Welcome to Internet and Mobile Marketing: HUD’s 1996 RESPA CLO Policy Statement Finally Refreshed

R. Colgate Selden, R. Andrew Arculin, Scott D. Samlin, Paula M. Vigo Marques, and Daniel V. Funaro ●

A new Consumer Financial Protection Bureau (“CFPB”) advisory opinion refreshes the Department of Housing and Urban Development’s computer loan origination system policy statement for a new generation of online marketing technology, specifically targeting the policy to “operators of certain digital technology platforms” that function via website and online applications. These “Digital Mortgage Comparison-Shopping Platforms,” as described by the CFPB, “enable consumers to comparison shop for mortgages and other real estate settlement services, and include platforms that generate potential leads for platform participants through consumer interactions.”

The CFPB advisory opinion applies long standing interpretations on unlawful referrals to new online marketing technology platforms. However, even if such platforms are permissible under a referral analysis, they still could violate prohibitions on unfair, deceptive, or abusive acts or practices and other federal and state laws. The advisory also functions to put the industry on notice for future enforcement actions should operators of noncompliant marketing platforms not heed the guidance in the advisory.


After nearly 30 years, the CFPB issued an advisory opinion (“CFPB Opinion”) last week picking up where the Department of Housing and Urban Development (“HUD”) left off in 1996 with its policy statement on computer loan origination systems (“CLOs”). The HUD policy statement, which addressed the applicability of the Real Estate Settlement Procedures Act’s (“RESPA”) Section 8 prohibition on kickbacks in exchange for settlement service business referrals to CLOs, was drafted at a time when CLOs often consisted of a lender’s Internet dial-up computer kiosk located in a real estate broker or other settlement service provider’s office.

Read the full client alert on our website.

CFPB Looks to Expand Its Oversight of Nonbanks through Two Controversial New Registries

R. Andrew Arculin, R. Colgate Selden, Scott E. Wortman, Paula M. Vigo Marques, and Daniel V. Funaro

The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) released two new proposals that aim to expand the Bureau’s authority over nonbank financial institutions:

  1. A “repeat offender” registry of consent orders or settlements with an array of state and federal regulators relating to compliance with consumer protection laws (“Repeat Offender Proposal”); and
  2. A public registry of the terms and conditions nonbanks use in “form contracts” that consumers typically are not able to negotiate (“Terms and Conditions Proposal”).

Assuming these registries are created as proposed and survive any ensuing legal challenges, complying with the reporting obligations should be relatively easy. The larger challenge will be managing the increased regulatory and litigation risk imposed by the registries.

Repeat Offender Proposal

On December 12, 2022, the CFPB issued a proposal to establish a “repeat offender” registry requiring certain nonbank covered entities to report all final public written orders and judgments (including any settlements, consent decrees, or stipulated orders and judgments) obtained or issued by any federal, state, or local government agency for violation of a number of enumerated consumer protection laws, including those related to unfair, deceptive, or abusive acts or practices (“UDAAPs”).

After receiving these written orders and judgments, the CFPB intends to create a database of enforcement actions that would be available online for use by the public and other regulators. The database will be limited to final settlement or consent orders, so injunctions, preliminary orders, temporary cease-and-desist, and other tentative or temporary orders would not be reportable.

In addition, the proposal would require supervised nonbanks to submit annual written statements regarding compliance with an attestation for each underlying order by an executive with “knowledge of the entity’s relevant systems and procedures for achieving compliance and control over the entity’s compliance efforts.” These entities would also be required to identify a central point of contact related to an entity’s compliance with reportable enforcement actions.

The proposed rule would only apply to certain nonbank covered entities subject to CFPB’s authority. At present, insured depository institutions and credit unions, related persons, states, natural persons, and certain other entities are excluded from registry participation requirements. However, the CFPB stated in the press release for the proposal that it “might later consider collecting or publishing the information described in the proposal from insured banks and credit unions.”

Read the full client alert on our website.

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.

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.



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.


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).


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.

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

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.

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

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.

Third Circuit Affirms Dismissal of RESPA Class Action against Bank of America

By: Louise Bowes Marencik

In Riddle v. Bank of America Corporation, et al., the United States Court of Appeals for the Third Circuit recently affirmed a lower court’s dismissal of a putative class action suit against Bank of America because the borrowers’ claims under Section 8 of the Real Estate Settlement Procedures Act (“RESPA”) were time-barred. 2014 U.S. App. LEXIS 19730 (3d. Cir. Oct. 15, 2014).

The putative class plaintiffs purchased homes in 2005 with mortgages obtained from Bank of America, and were required to obtain private mortgage insurance in connection with their loans. In 2012, the borrowers received advertisements from their legal counsel regarding possible causes of action they may have related to their private mortgage insurance. Although the borrowers had not previously investigated the reinsurance arrangement in connection with their mortgage insurance, they brought suit against Bank of America, alleging that the reinsurance arrangement between the bank and the insurer was in violation of RESPA.

The United States District Court for the Eastern District of Pennsylvania held that the plaintiffs’ claims were time-barred by RESPA’s one-year statute of limitations. The District Court also held that their claims did not meet the requirements for equitable tolling because the borrowers did not exercise reasonable diligence in investigating their claims, and the defendants did not mislead the plaintiffs.

On appeal, the Third Circuit affirmed the District Court’s decision, on the basis that the plaintiffs did “absolutely nothing” to investigate the reinsurance of their mortgage insurance during the seven-year period between when their claims arose and when they brought suit. The Court also noted that although the plaintiffs’ lack of reasonable diligence was a sufficient basis on which to deny equitable tolling, there was also inadequate evidence that the defendants misled the plaintiffs.

Ninth Circuit Affirms that FIRREA Stripped Court of Jurisdiction Over Claims Against JPMorgan Related to WaMu Loan

By:      Diana M. Eng

The Ninth Circuit Court of Appeals recently issued an opinion affirming the dismissal of claims by borrowers Todd and Michele Rundgren (“Borrowers”) against JPMorgan Chase, N.A. (“JPM”) for the alleged fraudulent conduct of now-defunct Washington Mutual Bank, F.A. (“WaMu”).  Rundgren v. Washington Mutual Bank, FA et al., No. 12-15368 (9th Cir. July 29, 2014).  The Ninth Circuit found that the district court properly determined that it lacked subject matter jurisdiction over Borrowers’ claims related to WaMu’s pre-failure conduct due to Borrowers’ failure to exhaust the administrative claims process mandated by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”).

FIRREA provides a comprehensive claims process that allows the Federal Deposit Insurance Corporation (“FDIC”), as Receiver, to determine claims against failed banks.  See id., at 6 (citing 12 U.S.C. § 1821(d)(3)-(10)).  Further, FIRREA unequivocally strips courts of jurisdiction over claims that have not been exhausted through this administrative claims process.  Specifically, section 1821(d)(13)(D) of FIRREA provides that “no court shall have jurisdiction over—(i) any claim or action for payment from, or any action seeking a determination of rights with respect to, the assets of any depository institution for which the [FDIC] has been appointed receiver . . . ; or (ii) any claim relating to any act or omission of such institution . . . .” (Emphases added).

In Rundgren, Borrowers refinanced their mortgage on their Hawaiian property with WaMu in 2008 for approximately $3,000,000.  Later that year, WaMu was seized by the Office of Thrift Supervision, and the FDIC was appointed Receiver.  The FDIC then transferred substantially all of WaMu’s assets, including the Rundgrens’ mortgage, to JPM pursuant to a Purchase and Assumption Agreement (“P&A”); the FDIC retained most liabilities associated with those assets under the P&A.  Since Borrowers defaulted on their mortgage, JPM accelerated the payments and notified them that a non-judicial foreclosure sale was scheduled for August 26, 2009.

Borrowers filed suit in Hawaii state court against WaMu and JPM, alleging that WaMu engaged in deceptive and fraudulent acts in connection with the refinancing, including securing a false appraisal and exaggerating Borrowers’ income. JPM removed the action to federal court, and the district court dismissed the case against JPM for lack of jurisdiction, because Borrowers had failed to exhaust their claims against the FDIC through the FIRREA claims process. The district court held that, alternatively, Borrowers failed to sate a claim.

On appeal, the Ninth Circuit affirmed, holding that because “WaMu was placed into receivership of the [FDIC], and the Rundgrens failed to exhaust the administrative remedies provided by FIRREA, the district court correctly determined it lacked authority to hear the Rundgrens’ claims.” Borrowers asserted two arguments that were flatly rejected by the Court.

First, Borrowers argued that their claims are not the sort of claims contemplated by section 1821(d)(13)(D), because Borrowers are not WaMu’s creditors.  The Court examined the purpose of FIRREA and explained that section 1821(d)(13)(D) “is drafted broadly to preclude courts from exercising jurisdiction over ‘any claim or any action for payment from, or any action seeking a determination of rights with respect to’ the assets of a failed bank in the hands of the FDIC, or ‘any claim relating to any act or omission’ of a failed bank, without respect to the identity of the claimant.”  The Court emphasized that nothing in the section suggests that “any claim” is limited to claims by creditors.  The Court also noted that although Congress specifically referred to “creditors” in other sections of FIRREA, section 1821(d)(13)(D) does not refer to “creditors,” which further supports the conclusion that federal courts should be precluded from exercising jurisdiction over any claims by a claimant who has failed to exhaust the FIRREA claims process.

Second, Borrowers argued that their complaint should be construed as raising affirmative defenses, because they are attempting to prevent a nonjudicial foreclosure.  This argument was based on Borrowers’ belief that section 1821(d)(13)(D) does not preclude the district court from exercising jurisdiction over an affirmative defense.  The Court disagreed, indicating that since Borrowers’ had contractually agreed to allow the lender to proceed to foreclosure without judicial proceedings, the lender “had no need to pursue foreclosure through a court action” and therefore, Borrowers “could not block a foreclosure by raising affirmative defenses.”  Rather, Borrowers chose to bring an affirmative lawsuit against WaMu and JPM for common law and statutory claims based on WaMu’s alleged fraud.  The Court found that nothing in FIRREA supports Borrowers’ argument that such a lawsuit should be construed as an affirmative defense.

Lastly, the Court concluded that Borrowers’ complaint alleges claims “relating to any act or omission” of WaMu, but does not assert any independent claims against JPM.  In reaching this conclusion, the Court found that all the claims in Borrowers’ complaint “rest on the theory that WaMu took deceptive and fraudulent actions to induce them to enter into a loan agreement.”  Importantly, the Court emphasized that “a claimant cannot circumvent the exhaustion requirement [of FIRREA] by suing the purchasing bank based on the conduct of the failed institution.”  Indeed, “[w]here a claim is functionally, albeit not formally, against a depository institution for which the FDIC is receiver, it is a ‘claim’ within the meaning of FIRREA’s administrative claims process.’” (Emphases in original).

Entities that purchase assets out of receivership and entities that subsequently acquire such assets should be mindful of the jurisdictional defense based on FIRREA.

CIT announces purchase of OneWest Bank

By: Daniel A. Cozzi

On July 22, 2014 CIT Group Inc announced that it would purchase OneWest Bank NA for $3.4 billion in cash and stock.

OneWest Bank NA (formerly OneWest Bank, FSB) was a participant in consumer lending and was  formed during the acquisition of certain assets and certain limited liabilities of IndyMac Federal Bank, FSB from the FDIC.  IndyMac Bank, FSB. was closed on July 11, 2008 by the Office of Thrift Supervision and the FDIC was named Conservator.