U.S. Supreme Court Unanimously Rejects HUD’s Position on Markups

The U.S. Supreme Court today unanimously rejected the U.S. Department of Housing and Urban Development’s interpretation of Section 8(b) of the Real Estate Settlement Procedures Act.

HUD, in its Statement of Policy 2001-1, said Section 8(b) is violated when one settlement service provider marks up the cost of services performed or goods provided by another settlement service provider without providing additional actual, necessary, and distinct services, goods, or facilities to justify the additional charge.

In Freeman v. Quicken Loans Inc., Justice Antonin Scalia stated: “In our view [RESPA section 8(b)] unambiguously covers only a settlement-service provider’s splitting of a fee with one or more other persons; it cannot be understood to reach a single provider’s retention of an unearned fee.” Stay tuned for more from Ballard Spahr on the important decision, including analyses of the opinion and the likely reaction of regulators and plaintiffs’ attorneys. 

MERS Has Power To Assign Interest in Deed of Trust, California Appeals Court Rules

The California Court of Appeal has ruled that the Mortgage Electronic Registration Systems, Inc., or MERS, has the power, as nominee beneficiary, to assign its interest under a deed of trust.

In its May 17, 2012, opinion in Herrera v. Federal National Mortgage Association, the California Court of Appeal, Fourth Appellate District, confirmed the universal view of California’s courts that a borrower’s signature on the deed of trust grants MERS such authority.

The borrowers in Herrera defaulted on a home loan and Federal National Mortgage Association (Fannie Mae) purchased the property at a nonjudicial foreclosure sale. The borrowers filed suit against Fannie Mae to set aside the sale. The trial court dismissed the complaint.

On appeal, the borrowers argued that they should be permitted to amend their complaint to allege that MERS, a nominee beneficiary, lacked authority to assign the note and deed of trust since MERS did not have an agency agreement with the original lender or with the Federal Deposit Insurance Corporation (FDIC) which obtained title to the loan after the original lender was placed in receivership. As a result, the borrowers asserted that the MERS assignment of the deed of trust and note to a subsequent lender was void.

Upholding the trial court’s dismissal of the case, the appellate panel in Herrera relied on the fact that MERS, in the original deed of trust, was granted the right to exercise all interests and rights held by the lender and its successors and assigns, including the right to assign the DOT and to foreclose on borrowers’ property. The court’s rationale is consistent with two California appellate decisions handed down in 2011.

The Herrera court further noted that even if borrowers could show that the MERS assignment of the deed of trust was somehow void, the borrowers could not show any prejudice that would justify invalidating the foreclosure sale. If MERS indeed lacked authority to make the assignment, the court reasoned, the true victims were not the borrowers in default, but the original lender that would have, under such circumstances, suffered the unauthorized loss of its promissory note.

- Barbara S. Mishkin

How Prepared Are You for AML Compliance?

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.

Is your company ready?

Our AML Compliance Questionnaire will help you assess whether your AML program will pass muster with the regulators.

- Beth Moskow-Schnoll

Arizona High Court Rejects ‘Show Me the Note’ Claim in Foreclosure Litigation

Arizona’s non-judicial foreclosure statutes do not require the beneficiary to prove its authority or “show the note” before a trustee may commence a non-judicial foreclosure, the Arizona Supreme Court has ruled.

The May 18, 2012, decision in Hogan v. Washington Mutual Bank, N.A. et. al should have a significant impact on pending and future mortgage foreclosure-related litigation in Arizona, as it flatly rejects a legal theory frequently advanced by borrowers in an attempt to avoid foreclosure.

Sitting en banc, the court was asked to decide whether Arizona law permits a trustee to foreclose on a deed of trust without the beneficiary first having to show ownership of the note that the deed of trust secures. This legal theory, often referred to as the “show me the note” theory, is commonly employed by delinquent borrowers against both trustees and beneficiaries in an attempt to prevent trustee’s sales from moving forward.

The Hogan case involved two parcels of property, each subject to a 2004 deed of trust. When the plaintiff went into default under those deeds of trust, separate notices of trustees’ sales were recorded, with Washington Mutual and Deutsche Bank named as the beneficiaries. Neither beneficiary was an original lender.

The plaintiff filed suit seeking to enjoin the trustees’ sales unless the beneficiaries proved that they were entitled to collect on their respective notes. Both the trial court and the Arizona Court of Appeals rejected the plaintiff’s claims, holding that Arizona’s non-judicial foreclosure statute does not require presentation of the original note before commencing foreclosure proceedings.

In a case of first impression, the Arizona Supreme Court also rejected the plaintiff’s “show me the note” claim, holding that nothing in Arizona’s non-judicial foreclosure statutes mandates that a beneficiary of the deed of trust must show possession of, or otherwise document its right to enforce, the underlying note prior to the trustee’s exercise of the power of sale.

Instead, the court held that the “only proof of authority the trustee’s sale statutes require is a statement indicating the basis for the trustee’s authority.”  The court noted that “[r]equiring the beneficiary to prove ownership of a note to defaulting trustors before instituting non-judicial foreclosure proceedings might again make the mortgage foreclosure process ... time-consuming and expensive, and re-inject litigation, with its attendant cost and delay, into the process.”

- Craig C. Hoffman and John G. Kerkorian

Banking Agencies Issue Joint Guidelines for Internal Stress Testing
Obligations for Small Institutions Remain Murky

The Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation jointly released guidance last week for depository institutions and holding companies with more than $10 billion in assets to assist them in conducting stress tests to detect weaknesses in their operations and on their balance sheets.

“The 2007-2009 financial crisis further underscored the need for banking organizations to incorporate stress testing into their risk management practices, demonstrating that banking organizations unprepared for stressful events and circumstances can suffer acute threats to their financial condition and viability,” the final supervisory guidance says.

The stress tests covered by the guidance are neither those conducted by the Federal Reserve to determine if large banks have enough capital to withstand financial and economic shocks nor those mandated by Section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 12 U.S.C. § 5365(i)(2). Nor are they the supplementary stress tests described in a proposed Federal Reserve rulemaking dealing with enhanced prudential standards for large banking institutions (over $50 billion in assets) and nonbank financial institutions of comparable significance.

Rather, these guidelines are for internal stress tests conducted by the institutions themselves consistent with their individual businesses and risk profiles.

The multiple testing requirements faced by these institutions represent a regulatory burden that is considerable and threatens to be duplicative. The regulators have indicated, however, that they plan to coordinate all of the different stress tests and make sure they are consistent with one another.

According to the agencies, last week’s guidance is intended to provide general principles that medium and large depository institutions and their holding companies should follow in conducting forward-looking assessments of risks to improve their overall risk management strategies and better prepare them to be able to address a sufficiently broad range of adverse eventualities. An effective stress-testing framework should generally be conducted with a horizon of at least two years and should, among other things, “explore the potential for capital and liquidity problems to arise at the same time or exacerbate one another.”

To paraphrase these general principles: (1) Each institution‘s stress testing framework should emphasize activities and exercises that are tailored to and sufficiently capture its exposures, activities, and risks; (2) To be effective, a stress testing framework should employ multiple, conceptually sound stress testing activities and approaches; (3) Likewise, an effective stress testing framework should be forward-looking and flexible; and (4) Stress test results should be clear, actionable, and well supported, and should inform future decision-making.

Small community banks justifiably fear that stress tests will eventually be mandated for them, which, in view of the relative simplicity of their operations when compared to their larger brethren, would be an onerous and wholly unnecessary regulatory burden. To allay these concerns, the regulators issued, contemporaneously with the guidance, a separate statement clarifying that the stress testing guidance does not apply to banks, thrifts, and their respective holding companies if they are below $10 billion in total consolidated assets.

That separate statement is cold comfort, however. First, it expressly recognizes, as does the guidance itself, that there are discrete areas of enterprise-wide stress testing that definitely do apply to smaller institutions. For example, pre-existing guidance on (A) interest rate risk management, (B) commercial real estate concentrations, and (C) funding and liquidity management continues to apply to all institutions, regardless of size.

Second, the agencies, even as they disclaim applicability to smaller institutions, continue to “emphasize that all banking organizations, regardless of size, should have the capacity to analyze the potential impact of adverse outcomes on their financial conditions . . . as part of sound risk management practices.” (Emphasis added).

Third, the Conference of State Bank Supervisors seems to be on board: Back in October 2010, CSBS issued a paper titled “The Case for Stress Testing at Community Banks.”

Finally, both the American Bankers Association and the Independent Community Bankers have identified anecdotal evidence from their membership to the effect that federal bank examiners are already strongly encouraging those institutions to undertake the very kind of stress testing covered by last week’s guidance and suggesting that it represents “best practices” in the industry.

Thus, we believe it is not a question of whether—but of when—community banks and other small financial institutions will be, in no uncertain terms, required to shoulder this additional regulatory burden.

- Keith R. Fisher

FOCUS ON PHONE CALLS
New Rulings on TCPA and FDCPA Issues  

A recent flurry of rulings on the rights and responsibilities of debt collectors when making phone calls to debtors prompted a series of legal alerts by attorneys in our Consumer Financial Services Group. Click on the headlines below to read the full alert.

Debt Collector's Voice Message Not a ‘Communication’ under FDCPA
A recent decision by a federal judge in Minnesota may offer a solution to the Hobson’s choice currently facing debt collectors whenever a call to a debtor is picked up by an answering machine or voicemail. In Zortman v. J.C. Christensen & Associates, Inc., the court held that a voicemail message containing the caller’s name and identifying the caller as a debt collector with “an important message” was not a “communication” under the Fair Debt Collection Practices Act.

TCPA Requires Consent from Current Cell Phone Subscriber for Autodialed Calls
A debt collector’s autodialed calls to a reassigned cellular telephone number violate the Telephone Consumer Protection Act (TCPA) unless the current subscriber to that number has consented to the calls, the Seventh Circuit has ruled. In its decision in Soppet v. Enhanced Recovery Company, LLC, the court held that a prior subscriber’s consent does not serve as “the prior express consent of the called party” required by the TCPA for autodialed, non-emergency calls to cell phone numbers.

Debtor May Give Consent under TCPA for Collection Calls to Non-Debtor’s Cell Phone
Autodialed or prerecorded collection calls to a non-debtor’s cellular telephone number did not violate the Telephone Consumer Protection Act (TCPA) because the calls were made with the consent of a debtor with “common authority” over the number called, a Florida federal court has ruled. In Osorio v. State Farm Bank, FSB, U.S. District Judge Donald M. Middlebrooks of the Southern District of Florida found that a debtor may provide “prior express consent” on behalf of a non-debtor “called party” for collection calls made to the non-debtor’s cell phone number.