Uniform State Test Implementation Nearing
As we previously noted, on April 1, 2013, 20 state agencies will begin to accept the Uniform State Test (UST) in connection with the licensing of mortgage loan originators. The UST will supplant the various state-specific testing requirements of those state agencies.
A new national test with a UST section will replace the existing national test for MLOs, regardless of whether a state has adopted the new test. The new test will be available to MLOs nationwide. Additionally, a 25-question "stand-alone" UST will be made available on April 1, 2013. This stand-alone test will allow currently licensed MLOs who have passed the old national test to meet the testing requirements of states that have adopted or will adopt the UST. The stand-alone test will only be available until March 31, 2014.
State agencies that have not yet adopted the UST will continue to require applicants to take and pass the current state-specific test components in addition to the national test, notwithstanding the inclusion of the UST in the national test. However, candidates who pass either the stand-alone or new national test will satisfy the testing requirements for any state agency that adopts the UST in the future.
If candidates already have enrolled to take the national test component before April 1, 2013, they must continue with their plans to take the national test in order to become eligible to take the new national test with the UST. Additionally, people who have already enrolled to take a state test component cannot cancel that enrollment. However, so long as they have successfully passed the national test component, they can enroll to take the stand-alone UST regardless of any open enrollments they may have for any state test components.
Once the national test component with the UST is launched, the old national component will no longer be available. At that time, candidates will be required to take and pass the new national test with the UST component, regardless of the state in which they intend to be licensed.
Any candidates who have taken and failed the national test component three times will be unable to enroll and take the national test component with the UST on April 1, unless they have satisfied their current wait period (whether it is 30 or 180 days). Candidates who have passed the national test but failed a state test can enroll to take the stand-alone UST as soon as it is launched and adopted by the state. In instances where a state has not yet adopted the UST, candidates must wait for the current wait period to expire if they have failed the state test.
Note that individuals still must satisfy state specific education requirements regardless of whether a state has adopted the UST.
The NMLS has provided examples concerning various enrollment scenarios to better guide candidates as to what test to take, and when.
- John D. Socknat and Matthew Saunig
Mortgage Servicer's Alleged Failure To Be Licensed Subjects Company to Claims under State and Federal Debt Collection Statutes
A Maryland court recently refused to dismiss a borrower's claims that a mortgage servicer operated as a debt collection agency without the debt collection license required under state law in violation of the Fair Debt Collection Practices Act (FDCPA), the Maryland Collection Agency Licensing Act (MCALA), and the Maryland Mortgage Fraud Protection Act (MMFPA). This case demonstrates the expanding notion of potential liability to mortgage servicers and others concerning debt collection and related activities that were previously believed to be excluded from exposure.
On March 11, 2013, U.S. District Court Judge Ellen Tipton Hollander issued her opinion in Ademiluyi v. PennyMac Mortgage Investment Trust Holdings, granting in part and denying in part the mortgage company defendants' motion to dismiss. In this case, the borrower asserts claims under state and federal law based on the defendants' debt collection and foreclosure activities, and seeks damages in excess of $8.5 million.
The main issues in Ademiluyi involve the borrower's debt collection and mortgage fraud claims under the FDCPA, MCALA, and MMFPA. As a preliminary matter, the Court considered whether the borrower stated a claim against PennyMac Holdings, the mortgage servicer, under the FDCPA for violations of the MCALA. To state a valid claim, the plaintiff must allege that the defendants violated the MCALA by failing to obtain the requisite collection license, and in violating the MCALA, the defendants engaged in conduct that also violated the FDCPA.
The court first determined that the complaint satisfied the pleading requirements for a claim against PennyMac Holdings. The Court noted that the definition of "consumer claim" under the MCALA mirrors that of "debt" under the FDCPA. In her analysis, Judge Hollander relied on a recent case, Glazer v. Chase Home Finance, in which the Sixth Circuit considered a home loan a "debt" so long as it meets the definition of "debt" under the FDCPA. The Sixth Circuit also observed that mortgage foreclosure is simply a method to satisfy a debt. Judge Hollander concluded that the Fourth Circuit would likely follow suit and similarly hold that a foreclosure practice constitutes debt collection under the FDCPA.
Next, the court's analysis shifted to whether the plaintiff alleged a violation of a specific FDCPA provision concerning the plaintiff's debt. The plaintiff alleged that PennyMac Holdings' Notice of Intent to Foreclose represented a "threat" by a debt purchaser to foreclose on her mortgage in violation of 15 U.S.C. 1692e(5) and that PennyMac Holdings engaged in collection activity without a license. The court noted that, based on these allegations, PennyMac Holdings may have used unfair or unconscionable means to collect the debt. The court was satisfied with the allegation that PennyMac Holdings sent the Notice of Intent to Foreclose "in connection with" the collection of the debt, which is all the FDCPA requires.
On the mortgage fraud claims, the court found that the plaintiff stated a viable claim under the MMFPA, which creates a statutory duty to disclose and related action for fraud. Under the MMFPA, PennyMac Holdings had a duty to disclose material information about the mortgage lending process. Similar to the FDCPA claim, the plaintiff alleged that PennyMac Holdings violated its duty to disclose that it lacked the license required to operate in Maryland as a debt collection agency. The court agreed that such a disclosure can be material to a plaintiff who believes that the defendant is licensed and therefore engaged in lawful conduct.
The court held, however, that even though PennyMac Holdings did not possess the required license, the borrower was not relieved of her duty to pay her debt or entitled to any restitutionary damages for mortgage payments made to the company. The court stated that the "plaintiff cannot assert that, in paying an obligation that she was contractually bound to pay, she relied on defendant's alleged failure to disclose that it lacked a license. To conclude otherwise would result in a financial windfall to plaintiff that does not appear to be contemplated by the statute."
- Shane Jasmine Young
Sixth Circuit Rejects Nationwide Settlement of Robo-Signing Class Action
A nationwide settlement of three class actions involving claims that a creditor's practice of using "robo-signed" affidavits in debt collection actions violated the Fair Debt Collection Practices Act (FDCPA) has been overturned by the U.S. Court of Appeals for the Sixth Circuit.
In Vassalle v. Midland Funding LLC, the Sixth Circuit held that the district court had abused its discretion in approving the settlement and certifying the nationwide settlement class and erred in finding that the notice to the class satisfied due process. The settlement required the defendant to pay $5.2 million into a common fund for the benefit of the class and, by way of injunctive relief, to create and implement procedures to prevent the use of robo-signing. A retired federal judge was to monitor the defendant's compliance with the injunction, which was to last one year.
The Sixth Circuit found that the settlement should not have been approved because the disparity in the relief it provided to the named plaintiffs and to the unnamed class members was so great as to make the settlement unfair. While exonerating the named plaintiffs of their debts, the settlement would prevent the unnamed class members from using the allegedly robo-signed affidavits against the defendant in any other lawsuit. In the court's view, this would "virtually assur[e] that [the defendant] will be able to collect on these debts."
In addition, the court found the relief provided to the unnamed class members "perfunctory at best" because it would only pay them $17.38 each. The court also found that the one-year injunction was of little value for reasons that included leaving the defendant "free to resume its predatory practices" after the injunction expired.
The court next concluded that the settlement did not satisfy two of the requirements for class certification: adequacy of representation and superiority of a class action. According to the court, adequacy of representation was lacking because the settlement's forgiveness of the class representatives' debts gave them an interest that was antagonistic to that of unnamed class members. While the unnamed class members were interested in ensuring the settlement's disapproval so they could retain the right to challenge the affidavits in court, the class representatives were interested in securing the settlement's approval so their debts would be forgiven.
The court found that the superiority factor was not satisfied because the unnamed class members had an interest in individually challenging the affidavits in lawsuits seeking to vacate the defendant's state court judgments against them. In the court's view, the likelihood was high that many class members would bring individual lawsuits.
The Sixth Circuit found the class notice to be deficient because it did not adequately notify class members that by not objecting, a class member would lose the right to raise the affidavits against the defendant in the collection actions.
- Barbara S. Mishkin
FTC Issues Report on Mobile Payments
The Staff Report on mobile payments recently issued by the Federal Trade Commission (FTC) focuses on areas of concern discussed at the FTC's April 2012 workshop. The report does not break much new ground, but it does reinforce the FTC's intention to be an active regulator in the mobile payments arena.
As the report notes, the FTC has jurisdiction over many of the companies that are involved in this arena. They include telecommunications companies when engaged in non-common carrier activities; according to the FTC, such activities include third-party mobile carrier billing. FTC jurisdiction also extends to nonbank providers of various types of goods and services, such as hardware manufacturers, operating system and application developers, data brokers, coupon and loyalty program administrators, payment card networks, advertisers, merchants, and payment processors.
The four areas of concern highlighted in the report are described below.
Payment cards linked to mobile payment apps, such as stored value cards, credit cards, and debit cards, are regulated differently. The report observes that stored value cards, such as gift cards and prepaid cards, are not subject to the Electronic Fund Transfer Act and its implementing regulation, Regulation E. This regulation includes limits on a cardholder's liability for disputed charges to $50 for credit and debit cards, as long as cardholders follow certain reporting procedures and time limits.
Regulation E also requires a bank to investigate dispute charges and limits a bank from asking for certain forms of proof from cardholders. While acknowledging that many stored value card issuers provide Regulation E protections, the FTC staff believes such protections should be mandated. As the report notes, the Consumer Financial Protection Bureau has been examining whether Regulation E protections should be extended to general purpose reloadable cards.
Mobile Carrier Billing
The FTC staff endorses a number of guidelines for wireless carriers to protect consumers against crammed charges. "Cramming" is the practice of third parties placing fraudulent charges on a consumer's telecommunications carrier bill. Although the Federal Communications Commission has adopted an "anti-cramming" rule, that rule does not apply to wireless carriers if they are conducting non-common carrier activities like delivering payments over the Internet. The report urges carriers to:
Block all third-party charges to wireless bills if requested by the consumer (emphasis in the original)
Provide clear and prominent disclosure that third-party charges may be added to consumers' bills and explain how to block these charges
Establish a dispute and reimbursement process
The report also states that carriers should highlight third-party charges on billing statements, notify consumers of recurring charges, provide an opportunity to cancel a subscription or other service before a recurring charge is imposed, and conduct more due diligence of third parties, including affirmative content monitoring.
The report states that mobile payment participants have the tools to improve the security of consumer information, such as end-to-end encryption and dynamic data authentication. The report observes that mobile payment technology, in theory, allows encryption to be present from the swipe of a card or the touch of a phone through each processing stage. It also says that virtual payments can provide unique authentication factors for each transaction so that even if one transaction is intercepted, the attacker can only misappropriate that transaction instead of the underlying payment card.
Using its unfair and deceptive practices authority outside the realm of mobile payments, the FTC previously initiated a number of enforcement actions. These actions targeted companies for allegedly using consumer information in ways that were inconsistent with or not disclosed in their privacy policies, or that were otherwise harmful to consumers.
Consistent with the FTC's February 2013 report on mobile privacy disclosures and the FTC's recent update of the Dot-Com Disclosures, the report identifies choice and transparency as the touchstones for consumer privacy. This means companies should be clear about how they use customer information and provide choices regarding how information is used, at least when the context of the transaction would not make a company's use of the information obvious to the consumer.
- Mercedes Kelley Tunstall, Amy S. Mushahwar, and Trevor Salter
Trustee and Loan Servicer Are in Privity for Purposes of Applying Res Judicata
The U. S. District Court for the Middle District of Georgia has joined district courts from Alabama, Nevada, and Tennessee in holding that for purposes of res judicata, privity exists between a loan servicer and trustee. As a result, the court held that because the borrower's earlier suit against the servicer had been dismissed with prejudice, res judicata barred the borrower's subsequent suit against the trustee. This decision has the potential to assist in combating abusive borrower litigation and enabling interested parties to repossess property more efficiently and with fewer associated costs.
In Bailey v. Deutsche Bank Trust Company Americas, a defaulted borrower filed suit against the trustee of the trust containing the borrower's mortgage. The borrower sought to enjoin a dispossessory action resulting from a prior foreclosure on her property. As a basis for her claim, the borrower alleged that the prior foreclosure was wrongful and/or negligent, and the dispossessory action should be barred.
Before filing the action against the trustee, however, the borrower had filed suit against her loan servicer for wrongful foreclosure and a variety of related claims in the Northern District of Georgia. After giving the borrower an opportunity to amend her complaint to remedy various pleading deficiencies, the court entered a dismissal with prejudice on the borrower's asserted claims against the servicer.
In holding that res judicata barred the borrower's subsequent suit against the trustee, the court noted that the 11th Circuit had not yet addressed the issue of whether privity exists between loan servicers and lenders or transferees. The court further noted, however, that several district courts had considered the question and found privity existed between these parties. The court found those opinions persuasive and held that privity exists between the servicer and trustee because both parties share "a concurrent interest in collecting the debt owed by [p]laintiff and enforcing the same property right, which was secured by the [plaintiff's] Property." The court also held that all of the other elements of res judicata were satisfied – the prior decision was rendered by a court of competent jurisdiction, the dismissal with prejudice operated as a decision on the merits, and the borrower's claims against the trustee could have been raised in the earlier suit.
The court also remarked that the borrower's most recent suit appeared to be yet another attempt to forestall her "imminent eviction" and that the borrower had been engaged in such litigation for more than three years. The filing of successive lawsuits is a common tactic that borrowers employ to retain possession of the property as long as possible after default. The Middle District of Georgia's decision seems to recognize this reality of the foreclosure process.
- Stefanie H. Jackman
Collection Letter Inviting Debtor To Call Toll-Free Number Violated FDCPA, Third Circuit Holds
A collection letter violated the Fair Debt Collection Practices Act (FDCPA) because its invitation to call a toll-free number could be read by the "least sophisticated debtor" to permit the debt to be effectively disputed by telephone, the U.S. Court of Appeals for the Third Circuit has ruled.
FDCPA Section 1692g requires a debt collector to send a written "validation notice" to a consumer within five days of the collector's initial attempt to collect a debt and specifies what information the notice must contain. This section requires the notice to include statements that if the consumer disputes a debt in writing or makes a written request for the name and address of the original creditor, the collector will provide verification of the debt or the requested information. This section also requires a debt collector to cease all collection efforts if it receives a written dispute or information request until the verification or information is provided.
While Section 1692g further requires the validation notice to include a statement that the debt will be assumed to be valid unless the consumer disputes the debt within 30 days, the section is silent on what form the dispute must take to avoid that assumption. Reading the section's requirements together, the Third Circuit has previously held that, to be effective, a debtor must dispute a debt in writing.
In Caprio v. Healthcare Revenue Recovery Group, LLC, the debt collector, on the front of a double-sided collection letter, told the debtor that "[i]f we can answer any questions, or if you feel you do not owe this amount, please call [our toll-free number] or write us at the above address." The words "please call" and the telephone number were in bold, and, in the letterhead at the top of the collection letter, the telephone number appeared again in a larger font than the collector's address. The FDCPA validation notice required by Section 1692g appeared on the letter's reverse side.
Reversing the district court's grant of judgment on the pleadings in favor of the debt collector, the Third Circuit held that the "substance" and "form" of the collection letter "overshadowed and contradicted" the validation notice in violation of Section 1692g. In reviewing the letter's substance, the Third Circuit acknowledged that it did not expressly state that a telephone call would be sufficient to dispute the debt and could be read merely to invite the plaintiff to call the collector. The court found, however, that the "least sophisticated debtor" could read the letter's "please call" statement as an instruction to call or write to dispute the debt.
On the letter's form, the court found that the emphasis on "please call" and the telephone number, combined with the placement of the validation notice on the reverse side, made it more likely that the "least sophisticated debtor" would take the easier alternative of making a toll-free call to dispute the debt. The Third Circuit concluded that the collection letter was deceptive because it could reasonably be read to mean that the plaintiff could call the collector to dispute the debt, even though "a telephone call is not a legally effective alternative for disputing the debt."
- Barbara S. Mishkin
Washington Supreme Court: Trustee's Actions in Nonjudicial Foreclosure Violated Consumer Law
The Washington Supreme Court has held that a trustee's practice in a nonjudicial foreclosure of deferring to the lender on whether to postpone a foreclosure sale violates the state's Washington's Consumer Protection Act (the CPA). In an opinion issued on February 28, 2013, the court found that the trustee failed to fulfill its duty to act impartially toward all of the parties to the deed, and that its practice constituted an unfair or deceptive practice. Further, the court found that a trustee's act of having a notary falsely date notices of sale – part of the practice known as "robo-signing" – also violated the CPA.
Two years after borrowing $73,000 from the lender, an elderly borrower developed dementia and was appointed a guardian by the court. After being placed in a care facility, the borrower became delinquent on her mortgage. A notice of trustee's sale was executed shortly thereafter. Though the notice was dated and notarized on November 26, 2007, it was not signed that day. Before the scheduled sale took place, the borrower's guardian informed Quality Loan Services, acting as the trustee of the deed of trust on the home, that the guardianship intended to sell the property. The guardian also contacted the trustee more than 20 times to get the trustee's sale postponed.
Although the guardian believed the trustee would postpone the sale if the guardian presented the lender with a signed purchase and sale agreement, the trustee had an express agreement with the lender that it would not delay a sale unless otherwise directed by the lender. By February 19, 2008, the guardianship had a signed agreement with a closing date set for nearly a month after the scheduled foreclosure sale, but within the 120-day window for a trustee to hold a sale under Washington law. Nevertheless, the trustee sold the property on February 29, 2008.
The borrower sued the trustee, alleging claims of negligence, breach of contract, and violation of the CPA. The crux of the borrower's claims was that the trustee's practices of deferring to the lender on requests for postponement and falsifying notarized documents were unfair and deceptive, and the trustee was negligent in failing to delay the sale. The jury found for the plaintiff on all claims, and the trustee appealed. The Court of Appeals found that the negligence verdict was sustainable, but the evidence was insufficient to support the breach of contract and CPA claims. The guardianship then sought review by the Supreme Court.
The Supreme Court reversed the Court of Appeals on the CPA claims and restored the trial court's award based upon the CPA. The trial court had determined that the notice was one of many foreclosure documents that had been falsely notarized, and that having a notary predate notices of sale was a common practice the trustee and its employees had been trained to do. The Supreme Court noted that it "does not take lightly the importance of a notary's obligation to verify the signor's identity and the date of signing by having the signature performed in the notary's presence." Considering its previous opinions in which it held notaries liable for falsifying documents and failing to determine the identity of those whose signatures they notarize, the court held that the act of false dating by a notary employed by a trustee violates the CPA.
As for the trustee's failure to exercise independent discretion to postpone the sale, the court found that trustees have obligations to all of the parties to the deed, not just the lender. At a minimum, an independent trustee owes a duty to act in good faith in impartially exercising a fiduciary duty, respecting the interests of both the lender and the debtor. Here, the trustee failed to act impartially toward both sides.
Finally, the court granted the guardianship's motion for an injunction to require the trustee to follow Washington law relating to foreclosures and notarizing documents. The court reasoned that the trustee "has demonstrated little understanding or regard for Washington law." Given that the trustee continues to function as a trustee and conduct sales in Washington, the court held injunctive relief was appropriate.
- Anthony C. Kaye and Allison L. Mollenhauer
Residential Lenders in Nevada Losing Out in HOA Lien Foreclosures
In recent months, homeowners associations (HOAs) in Nevada have been foreclosing on their liens for delinquent assessments. HOAs are a part of everyday life for homeowners and lenders in Nevada, but the recent trend of HOA foreclosures has come with an alarming new hitch.
In a number of situations, "investors" and other third parties have bought residential properties out of these HOA foreclosure sales for a small fraction of the properties' worth. These third-party purchasers then purport to own the property outright—free and clear of the lender's first mortgage. Subsequently, they file suit to quiet title to the property in their name, in an attempt to wipe out the mortgage and certain other liens on the property.
The purchasers rely on an ambiguity in Nevada's HOA lien statutes that contradicts the mortgagee protection clause generally included in an HOA's controlling documents. Success by a purchaser in such a quiet title action will result in the extinguishment of a lender's mortgage. Even if the purchaser is unsuccessful, the quiet title action may still prevent the lender from foreclosing during the course of the litigation.
Nevada law provides that a borrower's payment obligation to the HOA is intended to pay for things such as maintaining common areas, assuring that neighbors pull their weeds and contributing to the cost of a gate guard. If homeowners live in a development with an HOA, they must pay regular monthly assessments to the association so it can enforce regulations that are intended to foster a pleasant and uniform way of life. When a homeowner (the borrower with a mortgage or deed of trust in favor of the lender) does not pay the assessments, the HOA is entitled to declare the homeowner in default and, ultimately, to foreclose upon the corresponding HOA lien if the assessment remains unpaid.
Before this recent uptick in quiet title lawsuits, lenders often disregarded HOA foreclosure sales as not affecting their first lien mortgages, relying on a customary—as opposed to a literal—reading of statutes. Most lenders' interpretation of Nevada HOA lien law differs strikingly from the arguments being advanced by the current purchasers. In addition, lenders relied on "mortgagee protection" clauses included in an HOA's controlling documents, which generally protect the rights of first lien mortgage holders in the event of an HOA foreclosure.
The federal and state district courts in Nevada are now considering this issue, with new cases being filed regularly and judges ruling on both sides. Until the Nevada Supreme Court clarifies the status of the law, we anticipate that investors will continue their rampant purchase of properties at Nevada HOA sales and corresponding quiet title actions against mortgage lenders.
- Abran Vigil and Bruce F. Johnson
U.S. Supreme Court Renders Its First CAFA Decision
In its first opinion interpreting the Class Action Fairness Act (CAFA), the U.S. Supreme Court has unanimously held that a class representative cannot prevent removal of a class action from state to federal court by stipulating that he will seek less than $5 million in damages for the class. The decision issued on March 19, 2013, in Standard Fire Insurance Co. v. Knowles will go a long way toward ending the gamesmanship in which certain plaintiffs' class action attorneys have engaged to prevent removal of their cases to federal court under CAFA.
Congress adopted CAFA in 2005 in response to perceived abuses of the class action process in certain state courts. Indeed, Standard Fire was filed in Miller County Circuit Court in Arkansas, which is a well-known magnet for plaintiffs' class action lawyers.
Under CAFA, a class action can be removed to federal court if the proposed class contains at least 100 members, minimal diversity exists between the parties, and the aggregate amount in controversy is at least $5 million.
The Supreme Court had granted certiorari in Standard Fire to resolve a conflict in the circuit courts over whether CAFA jurisdiction could be defeated by the class representative's stipulation in the complaint that limited the damages sought to less than $5 million. In Standard Fire, it was uncontested that the value of the putative class members' claims would have exceeded $5 million, except for the stipulation purporting to limit the class recovery to less than that amount.
The Supreme Court held that the plaintiff's stipulation was not binding on the putative class members, and did not preclude defendant's removal of the case to federal court under CAFA. The Court emphasized that "a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified." Accordingly, the Court said, since the class representative's "precertification stipulation does not bind anyone but himself, [he] has not reduced the value of the putative class members' claims."
The Supreme Court stressed that its decision was consistent with "CAFA's primary objective: ensuring 'Federal court consideration of interstate cases of national importance.'" The Court acknowledged that in individual cases, a plaintiff, who is the "master" of his own complaint, can avoid removal to federal court "by stipulating to amounts at issue that fall below the federal jurisdictional requirement." The key distinction, however, is that such stipulations are legally binding on the individual plaintiff, while the stipulation in the Standard Fire complaint was not legally binding on the putative class members.
With this ruling, the Supreme Court has sent a strong signal to the lower courts that the Congressional goal of facilitating the removal of class actions to federal court under CAFA must be respected.
- Burt M. Rublin
Idaho Refines Mortgage Licensing Exemptions
Recent statutory amendments have added certain exemptions to Idaho's mortgage licensing laws. Accordingly, Idaho has explicitly exempted Idaho-licensed accountants from Mortgage Lender and Broker licensing obligations. Additionally, individuals who are employees of a federal, state, or local government agency or housing finance agency are exempt from MLO licensure so long as they only act as a loan originator as part of their official duties as an employee of such agency. These amendments become effective July 1, 2013.
Nebraska Amends Notification Obligations
Nebraska has amended notification requirements for licensed mortgage bankers and MLOs. Under the revisions, mortgage banker licensees have an obligation to notify the Department of Banking and Finance within three business days after the occurrence of an action to enforce consumer protection laws against the licensee (or any of its officers or employees) brought by a state attorney general, the CFPB, or the FTC. Similar notification is required if a mortgage banker's status as an approved seller or seller/servicer is terminated by Fannie Mae, Freddie Mac, FHA, or Ginnie Mae. The amendments also impose various notification obligations on Nebraska-licensed MLOs. The amendments become effective October 4, 2013.
- Matthew Saunig