Mortgage Banking Update - August 09, 2012

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August Deadline for AML Compliance Is Here

The deadline is fast approaching for every non-bank residential mortgage originator—mortgage lenders and mortgage brokers—to implement an AML (anti-money laundering) program. As of August 13, 2012, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is requiring such entities to:

  • Develop internal policies, procedures, and controls
  • Designate a compliance officer
  • Institute an ongoing employee training program
  • Employ an independent audit function to test programs

As part of the AML program, non-bank residential mortgage lenders must also implement programs to report potential money laundering, fraud, and other criminal activity to the government in the form of a SAR (suspicious activity report). The penalties for non-compliance are severe, ranging from cease-and-desist orders and civil money penalties to stiff fines and other criminal penalties.

Now is the time to assess whether your AML program will pass muster with the regulators. Use our questionnaire as a starting point to think about these issues.

Reid F. Herlihy


10th Circuit Court of Appeals: MERS Can Assign Deeds of Trust; Sending Letter To Lender is Insufficient To Assert Rescission Rights Under TILA

The 10th Circuit Court of Appeals recently affirmed a decision of the U.S. District Court for the District of Utah. In Tadehara v. HSBC Bank USA, N.A., et al., No. 11-4176, 2012 WL 2581037 (10th Cir. July 5, 2012), the 10th Circuit rejected appellants’ argument that assignments made by Mortgage Electronic Registration Systems, Inc., (MERS) of a deed of trust were invalid. The Court also held that appellants failed to assert certain rights under the Truth in Lending Act (TILA) by failing to file suit within three years of their loan transaction.

Appellants argued that MERS – which had been named as the beneficiary and granted the power to foreclose under the deed of trust at issue – lacked authority to effectuate the assignments, which then prevented the assignee bank from foreclosing. Citing to Commonwealth Property Advocates, LLC, v. MERS, 2011 UT App 232, 263 P.3d 397, cert. denied, 268 P.3d 192 (Utah 2011), the 10th Circuit pointed out that appellants’ interpretation of Utah statute had been “squarely rejected by the Utah Court of Appeals,” and explained that the reasoning of that case had been endorsed by the 10th Circuit in a different case of the same name, Commonwealth Property Advocates, LLC v. MERS, 680 F.3d 1194 (10th Cir. 2011). The Utah Court of Appeals had held that nothing in Utah statute prevents MERS from acting on behalf of a lender, and that transfers of interest such as those at issue in appellants’ case do not strip an assignee of a deed of trust from exercising rights under it, including the right to foreclose. 

The 10th Circuit upheld the District Court and rejected appellant’s arguments, holding that under the authority of the Commonwealth decisions, “it was entirely proper for the district court to dismiss” plaintiff’s claim. With Tadehara, the 10th Circuit reiterates its strong view that MERS can act on behalf of lenders, a view shared by courts in other jurisdictions. For more on the Commonwealth case from the Utah Court of Appeals, in which appellees were represented by Ballard Spahr attorneys, click here. For more on the 10th Circuit’s endorsement of the reasoning in Commonwealth, click here.

The 10th Circuit also rejected appellant’s TILA claims. TILA gives borrowers the right to rescind a consumer credit transaction that involves a security interest in the borrowers’ principal dwelling. If a creditor complies with TILA’s disclosure requirements, the “right of rescission” expires three days from the date the transaction is consummated or the house is sold, whichever happens first. If the disclosures are not provided, the right of rescission is extended from three days to three years. 

Appellants alleged that the originating lender had failed to provide required disclosures, and that they sent a letter to defendants notifying them of their intent to rescind the loan transaction. Appellants argued that by sending the letter within three years of the transaction, they had effectively exercised their rights under TILA. The 10th Circuit rejected this argument, explaining that TILA Section 1635(f) is “a statute of repose which limits the ability to file an action or assert a defense.” Citing to a recent 10th Circuit opinion, Rosenfield v. HSBC Bank, USA, No. 10-1442, 2012 WL 2087193 (10th Cir. June 11, 2012), the 10th Circuit explained that it is not enough for a borrower to simply send a letter within three years of the transaction; the borrower must file an action in court within that timeframe or their right of rescission is lost. With Tadehara and Rosenfield, the 10th Circuit joins the Third and Ninth circuits in holding that notice alone within the three-year period is insufficient to validly exercise a right to rescind. The Fourth Circuit, however, has held to the contrary. For more on this and other issues, click here.

Lawyers in Ballard Spahr’s Mortgage Banking Group regularly defend clients on mortgage-related issues and advise on statutes such as TILA.

- Steven D. Burt


Sending Collection Letter 'In Care of' Debtor's Employer Violates FDCPA, Ninth Circuit Holds

A debt collector violates the Fair Debt Collection Practices Act by sending a collection letter to the debtor's employer's address even if the letter is addressed to the debtor "in care of" the employer, the U.S. Court of Appeals for the Ninth Circuit has ruled.

In its August 1, 2012, majority decision in Evon v. Law Offices of Sidney Mickell, the Ninth Circuit held that, absent the debtor's consent, sending a collection letter addressed to a debtor "in care of" the debtor's employer is a per se violation of the prohibition on third-party communications in Section 1692c(b) of the FDCPA.

FDCPA Section 1692c(b) generally prohibits a debt collector, without the debtor's consent, from communicating about the collection of a debt with any person other than the debtor, the debtor's attorney, a consumer reporting agency if otherwise permitted by law, the creditor, the creditor's attorney, or the debt collector's attorney.

The Evon complaint was filed as a putative class action. The named plaintiff's employer had opened the letter addressed to her, which was mailed in an envelope showing the defendant "law office" as the return address.

In the Ninth Circuit's view, the debt collector "knew or could reasonably anticipate" that a letter sent to a debtor's employer "might be opened and read by someone other than the debtor as it made its way to him/her." It also observed that, because of the return address, someone handling the plaintiff's mail would know that she "was receiving legal mail, a fact many people would prefer be kept private," and that "disclosing a consumer's personal affairs to his or her employer is a form of collection abuse."

The court found support for its ruling in the Federal Trade Commission's FDCPA Staff Commentary. The Commentary provided that a debt collector cannot "send a written message that is easily accessible to third parties" and can use an "in care of" letter only "if the consumer lives at, or accepts mail at, the other party's address." (The Dodd-Frank Act gave FDCPA enforcement and rulemaking authority to the Consumer Financial Protection Bureau.)

In a harshly worded dissent, the dissenting judge took issue with the majority's view that "a debt collection letter addressed to a debtor at his place of employment is a communication made to an indefinite number of persons in the employer's business." Observing that there was "nothing in [his] experience" to suggest that it was "the rule or common practice in the United States" for letters to a person in care of the person's employer to be opened, the dissenting judge stated that "the majority invents a custom to confirm its conclusion."

The district court had denied the plaintiff's class certification motion, finding that commonality, typicality, and adequacy were lacking. The Ninth Circuit disagreed with the district court's conclusion that individual questions of consent precluded commonality, finding that the debt collector had produced no evidence showing certain class members had consented to receiving letters at work. In the Ninth Circuit's view, commonality existed because all class members "suffered the same injury" in that they received a collection letter at work without giving consent.

The Ninth Circuit also disagreed with the district court's view that, because the debt collector had sent the letter to the plaintiff's workplace by accident after being instructed not to contact her at work, the plaintiff's claim was subject to a unique bona fide error defense.

According to the Ninth Circuit, the debt collector was ineligible for the bona fide error defense as a matter of law because he intentionally sent collection letters to workplaces without having any procedures in place to determine whether a debtor had consented to receiving mail at work. Finally, the Ninth Circuit found that the plaintiff would be an adequate representative despite having waived her actual damages claim by accepting the debt collector's offer of judgment on her individual claim.

Ballard Spahr lawyers regularly consult with their clients engaged in consumer debt collection on compliance with the FDCPA and state debt collection laws. As we summarized in a prior legal alert, the CFPB has issued a proposal to supervise certain debt collectors and debt buyers as “larger participants.” The CFPB will soon be examining debt collectors and debt buyers who qualify as “larger participants." We are currently conducting compliance reviews for debt collectors and debt buyers in anticipation of their first CFPB examinations.

- Barbara S. Mishkin


Covenants in M&A Transactions
Guest column from members of our Mergers and Acquisitions/Private Equity Group

There is frequently a period of time between the signing of a definitive acquisition agreement and the closing of the acquisition. This is generally due to regulatory approvals, third-party contractual consents and other conditions that must be satisfied before an acquisition can be completed. It is very important that both the buyer and the seller understand their obligations to the other party during this time. Frequently, the parties will also agree to do (or not do) certain things for a period of time after the acquisition has closed. These pre-closing and post-closing agreements between the buyer and the seller are generally referred to as “covenants” and are usually extensively negotiated by the parties. Below is a summary of some key covenants typically included in a definitive acquisition agreement.

Conduct of Business Pending Closing. In this provision, the parties will agree that, until the acquisition is complete or terminated pursuant to the terms of the definitive acquisition agreement, the seller shall continue to operate the business in the ordinary course, consistent with past practices. The seller will also usually agree to take reasonable measures to preserve the business during this period. The buyer, however, will also likely want the seller to affirmatively agree not to engage in specified activities outside of the ordinary course of business, such as amending organizational documents, incurring additional indebtedness, settling significant litigation, or changing the compensation of its employees. The parties frequently spend a significant amount of time negotiating these restrictions, as the seller wants to maintain flexibility in operating the business prior to the closing and the buyer wants to make sure that there are no material changes to the business during this period.

No Solicitation. In this provision, frequently referred to as a “no shop” provision, the seller agrees not to solicit, provide information to, or otherwise encourage the negotiation of an alternative sale transaction with a third party other than the buyer. However, in a sale of a publicly held company, it is customary to include a “fiduciary out” as an exception to the no solicitation provision. This exception allows the company to negotiate and complete a transaction with a third party if failing to do so would be a breach of the directors’ fiduciary duties. In many cases, the fiduciary out requires that the seller’s board of directors make a determination that the alternative proposal is a superior proposal. The parties often will spend a great deal of time carefully structuring the process of determining whether an alternative proposal is superior, including whether the buyer has the right to match any proposal before the seller is able to accept a superior proposal.

Reasonable Best Efforts; Further Action. In this provision, the parties will agree to work together to make any necessary filings or obtain any necessary regulatory approvals or third-party consents. This section will set forth the standard of conduct that will apply to the parties. For example, if a transaction is subject to the Hart-Scott Rodino Act (HSR), the federal premerger notification program, this section may specify when the HSR filing will be made, who pays for the filing, and the ramifications if the transaction is not approved or if the applicable government entities make one or more requests for additional information.

Stockholder Approval. In connection with the sale of a publicly held company, this section requires the seller (and the buyer if the buyer’s stockholders are required to approve the acquisition) to take actions necessary to hold the stockholders’ meeting to adopt the definitive acquisition agreement and approve the transaction. This section will also cover when proxy materials must be prepared and who pays for the solicitation.  In the sale of a privately held company, stockholder approval is typically obtained prior to the execution of the definitive acquisition agreement.

Access to Information; Confidentiality. This provision ensures that the buyer has the access and ability to continue to conduct due diligence between signing and closing the acquisition. The seller will want to ensure that this access does not interfere with the seller’s ability to conduct its business and does not disrupt relationships with its suppliers, customers, and governmental entities having jurisdiction over the target business, particularly if the acquisition is not publicly announced.

Employees and Employee Benefits Matters. This section will vary depending on the structure of the transaction and is often heavily negotiated by the parties. It generally governs how the buyer will treat the employees of the seller after the transaction is consummated. This provision may require the buyer to continue to employ the seller’s employees for a period of time, keep salary and bonus compensation at the same level for a period of time, offer comparable benefits, and/or provide employees with credit under the buyer’s employee benefit plans for the time that the employees were employed by the seller. 

Directors’ and Officers’ Indemnification and Insurance. This provision assures the seller that its directors and officers will be indemnified after the closing for their actions in the same manner as they would have been if the acquisition had not occurred. It also contractually obligates the buyer and the surviving corporation to maintain the current directors and officers insurance (D&O insurance) policy, buy a substitute policy with comparable coverage and terms, or obtain what is known as a “tail” policy that provides continuation of coverage of the pre-acquisition policy for a specific period after the merger, while a separate policy is maintained for any actions or claims that arise out of director or officer action following the merger. Frequently, this section will also prohibit the buyer from altering the indemnification provisions of the surviving company’s governing documents for a specific period of time following closing.

Non-Competition. Depending on the structure of the transaction, it may make sense for the buyer to request a non-competition agreement from the seller. This provision would prohibit the seller from engaging in activities that would compete with the buyer in its operations of the acquired business after the closing. Typically, the definition of restricted business, duration of the non-competition period, and the geographic scope are heavily negotiated. This provision may also be broadened to cover the non-solicitation of employees.

While certain key covenants are highlighted here, the parties may include other covenants that are important and relevant to the transaction. Other covenants may include agreements with respect to pre-closing taxes obligations, keeping certain locations open, ensuring that the transaction is qualified as a tax-free reorganization, or electing a representative of the seller to the buyer’s board for a period of time post-closing.

Ballard Spahr’s Mergers and Acquisitions/Private Equity Group has extensive experience drafting and negotiating purchase agreements on behalf of both buyers and sellers in both public and private M&A transactions. For further information, please contact Craig Circosta at 215.864.8520 or circostac@ballardspahr.com, or Jill Stadelman at 215.864.8504 or stadelmanj@ballardspahr.com.


Hawaii Allows Transition Period for Licensing of Subsidiary Mortgage Loan Originator Companies and Mortgage Loan Originators

In its 2012 session, the Hawaii legislature required all exempt registered Mortgage Loan Originators and Mortgage Loan Originator Companies of subsidiaries of insured depository institutions to be licensed, notwithstanding that the federal SAFE Act only imposes registration requirements upon such individuals. This new licensing requirement became effective July 1, 2012. The Hawaii Department of Commerce and Consumer Affairs recently announced that affected mortgage loan originators will have until September 30, 2012, to comply with the new licensing provisions, provided that by July 1, 2012, the mortgage loan originator had created an NMLS record, obtained an NMLS number, and created a sponsorship with an exempt registered mortgage loan originator company. 

Illinois Amends Mortgage Loan Originator Definition to Include Loan Modifications

Illinois recently broadened the scope of the mortgage loan originator definition to include individuals engaged in loan modification activities on behalf of borrowers. Accordingly, individuals who, on behalf of a borrower, directly or indirectly offer or negotiate to adjust the terms of a residential mortgage loan in a manner not previously provided for in the original mortgage loan must be licensed as a mortgage loan originator. Importantly, this change does not apply to loan modification personnel employed by mortgage servicers as they are engaged n loan modification activities on behalf of the servicer, and not the consumer. This amendment is effective immediately.

Published In: General Business Updates, Finance & Banking Updates, Mergers & Acquisitions Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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