Mortgage Banking Update - February 21, 2013

by Ballard Spahr LLP
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MERS Has Power To Assign Interest in Deed of Trust, Borrower Can Challenge Assignment of Mortgage, First Circuit Rules

Under Massachusetts law, Mortgage Electronic Registration Systems, Inc., or MERS, has the power, as nominee beneficiary, to assign its interest under a deed of trust, the U.S. Court of Appeals for the First Circuit has ruled. The ruling is consistent with the majority of appellate rulings throughout the country on this question.

In its February 13, 2013, opinion in Culhane v. Aurora Loan Services of Nebraska, the court further ruled that borrowers have standing to challenge certain assignments of interest in a deed of trust. In addition, the court upheld MERS's practice of appointing employees of the assignee to the position of "vice president" for purposes of assigning legal title.

In a matter of first impression, the First Circuit held that a mortgagor, who is not a party to an assignment, has standing to challenge an assignment only if it claims the assignment is "invalid, ineffective, or void (if, say, the assignor had nothing to assign or had no authority to make an assignment to a particular assignee)." Conversely, a mortgagor has no standing to challenge an assignment that is "effective to pass legal title," even if such assignment may be voidable by one party to the agreement.

The First Circuit reasoned that under Massachusetts law, the mortgagor has the right to a lawful foreclosure and has no way to challenge foreclosure proceedings absent standing because Massachusetts law provides for nonjudicial foreclosure.

The First Circuit also ruled that MERS held valid legal title to the property when it assigned its interest to the servicer. Rejecting the argument that splitting ownership of the note and trust deed invalidated the mortgagor's repayment obligation, the court held that MERS derived its authority to assign the mortgage both from the mortgage contract and from its status as equitable trustee for the noteholder.

Importantly, the court held that the assignment of legal title by MERS was valid even though the "vice president of MERS" who served as the certifying officer executing the assignment, as required by Massachusetts statute, was primarily employed by the servicer/assignee and was designated vice president of MERS "purely as a matter of administrative convenience." The court rejected as "wishful thinking" the plaintiff's argument that the certifying officer's status defeated the assignment, since no statute limited who could serve as a vice president of an assignor corporation.

Anthony C. Kaye and Emily L. Wegener


Federal Judge Refuses To Dismiss Arizona Mortgage Class Action Alleging Interest Rate Fraud

On January 25, 2013 a federal judge in Arizona refused to dismiss a class action lawsuit against an Arizona-based mortgage company in a case involving the 3.5 percent down payment requirement for FHA insurance. The defendant mortgage company had offered a "1 percent down" program, whereby borrowers would provide the 1 percent down payment and receive a "gift" of the 2.5 percent from an ostensibly independent charitable organization.

The plaintiff claimed that she was charged a higher interest rate because she participated in the 1 percent down program. The interest rate was allegedly elevated so the mortgage could be sold as a "premium" mortgage on the secondary market and the additional proceeds of that sale used to repay the 2.5 percent gift along with an "administrative fee." Plaintiff alleged that because she is actually paying the 2.5 percent "gift" through a higher interest rate, the defendants misrepresented the terms of the loan.

The plaintiff brought causes of action against The Lending Company under the Real Estate Settlement Procedures Act (RESPA), the federal RICO statute, the Arizona Consumer Fraud Act, common law fraud, and breach of contract. The mortgage company defendant did not move to dismiss the claims under RESPA, but did move to dismiss one of the RICO claims and the common law fraud and breach of contract claims as merely a recasting of the alleged RESPA violations. The court denied this motion except for the breach of contract claim, which the plaintiff did not oppose. The court also denied the motion to dismiss the RICO claims. It held that the alleged RICO claims did not merely rehash the underlying RESPA claims but that the statutory and common law fraud alleged could form a predicate act under RICO.

The defendant mortgage company's executives attempted to be dismissed from personal liability, arguing that the plaintiff did not assert facts or legal theories under which the individuals could be held liable. The executives were kept in the suit because they allegedly devised the 1 percent down program.

One of the three executives conceived the program and "approved and directed" the corporate actions that form the basis of the claim. The other two executives, however, merely were alleged to have participated in running the loan program, and the plaintiff included an e-mail between the three executives suggesting they get rid of the program and a letter from GMAC Bank informing them GMAC would not participate because it believed the charitable gift was ultimately paid by the lender.

The case is significant because it demonstrates the level of alleged involvement that may be sufficient for a company's executives to be personally named in Arizona mortgage litigation. Indeed, the district court noted that under Arizona law, corporate officers can be liable for the corporation's torts if they have knowledge that amounts to acquiescence.

The case is also significant because it highlights the interplay and potential for lawsuits involving the "gift" requirements for FHA loans. HUD 4155.1 outlines the acceptable sources of borrower funds. While a gift is an acceptable source of funds, the donor may not be a person or entity with an interest in the sale of the property and the gift must be properly documented pursuant to HUD guidelines.

- John G. Kerkorian


DOJ Settles Another 'Pattern or Practice' Fair Lending Case

The U.S. Department of Justice (DOJ) recently settled a fair lending lawsuit against Texas Champion Bank. This means that, once again, a DOJ attempt to use disparate impact evidence to establish that a lender engaged in a "pattern or practice" of intentional discrimination will not be tested in court.

The complaint alleged that there was a "statistically significant" disparity between the interest rates charged to Hispanic and non-Hispanic borrowers on unsecured consumer loans. In addition, the DOJ alleged that the higher rates charged to Hispanic borrowers stemmed from the bank's policy of giving its loan officers "broad subjective discretion" to set rates. According to the complaint, each loan applicant's national origin "was available and known to" the loan officers who personally handled the loans at the bank's branch offices. 

In the complaint, the DOJ asserted various theories for its claim that the bank had discriminated against borrowers on the basis of national origin, violating the Equal Credit Opportunity Act (ECOA). The complaint charged that the bank's policy had a "disparate detrimental impact on Hispanic borrowers." It also charged that such policy constituted "a pattern or practice of resistance to the full enjoyment of rights secured by ECOA" and that the bank's "pattern or practice of discrimination has been intentional, willful, and implemented with reckless disregard for the rights of Hispanic borrowers." Although it did not directly say so in the complaint, the DOJ presumably based its allegation of intentional discrimination on a loan officer's alleged knowledge of an applicant's national origin.

The settlement, which is subject to approval by a Texas federal district court, requires the bank to pay $700,000 to approximately 2,000 Hispanic borrowers. It also requires the bank to implement uniform pricing policies that include a uniform pricing matrix or matrices setting forth objective, non-discriminatory standards for setting interest rates. Under the settlement, if there is a discretionary element in the bank's loan pricing, such standards must include various items such as:

  • Limits on how much a borrower's rate can deviate from the rate determined by the  matrix or matrices
  • The factors a loan officer may consider in exercising such discretion
  • A requirement for loan officers to give borrowers, before setting a rate, written notice that the rate is determined by various factors and may be negotiable within the limits of the bank's loan policies

The bank must also monitor its loans for interest rate disparities and provide ECOA training to its employees.  

The action against Texas Champion appears to be part of a DOJ trend to conflate disparate impact and disparate treatment theories of ECOA liability. Last year, the DOJ took a similar approach in a fair lending case filed against a mortgage company in a New York federal district court; the DOJ also settled that case. The DOJ's decision not to rely exclusively on disparate impact to frame its fair lending cases could reflect its concern over the continued survival of the disparate impact theory.

The U.S. Supreme Court could soon decide whether disparate impact claims are available under the Fair Housing Act if it grants the petition for certiorari filed in Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. A decision disallowing the use of disparate impact claims under the FHA would likely be the death knell for such claims under the ECOA.

To help consumer credit providers prepare for examinations and to prevent, manage, and defend against the increasing number of fair lending challenges, Ballard Spahr has created a Fair Lending Task Force. The task force brings together regulatory attorneys who deal with fair lending law compliance (including the preparation of fair lending assessments in advance of Consumer Financial Protection Bureau examinations), litigators who defend against claims of fair lending violations, and attorneys who understand the statistical analyses that underlie fair lending assessments and discrimination claims.


CFPB Plans for Sharing Information with State AGs Unchanged in Final Disclosure Rule

In its final rule on Disclosure of Records and Information published last week, the Consumer Financial Protection Bureau gave no ground on its position that it has discretionary authority to share confidential information with state attorneys general. This has been a significant concern to the financial industry since the rule was published as an interim final rule in July 2011. 

The final rule allows the CFPB to make discretionary disclosures of confidential information to state AGs "to the extent that the disclosure of the information is relevant to the exercise of the [AG's] statutory…authority" and of supervisory information as long as the AG has "jurisdiction over [the] supervised financial institution."

The CFPB rejected the view of commenters that Dodd-Frank allows the CFPB to share supervisory information such as exam reports only with state regulators having supervisory authority or that confidential information can be shared with state AGs only in circumstances where the AG is exercising its enforcement authority within a judicial process and the disclosure relates to the exercise of such authority. 

The CFPB also refused to modify the rule to notify a financial institution when it receives a request for confidential information from a state regulator or AG or to give a financial institution an opportunity to object to a CFPB decision to provide such information. According to the CFPB, it typically engages in such sharing "within the context of joint supervisory examinations and law enforcement investigations" and "within [that] context, notification could reveal prematurely [investigation or examination] plans and might compromise these joint endeavors." Also, the CFPB is worried that a financial institution "could misuse a right to object…to obstruct or stymie" such plans.

Perhaps most troubling is the ease with which the CFPB dismisses commenters' concerns about privilege waivers resulting from such sharing. The CFPB believes such concerns are "unwarranted," and said financial institutions should take comfort in the fact that the final rule provides that the CFPB's disclosure of confidential information to another agency does not result in a waiver of any legal privileges.

The problem remains that financial institutions have no statutory protection against a waiver when the CFPB provides information to state agencies. While H.R. 4014, which was signed into law near the end of 2012, provides protection for information the CFPB shares with other federal agencies, it provides no anti-waiver protection for privileged information the CFPB shares with state AGs or other state agencies.

- Barbara S. Mishkin


Chicago Adds Debt Collector License

The City of Chicago has added a licensing requirement for any person who, in the ordinary course of business, regularly engages in consumer debt collection on behalf of themselves or others. This new licensing requirement is in addition to the already existing Illinois Collection Agency licensing requirement. However, anyone who is exempt from Illinois Collection Agency licensure is also exempt from the Chicago Debt Collector licensing requirements. The Chicago ordinance also requires debt collectors to send a validation notice to a debtor within five days of initial communication and to also provide verification of the debt. This new licensing obligation goes into effect July 1, 2013.

Texas OCCC Defers Adoption of New MLO Test

The Texas Office of Consumer Credit Commissioner (OCCC), which was initially scheduled to adopt the new Uniform State MLO Test on April 1, 2013, has deferred its adoption of the test to a later date. While a new date has not been selected, the Texas OCCC has indicated that it still plans to adopt the test sometime in 2013.

- Matthew Saunig

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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