by which a lender can waive its earlier acceleration.”[iv] Section 16.038 allows a lender or loan servicer to unilaterally rescind acceleration of the debt by serving each debtor at their last known address, by first class or certified mail, with notice that the accelerated maturity date is rescinded or waived. The service requirements for such notice tracks that of Tex. Prop. Code § 51.002(e) and is complete when mailed, not received.[v]

Despite the enactment of this Texas statute, borrowers have continued to rely on statute of limitations arguments to attempt to avoid foreclosure. However, the new law provides clear guideposts which, if followed, will afford servicers and lenders a strong defense and assurances that delays resulting from loss mitigation, litigation or other factors will not adversely affect their ability to enforce deeds of trust in Texas.

[i] See Tex. Civ. Prac. & Rem. Code § 16.035(a).

[ii] Boren v. U.S. Nat. Bank Ass’n, 807 F.3d 99, 104 (5th Cir. 2015) (acceleration requires both a notice of intent to accelerate and a notice of acceleration).

[iii] See, e.g., Callan v. Deutsche Bank Truste Co. Ams., 93 F.Supp.2d 725, 734 (S.D. Tex. Mar. 21, 2015) (observing that “there is no Texas case law on the validity of unilateral notices of rescission of acceleration.”).

[iv] Boren, 807 F.3d at 106.

[v] See Tex. Civ. Prac. & Rem. Code § 16.038(c).

U.S. SUPREME COURT RULES THAT FEDERAL ARBITRATION ACT PRE-EMPTS CA LAW AGAINST CLASS ACTION WAIVERS

By Diana Eng and Joe Patry

In a 6-3 decision in DirectTv, Inc. v. Imburgia et al., 577 U.S. ____ (2015),[1] the United States Supreme Court reversed the California Court of Appeal and held that state courts must enforce arbitration clauses even if a class action waiver in an arbitration clause would be unenforceable under state law, because the Federal Arbitration Act pre-empts conflicting state laws. Under the Federal Arbitration Act (“FAA”), 9 U.S.C. § 2, arbitration clauses are enforceable unless they can be revoked for the same legal or equitable reasons that allow any contract to be revoked. See 9 U.S.C. § 2.

Summary of Facts

DirecTv entered into a service agreement with a number of California customers, including the named plaintiffs, Amy Imburgia and Kathy Grenier (the “Service Agreement”). Id. at 1. Section 9 of the Service Agreement provides that any disputes would be decided by arbitration and that the parties waived the right to bring class claims. Id. Although the Service Agreement stated that it would be governed by the FAA, 9 U.S.C. § 2, it also provided that if the law of the particular state made the waiver of class arbitration unenforceable, then the entire arbitration provision would also be unenforceable. Id. at p. 2.

The CA Court of Appeal Ruled that the Entire Arbitration Clause Was Unenforceable

The plaintiffs sued DirecTv in California state court, seeking damages for early termination fees that they believe violate California law. Id. DirecTv sought to enforce the arbitration clause, but the state trial court denied that request, and DirecTv appealed. Id. On appeal, the California Court of Appeal held that the crucial issue was whether California law made the class waiver provision unenforceable, because, if the class waiver provision is not enforceable, the entire clause was unenforceable. Id. Although the California Supreme Court previously held that class waiver provisions are unenforceable because such provisions are unconscionable, the U.S. Supreme Court overturned the California court’s decision in AT&T Mobility v. Concepcion, 563 U.S. 333, 352 (2011). See DirecTv, 577 U.S. ____ (2015) at 3. In Concepcion, the U.S. Supreme Court found that the California rule was an obstacle to the accomplishment and execution of Congress’s purpose in enacting the FAA, and thus the California rule was pre-empted by federal law. DirecTv, 577 U.S. ____ (2015) at 3, citing Concepcion, 563 U.S. at 352.

Despite the U.S. Supreme Court’s ruling in Concepcion, the California Court of Appeal found that the class action waiver is unenforceable under California law. DirecTv, 577 U.S. ____ (2015) at 3. The California court found that because a California statute made class action waivers unenforceable, then the entire arbitration agreement was unenforceable under California state law. Id. Because the parties chose to have govern California law govern their agreement, the parties essentially contracted around the Concepcion decision. Id. Further, the California court found that the Service Agreement was ambiguous because the general language that the FAA would govern disputes was trumped by the specific language stating that the arbitration clause would be unenforceable if state law prevented class action waivers. Id. DirecTv appealed to the U.S. Supreme Court.

The U.S. Supreme Court Overturns the CA Court

In deciding to overturn the California court, Justice Breyer explained that, although lower court judges “are certainly free to note their disagreement with a decision of this Court,” state court judges are, of course, bound by the Supremacy Clause of the Constitution. Id. at 5. The FAA is a law of the United States and Concepcion “is an authoritative provision of that Act. Consequently, the judges of every State must follow it.” Id. However, Justice Breyer noted that this elementary principle of federal law did not decide the case because the FAA allows parties to choose which law governs their agreement. Id.

Because contract interpretation is ordinarily a matter of state law, the Supreme Court needed to decide whether the California Court’s interpretation of the arbitration clause in this case was consistent with the FAA. Id. at 6.  To do so, the Supreme Court considered whether the lower court opinion rested upon “grounds as exist at law or in equity for the revocation of any contract.” Id. at 6, citing 9 U.S.C. § 2 (grounds in the FAA under which a court may find that an arbitration clause is unenforceable).

The Supreme Court then considered whether the California decision was based on a valid reason for finding that the Service Agreement was unenforceable. Id. at p. 6. To make that determination, the Supreme Court considered whether California treated arbitration clauses on equal footing with all other contracts. Id. Ultimately, the Supreme Court found that the California decision had treated arbitration clauses differently from how it would interpret other contracts. Id. Specifically, the Supreme Court noted that the California court had invalidated the arbitration clause because of a perceived ambiguity. DirecTv, 577 U.S. ____ (2015) at p. 6. In contrast to the California court, the Supreme Court found that the contract is not ambiguous because the reference to state law could mean only valid state law, i.e., there was no suggestion that the parties intended to contract based on an unenforceable state law. Id. The Supreme Court evaluated several other possible scenarios for the California court’s interpretation of the phrase “law of your state” to mean a law that has been invalidated under federal law and found that none of these were valid interpretations of the phrase. Id. at 7-9.

Justice Breyer concluded that the California court’s interpretation of the phrase “law of your state” included legal principles that violate the Constitution. Id. at 10. The majority essentially found that the California court was using that phrase to strike down an otherwise enforceable arbitration clause and that this interpretation did not respect the FAA’s policy favoring arbitration; thus, the California state law against class action waivers was pre-empted. Id. at 10.

Conclusion

The DirecTv decision reiterates the U.S. Supreme Court’s 2011 Concepcion decision, which held that the FAA pre-empts state law bans on class action waivers. The highest court’s recent decision highlights that federal policy favors the enforceability of arbitration clauses and suggests that courts should continue to enforce such clauses.

[1] All citations refer to the copy of the decision that is posted on the Supreme Court’s website at http://www.supremecourt.gov/opinions/15pdf/14-462_2co3.pdf (as accessed December 14, 2015).

HOUSE PASSES BILLS TO REPEAL CFPB AUTO LENDING GUIDANCE AND EXPAND SAFE HARBOR FOR MORTGAGE LENDERS

By: Louise Bowes Marencik

On November 18, 2015, the House of Representatives passed H.R. 1737, known as the Reforming CFPB Indirect Auto Financing Guide Act (the “Auto Financing Act”), which rejected the position taken by the CFPB in its March 2013 bulletin on indirect auto lending. Although intended to provide guidance to auto lenders regarding compliance with the Equal Credit Opportunity Act, the proponents of the Auto Financing Act have concluded that the effect of the CFPB’s bulletin has been to regulate auto lenders, which the CFPB is not permitted to do pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”). The bulletin has resulted in uncertainty in the auto lending market, as it impacts the interest rates lenders may offer to consumers. Although the bulletin is nonbinding, it has functioned as a rule because lawmakers have had no opportunity to comment on it.   Accordingly, the Auto Financing Act provides that any replacement to the CFPB’s bulletin must go through the rulemaking process to allow for comments.

The House of Representatives also passed another bill on the same day, the Portfolio Lending and Mortgage Access Act, H.R. 1210 (the “Mortgage Access Act”). The Mortgage Access Act provides that depository institutions can receive safe harbor protection for “qualified mortgages,” or “QMs,” even if the loans do not comply with Dodd Frank’s “ability to repay” requirement. This requirement, implemented as part of the CFPB’s amendments to Regulation Z, provides that a lender must make a reasonable, good-faith determination that a potential borrower has the ability to repay a loan prior to consummation. 12 C.F.R. 1026.43(c). To receive protection under the Mortgage Access Act without satisfying the ability to repay requirement, the lender must keep the loan in question on its own books. Lenders have been hesitant to issue new loans that do not qualify as QMs because such loans do not receive safe harbor protection, which would insulate the lender from claims made under the Truth in Lending Act and Regulation Z related to the qualified mortgage requirements. Proponents of the Mortgage Access Act believe that the unavailability of safe harbor protection for non-QM loans has resulted in potential borrowers being refused non-QM loans they could afford to repay.   Although removal of the ability to repay requirement may afford less protection to consumers, supporters of the Mortgage Access Act believe that requiring lenders to keep these loans on their own books will deter them from issuing loans to borrowers who cannot afford them.

If enacted, the Auto Financing Act and Mortgage Access Act may allow both auto lenders and mortgage lenders more flexibility in their lending practices; however, the White House has indicated that it opposes both Acts, and has specifically stated that President Barack Obama will veto the Auto Financing Act if given the opportunity.