Mortgage Banking Update - March 08, 2013

by Ballard Spahr LLP

Kentucky County Clerks Cannot Sue MERS for Failure To Record Mortgage Assignments, Sixth Circuit Rules

The U. S. Court of Appeals for the Sixth Circuit recently affirmed the district court’s dismissal of a putative class action filed against Mortgage Electronic Registration Systems (MERS), its parent company, and 15 financial institutions by two Kentucky county clerks. The clerks alleged that the defendants had violated Kentucky law by failing to record mortgage assignments. The plaintiffs sought recovery of unpaid recording fees and an injunction ordering MERS to cease its practice of not recording assignments.

In Christian County Clerk v. Mortgage Electronic Registration Systems, Inc., the Sixth Circuit agreed with the district court’s finding that the clerks’ allegation of injury to their financial interests provided Article III standing to bring the lawsuit. But the Sixth Circuit affirmed the district court’s dismissal of the lawsuit because the clerks had no private right of action to sue MERS for a violation of Kentucky’s recording requirements.

The clerks were challenging MERS’ practice of not recording an assignment when a note secured by a mortgage naming MERS the mortgagee as nominee for the lender and its assigns is transferred to a new owner who is a system member. Instead, the change in beneficial ownership is registered in the MERS electronic database.

While conceding that the state recording statute did not give them a cause of action, the clerks argued that they could sue under Kentucky’s negligence per se statute. The Kentucky Supreme Court had interpreted that statute to create a cause of action for a person damaged by a violation of a statute that does not provide a civil remedy to someone within the class of persons the statute is intended to protect. Although the Sixth Circuit agreed that the clerks satisfied the statute’s first requirement, it found that the clerks were not among the three categories of persons the recording statute intended to protect. Those persons consisted of:

  • Existing lienholders and lenders who record their security interests to provide notice of their secured status
  • Prospective lienholders and purchasers
  • Property owners and borrowers whose loans have been satisfied

According to the Sixth Circuit, the district court correctly found an absence of legislative intent to protect the officers who administer the recording statute and collect fees.

The Sixth Circuit also rejected the clerks’ common law civil conspiracy and unjust enrichment claims, which the district court had not expressly addressed. The Sixth Circuit found that because the clerks had no claim under the negligence per se statute, they did not have a tort claim needed to support a civil conspiracy claim. Concluding that the negligence per se statute provided the exclusive remedy for violations of statutes that did not contain a remedy, the court also rejected the clerks’ unjust enrichment claim.

In addition, the Sixth Circuit found that the clerks had not alleged facts establishing a necessary element of such a claim—a benefit conferred upon the defendants at the clerks’ expense. According to the court, the benefit from recording mortgages in MERS’ name to the defendant financial institutions, such as lien priority and the ability to release satisfied mortgages, was derived from Kentucky law and not from the clerks themselves.

Similar actions have been brought by county officials across the country against MERS and its member financial institutions. Although most of these cases have not survived motions to dismiss, in Montgomery County, Pennsylvania, Recorder of Deeds v. MERSCORP, Inc., a Pennsylvania federal district court recently allowed such a case to proceed as a quiet title action to compel recordation even though the complaint was not styled as such. The court is now considering the defendants’ motion to dismiss the quiet title action on grounds that include the complaint’s failure to allege facts necessary to state a quiet title claim and join indispensible parties.

- Barbara S. Mishkin

Bipartisan Policy Center Proposes New Directions for National Housing Policy

The Housing Commission of the Bipartisan Policy Center (BPC) recently released proposals for reforming federal housing policy. The Housing Commission report, issued on February 25, 2013, proposes a number of changes to address the challenges faced by the housing sector. The Housing Commission focused on:

  • Housing finance reform that eliminates government-sponsored enterprises (GSEs) and gives the private sector a more significant role in bearing credit risk
  • Revisions to rental assistance policies to target resources for the lowest-income renters, reduce regulatory burdens, and implement outcome driven evaluation of housing providers
  • A sustainable approach that will give all creditworthy households access to homeownership
  • A more comprehensive focus on the housing needs of seniors who desire to age in place

For more information, read our Housing Group’s detailed analysis of the report.

- Sharon Wilson Géno, Amy M. Glassman, and Nydia M. Pouyes

FTC Issues 2012 Complaints Report

The Federal Trade Commission received more than 2 million consumer complaints in 2012, according to its newly released Consumer Sentinel Network Data Book. The report provides national and state-by-state data on consumer complaints received by the FTC in that year.

Last year marked the first time the total number of complaints to the FTC exceeded 2 million, reflecting a nearly 9 percent increase from 2011. The top three complaint categories consisted of identity theft (369,132 complaints, or about 18 percent of the total), debt collection (199,721, or about 10 percent), and banks and lenders (132,340, or about 6 percent).

The Consumer Sentinel Network is an online database of consumer complaints maintained by the FTC. Other federal and state law enforcement agencies contribute to the database, including the Consumer Financial Protection Bureau and the offices of 14 state attorneys general. Private-sector organizations contributing data include all Better Business Bureaus in the United States and Canada.

Any federal, state, or local law enforcement agency can obtain access to the database by entering into a confidentiality and data security agreement with the FTC. In addition, certain international law enforcement authorities are allowed to access the database.

While the data only reflects “unverified complaints reported by consumers” without regard to merit, the report nevertheless has the potential to significantly affect the industries targeted by the complaints. The FTC and state attorneys general have long used consumer complaints to identify victims and potential targets for investigations, and the Consumer Financial Protection Bureau has similarly begun to consider complaints in prioritizing which companies to investigate. For example, the CFPB has cited the FTC’s high volume of debt collection-related complaints as a reason for its focus on the debt collection industry. (The FTC’s data includes complaints received by the CFPB through its own complaint system.)

Since industries receiving a large number of complaints are more likely to draw a regulator’s attention, minimizing the number of consumers who complain to the FTC, CFPB, or other consumer watchdogs is an essential first step to reducing potential exposure. To preempt as many complaints to regulators as possible, it is important for companies to establish their own systems to track and resolve complaints. Indeed, the CFPB’s examination procedures specifically instruct examiners to assess the quality of a company’s system for receiving and dealing with complaints.

- Barbara S. Mishkin

Welcome to Craig Benson

We are pleased to welcome Licensing & Compliance Specialist William (Craig) Benson as the newest member of our Mortgage Banking Group. Craig brings both a licensing and project management background to his role at Ballard Spahr. He joins us from SunTrust, where he served as Assistant Vice President/Compliance Analyst III. At SunTrust, he was responsible for managing the state regulatory examination process and served as a Deployment Leader for the company’s Six Sigma and lean process improvement initiatives.

Craig previously was Manager of State Regulatory Affairs for Saxon Mortgage, where he was responsible for state and federal regulatory examinations as well as company and loan originator licensing. He holds an M.B.A. and a B.A. in Accounting from Radford University.

Washington Amends MLO Education Requirements

The state of Washington recently amended its pre-license education requirements for mortgage loan originators. The new regulations require candidates for a Washington MLO license to complete at least 22 hours of pre-license education. The amendment adds an additional two hours to the previous 20-hour requirement. The new requirement increases the total amount of state-specific pre-license education required from two to four hours. The new education requirements become effective on April 1, 2013 – the same day that Washington will begin participating in the Uniform State Test.

Virginia Revises the Definition of “Mortgage Loan Originator”

Virginia has expanded the statutory definition of “mortgage loan originator” to include individuals who represent to the public, through advertising or other means, that they can or will take an application for or offer or negotiate the terms of a residential mortgage loan in Virginia. The types of representations and advertising covered by this expanded definition include business cards, stationery, brochures, signs, rate lists, and other promotional items. The amendment is effective July 1, 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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