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.

Texas Court of Appeals for the First District Court Holds Mortgagors Have Standing to Challenge “Void” Assignment

By: Joshua A. Huber

On July 24, 2014, the First District Court of Appeals of Texas issued an opinion holding that mortgagors have standing to challenge a void assignment in certain circumstances. In Vazquez v. Deutsche Bank Nat. Trust Co., N.A., —S.W.3d—, 2014 WL 3672892 (Tex. App—Houston [1st Dist.] Jul. 24, 2014, no pet.), the mortgagor filed suit to quiet title contending, among other things, that the assignment of her deed of trust was invalid. The trial court found the mortgagor lacked standing to contest the assignment and granted summary judgment in favor of the mortgagee. [1] The mortgagee’s standing defense was premised on the general Texas rule that “a non-party to a contract cannot enforce the contract unless she is an intended third-party beneficiary.”[2]

On appeal, the Court rejected the mortgagee’s argument, noting that this general rule does not apply when a non-party to a contract alleges that the contract was void from the outset.[3] The Court based its determination on its prior decision, which held that “[t]he law is settled that the obligors of a claim may defend the suit brought thereon on any ground which renders the assignment void, but may not defend on any ground which renders the assignment voidable only . . . .”[4] 

Thus, the Court clarified that a mortgagor has standing to contest an assignment of his deed of trust, so long as the petition includes allegations which, if true, would render the assignment void, as opposed to merely voidable.[5] In Vazquez, the borrower alleged that the assignment was invalid because the signature appearing thereon was a forgery. The Court determined that the borrower met the standard of sufficiently alleging that the assignment is void, because a forged deed is void.[6] 

As a result of the Court’s decision, it appears that, under certain limited circumstances, borrowers may be able to contest the assignment of their deeds of trust, provided that such allegations, if true, would render the assignment absolutely void. The standing defense should still be an effective tool, however, against allegations which would merely render an assignment voidable by the parties, such as allegations of fraud or lack of authority.[7]

[1] Id. at *1.

[2] Reinagel v. Deutsche Bank Nat. Trust Co., 735 F.3d 220, 224-25 (5th Cir. 2013) (citing S. Tex. Water Auth. v. Lomas, 223 S.W.3d 304, 306 (Tex. 2007).

[3] Vazquez, 2014 WL 3672892, at *3.

[4] Id. at *2 (quoting Tri–Cities Construction, Inc. v. American National Insurance Co., 523 S.W.2d 426 (Tex. Civ. App.-Houston [1st Dist.] 1975, no writ).

[5] Id. at *3.

[6] See Dyson Descendant Corp. v. Sonat Exploration Co., 861 S.W.2d 942, 947 (Tex. App.—Houston [1st Dist.] 1993, no writ).

[7] See, e.g., Nobles v. Marcus, 533 S.W.2d 923 (Tex. 1976) (a contract executed on behalf of a corporation by a person fraudulently purporting to be a corporate officer is, like any other unauthorized contract, not void, but merely voidable at the election of the defrauded principal).

Special Considerations Required to Protect Lienholder Interests in Ohio Expedited Foreclosure Matters

By: Chrissy M. Dunn

Recently, there has been an uptick in demolitions of dilapidated and abandoned residential properties in Ohio, which are primarily acquired by community land banks through expedited tax foreclosure matters.  Lienholders should be aware of special considerations needed to protect their interests in expedited tax foreclosure matters authorized by Ohio law.

Summary of the Ohio Expedited Foreclosure Statute

Ohio Revised Code Sections 323.65 to 323.79 (“Ohio Expedited Tax Foreclosure Statute”) allow counties to expeditiously prosecute tax foreclosure actions against abandoned or vacant properties.  Expedited foreclosure proceedings are intended to help communities recover from the foreclosure crisis by facilitating the return of vacant, abandoned, and tax foreclosed properties to productive economic use, more quickly than they would be in traditional tax foreclosure actions through direct transfer to a county land bank without a foreclosure sale. The statutory procedure allows for quick disposal of abandoned properties which are dilapidated, run down, neglected, environmentally hazardous, and/or dangerous, by turning them over to a political subdivision, land reutilization corporation, school district, or eligible community development organization for demolition or rehabilitation purposes. Donations of these properties to land reutilization corporations, known as community land banks, appear to be on the rise in Ohio.  

Banks and HOAs may actually favor these expedited procedures, as shorter timelines free up the backlog of court cases and help resell homes more quickly. Nonetheless, due to the quick pace in these cases, it is especially important that lienholders served with a Complaint in an expedited tax foreclosure act promptly to protect their interests.

Expedited foreclosure actions may be prosecuted in civil courts or the Ohio “Board of Revision” (“BOR”). To qualify as an expedited foreclosure case under the statute, the subject property must be abandoned, unoccupied, and certified as tax delinquent for a year or more.  If even one of these requirements is not met, the BOR loses jurisdiction over the case, and the Ohio Expedited Tax Foreclosure Statute does not apply.    

The Ohio Expedited Tax Foreclosure Statute provides that if “Impositions (delinquent taxes, assessments, penalties, interest, costs, reasonable attorney’s fees of a certificate holder, applicable and permissible costs of the prosecuting attorney of a county, and other permissible charges against abandoned land) exceed the auditor’s assessed value of the property in an expedited foreclosure proceeding, it may be transferred without a foreclosure sale.  The statute on its face appears to require that a property be taken to foreclosure sale after the entry of a decree of foreclosure, only if the Impositions do not exceed the auditor’s assessed value of the property; however, some Ohio prosecutors take the position that O.R.C. § 323.78 allows the BOR to transfer any abandoned, qualifying property directly to an applicable community organization, without a sale.

Responding to an Expedited Tax Foreclosure Matter

The easiest resolution for a case in which the lienholder believes the property has equity and wants to prevent the immediate transfer of the property without a sale, is to pay the taxes for the parcel to have the case dismissed, so that a lienholder may file its own foreclosure. This will not likely be a desirable option in most expedited foreclosure matters (due to the jurisdictional requirements in these cases, they are likely blighted properties).

O.R.C. § 323.72(A)(2) provides that at any time before confirmation of sale or transfer of abandoned land or before the expiration of the alternative redemption period, a lienholder or another person having a security interest of record in the abandoned land may plead that in order to preserve the lienholder’s or other person’s security interest of record in the land, the complaint should be dismissed and the abandoned land should be removed from the abandoned land list and not disposed of as provided in sections 323.65 to 323.79 of the Ohio Expedited Tax Foreclosure Statute. The BOR may approve such a request without a hearing.  

If the board approves the request without a hearing, the board shall file the decision with the clerk of court, and the clerk shall send a notice of the decision to the lienholder or other person by ordinary mail.

BOR Hearings

If a lienholder does not wish to pay the taxes in an expedited foreclosure action, it may answer the complaint and seek that the property be taken to a sheriff’s sale. A lienholder may file with the county BOR a good faith appraisal of the parcel from a licensed professional appraiser, and request a hearing to determine whether the Impositions against the parcel of abandoned land exceed or do not exceed the fair market value of that parcel as shown by the auditor’s then-current valuation of that parcel. The lienholder may present evidence of the property value at the hearing. The request for this hearing must be filed not later than seven days before a final hearing on a complaint.  

The only questions to be considered at the hearing are the amount and validity of all or a portion of the Impositions, whether those Impositions have in fact been paid in full, and, under division (A)(1) of the section, whether valid issues pertaining to service of process and the parcel’s status as abandoned land have been raised. 

At the hearing, the BOR shall make a factual finding as to whether the Impositions against the parcel exceed or do not exceed the fair market value of that parcel as shown by the auditor’s then-current valuation of that parcel.  An owner or lienholder must show by a preponderance of the evidence that the Impositions against the parcel do not exceed the auditor’s then-current valuation of the parcel in order to preclude direct transfer without a sale. 

The auditor’s valuation may serve as evidence of the property value, but may be rebutted.

At the conclusion of the final hearing at which a final decree of foreclosure is entered in an expedited foreclosure proceeding, the property may be transferred without a sheriff’s sale unless the Impositions are paid within 45-days of journalization of the entry of final foreclosure.  After the 45-day redemption period expires, the right and equity of redemption of any owner or party terminates without further order of the court or BOR.  

Lienholders should keep these considerations in mind if a property has equity which the lienholder would like to protect, and should retain counsel quickly to protect their interests.