Mortgage Banking Update - September 07, 2012

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DOJ Settles 'Pattern or Practice' Fair Lending Case

The Department of Justice's "pattern or practice" fair lending lawsuit against GFI Mortgage Bankers, Inc., has resulted in a settlement that requires GFI to pay a total of $3.555 million, consisting of $3.5 million in monetary damages to aggrieved borrowers and a $55,000 civil penalty.

The settlement means that this case will not be a test of the DOJ's attempt to use disparate impact evidence to establish that the defendant had engaged in intentional discrimination as alleged in the complaint. The complaint charged that there was a “statistically significant” disparity between the interest rates paid by various groups of borrowers, and that these disparities occurred because of a pricing policy that allowed individual loan officers to exercise discretion in setting interest rates and a compensation policy that rewarded the loan officers for making loans at higher interest rates.

However, rather than using this evidence to support a disparate impact claim, the DOJ instead asserted that the defendant had engaged in a "pattern or practice" of intentional discrimination because it “knew or had reason to know” that the statistical disparities existed. (See our prior legal alert for an analysis of the DOJ's legal theory, including the deficiencies we saw in the DOJ's complaint.)

The DOJ's decision to frame the case as "pattern or practice" instead of disparate impact might have resulted from the perception that, if not for the parties' dismissal of Magner v. Gallagher, the U.S. Supreme Court would likely have disallowed the use of disparate impact analysis under the Fair Housing Act, and the same analysis would have then been applied by lower courts to claims under the Equal Credit Opportunity Act. (The Supreme Court may have another opportunity to decide this term whether disparate impact claims are available under the Fair Housing Act if it grants the petition for certiorari filed in Mount Holly v. Mount Holly Gardens Citizens in Action, Inc. As discussed in our prior legal alert, the issues in Mount Holly are virtually a carbon copy of those raised in Magner.)

The consent order contains GFI's admission that the DOJ performed a statistical analysis that it claimed showed that certain interest rate and fee disparities were "statistically significant" and could not "be explained by objective credit characteristics of the borrowers or loan product features." In addition to payment of monetary relief, the settlement requires GFI to adopt fair lending policies that include limits on any pricing discretion given to GFI employees and requirements for justifying pricing that exceeds that discretion or deviates from a standard fee schedule. GFI must also develop a program to monitor loans it originates for interest rate and fee disparities and take corrective action if the monitoring shows statistically significant disparities.

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 likewise understand the statistical analyses that underlie fair lending assessments and discrimination claims.

Barbara S. Mishkin


Federal Courts Reject FDCPA Claims Based on Communication with Debtor’s Attorney and Attempt To Collect Debt Disputed with Prior Collectors

Some claims commonly made by debtors under the Fair Debt Collection Practices Act (FDCPA) were rejected in two recent federal court decisions. One decision involves communications with the debtor’s counsel and the other involves the effect of a validation request made to a prior collection agency.

Angel v. American Recovery Inc. The debtor’s complaint claimed that a message left by a debt collector on her attorney’s voicemail violated the FDCPA by falsely representing the character, amount, or legal status of her debt. In the message, the collector stated incorrectly that it had not received a monthly payment due under the debtor’s payment plan and that her account might be sent to the legal department for further action.

The U.S. District Court for the Western District of Washington held that since the only communication alleged to have violated the FDCPA was made to the debtor’s attorney, her FDCPA claim was not actionable. In dismissing the complaint, the district court relied on the Ninth Circuit’s decision in Guerrero v. RJM Acquisitions, in which an alleged misrepresentation made to a debtor’s attorney was held not to violate the FDCPA.

Observing that the debtor had not alleged that the debt collector had taken any legal action or that she was served with legal process, the district court also rejected the debtor’s argument that, because the collector threatened to send the matter to its legal department, the message was actually directed at her. In addition, the court rejected the debtor’s claim that the collector had engaged in “unfair and unconscionable” conduct in violation of the FDCPA, noting that the Ninth Circuit’s holding in Guerrero was not limited to specific FDCPA provisions and instead precluded any FDCPA claims based on communications directed solely to a debtor’s attorney.

Jacques v. Solomon & Solomon P.C. The debtor’s complaint alleged that the FDCPA barred the debt collector from attempting to collect the debt because she had previously disputed the debt with the creditor and other debt collectors. She also alleged that the debt collector violated the FDCPA by failing to validate the debt upon receiving her dispute.

The U.S. District Court for the District of Delaware held that the disputes previously sent to the creditor and other debt collectors did not bar the current debt collector from attempting to collect the debt. Because the debtor did not allege the current debt collector knew about the prior disputes, the court refused to impute the knowledge of the creditor or other debt collectors to the current debt collector. The court also held that the current debt collector had no duty under the FDCPA to validate the debt so long as it ceased collection efforts after receiving the debtor’s dispute.

The court also rejected the debtor’s claims that the debt collector had used false, deceptive, or misleading representations or means to collect the debt by failing to show that it had a contract with the creditor and by failing to notify credit reporting agencies of the dispute. According to the court, the debtor conceded that the creditor had placed the account with the debt collector and had not identified any FDCPA provision requiring a debt collector to prove its collection authority. The court also found that since the debt collector was not alleged to report credit information to consumer reporting agencies, it had no duty under the FDCPA or the Fair Credit Reporting Act to report the dispute.

Ballard Spahr lawyers regularly advise 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 Consumer Financial Protection Bureau 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


Supreme Court To Decide Class Action Fairness Act Case
Can Plaintiff Limit Class Damages To Avoid Removal?

On August 31, 2012, the U.S. Supreme Court granted a petition for certiorari in Standard Fire Insurance Co. v. Knowles (11-1450). The question presented by the petition is whether a named plaintiff in a state court class action can avoid removal to federal court under the Class Action Fairness Act of 2005 (CAFA) by filing a “stipulation” with the class action complaint that provides that the class will not seek damages in excess of the threshold for federal jurisdiction under CAFA. This case will represent the Court’s first examination of CAFA since the statute was passed seven years ago.

To remove a class action under CAFA, the class damages must reach or exceed $5 million. The class representative in Knowles filed a stipulation with his class action complaint stating that he will not seek damages for himself or any other individual class member in excess of $75,000 (inclusive of costs and attorneys’ fees) or seek damages for the class in excess of $5 million (inclusive of costs and attorneys’ fees). Standard Fire argued that the actual amount in controversy, absent the stipulation, exceeded $5 million and that the class representative’s stipulation could not be used to avoid federal jurisdiction. The district court disagreed with Standard Fire and relied on the stipulation to determine that there was no CAFA jurisdiction. The Eighth Circuit denied Standard Fire’s petition for interlocutory review of the district court remand order.

Standard Fire’s certiorari petition argued that the district court’s reliance on the plaintiff's stipulation conflicted with the Supreme Court’s 2011 decision in Smith v. Bayer Corp., where the Court held that a class representative does not represent the interests of the members of a putative class unless and until a court grants a motion for class certification and that “the mere proposal of a class . . . could not bind persons who were not parties.” The Supreme Court’s grant of certiorari even though there was no appellate decision in this case and even though Standard Fire had not asserted in its petition that there was now a true split in the circuits is rather unusual, and suggests that the Court may be inclined to reject stipulations of the type used by plaintiff in this case.

Daniel J.T. McKenna


State Attorneys General Allowed To Sue Even After Nationwide Class Action Settlement

When a defendant settles a nationwide class action suit, it hopes to gain global peace and finality. However, the United States District Court for the Middle District of Florida limited the finality afforded to the settling defendant when it ruled in Spinelli v. Capital One Bank, N.A. that a nationwide class action settlement did not bar subsequent claims by state attorneys general related to the settled issue.

Capital One cardholders originally filed suit in 2007 against the bank over its "payment protection" fees, and the parties reached a nationwide class action settlement in 2010. The settlement agreement explicitly released claims by those “who assert claims on [cardholders’] behalf, including the government in its capacity in parens patriae." But the attorneys general of Hawaii and Mississippi subsequently filed state-court parens patriae suits against Capital One in April and June of 2012, citing the same payment protection fees at issue in the class action.

The court rejected Capital One's argument that the settlement barred the lawsuits by the state attorneys general. It emphasized that the settlement class definition only encompassed “natural persons,” not governmental entities. "The [state Attorneys General] were not defined as class members and did not have an opportunity to participate in the litigation or opt out of the class. It would be a violation of the Due Process clause to now enjoin such Attorney General via the requested injunction."

The Spinelli case serves as a cautionary tale because it illustrates that even a well-drafted, broad release in a nationwide consumer class action settlement agreement may not fully protect a defendant from subsequent suits by state attorneys general.

Glenn A. Cline


Closing Conditions and Termination Rights in M&A Transactions
Guest column from members of our Mergers and Acquisitions/Private Equity Group

In the event there is a period of time between the signing of a definitive acquisition agreement and the closing of the acquisition, the parties will have to agree on a set of conditions that must be satisfied (or waived) before the acquisition may be closed. These conditions are generally referred to as “closing conditions.”

The failure to satisfy a closing condition gives the other party a right to refuse to close the acquisition but does not make the failing party liable to the other party, unless such failure is the result of, or the cause of, a separate breach of the acquisition agreement. In addition, because of the period of time between signing and closing, events may occur that may result in a party’s desire to terminate the acquisition agreement prior to closing. Accordingly, the parties often negotiate provisions granting the right to terminate the acquisition agreement upon mutual agreement or upon the occurrence of certain specified events. This article summarizes the principal closing conditions and termination rights that parties seek to include in an acquisition agreement.

Closing Conditions

Closing conditions generally provide that the obligations of each party to consummate the transactions contemplated by an acquisition agreement are subject to the satisfaction (or waiver) at the closing of an agreed upon set of conditions. In an acquisition agreement, the closing conditions are generally divided into conditions to the performance of the buyer and conditions to the performance of the seller. Occasionally, where closing conditions are applicable to both parties, such closing conditions may be separately identified as conditions to the performance of both of the parties. If a party fails to satisfy a closing condition of the other party, then the other party will not be obligated to consummate the transaction.

The following closing conditions are typically included in acquisition agreements:

No Legal Impediments: Parties typically include as a joint closing condition that no governmental authority shall have enacted any law or issued any order that has the effect of making the consummation of the transactions contemplated by the acquisition agreement illegal or otherwise restrains or prohibits the consummation of the transaction.

HSR Filing: In the event that the transaction is subject to the Hart-Scott-Rodino Act (HSR), the federal premerger notification program, the acquisition agreement will include as a closing condition of both parties that, with respect to the HSR filing previously made by parties, the applicable governmental authorities shall have either granted early termination or the applicable waiting period shall have expired.

Regulatory Approvals:  In the event that the parties to the transaction are engaged in an industry regulated by one or more governmental authorities, the acquisition agreement will include as a closing condition of both parties that the applicable governmental authorities shall have approved the transaction.

Bring-Down of Representations and Warranties and Compliance with Pre-Closing Covenants: These conditions generally provide that the other party’s representations and warranties made in the acquisition agreement are true as of the closing date and that such party has complied with all pre-closing covenants. Parties to the acquisition agreement will often negotiate whether these conditions are qualified by materiality or a material adverse effect. There may also be some negotiations as to whether the bring-down of the representations and warranties should be as of the closing date only or as of both the closing date and the signing date.

Delivery of Closing Certificates: In order to verify the accuracy of each party’s satisfaction of its bring-down of the representations and warranties and compliance with the pre-closing covenants, parties will include a condition that the other party deliver a certificate of an officer certifying as to the satisfaction of such condition. Each party is also typically required to provide a certificate of the party’s secretary certifying as to the party’s resolutions authorizing the consummation of the transaction.

Delivery of Ancillary Documents: As will be described in a subsequent article, acquisition agreements generally include a number of ancillary documents and agreements the form of which are agreed upon in advance and executed and delivered at closing. This closing condition therefore provides that each party is required to deliver to the other party executed copies of each of these ancillary documents and agreements.

Delivery of Purchase Price: The seller will include a closing condition that provides that the buyer shall have delivered the purchase price to the seller and, if applicable, one or more third parties, such as an escrow agent or creditor.

Third-Party Consents: The buyer in an acquisition transaction will typically seek to include a condition requiring the seller to obtain certain third-party consents required under contracts to which the seller is a party, such as customer contracts, supply contracts, and/or leases, prior to the closing of the acquisition. Although there may be numerous agreements that require consent, the parties may negotiate the specific agreements for which the seller must obtain consent prior to closing the acquisition.

Material Adverse Effect: While this condition is partially covered by the bring-down of the representations and warranties, it is often desirable for the buyer to include as a separate condition that no “material adverse effect” has occurred since signing. The definition of “material adverse effect” is typically the subject of substantial negotiations.

Litigation: Buyers and sellers may also consider including a condition that no litigation has been commenced that would restrain or prohibit the transaction.

Financing Condition: The buyer may attempt to include a closing condition that would make the closing subject to the buyer securing financing to pay the purchase price. The financing condition is especially important in acquisitions in which the buyer expects to borrow money to pay the purchase price.

Deal-Specific Conditions and Deliverables: If the buyer has any special concerns about an acquisition, such as the employment of certain employees, the settlement of certain liabilities, or the termination of certain liens, the buyer should address those concerns by including a deal-specific closing condition. In addition, the buyer may want to include certain deal specific deliverables that are required by the buyer to close. These deliverables may include legal opinions, evidence of termination of any liens or security interests, and any real property-related deliverables.

Termination Rights

As noted above, if there will be a period of time between signing of the acquisition agreement and closing, the parties will need to agree on certain rights pursuant to which a party may terminate the acquisition agreement prior to closing. Parties generally include the following termination rights in an acquisition agreement:

Mutual Agreement: This right permits the acquisition agreement to be terminated upon the mutual written consent of both parties.

Breach of a Representation or Failure to Perform a Covenant: If a party is not in breach (generally, material breach) of the agreement, then such party may terminate the agreement for a breach or failure by the other party of its representations and warranties or covenants following an agreed-upon opportunity to cure.

“Drop Dead Date”: Parties typically will include a termination provision relating to a “drop dead date” for the acquisition. This provision provides that if a party’s closing conditions have not been satisfied by the agreed upon date, then the other party may terminate the agreement (provided that the terminating party is not in breach of the acquisition agreement).

Termination Due to Legal Impediment: Either party may terminate the acquisition agreement in the event any law makes the consummation of the transaction illegal or any governmental authority issues an order restraining or prohibiting the consummation of the transaction.

The acquisition agreement sometimes includes provisions imposing financial penalties on the party terminating the agreement. These provisions, commonly referred to as "break fees" (in the case of termination by the seller) or "reverse break fees" (in the case of termination by the buyer), are complicated and are often the subject of intense negotiation. The topic of break fees will be the subject of a separate article in this publication.

Although the most common closing conditions and termination rights are summarized in this article, the parties may include other closing conditions and termination rights based on deal-specific concerns. In addition, closing conditions and termination rights may vary depending on whether the transaction is a public or private acquisition.

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 Peter Jaslow at 215.864.8737 or jaslowp@ballardspahr.com.


District Court Extends Cost-Shifting to Pre-Certification Discovery in Class Action

A concern that discovery burdens can "force [a] party to succumb to a settlement that is based on the cost of litigation rather than the merits of the case" has led to several significant decisions on discovery cost-shifting in the past several years. A recent Eastern District of Pennsylvania opinion in a class action case has broken new ground by extending cost-shifting to pre-certification discovery where the scope and cost burdens for that discovery are significantly asymmetrical.

In Boeynaems v. LA Fitness International, LLC, No. 10-2326, Judge Michael M. Baylson held that, absent compelling equitable circumstances to the contrary, the class plaintiffs should share in the cost of the defendant's collection and production where the plaintiffs have asked for extensive discovery while class certification is pending and the requested production will be very expensive for the defendant.

The named plaintiffs in Boeynaems purport to represent a class of persons who signed a membership contract for the defendant’s health club and subsequently canceled or attempted to cancel their memberships. The robust first round of discovery was directed principally at issues affecting class certification and included depositions of the defendant’s key employees and the defendant’s review and production of thousands of pages of documents. The plaintiffs then served additional document requests and a request that the defendant continue to preserve paper documents being stored at an Iron Mountain facility. When the defendant balked at this further discovery, the plaintiffs filed a motion to compel. In letter briefs to the court, the defendant estimated that its costs for responding to plaintiffs' supplemental discovery requests would be nearly $600,000.

The court observed that treating a case as a class action dramatically changes the strategies and economic considerations of the parties and their counsel. In an ordinary case, there is usually a well-defined range of economic consequences. If a class action is allowed by the court, however, the economic pressure on the defendant will dramatically increase. This shift can alter the dynamics of a case, irrespective of the substantive merits.

Class actions also often involve “asymmetrical” discovery, where one party has the majority of discoverable information and will incur most of the discovery burdens. If the cost of producing documents is very significant, the court has the power to allocate the cost of discovery. Doing so is fair, the court said, as "discovery burdens should not force either party to succumb to a settlement that is based on the cost of litigation rather than the merits of the case." The court further observed that, “[i]f Plaintiffs’ counsel has confidence in the merits of its case, they should not object to making an investment in the cost of securing documents from Defendant and sharing costs with Defendant.”

Addressing the specific discovery requested, the court applied the metaphor of a “discovery fence” to distinguish between information that is relevant to a specific aspect or phase of a case and information that is not relevant. In the court's view, only a subset of the information requested by the plaintiffs was within the class certification discovery fence. The court barred all discovery outside that discovery fence and directed the plaintiffs to provide the defendant with a list of documents within the discovery fence that had been requested but not yet produced. The defendant is to respond with a summary of its internal costs to provide that information. The plaintiffs are then required to advise the defendant whether they are willing to incur those costs and, if so, to tender payment.

By shifting some of the economic burden of pre-certification discovery to class action plaintiffs in this manner, the court in Boeynaems has continued the trend of making plaintiffs economically responsible for the large volume of discovery they frequently seek. If this trend continues, it will be a significant advantage for class action defendants in resisting overbroad discovery, and may ultimately rein in plaintiffs’ lawyers’ willingness to pursue more marginal claims.

– Carl G. Roberts and Maura E. McKenna


Federal Reserve Extends Comment Period on Basel III Capital Rulemaking

The Federal Reserve has extended the comment period on its Basel III regulatory capital rulemaking from its original September 7 deadline until October 22, 2012. The rulemaking, which was the subject of a previous Ballard Spahr legal alert, actually comprises three separate rulemakings intended to implement many of the reforms suggested by the Basel Committee on Banking Supervision as well as certain U.S.-only requirements mandated by provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The extension came in response to a number of requests. These include a letter dated August 2 from House Financial Services Committee Chair Spencer Bachus and a letter dated August 7 from 54 bankers’ associations. Both letters requested a 90-day extension in order to adequately deal with the complexities of the proposed rules. The Fed “split the baby” and granted a 45-day extension.

An extension seems warranted, not only because of the complexities but also to identify and address any unintended consequences of the proposed rules. A July 30 article in American Banker discussed tests by four banks showing what their capital ratios would look like if the Basel III requirements were in effect now. The requirements will not be implemented for another five years.

Pursuant to the proposed rule, residential mortgages guaranteed by the government or its agencies would continue to enjoy a zero risk-weighting for those unconditionally guaranteed and a 20 percent risk-weighting for those conditionally guaranteed. All other mortgages, as well as home equity loans, would be subject to higher risk-weightings, depending on loan-to-value ratios, which could go as high as 200 percent.

Banks with higher concentrations in mortgages without government guarantees, home equity loans, and elevated non-performing assets should face a greater risk of reduction in their capital ratios. The extent of the reduction could potentially be overly severe. The results of the type of experimental, internal testing that was reported by American Banker should arguably be carefully considered by regulators to ensure that the rules as currently proposed are not too stringent.

Keith R. Fisher


FTC Updates Fees To Access Do-Not-Call Registry

The Federal Trade Commission amended the Telemarketing Sales Rule to revise the rates for entities accessing the FTC's Do-Not-Call Registry. Effective October 1, 2012, the amended Rule increases the annual fee for access to the Registry for each area code of data from $56 to $58 per area code; increases the fee per area code of data during the second six months of an entity's annual subscription period from $28 to $29; and increases the maximum amount that will be charged to any single entity for accessing area codes of data from $15,503 to $15,962.

The Telemarketing Sales Rule requires sellers to access the Registry prior to making telemarketing calls to persons within any area code. There are exceptions if the seller is calling a person (1) after receiving that person's written authorization to place calls to that person or (2) who is in an established business relationship with the seller and has not stated that she does not wish to receive telemarketing calls from the seller.

The Do-Not-Call Registry Fee Extension Act of 2007 requires the FTC to increase the Registry rates each fiscal year in which the Consumer Price Index (CPI) has increased by more than 1 percent since the last rate increase. The FTC recalculates the rates by multiplying the percentage change in a baseline CPI by the original fiscal year 2009 fees contained in the Act.

Heather S. Klein


Borrowers Must Bring Claims for Unfair Mortgage Lending Practices during Foreclosure Proceeding, N.J. Court Rules

Under New Jersey’s “Entire Controversy Doctrine,” borrowers alleging unfair mortgage lending practices must raise such claims during the foreclosure proceeding itself.

In Napoli v. HSBC Mortgage Services, Inc., the U.S. District Court for the District of New Jersey held that the Entire Controversy Doctrine applied to foreclosure actions, and therefore borrowers were barred from asserting a post-judgment claim against their mortgage lender and its servicer alleging improper lending practices.

The Entire Controversy Doctrine is a New Jersey-specific doctrine of claim preclusion similar to, but broader than, res judicata and collateral estoppel (which prohibit a court from considering claims that could have been raised in a prior action). As the court explained, the Entire Controversy Doctrine “compels the parties, when possible, to bring all claims relevant to the underlying controversy in one legal action.” Thus, parties are barred from raising, in a subsequent proceeding, any claims they knew or should have known about during a prior proceeding. The court specified that, as it applies to foreclosure actions, the Doctrine requires joinder of counterclaims that arise out of the mortgage that is the basis of the foreclosure. Such counterclaims include those relating to “payment and discharge, [and] incorrect computation of the amounts due.”

In Napoli, the borrowers filed a post-judgment motion to stay foreclosure, claiming that the mortgage payoff balance required by the lender was “higher than expected,” and that they needed more time to obtain the higher payoff amount through refinancing. The borrowers subsequently claimed that the payoff balance was miscalculated by the lender, and that this overcharge was wrongful and fraudulent. After the foreclosure was completed, the borrowers later filed a putative class action on behalf of themselves and others who allegedly experienced similar fraudulent business practices.

The court, citing the Entire Controversy Doctrine, refused to address the merits of the borrowers’ claims, holding that “they should have been raised during the foreclosure proceeding.” The court reasoned that not only were the borrowers’ claims germane to the foreclosure proceeding, but the borrowers knew or should have known about the alleged discrepancy in payoff amount based on their prior claim that the payoff amount was higher than expected.

Plaintiffs argued that they lacked an opportunity to bring their claims during foreclosure because final judgment had already been entered when they received the payoff notice, and their claims arose between final judgment and receipt of the notice. But the court rejected their assertion, noting that the foreclosure court retained jurisdiction until at least the time when the borrowers tendered their payoff quote; thus, the borrowers “had a full opportunity to assert their claims during the prior foreclosure action.”

Although New Jersey’s Entire Controversy Doctrine is more strictly applied than res judicata and collateral estoppel, this decision serves as a reminder that, in states with judicial foreclosure processes, the requirement to bring a compulsory counterclaim in the foreclosure action can operate to prevent borrowers from asserting claims arising out of loans as to which a foreclosure has been completed. Lenders and servicers defending such actions should always evaluate the applicability of this defense where a lawsuit arises out of a loan that has been the subject of a judicial foreclosure.

Ross M. Speier


Single Publication Notice of Class Action Settlement Did Not Bar Subsequent Lawsuit

The Second Circuit has held that a plaintiff’s lawsuit against a debt collector alleging violations of the Fair Debt Collection Practices Act (FDCPA) was not barred even though she was a member of a settlement class in a prior class action against that debt collector.

In Hecht v. United Collection Bureau, Inc. the Second Circuit held that due process prevented the application of res judicata to the debtor’s FDCPA claim because she did not receive constitutionally adequate notice of the settlement of the earlier class action.

The settlement notice in the class action against the debt collector had not been mailed to the more than 2 million class members. Instead, it was published once in an advertisement in USA Today. That’s because the miniscule settlement recovery for the class (just $13,254, which was the FDCPA maximum class recovery of 1 percent of the debt collector’s net worth) was far outweighed by the cost of mailing notices to the class members. In fact, the $13,254 class settlement had not been distributed to class members, but instead was distributed to a charitable organization as a cy pres payment.

The Second Circuit held that the one-time publication notice in USA Today did not satisfy due process requirements. The court stated that aside from individual mailed notices, the debt collector defendant could have undertaken a more extensive notification campaign to inform class members of the settlement, including the use of electronic media and local publications. Since due process requires the “best practicable” notice, the plaintiff’s claims were not extinguished by the class settlement.

– by Alan S. Kaplinsky and Burt M. Rublin


Maine Transitions Supervised Lender and Loan Broker Licensing to NMLS

Maine is going to start utilizing the NMLS for the licensing of supervised lenders and loan brokers. In connection with the transition, both of those licenses will be converted from two-year to one-year licenses. The transition will also eliminate the September 30 license expiration date for supervised lenders and the January 31 license expiration date for loan brokers. Under the new system, licenses will be effective from January 1 through December 31 each year. The fees associated with new and renewal license applications have also been cut in half to reflect the shortened license periods. Currently licensed companies can transition onto NMLS as renewals between August 31, 2012, and October 31, 2012. There will be a late transition period for currently licensed companies between November 1, 2012, and November 30, 2012, but a late fee will be assessed for renewals during this time. Renewal applications will not be accepted after November 30. A licensee who fails to renew by that time will be required to submit a new application. New applicants can submit applications through the NMLS after August 31, 2012.

 

Washington Exempts Employees of Nonprofits from Mortgage Loan Originator Licensing

The State of Washington recently added an MLO licensing exemption concerning employees of a bona fide nonprofit. Under the new exemption, if such employees act as loan originators solely in connection with their nonprofit work duties, they do not need to be licensed. The origination activities must also relate to mortgage loans that have terms favorable to the borrower in order to trigger the exemption. This provision becomes effect November 1, 2012.

– Matthew Saunig

Published In: Civil Procedure Updates, 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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