Category Archives: Consumer Financial Protection

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

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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

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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.

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

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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.

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

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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.

NJ Appellate Division Decisions Hold that, While Borrowers Do Not Have a Private Right of Action Under HAMP, Borrowers Are Not Precluded from Pursuing Valid State Law Claims

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By: Donna M. Bates

It is well-established that the federal Home Affordable Modification Program (“HAMP”) does not offer borrowers a private right of action to allege a lender or servicer violated HAMP. However, the New Jersey Appellate Division recently held that borrowers may pursue state law claims that a lender or servicer engaged in the modification process in bad faith or otherwise breached the terms of a HAMP Trial Period Plan (“TPP”).

In Arias v. Elite Mortgage Group, Inc., et al.,[1] the first reported New Jersey case on this issue, the Appellate Division held that a written TPP, which allowed the borrowers to make three reduced monthly mortgage payments as a condition of the TPP, constitutes a unilateral offer by the lender to modify a mortgage loan if the borrowers completely and timely comply with their obligations under the TPP.

In Arias, the plaintiff borrowers appealed from an order granting summary judgment to the defendant servicer. On appeal, Plaintiffs claimed that they had a contractual right to a permanent loan modification under the terms of a HAMP TPP, and defendant breached the TPP when it did not give them a loan modification. They also argued that defendant breached the covenant of good faith and fair dealing when it denied them the loan modification.

The Appellate Division upheld the grant of summary judgment to defendant, but it did so for different reasons than the trial court. After acknowledging that there were no reported New Jersey cases on this issue, the Arias Court opined that current case law suggests that an agreement that binds a debtor to make payments while leaving the mortgage company free to give nothing in return may violate the New Jersey Consumer Fraud Act (“CFA”). In its analysis, the Court relied heavily on Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012), which held that, even though there was no private right of action for a borrower under HAMP, a borrower may still assert a common law contract claim for a lender’s failure to honor the terms of a HAMP TPP.

The Arias Court rejected defendant’s arguments that there was no enforceable promise to modify Plaintiffs’ loan because there was no consideration given and that the lender had sole and unbridled discretion whether to give a modification, where the borrower complied with the payment terms and other requirements of the TPP. The Court reviewed the language of the TPP and noted that, even though the TPP notified borrowers that it was not a loan modification, it also contained language stating that ‘if” borrowers complied with the TPP and their representations continued to be true in all material respects, “then” the servicer will provide them with a modification agreement.

Ultimately, the Arias Court affirmed the grant of summary judgment in favor of the defendant because the terms of the TPP in this case constituted “a unilateral offer” to give plaintiffs a loan modification if and only if plaintiffs fully complied with their obligations under the TPP. In this case, the borrowers did not comply with the TPP requirements. The Court held that the summary judgment record clearly established that the plaintiffs failed to comply with the payment schedule set forth in the TPP and, therefore, defendant was justified in refusing to give plaintiffs a loan modification. Therefore, there was no breach of contract or breach of the duty of good faith and fair dealing on these facts.

In Miller v. Bank of America Home Loan Servicing, L.P.,[2] decided just over one month after Arias, the Appellate Division was again faced with deciding whether borrowers could sustain claims against a mortgagee related to a HAMP TPP. In Miller, after defendant declined to modify their mortgage under HAMP, the borrowers filed an action alleging breach of contract, violation of the CFA, promissory estoppel, and breach of the covenant of good faith and fair dealing. Defendant was granted summary judgment after the judge concluded there was no private right of action under HAMP. Plaintiffs moved for reconsideration, and their motion was denied. They then appealed both orders.

After briefly recapping the history of the HAMP program, the Miller Court specifically agreed with the Appellate Division’s holding in Arias that “HAMP’s preclusion of a private right of action does not preempt pursuit of valid state law claims arising between the parties to a TPP.” The Court then reviewed the specific facts in the record regarding plaintiffs’ loan modification efforts. The TPP at issue in Miller contained language similar to the TPP in Arias, requiring  plaintiffs to make three payments of $3,508.17, due on May 1, June 1, and July 1, 2009. Defendant’s records showed that the three TPP payments were instead received on May 14, June 18, and August 18, 2009, and plaintiffs were ultimately denied a modification “because [they] did not make all of the required [TPP] payments by the end of the trial period.” Plaintiffs argued on appeal that summary judgment was inappropriate because there were disputed issues of material facts regarding their payments under the TPP, and they challenged the reliability of defendant’s payment records.

The Miller Court affirmed summary judgment in favor of the defendant. It held that plaintiffs’ self-serving assertions regarding challenges to the payment history, unsupported by any documentary proof, were insufficient to raise a genuine issue of material fact. The Court also held that plaintiffs’ CFA claim, which suggested that the defendant engaged in elusive tactics and failed to fulfill its promise of a loan modification, was properly dismissed. Plaintiffs failed to identify the alleged unlawful conduct, they failed to detail material misrepresentations they reasonably relied upon that resulted in damages, or to proffer facts that demonstrated a business practice to materially conceal information that ultimately induced them to act. Plaintiffs’ unsupported assertions were insufficient to create a material dispute, and therefore summary judgment was appropriate.

These decisions qualify the long-standing and frequently cited principle that a borrower does not have a right to a loan modification, and a lender is not required to offer one. While the Arias and Miller decisions do not hold that a borrower is entitled to a loan modification, they do hold that the language of a TPP or forbearance agreement may require the lender to modify the loan if the borrower complies with its terms. Lenders and servicers frequently engage in loss mitigation efforts with borrowers, including loan modification reviews, whether pursuant to the HAMP program, court mediation programs, or in-house modification programs. In light of these decisions, lenders and servicers should take care when drafting the terms of a written TPP or other forbearance agreement, so that it is clear what requirements a borrower must fulfill to receive a loan modification. Lenders and servicers should also make sure to provide written and timely notification to borrowers when they fail to comply with the terms of a loss mitigation agreement. These recent cases also underscore the importance of maintaining accurate records of payments and communications regarding loss mitigation efforts, which records may be necessary to rebut a borrower’s claims that they complied with all the TPP terms. Following these steps will help provide the support needed to defend against a borrower’s claims that they were improperly denied a loan modification.

[1] Arias v. Elite Mortgage Group, Inc., et al., New Jersey Superior Court, Appellate Division, Case Number A-4599-12T1. The Appellate Division approved Arias for publication on January 23, 2015.

[2] Miller v. Bank of America Home Loan Servicing, L.P., Superior Court of New Jersey, Appellate Division, Case Number A-0169-13T2. The Appellate Division approved Miller for publication on March 5, 2015.

U.S. Supreme Court to Decide ECOA Circuit Split: Can Spouses be Required to Sign Personal Guaranties?

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By: Joe Patry

The Equal Credit Opportunity Act (“ECOA”), 15 U.S.C. § 1691 et seq. was enacted in 1974 “to eradicate credit discrimination waged against women, especially married women whom creditors traditionally refused to consider for individual credit.” Mays v. Buckeye Rural Elec. Coop., 273 F.3d 837 (6th Cir. 2002), at 5 (all references to pagination is to the pagination in the .PDF copies of the cases to which this post links). Under ECOA, a creditor cannot discriminate deny an application for credit solely because of that person’s marital status. See 15 U.S.C. § 1691(a).

Based on recent decisions, the Courts of Appeal for the Eighth Circuit and Sixth Circuit are split on the question of whether a creditor may require a spouse to execute a personal guaranty for a loan. If a guarantor is considered an “applicant” under ECOA, then requiring a spouse to guarantee a loan violates ECOA and may allow the spouse to use the affirmative defense of recoupment to avoid enforcement of the personal guaranty.  Last month, the Supreme Court of the United States granted the writ of certiorari to resolve this circuit split.  The case has not yet been set for argument.

In Hawkins v. Community Bank of Raymore 761 F.3d 937 (8th Cir. 2014), the husbands of Plaintiffs Valerie J. Hawkins and Janice A. Patterson were the two members of PHC Development, LLC (“PHC”).  Id. at 2. Patterson and Hawkins themselves had no interest in PHC.  Id.  From 2005 to 2008, Community Bank of Raymore (“Community”) made four loans to PHC, totaling $2,000,000. Id.  Hawkins, Patterson and their husbands signed personal guaranties on the loans.  Id.  The loans went into default and Community demanded payment not only from PHC but also from Hawkins and Patterson as guarantors.  Id.

Hawkins and Patterson sued Community, asserting that Community violated ECOA when it forced them to execute the guaranties solely because they were married to their husbands – the members of PHC.  Id.  Further, Hawkins and Paterson claimed that because of the alleged ECOA violation, the personal guaranties were unenforceable against them.  Id.  The trial court found that Hawkins and Patterson were not “applicants” within the meaning of ECOA and thus there was no ECOA violation, and granted summary judgment for Community.  Id.

On appeal, the Eighth Circuit noted that ECOA makes it “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction . . . on the basis of . . . marital status.”  Id. at 3 (citing 15 U.S.C. § 1691(a)).  An applicant is any person who applies “directly” to a creditor for “an extension, renewal, or continuation of credit . . . .”  Id. (citing 15 U.S.C. § 1691a(b)).  Interpreting this definition, the Federal Reserve Bank promulgated 12 C.F.R. § 202.2(e), which provides that the definition of “applicant” under ECOA includes guarantors.  Id. 

Under the Chevron doctrine, federal courts typically defer to a federal agency’s interpretation of a statute if (1) the statute is ambiguous or unclear and (2) if the agency’s reading is reasonable in light of Congress’s intent.  Id.  at 4; Chevron U.S.A. v. Natural Resources Defense Counsel, 467 U.S. 837 (1984). If the statute is clear, then the analysis stops and the second step is irrelevant. Hawkins at 4. Applying the first step of the Chevron doctrine, the Eighth Circuit found that ECOA was clear that a guarantor is not an applicant because ECOA requires that, to be an applicant, a person must request credit directly from a creditor.  Id.   However, when making a guaranty, a person does not request credit.  Id.  Rather, a guaranty is collateral and security for an underlying loan; although a guarantor makes the guaranty so that credit will be extended to a borrower, providing a guarantee does not constitute a request for credit.  Id.

The Hawkins court noted that the Sixth Circuit recently reached a contrary conclusion in RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., 754 F.3d 380 (6th Cir. 2014), where BB&T required the borrower’s wife to execute a guaranty on a commercial loan.  Id. at 3.  In RL BB, the borrower’s wife claimed that this requirement violated ECOA, and she argued that the personal guaranty was thus unenforceable.  Id. at 4.  The trial court in RL BB ruled against the borrower’s wife and found that the guaranty was enforceable.  Id.

On appeal, the Sixth Circuit noted that the Federal Reserve has interpreted ECOA as prohibiting a creditor from requiring an applicant’s spouse from guaranteeing a security instrument.  Id. at 5.  While the Sixth Circuit noted that ECOA does not explicitly define an applicant to include a guarantor, the Sixth Circuit highlighted that the Federal Reserve’s regulations define an applicant as a guarantor (meaning that a guarantor would be able to sue for an ECOA violation).  Id. 

Applying the first prong of the Chevron doctrine, the Sixth Circuit found that an ambiguity existed in ECOA’s definition of “applicant” because a guarantor approaches a creditor in the sense that she offers her own personal liability if the borrower defaults.  Id.  Further, the Sixth Circuit explained that a guaranty is made in consideration of the borrower’s receiving credit.  Id.  The Sixth Circuit explained that an “applicant” requests credit, but credit is the right granted by a creditor to a debtor to defer payment of debt.  Id.  Thus, the Sixth Circuit found that an applicant requests credit but the debtor enjoys the benefit of the credit, and as a result, an applicant and the debtor could be different persons.  Id.  Looking at the larger purpose of ECOA to prevent discrimination “in any respect” of a credit transaction, the RL BB court reasoned that the broad remedial goal of the statute meant that the term applicant could be ambiguous.  Id. 

Because the Sixth Circuit found that the term “applicant” could be ambiguous, the court continued from where the Eighth Circuit stopped and moved on to the second prong of the Chevron analysis.  Id. With respect to the second prong, the Sixth Circuit found that because an “applicant” could include a guarantor (and that a creditor could not require a spouse to be a guarantor), the Federal Reserve’s interpretation in Regulation B was reasonable and thus entitled to deference.  Id.  Because the borrower’s wife impermissibly had been required to execute a personal guaranty, the personal guaranty was not enforceable and the Sixth Circuit reversed the lower court’s finding and allowed the borrower to use the affirmative defense of recoupment to prevent the enforcement of the guaranty.  Id. at 12.

Lenders that require a personal guaranty from a spouse should monitor the Supreme Court’s resolution of this circuit split. If the Supreme Court agrees with the Sixth Circuit, creditors should ensure that spouses are not required to execute personal guaranties on loans, as such guaranties may well be unenforceable.

Supreme Court Rules that Written Notice Is Sufficient to Rescind Under TILA

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By: Daniel A. Cozzi and Diana M. Eng

The Supreme Court of the United States recently held that a borrower can exercise its right to rescind a loan pursuant to the federal Truth in Lending Act (TILA) by providing written notice to the lender within three (3) years of the loan closing date. In doing so, the Supreme Court reversed the Court of Appeals for the Eighth Circuit’s affirmation of the District Court of Minnesota’s decision, which had held that a borrower must file a lawsuit within three (3) years of the consummation of the loan to exercise his/her rescission rights.

In Jesinoski v. Countrywide Home Loans, Inc., the United States Supreme Court considered “whether a borrower exercises this right by providing written notice to his lender, or whether he must also file a lawsuit before the 3-year period elapses.” Jesinoski v. Countrywide Home Loans, Inc., No. 13-684, 574 U.S. _____ (2015).

Under TILA, borrowers have the right to rescind certain consumer mortgage transactions up to three days after the loan closes. Specifically, TILA grants borrowers the right to rescind a loan transaction, “until midnight of the third business day following the consummation of the transaction or the delivery of the [disclosures required by the Act], whichever is later, by notifying the creditor, in accordance with regulations of the [Federal Reserve] Board, of his intention to do so.” 15 U.S.C. 1635(a). However, if the creditor fails to provide requisite TILA disclosures, a borrower may rescind the transaction up to three years from the date the loan closes. 15 U.S.C. 1635(f).

On February 23, 2007, Larry and Cheryle Jesinoski (“Petitioners” or “Jesinoskis”) refinanced their home loan and obtained a mortgage from Countrywide Home Loans, Inc. (“Respondent” or “Lender”) in the amount of $611,000. Exactly three years later, the Jesinoskis mailed a purported rescission notice to Lender. The Lender responded on March 12, 2010 and refused to acknowledge the validity of the rescission. On February 24, 2011 – one year after the Jesinoskis sent their notice of rescission, the Jesinoskis filed suit in the District Court of Minnesota, seeking rescission of the mortgage and damages.

The District Court agreed with the Lender and held that the Petitioners were barred from exercising rescission pursuant to TILA, as they had failed to file a lawsuit within three years of the consummation of the loan. Jesinoski v. Countrywide Home Loans, Inc., 2012 WL 1365751 (D. Minn. Apr. 19, 2012). The District Court found that the Petitioners’ written notice within three years was insufficient to exercise their rescission rights. The Eighth Circuit affirmed. Jesinoski v. Countrywide Home Loans, Inc., 729 F. 3d 1092 (8th Cir. 2013) (per curiam). The Eighth Circuit relied on its prior decision in Keiran v. Home Capital, Inc., 720 F. 3d 721 (8th Cir. 2013), which held that a borrower must file a lawsuit for rescission within three years of the loan’s consummation to exercise rescission rights under TILA.

The Supreme Court disagreed with the District Court and the Eighth Circuit, holding that “Section 1635(a) explains in unequivocal terms how the right to rescind is to be exercised: It provides that a borrower ‘shall have the right to rescind . . . by notifying the creditor’ . . . of his intention to do so’ (emphasis added). The language leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind.” The Supreme Court further declared that the “statute does not also require him to sue within three years.”

Lender raised several additional arguments that the Supreme Court ultimately dismissed. First, Lender argued that TILA rescission only requires written notice (and not legal action) when the parties dispute the adequacy of the TILA disclosures (e.g., whether the borrower is actually entitled to the three-year rescission period rather than the three-day rescission period). The Supreme Court found that Section 1635(a) makes no distinction between disputed and undisputed rescissions. Second, Lender argued that pursuant to the common law, rescission requires that a borrower tender the proceeds received under the transaction prior to rescission. The Supreme Court also dismissed this argument, finding that TILA rescission need not follow the rules and procedures of “its closest common-law analogue.” The Supreme Court further stated, “[t]o the extent §1635(b) alters the traditional process for unwinding such a unilaterally rescinded transaction, this is simply a case in which statutory law modifies common-law practice.”

In light of this decision, lenders should be aware that a written notice provided by the borrower, within three years of the loan consummation is sufficient to exercise his/her right to rescission under TILA. However, the Supreme Court provided no guidance on when a lawsuit must be commenced after written notice of rescission is sent.

New York Adopts More Stringent Debt Collection Regulations

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By:  Diana M. Eng and Jennifer L. Neuner

The New York State Department of Financial Services recently issued new regulations requiring debt collectors to provide additional disclosures to consumers. The new regulations (see 23 NYCRR § 1) are intended to provide protections beyond what is currently required by the Fair Debt Collection Practices Act (“FDCPA”). These new debt collection regulations will become effective in March 2015, except that provisions regarding required disclosures for charged-off debt[1] and substantiation of a charged-off debt[2] will become effective in August 2015.[3]

Required Initial Disclosures

The regulations require enhanced initial disclosures when a new debt collector first contacts an alleged debtor. The newly mandated disclosures include specific notices that are not formally required by the FDCPA. Specifically, pursuant to 23 NYCRR § 1.2, the debt collector must, within 5 days of the initial communication with the consumer, provide “clear and conspicuous written notification” that 1) debt collectors are prohibited from engaging in “abusive, deceptive, and unfair debt collection efforts” under the FDCPA; and 2) a written statement that if a creditor or debt collector receives a money judgment against the consumer in court, state and federal laws may prevent certain types of income from being taken to pay the debt, including, among others, social security, public assistance, unemployment and disability benefits, pensions and veterans’ benefits.

Similarly, with respect to debts that have been charged-off, the debt collector must, within 5 days of the initial communication with the consumer, provide a “clear and conspicuous” written notification about the debt, including 1) the name of the original creditor; and 2) an itemized accounting of the charged-off debt, including the amount owed as of charge-off, total amount paid on the debt since the charge-off and the total post charge-off interest, charges and fees. 23 NYCRR § 1.2(b).

Required Disclosures Regarding Collection of So-called “Zombie Debts”

The regulations also require disclosures regarding the collection of debts for which the statute of limitations has already expired. 23 NYCRR § 1.3. Further, the debt collector must maintain reasonable procedures to determine the applicable statute of limitations of a debt and to determine whether the statute of limitations has expired. The FDCPA does not contain such requirements.

Under the New York regulation, if a debt collector “knows or has reason to know” that the statute of limitations for a debt may have expired, the debt collector must provide a “clear and conspicuous” notification to the consumer that 1) the debt collector believes that the statute of limitations may be expired; 2) suing on a debt for which the statute of limitations has expired is a violation of the FDCPA, and, if the consumer is sued, the consumer may present evidence to the court that the statute of limitations has run; 3) the consumer is not required to provide the debt collector with an admission of any kind that the debt is still owed, or to waive the statute of limitations; and 4) a partial payment of the debt, or other admission that the debt is owed, may restart the statute of limitations. 23 NYCRR § 1.3(a)-(b). Further, the regulation provides specific language that would comply with the notice requirement.

Requirements Regarding “Substantiation” of the Debt

The regulations also contain important changes regarding a debt collector’s obligations when a consumer disputes the validity of a charged-off debt. 23 NYCRR § 1.4. Currently, under the FDCPA, consumers must dispute the debt in writing and request verification of the debt within 30 days of the first collection attempt. See 15 U.S.C. § 1692g. Under the new New York regulations, consumers may request “substantiation” of the debt at any time during the collections process, and may do so orally. Once a request is received, the debt collector must provide the consumer written substantiation of a charged-off debt within 60 days of receiving the request. 23 NYCRR § 1.4(b). The debt collector must also cease collection until written substantiation has been provided to the consumer. The regulation further lists the various forms of documentation required to substantiate the debt.

In addition, the New York regulation includes a document retention requirement related to a request for substantiation of a charged-off debt under 23 NYCRR § 1.4. 23 NYCRR § 1.4(d). Specifically, debt collectors must retain evidence of the consumer’s request for substantiation and all documents provided in response to such request until the charged-off debt is discharged, sold or transferred.[4]

Requirements for Agreements to Settle a Debt

The regulations also include procedures for documenting any agreement between the consumer and the debt collector to satisfy or otherwise settle the debt. 23 NYCRR § 1.5. The FDCPA does not regulate communications from a debt collector regarding settlement. Under the new regulations, a debt collector must, within 5 business days of agreeing to a debt payment schedule or other agreement to settle the debt, provide the consumer with 1) written confirmation of the debt payment schedule or agreement, including all material terms and conditions relating to the agreement; and 2) a notice stating that if a creditor or debt collector receives a money judgment against the consumer in court, state and federal laws prevent certain types of income from being taken to satisfy the debt.[5] The debt collector is also required to provide the consumer with 1) an accounting of the debt on at least a quarterly basis while the consumer is making scheduled payments; and 2) a written confirmation of the satisfaction of the debt, along with the name of the original creditor and the account number, within 20 days of receipt of the final payment.[6] 23 NYCRR § 1.5.

Debt collection companies that operate in New York should review their current policies and take steps to comply with the new regulations in advance of the 2015 effective dates. Specifically, debt collectors should ensure that initial disclosures satisfy the new regulations, that disclosures inform consumers regarding the potential expiration of the statute of limitations and that procedures are in place to substantiate the debt upon a debtor’s request.

[1] 23 NYCRR § 1.2(b).
[2] 23 NYCRR § 1.4.
[3] 23 NYCRR § 1.7.
[4] Debt collectors who transfer a charged-off debt should consult the CFPB rules regarding mortgage servicing transfers to the extent applicable.
[5] This notice provision is identical to the statement required in the initial disclosures (23 NYCRR § 1.2) noted above.
[6] 23 NYCRR § 1.6 provides that, after mailing the initial disclosures required by Section § 1.2, a debt collector and consumer may communicate via email, if the consumer voluntarily provides an email address and consents to receiving email correspondence regarding a specific debt.

CFPB PROPOSES CHANGES TO MORTGAGE SERVICING RULES

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By: Joshua A. Huber

On November 20, 2014, the Consumer Financial Protection Bureau (the “Bureau”) proposed changes to the mortgage servicing rules under Regulation X, which implements the Real Estate Settlement Procedures Act (“RESPA”), and Regulation Z, the implementing regulation for the Truth in Lending Act (“TILA”). The Bureau has proposed, with one exception,[1] that the amendments take effect 280 days after publication of a final rule in the Federal Register.

The proposal encompasses nine broad topics,[2] the most significant of which are summarized below:

Expansion to Successors in Interest. The Bureau is proposing to apply all of the Mortgage Servicing Rules[3] to successors in interest of a borrower once a servicer confirms the successor in interest’s identity and ownership interest in the property. This aspect of the proposal would help ensure that those who inherit or receive property, such as a surviving family member, have the same protections under the Mortgage Servicing Rules as the original borrower.

Requests for Information. The Bureau is proposing amendments that would change how a servicer must respond to requests for information asking for ownership information for loans in trust for which Fannie Mae or Freddie Mac is the trustee, investor, or guarantor. As modified, mortgage servicers for loans for which Fannie Mae or Freddie Mac is the trustee, investor, or guarantor would comply with their obligations under Regulation X[4] when the servicer responds to requests for information asking only for the owner or assignee of the loan by providing only the name and contact information for Fannie Mae or Freddie Mac, as applicable, without also providing the name of the trust.

Loss Mitigation. The most sweeping aspects of the proposed rule changes are those pertaining to loss mitigation. The Bureau is proposing to:

(1) Require servicers to meet the loss mitigation requirements more than   once in the life of a loan for borrowers who become current after a delinquency;

(2) Modify the existing exception to the 120-day prohibition on foreclosure filing to allow a servicer to join the foreclosure action of a senior lienholder;

(3) Clarify that servicers have significant flexibility in setting a reasonable date by which a borrower must return documents and information to complete an application, so long as the date maximizes borrower protections and allows borrowers a reasonable period of time to return documents and information;

(4) Clarify that servicers must take affirmative steps to delay a foreclosure sale, even where the sale is conducted by a third party, including clarification that the servicer has a duty to instruct foreclosure counsel to take steps to comply with the dual-tracking prohibitions and that a servicer who has not taken, or caused counsel to take, all reasonable affirmative steps to delay the sale, is required to dismiss the foreclosure action if necessary to avoid the sale;

(5) Require that servicers who receive a complete loss mitigation application must promptly provide borrowers with written notice stating: (a) a complete application was received, (b) additional information may be requested if needed, (c) the date of completion, (d) whether a foreclosure sale was scheduled as of that date, (e) the date foreclosure protections began, (f) the borrower’s applicable appeal rights, and (g) that the servicer will complete its evaluation within 30 days;

(6) Address and clarify how servicers obtain and evaluate third party information not in the borrower’s control, including: (a) prohibiting servicers from denying modifications based upon delays in receiving such third party information; (b) requiring prompt notice to the borrower of any missing third party information within 30 days after receiving a complete application; and (c) requiring servicers to notify borrowers of their determination in writing promptly upon receipt of the third party information;

(7) Permit servicers to offer a short-term repayment plan based upon an evaluation of an incomplete application;

(8) Clarify that servicers may stop collecting documents and information from a borrower pertaining to a loss mitigation option after receiving information confirming that the borrower is ineligible for that option; and

(9) Address and clarify how loss mitigation procedures and timelines apply to a transferee servicer that receives a mortgage loan for which there is a loss mitigation application pending at the time of a servicing transfer.[5]

The proposed rules, including the proposed effective date, will be open for public comment for 90 days after its publication in the Federal Register.

These proposed rules, particularly as they pertain to loss mitigation, may present operational challenges for mortgage servicers. The revised notice requirements and additional loss mitigation obligations may result in significant increased litigation and compliance costs.

[1] The Bureau has proposed that the amendments applicable to the periodic statement requirement for certain bankrupt borrowers should take effect one year after publication.

[2] In addition to the areas addressed herein, the Proposed Rules include: (1) a definition of the word “delinquency,” (2) new requirements pertaining to force-placed insurance, (3) clarification of the “early intervention” requirements for loss mitigation, (4) guidance regarding payment crediting and application for borrowers under temporary or permanent loan modifications, and (5) changes to the definition of “small servicer.”

[3] The term “Mortgage Servicing Rules” as used herein refers to the Bureau’s January 2013 final rules pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010), as amended in 2013 and 2014. See 78 FR 44685 (July 24, 2013), 78 FR 60381 (Oct. 1, 2013), 15 U.S.C. 1692 et seq, 78 FR 62993 (Oct. 23, 2013).

[4] 12 CFR § 1024.36(d).

[5] The proposed rule would cover the transfer of mortgages between servicers during the loss mitigation process. In a voluntary transfer, the new servicer would be required to observe the date the borrower’s loss mitigation application became complete with the prior servicer. The new servicer would be provided an additional five days to provide the acknowledgment notice. However, for an involuntary transfer, the new servicer would be provided at least 15 days to evaluate the transferred loss mitigation applications.

 

 

U.S. Regulators Approve Risk Retention Rules For Mortgage Backed Securities

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By: Daniel A. Cozzi

On October 22, 2014 The Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; U.S. Securities and Exchange Commission; Federal Housing Finance Agency (FHFA); and Department of Housing and Urban Development adopted rules to implement the credit risk retention requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act, enacted in 2010, requires the implementation of stricter rules governing mortgage-backed securities. The adopted rules seek to balance the importance of the securities market in providing credit to homeowners with appropriate underwriting standards, in light of the 2008 financial crisis. (“During the financial crisis, securitization transactions displayed significant vulnerabilities arising from inadequate information and incentive misalignment among various parties involved in the process.”) See Joint Final Rule to implement the requirements of section 941 of the Dodd–Frank Act.

Under Dodd-Frank, firms which issue mortgage-backed securities must retain a portion of the risk or demonstrate that the mortgages are held by borrowers with an ability to repay the debt. These risk retention requirements are meant to ensure that lenders retain some “skin in the game.” The rules require that lenders retain 5% of the risk associated with mortgages packaged as securities or comply with Consumer Financial Protection Bureau rules governing borrower debt-to-income ratios. The latter exception would require that lenders verify that a borrower can repay the debt and comply with other requirements, such as verification that the borrower’s debt payments do not exceed 43% of his or her income.

The new rules go into effect in the Fall of 2015 and will only impact the market for private securities. Securities sold to Fannie Mae and Freddie Mac are exempt from the new rules.