InfoBytes, July 11, 2008
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Mortgages
- Banking
- Consumer Finance
- Securities
- Insurance
- Litigation
- E-Financial Services
Federal Issues
Senate Passes Housing Bill. On July 11, the U.S. Senate passed H.R. 3221, the omnibus housing bill that, among other things, modernizes the Federal Housing Administration (FHA), reforms the regulation of Government Sponsored Entities, and provides $300 billion for FHA refinancings of distressed loans (reported in InfoBytes, May 9, 2008), by a vote of 63-5. The bill now goes back to the House for consideration. As of the date of this publication, the text of the bill as passed by the Senate was not available. InfoBytes will report a more detailed analysis of the bill as passed by the Senate when the bill text becomes available.
OTS Documents 1Q 2008 Thrift Mortgage Market Activities. On July 3, the OTS released its first Mortgage Metrics Report, which provides performance data on first lien residential mortgages, covering first quarter 2008 delinquency, loss mitigation action, and foreclosure data for the five thrift-related servicers that have the largest mortgage servicing portfolios among all thrifts and their affiliates. The report found that foreclosures in process rose from January to March and that new foreclosures, as a percentage of seriously delinquent loans, increased from 8.69% to 11.21% during that time. The report also found that loss mitigation actions significantly outpaced the number of new foreclosures during February and March. For a copy of the report, please see http://www.ots.treas.gov/docs/4/481097.pdf.
SEC Examinations Find Shortcomings in Credit Rating Agencies’ Practices and Disclosure to Investors. On July 8, the Securities and Exchange Commission (SEC) released findings from 10-month examinations of three major credit rating agencies that uncovered weaknesses in ratings practices and the need for remedial action by the firms to provide meaningful ratings and the necessary levels of disclosure to investors. The SEC conducted examinations of Fitch Ratings Ltd., Moody’s Investor Services Inc., and Standard & Poor’s Ratings Services to evaluate whether they are adhering to their published methodologies for determining ratings and managing conflicts of interest. The SEC’s examinations found that rating agencies struggled significantly with the increase in the number and complexity of subprime residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) deals since 2002. The examinations uncovered that none of the rating agencies examined had specific written comprehensive procedures for rating RMBS and CDOs. Furthermore, significant aspects of the rating process were not always disclosed or even documented by the firms, and conflicts of interest were not always managed appropriately. The report summarizes generally the remedial actions that credit rating agencies are expected to take as a result of the examinations, and includes observations by the SEC’s Office of Economic Analysis about conflicts of interest that are unique to these products. For the Summary Report of Issues Identified in the Commission Staff’s Examinations of Select Credit Rating Agencies, please see http://www.sec.gov/news/studies/2008/craexamination070808.pdf.
SEC, FRB Sign Agreement to Enhance Information Sharing. On July 7, the Securities and Exchange Commission (SEC) Chairman Christopher Cox and the Federal Reserve Board (FRB) Chairman Ben Bernanke signed a memorandum of understanding (MOU) between the two agencies that is intended to enhance information sharing and cooperation. Under the MOU, the SEC and the FRB would share information and cooperate across a number of areas of common interest, including anti-money laundering, bank brokerage activities under the Gramm-Leach-Bliley Act, and clearance and settlement in the banking and securities industries. For a copy of the MOU, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080707a1.pdf.
U.S. Treasury Secretary Paulson Advocates for Widespread Reform of the Financial Regulatory System. In a speech on July 2 in London, U.S. Treasury Secretary Henry M. Paulson, Jr. spoke on the Treasury Department’s plan to modernize the financial regulatory system, calling for robust oversight and increased market discipline. Secretary Paulson outlined the Treasury Department’s recommendations made last March pursuant to its “Blueprint for a Modernized Financial Regulatory Structure” which proposed three models for an oversight plan which include models with a focus on (i) market stability across the entire financial sector, (ii) the safety and soundness of institutions supported by a federal guarantee, and (iii) protecting consumers and investors. Secretary Paulson stated that, in light of recent market turmoil and the Bear Stearns episode, the overhaul of the “outdated” U.S. financial regulatory system should be accelerated. He suggested that the Federal Reserve and the Securities and Exchange Commission draft a formal arrangement setting forth their objectives and decisions for Congress to consider in modernizing the regulatory structure. Further, to address the historical expectation that the Federal Reserve will intervene to avert events that pose unacceptable systemic risk, Secretary Paulson also recommended that the Federal Reserve be given access to necessary information from complex financial institutions (commercial banks, investment banks, hedge funds, etc) and clear statutory authority to act preemptively to mitigate systemic risk in advance of a crisis, provided that the costs are allocated to creditors and equity holders, not taxpayers. Also, Secretary Paulson warned that government support should be used only in extraordinary situations and should require executive branch participation. For a copy of the speech, see http://www.ustreas.gov/press/releases/hp1064.htm.
FTC Plans to Survey Consumer Remedies Under FACTA. On July 2, the Federal Trade Commission (FTC) announced plans to survey identify theft victims who contacted the FTC between January 1 and May 30, 2008. The survey will examine the remedies available to identify theft victims under the Fair and Accurate Credit Transactions Act (FACTA). Information gathered from the survey is expected to allow the FTC to focus its approach regarding consumer education and law enforcement. For the survey proposal, as published in the Federal Register, please see http://www.ftc.gov/os/fedreg/2008/july/080701craresearch.pdf.
Comptroller Dugan Emphasizes Continued Compliance Supervision. On July 7, at the Office of the Comptroller of the Currency (OCC) Compliance Conference, Comptroller of the Currency John Dugan warned examiners that the OCC should not lose sight of compliance supervision in the midst of the recent focus on safety and soundness. Dugan then identified a number of priority compliance issues. First, he stressed the increased scrutiny of banks through fair lending laws and emphasized transparency and communication while discouraging race or gender based variation in foreclosing on borrowers. Dugan also underscored consumer protection, predicting that the Federal Reserve would soon issue new rules on subprime mortgages that represent a shift from disclosure-focused to prescription-focused regulation. Next, Dugan touched on the Community Reinvestment Act (CRA) and acknowledged that while CRA loan volume would almost certainly be down, lenders can still “make good loans that will fulfill their CRA obligations.” Finally, Dugan touted recent Bank Secrecy Act (BSA) compliance supervision as an example of striking the desired balance between successful OCC supervision and overregulation. For a copy of the speech, please see http://www.occ.gov/ftp/release/2008-76a.pdf.
Department of Education Issues Terms and Conditions of Student Loan Purchase Plans. On July 1, the Department of Education (Department) detailed the terms and conditions governing two new loan purchasing programs, the Loan Purchase Commitment Program and the Loan Participation Purchase Program (collectively, the Programs). The Programs will provide eligible lenders, which have entered into a master sales agreement with the Department, with the opportunity to sell their student loans or participation interests to the Department. In addition to outlining the terms and conditions for the Programs, the Federal Register notice also details the methodology for purchasing of student loans from lenders, as well as discusses how the Programs will ensure that loan purchases do not result in any net cost to the Federal Government. The Programs are meant to encourage eligible lenders to provide students and parents access to loans for the upcoming academic year. The terms and conditions governing the Programs became effective July 1. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2008/pdf/E8-14820.pdf.
Delaware Supreme Court to Resolve SEC Question Regarding Shareholder Election Proposal. On July 1, the Delaware Supreme Court granted a June 27 Securities and Exchange Commission (SEC) certification to resolve a dispute regarding whether a shareholder election proposal violates state law. Earlier this year, CA Inc. asserted to the SEC that an American Federation of State, County and Municipal Employees proposal requiring the company to reimburse stockholders for successfully running at least one director in a contested election violates various subdivisions of Rule 14a-8 and should therefore be excluded from proxy materials. The SEC declined to issue a no-action letter upon finding that the proposal neither conflicts with Exchange Act Rule 14a-7, nor relates to a procedure for the election of directors. However, the SEC deferred to the Delaware Supreme Court as to whether the proposal is proper under Delaware law, taking advantage of a 2007 enactment by Delaware’s General Assembly authorizing the Delaware Supreme Court to resolve questions of state law upon SEC certification. This is the first time the SEC has requested a certification under the new law. A portion of the SEC letter can be found at http://www.sec.gov/divisions/corpfin/cf-noaction/2008/ca062708-14a8.htm.
State Issues
California Enacts Mortgage Foreclosure Bill. On July 8, California Governor Arnold Schwarzenegger approved S.B. 1137, which enacts several changes and requirements to the procedures relating to mortgage foreclosures. Among other things, S.B. 1137, (i) requires a mortgage holder of a residential real property loan made from January 1, 2003, to December 31, 2007, for owner-occupied residences, to wait 30 days after contacting the borrower or 30 days after satisfying specified due diligence requirements to contact the borrower, in order to explore options for the borrower to avoid foreclosure, before it may issue a notice of default or notice of trustee sale, (ii) requires a mortgage holder to mail a specified notice to the tenant(s) of a property on which foreclosure proceedings have begun and gives a tenant or subtenant of a rental housing unit at the time the property is sold in foreclosure 60 days to remove himself or herself from the property, and (iii) authorizes a governmental entity to impose civil fines and penalties of up to $1,000 per day on property owners who fail to adequately maintain foreclosed properties, as specified. The bill became effective on July 8 (with certain provisions becoming operative 60 days after the effective date), and remains effective until January 1, 2013. For a copy of S.B. 1137, please see http://www.buckleykolar.com/documents/CASB1137.pdf.
California Expands Jurisdiction for the Prosecution of Identity Theft. On July 1, California Governor Arnold Schwarzenegger signed CA S.B. 612, which will allow identity-theft crimes to be prosecuted in the county in which the victim resided when the offense was committed, in addition to the county in which the crime occurred. Previously, identity-theft victims could seek justice only in the county in which the identity theft occurred or the county in which the identity information was illegally used. The bill becomes effective on January 1, 2009. For more on CA S.B. 612 please see http://www.leginfo.ca.gov/pub/07-08/bill/sen/sb_0601-0650/sb_612_bill_20080701_chaptered.pdf.
Pennsylvania Enacts Four Mortgage Lending Bills. On July 8, Pennsylvania Governor Ed Rendell signed four bills, S.B. 483, S.B. 484, S.B. 486, and H.B. 2179, which affect mortgage licensing, interest rates, foreclosure notices, and the powers of the Pennsylvania Department of Banking (Department). S.B. 483, which becomes effective 60 days after July 8, amends the Loan Interest and Protection Law, Pennsylvania’s usury statute, so that it applies to residential mortgage loans in principal amounts of $217,873 or less, to be adjusted annually for inflation by the Pennsylvania Department of Banking. S.B. 484, which became effective on July 8, authorizes the Department to require use of a national electronic licensing system for original application and renewal of licensees regulated by the Department. S.B. 486, which becomes effective 60 days after July 8, amends Pennsylvania’s Homeowners’ Emergency Mortgage Assistance Act, by amending the notice period and requirements for the statutory default and foreclosure notice. H.B. 2179, which becomes effective 120 days after July 8, creates a new licensing scheme for participants in the mortgage loan industry. For a copy of S.B. 483, S.B. 484, S.B. 486, and H.B. 2179, please see http://www.buckleykolar.com/documents/PASB483.pdf, http://www.buckleykolar.com/documents/PASB484.pdf, http://www.buckleykolar.com/documents/PASB486.pdf, and http://www.buckleykolar.com/documents/PAHB2179.pdf, respectively.
New Hampshire Requires Licensure for Loan Originators. On July 9, New Hampshire Governor John Lynch signed H.B. 1286, which requires loan originators to be licensed prior to transacting business as an originator in New Hampshire. Under the new law, an originator’s license is only in effect when such originator is associated with a particular licensed mortgage banker or broker. Further, the new law makes it unlawful for any mortgage banker or mortgage broker to employ, retain, or otherwise engage an originator unless the originator is licensed. For a copy of H.B. 1286, please see http://www.gencourt.state.nh.us/legislation/2008/HB1286.html.
Oregon Adopts Rule Concerning Report of Mortgage Banker and Broker’s Mortgage Activity. On June 26, the Oregon Department of Consumer and Business Services (Department) adopted a new temporary rule, OAR 441-865-0024, to implement S.B. 1064. S.B. 1064 requires the Department to require reports from mortgage bankers and mortgage brokers concerning their residential mortgage activity, which includes specifying what loan information mortgage brokers and mortgage bankers must submit. The new temporary rule details the information that licensees must include in the report. The Department previously issued a temporary rule, OAR 441-865-0022 (reported in InfoBytes, May 23, 2008), addressing these requirements that listed mandatory items licensees had to report. However, OAR 441-865-0022 raised concerns that the collection of some portions of the information the Department requested may be too costly to accomplish through reasonable effort. The new temporary rule suspends the previous rule and clarifies that while the Department encourages the collection of all the data specified in the previous rule, certain of that data will not be mandatory for the present reporting period. As with the previous temporary rule, mortgage brokers and mortgage bankers must file their report on or before August 30, 2008 for loans closed between January 1, 2007 and December 31, 2007. The new temporary rule became effective on June 26, 2008, and will remain in effect until December 1, 2008. For a copy of the new temporary rule, please see http://www.cbs.state.or.us/dfcs/rules_statutes/rulemaking/441-865-0024.pdf.
Louisiana Enacts Bill Requiring Periodic Records Review of Mortgage Lenders. On June 30, Louisiana Governor Bobby Jindal signed S.B. 253, which requires the Louisiana Office of Financial Institutions to review the books, records, and accounts of all licensed residential mortgage lenders at least once every three years. The bill also reduces the continuing education requirements for licensed mortgage brokers, lenders, and originators from ten hours to eight hours. The bill became effective on June 30. For a copy of the bill, please see http://www.legis.state.la.us/billdata/streamdocument.asp?did=503687.
Louisiana Enacts Bill Requiring Written Contracts For E-Recording. On June 21, Louisiana Governor Bobby Jindal signed H.B. 828, which requires that recorders of mortgages, clerks of court, and registers of conveyances must have a written contract with persons filing documents electronically in order to comply with the Louisiana Uniform Electronic Transactions Act. This bill becomes effective on August 15. For a copy of the bill, please see http://www.legis.state.la.us/billdata/streamdocument.asp?did=503189.
Massachusetts Commissioner of Banks Issues Opinion on Permissible Fees During 90-Day Right to Cure. On June 25, Massachusetts Commissioner of Banks Steven Antonakes issued an opinion letter addressing fees and charges that may be charged during the 90-Day Right to Cure, pursuant to Chapter 206 of the Acts of 2007 (reported in InfoBytes, May 2, 2008). The opinion letter states that it is the position of the Massachusetts Division of Banks (Division) that all fees charged for a modification and any related filings are not precluded during the 90-day Right to Cure. Similarly, the opinion letter states that it is the Division’s position that charges for necessary expenditures to protect a mortgagee’s lien status are not precluded during the 90-day Right to Cure. The opinion states that the provision of the 90-day Right to Cure that prohibits a mortgagor from being “required to pay any charge, fee, or penalty, attributable to the exercise of the right to cure a default” runs solely to the curing of the default. The opinion letter, however, states that the Division encourages lenders and servicers to pursue loan modifications, in order to avoid unnecessary foreclosures, and to make fees for such modifications as low as possible so as to make them accessible to as many borrowers as feasible. For a copy of Commissioner Antonakes’s opinion letter, please see http://www.mass.gov/Eoca/docs/dob/08-016.pdf.
MoneyGram Reaches Multi-State Compliance Agreement Regarding Wire Transfer Scams. On July 2, MoneyGram entered into an agreement with attorneys general in 44 states and the District of Columbia, aimed at preventing wire transfer fraud, in response to concerns about the use of MoneyGram’s wire transfer services by scammers. Under the terms of the agreement, MoneyGram agreed to print a consumer fraud warning on its money transfer form alerting consumers to potential sources of fraud. The warning requests a consumer to cancel any transaction suspected to be fraudulent. If the funds have not been picked up, the agreement allows for funds to be returned to the consumer upon such a request. MoneyGram also agreed to provide additional fraud detection training to branch agents, to pay $1.1 million to fund a national peer-counseling program, and, when practicable, to share fraud complaint information with United States law enforcement officials. For a copy of the MoneyGram Compliance Agreement, please see http://www.buckleykolar.com/documents/MoneyGramComplianceAgreement.pdf.
Missouri Governor Signs Credit Freeze Bill. On June 30, Missouri Governor Matt Blunt signed into law H.B. 1384/H.B. 2157, which allows Missouri residents to order a security freeze on their credit report to prevent identity thieves from affecting their credit reports. Under the new law, a credit reporting agency (CRA) must honor a consumer’s request for a security freeze within five business days of receipt the request. A consumer may request a temporary release of the security freeze, but the CRA is permitted to charge a nominal fee, not to exceed five dollars, for temporarily lifting the freeze. A CRA that knowingly violates the provisions of the new law may be held liable for any actual damages sustained by a consumer as a result of the CRA’s negligence, including costs and attorneys fees associated with any lawsuit. The new law becomes effective on August 28, 2008. For a copy of H.B. 1384/H.B. 2157, please see http://www.house.mo.gov/billtracking/bills081/billpdf/truly/HB1384T.PDF.
Ohio Governor Signs Security Freeze Bill. Ohio Governor Ted Strickland recently signed H.B. 46 into law, which allows consumers to order a security freeze on their credit reports to prevent identify theft. Under the new law, which provides a detailed procedure for requesting such security freezes, credit reporting agencies (CRA’s) must place a security freeze on a consumer’s account within three days after receipt of a proper request. The CRA is required to keep the security freeze in place until the consumer properly requests to have it lifted, either on a temporary or permanent basis. Under the new law, individual consumers are permitted to bring a civil action against a CRA if the CRA willfully or negligently fails to comply with the security freeze requirements. H.B. 46 becomes effective on August 5, 2008. For a copy of H.B. 46, please see http://www.legislature.state.oh.us/BillText127/127_HB_46_EN_N.pdf.
Arkansas Adopts Statement on Subprime Lending. The Arkansas Securities Commissioner recently issued a Policy Statement to adopt the Statement on Subprime Mortgage Lending (Subprime Statement) (reported in InfoBytes, July 20, 2007). The Subprime Statement was developed by the American Association of Residential Mortgage Regulators, the Conference of State Banker Supervisors, and the National Association of Consumer Credit Administrators to address emerging risks associated with certain subprime mortgage products and lending practices. For a copy of the Arkansas Securities Commissioner Policy Statement, please see http://www.buckleykolar.com/documents/AKSecuritiesCommissionerPolicyStmt.pdf.
Delaware Authorizes Participation in Multi-State Automated Licensing System. On June 30, Delaware Governor Ruth Ann Minner signed S.B. 203, which authorizes the Delaware State Bank Commissioner to participate in the multi-state automated licensing system and provides the Commissioner authority to establish additional licensing requirements and fees that are necessary for that participation. The new law became effective on June 30, 2008. For a copy of S.B. 203, please see http://www.buckleykolar.com/documents/DESB203.pdf.
Courts
Eleventh Circuit Issues 3 RESPA Fee Decisions. On July 3, the U.S. Court of Appeals for the Eleventh Circuit issued three unpublished opinions holding that § 8(b) of the Real Estate Settlement Procedures Act (RESPA) does not govern excessive fees because the provision is not a mechanism for price control. Williams v. Countrywide Home Loans, No. 08-10303 (11th Cir. July 3, 2008); Moody v. Commonwealth Land Title Ins. Co., No. 07-14999 (11th Cir. July 3, 2008); Morrisette v. Novastar Home Mortgage, Inc., No. 08-10036 (11th Cir. July 3, 2008). The court rejected the notion that courts should break single fees into various “components” for evaluation. Moreover, the court reiterated its position that § 8(b) requires a plaintiff to allege that no services were rendered in exchange for a settlement fee. In each of these cases, the court found that the plaintiffs merely claimed that they were charged an inflated fee for a service that was indisputably provided. As such, the court held that each of the plaintiffs’ claims are beyond the purview of RESPA. For a copy of the Williams, Moody, and Morrisette opinions, please see http://www.buckleykolar.com/documents/WilliamsvCountrywideHomeLoans.pdf,http://www.buckleykolar.com/documents/MoodyvCommonwealthLandTitleInsCo.pdf, andhttp://www.buckleykolar.com/documents/MorrisettevNovastarHomeMortgage.pdf, respectively.
Washington State Regulator Sues Countrywide Home Loans. On June 25, the Washington Department of Financial Institutions (the Department) Division of Consumer Services filed suit against Countrywide Home Loans seeking to revoke the lender’s license and reclaim up to $6 million in fines, fees, and back assessments. In its statement of charges, the Department claims Countrywide engaged in racially discriminatory pricing and failed to comply with disclosure requirements related to Good Faith Estimates, annual percentage rates, prepayment penalties, loan servicing, and home equity lines of credit. In addition, the complaint alleges that Countrywide underreported loan volume to reduce its state assessment fees and failed to notify the Department of significant developments regarding investigations by other regulators. The complaint also claims that Countrywide failed to correctly file data on 25% of the applications the Department reviewed for home purchase loans and refinances, in violation of the Home Mortgage Disclosure Act. For a copy of the complaint, please see http://www.dfi.wa.gov/CS%20Orders/C-08-030-08-SC01.pdf.
District Court Finds Debt Collection Company Violated FDCPA By Harassing Consumer. On July 2, a federal district court in Maine found that a debt collection company violated the Fair Debt Collection Practices Act (FDCPA) and Maine Fair Debt Collection Practices Act (MFDCPA) by harassing a consumer through two direct telephone calls within a brief period and one later telephone message to the consumer’s attorney. Sweetland v. Stevens & James, Inc., No. CV-07-161-B-W (D. Me. July 2, 2008). The consumer plaintiff had sustained a heart attack approximately six months before the harassing calls and fell behind on her bills. During the calls, the plaintiff attempted to explain that she was filing for bankruptcy, but she claimed that the debt collector was threatening and rude to her and allegedly caused her to suffer anxiety attacks, as well as ongoing anxiety, after each call. The debt collector also left a message with the plaintiff’s law firm that was alleged to be abusive and threatening. The plaintiff claimed damages under the FDCPA and the MFDCPA, but because the statutory remedies were identical under both laws, the court proceeded under the FDCPA, which authorized the court to award any actual damage up to $1,000, and “attorney’s fees. Noting that courts have interpreted “actual damages” to include damages for emotional distress caused by a debt collector’s statutory violation, the court awarded $2,500 in actual damages, $250 in additional damages, and $3,520 in attorney’s fees and costs. Plaintiff originally demanded $15,000 in actual damages, but given the confined period within which the two calls were made, the fact that the calls and other contact ceased entirely, and the fact that the claim was limited to emotional damages alone, the court found that $15,000 was excessive. For a copy of this opinion, please see http://www.buckleykolar.com/documents/SweetlandvStevensJamesInc.pdf.
Federal District Court Grants Motion to Dismiss Based Upon Federal Preemption. On July 1, a federal district court in Missouri granted a defendant’s motion to dismiss a claim preempted by the National Bank Act (NBA) and the authority of the Office of the Comptroller of the Currency (OCC) pursuant to the Federal Trade Commission Act (FTCA). Weiss v. Wells Fargo Bank, No. 07-5037-CV-SW-WAK (W.D. Mo. July 1, 2008). In this case, the borrower obtained a mortgage and enrolled in an accelerated ownership plan (AOP) with the lender. The AOP allowed Wells Fargo to withdraw one-half of the borrower’s monthly mortgage payment every two weeks while Wells Fargo only made mortgage payments on behalf of the borrower every four weeks. However, the plaintiff understood that his payments would be applied to the mortgage every two weeks and thus claimed that (i) Wells Fargo did not adhere to local advertising and disclosure requirements, and (ii) Wells Fargo made false and misleading statements, as defined by the Missouri Merchandising Practices Act (MPA). The court held that the NBA preempted local advertising and disclosure requirements, citing Franklin National Bank v. New York, 347 U.S. 373 (1954), and Bank One, Utah National Association v. Guttau, 190 F.3d 844 (8th Cir. 1999).The court further held that the MPA was preempted, reasoning that the OCC must enforce the FTCA’s provisions regarding false and misleading statements, and that providing a separate remedy and suit under the MPA would be inconsistent with a uniform federal standard. For a copy of the opinion, please see http://www.buckleykolar.com/documents/WeissvWellsFargoBank.pdf.
RESPA Captive Reinsurance Complaint Survives Motion to Dismiss. On June 30, a federal district court in Pennsylvania refused to dismiss a class action complaint alleging violations of the Real Estate Settlement Procedures Act (RESPA) by a mortgage lender and its captive mortgage reinsurer. Alexander v. Washington Mutual, Inc., No. 07-4426, 2008 WL 2600323 (E.D. Pa. June 30, 2008). The borrowers in the case alleged that their mortgage lender directed them and other borrowers to private mortgage insurance providers that had agreed to reinsure the borrowers’ mortgage insurance with the lender’s captive reinsurance company. According to the borrowers, the lender and its captive reinsurer violated RESPA by collecting illegal referral or kickback payments in the form of reinsurance premiums. The court found that RESPA’s safe harbor provision – which permits payment for goods or facilities actually furnished or for services actually performed – did not preclude the lawsuit, as the plaintiffs alleged that the reinsurance premiums at issue constituted payments for services not actually performed. To support this claim, the plaintiffs alleged that, from 2000 to 2005, the lender’s captive reinsurer had received over $295 million in reinsurance premiums, but had never paid for a single loss. The lenders argued that, because Pennsylvania law requires that rates for property insurance policies be filed with the Department of Insurance (in part to ensure that they are not excessive), mortgage insurance rates are per se reasonable and unassailable in a judicial proceeding. According to the court, however, the filed rate doctrine did not bar the plaintiffs’ RESPA complaint, as the plaintiffs were not challenging the reasonableness of any rate set by the state, but were alleging that the defendants’ captive reinsurance arrangement involved an illegal kickback or fee-splitting scheme. The court also ruled that the plaintiffs’ failure to allege an overcharge for settlement services did not preclude a finding of injury in fact for purposes of Article III standing. For a copy of the opinion, please see http://www.buckleykolar.com/documents/AlexandervWashingtonMutual.pdf.
Mortgages
Senate Passes Housing Bill. On July 11, the U.S. Senate passed H.R. 3221, the omnibus housing bill that, among other things, modernizes the Federal Housing Administration (FHA), reforms the regulation of Government Sponsored Entities, and provides $300 billion for FHA refinancings of distressed loans (reported in InfoBytes, May 9, 2008), by a vote of 63-5. The bill now goes back to the House for consideration. As of the date of this publication, the text of the bill as passed by the Senate was not available. InfoBytes will report a more detailed analysis of the bill as passed by the Senate when the bill text becomes available.
OTS Documents 1Q 2008 Thrift Mortgage Market Activities. On July 3, the OTS released its first Mortgage Metrics Report, which provides performance data on first lien residential mortgages, covering first quarter 2008 delinquency, loss mitigation action, and foreclosure data for the five thrift-related servicers that have the largest mortgage servicing portfolios among all thrifts and their affiliates. The report found that foreclosures in process rose from January to March and that new foreclosures, as a percentage of seriously delinquent loans, increased from 8.69% to 11.21% during that time. The report also found that loss mitigation actions significantly outpaced the number of new foreclosures during February and March. For a copy of the report, please see http://www.ots.treas.gov/docs/4/481097.pdf.
Comptroller Dugan Emphasizes Continued Compliance Supervision. On July 7, at the Office of the Comptroller of the Currency (OCC) Compliance Conference, Comptroller of the Currency John Dugan warned examiners that the OCC should not lose sight of compliance supervision in the midst of the recent focus on safety and soundness. Dugan then identified a number of priority compliance issues. First, he stressed the increased scrutiny of banks through fair lending laws and emphasized transparency and communication while discouraging race or gender based variation in foreclosing on borrowers. Dugan also underscored consumer protection, predicting that the Federal Reserve would soon issue new rules on subprime mortgages that represent a shift from disclosure-focused to prescription-focused regulation. Next, Dugan touched on the Community Reinvestment Act (CRA) and acknowledged that while CRA loan volume would almost certainly be down, lenders can still “make good loans that will fulfill their CRA obligations.” Finally, Dugan touted recent Bank Secrecy Act (BSA) compliance supervision as an example of striking the desired balance between successful OCC supervision and overregulation. For a copy of the speech, please see http://www.occ.gov/ftp/release/2008-76a.pdf.
Department of Education Issues Terms and Conditions of Student Loan Purchase Plans. On July 1, the Department of Education (Department) detailed the terms and conditions governing two new loan purchasing programs, the Loan Purchase Commitment Program and the Loan Participation Purchase Program (collectively, the Programs). The Programs will provide eligible lenders, which have entered into a master sales agreement with the Department, with the opportunity to sell their student loans or participation interests to the Department. In addition to outlining the terms and conditions for the Programs, the Federal Register notice also details the methodology for purchasing of student loans from lenders, as well as discusses how the Programs will ensure that loan purchases do not result in any net cost to the Federal Government. The Programs are meant to encourage eligible lenders to provide students and parents access to loans for the upcoming academic year. The terms and conditions governing the Programs became effective July 1. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2008/pdf/E8-14820.pdf.
California Enacts Mortgage Foreclosure Bill. On July 8, California Governor Arnold Schwarzenegger approved S.B. 1137, which enacts several changes and requirements to the procedures relating to mortgage foreclosures. Among other things, S.B. 1137, (i) requires a mortgage holder of a residential real property loan made from January 1, 2003, to December 31, 2007, for owner-occupied residences, to wait 30 days after contacting the borrower or 30 days after satisfying specified due diligence requirements to contact the borrower, in order to explore options for the borrower to avoid foreclosure, before it may issue a notice of default or notice of trustee sale, (ii) requires a mortgage holder to mail a specified notice to the tenant(s) of a property on which foreclosure proceedings have begun and gives a tenant or subtenant of a rental housing unit at the time the property is sold in foreclosure 60 days to remove himself or herself from the property, and (iii) authorizes a governmental entity to impose civil fines and penalties of up to $1,000 per day on property owners who fail to adequately maintain foreclosed properties, as specified. The bill became effective on July 8 (with certain provisions becoming operative 60 days after the effective date), and remains effective until January 1, 2013. For a copy of S.B. 1137, please see http://www.buckleykolar.com/documents/CASB1137.pdf.
Pennsylvania Enacts Four Mortgage Lending Bills. On July 8, Pennsylvania Governor Ed Rendell signed four bills, S.B. 483, S.B. 484, S.B. 486, and H.B. 2179, which affect mortgage licensing, interest rates, foreclosure notices, and the powers of the Pennsylvania Department of Banking (Department). S.B. 483, which becomes effective 60 days after July 8, amends the Loan Interest and Protection Law, Pennsylvania’s usury statute, so that it applies to residential mortgage loans in principal amounts of $217,873 or less, to be adjusted annually for inflation by the Pennsylvania Department of Banking. S.B. 484, which became effective on July 8, authorizes the Department to require use of a national electronic licensing system for original application and renewal of licensees regulated by the Department. S.B. 486, which becomes effective 60 days after July 8, amends Pennsylvania’s Homeowners’ Emergency Mortgage Assistance Act, by amending the notice period and requirements for the statutory default and foreclosure notice. H.B. 2179, which becomes effective 120 days after July 8, creates a new licensing scheme for participants in the mortgage loan industry. For a copy of S.B. 483, S.B. 484, S.B. 486, and H.B. 2179, please see http://www.buckleykolar.com/documents/PASB483.pdf, http://www.buckleykolar.com/documents/PASB484.pdf, http://www.buckleykolar.com/documents/PASB486.pdf, and http://www.buckleykolar.com/documents/PAHB2179.pdf, respectively.
New Hampshire Requires Licensure for Loan Originators. On July 9, New Hampshire Governor John Lynch signed H.B. 1286, which requires loan originators to be licensed prior to transacting business as an originator in New Hampshire. Under the new law, an originator’s license is only in effect when such originator is associated with a particular licensed mortgage banker or broker. Further, the new law makes it unlawful for any mortgage banker or mortgage broker to employ, retain, or otherwise engage an originator unless the originator is licensed. For a copy of H.B. 1286, please see http://www.gencourt.state.nh.us/legislation/2008/HB1286.html.
Oregon Adopts Rule Concerning Report of Mortgage Banker and Broker’s Mortgage Activity. On June 26, the Oregon Department of Consumer and Business Services (Department) adopted a new temporary rule, OAR 441-865-0024, to implement S.B. 1064. S.B. 1064 requires the Department to require reports from mortgage bankers and mortgage brokers concerning their residential mortgage activity, which includes specifying what loan information mortgage brokers and mortgage bankers must submit. The new temporary rule details the information that licensees must include in the report. The Department previously issued a temporary rule, OAR 441-865-0022 (reported in InfoBytes, May 23, 2008), addressing these requirements that listed mandatory items licensees had to report. However, OAR 441-865-0022 raised concerns that the collection of some portions of the information the Department requested may be too costly to accomplish through reasonable effort. The new temporary rule suspends the previous rule and clarifies that while the Department encourages the collection of all the data specified in the previous rule, certain of that data will not be mandatory for the present reporting period. As with the previous temporary rule, mortgage brokers and mortgage bankers must file their report on or before August 30, 2008 for loans closed between January 1, 2007 and December 31, 2007. The new temporary rule became effective on June 26, 2008, and will remain in effect until December 1, 2008. For a copy of the new temporary rule, please see http://www.cbs.state.or.us/dfcs/rules_statutes/rulemaking/441-865-0024.pdf.
Louisiana Enacts Bill Requiring Periodic Records Review of Mortgage Lenders. On June 30, Louisiana Governor Bobby Jindal signed S.B. 253, which requires the Louisiana Office of Financial Institutions to review the books, records, and accounts of all licensed residential mortgage lenders at least once every three years. The bill also reduces the continuing education requirements for licensed mortgage brokers, lenders, and originators from ten hours to eight hours. The bill became effective on June 30. For a copy of the bill, please see http://www.legis.state.la.us/billdata/streamdocument.asp?did=503687.
Massachusetts Commissioner of Banks Issues Opinion on Permissible Fees During 90-Day Right to Cure. On June 25, Massachusetts Commissioner of Banks Steven Antonakes issued an opinion letter addressing fees and charges that may be charged during the 90-Day Right to Cure, pursuant to Chapter 206 of the Acts of 2007 (reported in InfoBytes, May 2, 2008). The opinion letter states that it is the position of the Massachusetts Division of Banks (Division) that all fees charged for a modification and any related filings are not precluded during the 90-day Right to Cure. Similarly, the opinion letter states that it is the Division’s position that charges for necessary expenditures to protect a mortgagee’s lien status are not precluded during the 90-day Right to Cure. The opinion states that the provision of the 90-day Right to Cure that prohibits a mortgagor from being “required to pay any charge, fee, or penalty, attributable to the exercise of the right to cure a default” runs solely to the curing of the default. The opinion letter, however, states that the Division encourages lenders and servicers to pursue loan modifications, in order to avoid unnecessary foreclosures, and to make fees for such modifications as low as possible so as to make them accessible to as many borrowers as feasible. For a copy of Commissioner Antonakes’s opinion letter, please see http://www.mass.gov/Eoca/docs/dob/08-016.pdf.
Arkansas Adopts Statement on Subprime Lending. The Arkansas Securities Commissioner recently issued a Policy Statement to adopt the Statement on Subprime Mortgage Lending (Subprime Statement) (reported in InfoBytes, July 20, 2007). The Subprime Statement was developed by the American Association of Residential Mortgage Regulators, the Conference of State Banker Supervisors, and the National Association of Consumer Credit Administrators to address emerging risks associated with certain subprime mortgage products and lending practices. For a copy of the Arkansas Securities Commissioner Policy Statement, please see http://www.buckleykolar.com/documents/AKSecuritiesCommissionerPolicyStmt.pdf.
Delaware Authorizes Participation in Multi-State Automated Licensing System. On June 30, Delaware Governor Ruth Ann Minner signed S.B. 203, which authorizes the Delaware State Bank Commissioner to participate in the multi-state automated licensing system and provides the Commissioner authority to establish additional licensing requirements and fees that are necessary for that participation. The new law became effective on June 30, 2008. For a copy of S.B. 203, please see http://www.buckleykolar.com/documents/DESB203.pdf.
Eleventh Circuit Issues 3 RESPA Fee Decisions. On July 3, the U.S. Court of Appeals for the Eleventh Circuit issued three unpublished opinions holding that § 8(b) of the Real Estate Settlement Procedures Act (RESPA) does not govern excessive fees because the provision is not a mechanism for price control. Williams v. Countrywide Home Loans, No. 08-10303 (11th Cir. July 3, 2008); Moody v. Commonwealth Land Title Ins. Co., No. 07-14999 (11th Cir. July 3, 2008); Morrisette v. Novastar Home Mortgage, Inc., No. 08-10036 (11th Cir. July 3, 2008). The court rejected the notion that courts should break single fees into various “components” for evaluation. Moreover, the court reiterated its position that § 8(b) requires a plaintiff to allege that no services were rendered in exchange for a settlement fee. In each of these cases, the court found that the plaintiffs merely claimed that they were charged an inflated fee for a service that was indisputably provided. As such, the court held that each of the plaintiffs’ claims are beyond the purview of RESPA. For a copy of the Williams, Moody, and Morrisette opinions, please see http://www.buckleykolar.com/documents/WilliamsvCountrywideHomeLoans.pdf,http://www.buckleykolar.com/documents/MoodyvCommonwealthLandTitleInsCo.pdf, andhttp://www.buckleykolar.com/documents/MorrisettevNovastarHomeMortgage.pdf, respectively.
Washington State Regulator Sues Countrywide Home Loans. On June 25, the Washington Department of Financial Institutions (the Department) Division of Consumer Services filed suit against Countrywide Home Loans seeking to revoke the lender’s license and reclaim up to $6 million in fines, fees, and back assessments. In its statement of charges, the Department claims Countrywide engaged in racially discriminatory pricing and failed to comply with disclosure requirements related to Good Faith Estimates, annual percentage rates, prepayment penalties, loan servicing, and home equity lines of credit. In addition, the complaint alleges that Countrywide underreported loan volume to reduce its state assessment fees and failed to notify the Department of significant developments regarding investigations by other regulators. The complaint also claims that Countrywide failed to correctly file data on 25% of the applications the Department reviewed for home purchase loans and refinances, in violation of the Home Mortgage Disclosure Act. For a copy of the complaint, please see http://www.dfi.wa.gov/CS%20Orders/C-08-030-08-SC01.pdf.
RESPA Captive Reinsurance Complaint Survives Motion to Dismiss. On June 30, a federal district court in Pennsylvania refused to dismiss a class action complaint alleging violations of the Real Estate Settlement Procedures Act (RESPA) by a mortgage lender and its captive mortgage reinsurer. Alexander v. Washington Mutual, Inc., No. 07-4426, 2008 WL 2600323 (E.D. Pa. June 30, 2008). The borrowers in the case alleged that their mortgage lender directed them and other borrowers to private mortgage insurance providers that had agreed to reinsure the borrowers’ mortgage insurance with the lender’s captive reinsurance company. According to the borrowers, the lender and its captive reinsurer violated RESPA by collecting illegal referral or kickback payments in the form of reinsurance premiums. The court found that RESPA’s safe harbor provision – which permits payment for goods or facilities actually furnished or for services actually performed – did not preclude the lawsuit, as the plaintiffs alleged that the reinsurance premiums at issue constituted payments for services not actually performed. To support this claim, the plaintiffs alleged that, from 2000 to 2005, the lender’s captive reinsurer had received over $295 million in reinsurance premiums, but had never paid for a single loss. The lenders argued that, because Pennsylvania law requires that rates for property insurance policies be filed with the Department of Insurance (in part to ensure that they are not excessive), mortgage insurance rates are per se reasonable and unassailable in a judicial proceeding. According to the court, however, the filed rate doctrine did not bar the plaintiffs’ RESPA complaint, as the plaintiffs were not challenging the reasonableness of any rate set by the state, but were alleging that the defendants’ captive reinsurance arrangement involved an illegal kickback or fee-splitting scheme. The court also ruled that the plaintiffs’ failure to allege an overcharge for settlement services did not preclude a finding of injury in fact for purposes of Article III standing. For a copy of the opinion, please see http://www.buckleykolar.com/documents/AlexandervWashingtonMutual.pdf.
Banking
SEC, FRB Sign Agreement to Enhance Information Sharing. On July 7, the Securities and Exchange Commission (SEC) Chairman Christopher Cox and the Federal Reserve Board (FRB) Chairman Ben Bernanke signed a memorandum of understanding (MOU) between the two agencies that is intended to enhance information sharing and cooperation. Under the MOU, the SEC and the FRB would share information and cooperate across a number of areas of common interest, including anti-money laundering, bank brokerage activities under the Gramm-Leach-Bliley Act, and clearance and settlement in the banking and securities industries. For a copy of the MOU, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080707a1.pdf.
U.S. Treasury Secretary Paulson Advocates for Widespread Reform of the Financial Regulatory System. In a speech on July 2 in London, U.S. Treasury Secretary Henry M. Paulson, Jr. spoke on the Treasury Department’s plan to modernize the financial regulatory system, calling for robust oversight and increased market discipline. Secretary Paulson outlined the Treasury Department’s recommendations made last March pursuant to its “Blueprint for a Modernized Financial Regulatory Structure” which proposed three models for an oversight plan which include models with a focus on (i) market stability across the entire financial sector, (ii) the safety and soundness of institutions supported by a federal guarantee, and (iii) protecting consumers and investors. Secretary Paulson stated that, in light of recent market turmoil and the Bear Stearns episode, the overhaul of the “outdated” U.S. financial regulatory system should be accelerated. He suggested that the Federal Reserve and the Securities and Exchange Commission draft a formal arrangement setting forth their objectives and decisions for Congress to consider in modernizing the regulatory structure. Further, to address the historical expectation that the Federal Reserve will intervene to avert events that pose unacceptable systemic risk, Secretary Paulson also recommended that the Federal Reserve be given access to necessary information from complex financial institutions (commercial banks, investment banks, hedge funds, etc) and clear statutory authority to act preemptively to mitigate systemic risk in advance of a crisis, provided that the costs are allocated to creditors and equity holders, not taxpayers. Also, Secretary Paulson warned that government support should be used only in extraordinary situations and should require executive branch participation. For a copy of the speech, see http://www.ustreas.gov/press/releases/hp1064.htm.
Comptroller Dugan Emphasizes Continued Compliance Supervision. On July 7, at the Office of the Comptroller of the Currency (OCC) Compliance Conference, Comptroller of the Currency John Dugan warned examiners that the OCC should not lose sight of compliance supervision in the midst of the recent focus on safety and soundness. Dugan then identified a number of priority compliance issues. First, he stressed the increased scrutiny of banks through fair lending laws and emphasized transparency and communication while discouraging race or gender based variation in foreclosing on borrowers. Dugan also underscored consumer protection, predicting that the Federal Reserve would soon issue new rules on subprime mortgages that represent a shift from disclosure-focused to prescription-focused regulation. Next, Dugan touched on the Community Reinvestment Act (CRA) and acknowledged that while CRA loan volume would almost certainly be down, lenders can still “make good loans that will fulfill their CRA obligations.” Finally, Dugan touted recent Bank Secrecy Act (BSA) compliance supervision as an example of striking the desired balance between successful OCC supervision and overregulation. For a copy of the speech, please see http://www.occ.gov/ftp/release/2008-76a.pdf.
Federal District Court Grants Motion to Dismiss Based Upon Federal Preemption. On July 1, a federal district court in Missouri granted a defendant’s motion to dismiss a claim preempted by the National Bank Act (NBA) and the authority of the Office of the Comptroller of the Currency (OCC) pursuant to the Federal Trade Commission Act (FTCA). Weiss v. Wells Fargo Bank, No. 07-5037-CV-SW-WAK (W.D. Mo. July 1, 2008). In this case, the borrower obtained a mortgage and enrolled in an accelerated ownership plan (AOP) with the lender. The AOP allowed Wells Fargo to withdraw one-half of the borrower’s monthly mortgage payment every two weeks while Wells Fargo only made mortgage payments on behalf of the borrower every four weeks. However, the plaintiff understood that his payments would be applied to the mortgage every two weeks and thus claimed that (i) Wells Fargo did not adhere to local advertising and disclosure requirements, and (ii) Wells Fargo made false and misleading statements, as defined by the Missouri Merchandising Practices Act (MPA). The court held that the NBA preempted local advertising and disclosure requirements, citing Franklin National Bank v. New York, 347 U.S. 373 (1954), and Bank One, Utah National Association v. Guttau, 190 F.3d 844 (8th Cir. 1999).The court further held that the MPA was preempted, reasoning that the OCC must enforce the FTCA’s provisions regarding false and misleading statements, and that providing a separate remedy and suit under the MPA would be inconsistent with a uniform federal standard. For a copy of the opinion, please see http://www.buckleykolar.com/documents/WeissvWellsFargoBank.pdf.
Consumer Finance
FTC Plans to Survey Consumer Remedies Under FACTA. On July 2, the Federal Trade Commission (FTC) announced plans to survey identify theft victims who contacted the FTC between January 1 and May 30, 2008. The survey will examine the remedies available to identify theft victims under the Fair and Accurate Credit Transactions Act (FACTA). Information gathered from the survey is expected to allow the FTC to focus its approach regarding consumer education and law enforcement. For the survey proposal, as published in the Federal Register, please see http://www.ftc.gov/os/fedreg/2008/july/080701craresearch.pdf.
California Expands Jurisdiction for the Prosecution of Identity Theft. On July 1, California Governor Arnold Schwarzenegger signed CA S.B. 612, which will allow identity-theft crimes to be prosecuted in the county in which the victim resided when the offense was committed, in addition to the county in which the crime occurred. Previously, identity-theft victims could seek justice only in the county in which the identity theft occurred or the county in which the identity information was illegally used. The bill becomes effective on January 1, 2009. For more on CA S.B. 612 please see http://www.leginfo.ca.gov/pub/07-08/bill/sen/sb_0601-0650/sb_612_bill_20080701_chaptered.pdf.
MoneyGram Reaches Multi-State Compliance Agreement Regarding Wire Transfer Scams. On July 2, MoneyGram entered into an agreement with attorneys general in 44 states and the District of Columbia, aimed at preventing wire transfer fraud, in response to concerns about the use of MoneyGram’s wire transfer services by scammers. Under the terms of the agreement, MoneyGram agreed to print a consumer fraud warning on its money transfer form alerting consumers to potential sources of fraud. The warning requests a consumer to cancel any transaction suspected to be fraudulent. If the funds have not been picked up, the agreement allows for funds to be returned to the consumer upon such a request. MoneyGram also agreed to provide additional fraud detection training to branch agents, to pay $1.1 million to fund a national peer-counseling program, and, when practicable, to share fraud complaint information with United States law enforcement officials. For a copy of the MoneyGram Compliance Agreement, please see http://www.buckleykolar.com/documents/MoneyGramComplianceAgreement.pdf.
Missouri Governor Signs Credit Freeze Bill. On June 30, Missouri Governor Matt Blunt signed into law H.B. 1384/H.B. 2157, which allows Missouri residents to order a security freeze on their credit report to prevent identity thieves from affecting their credit reports. Under the new law, a credit reporting agency (CRA) must honor a consumer’s request for a security freeze within five business days of receipt the request. A consumer may request a temporary release of the security freeze, but the CRA is permitted to charge a nominal fee, not to exceed five dollars, for temporarily lifting the freeze. A CRA that knowingly violates the provisions of the new law may be held liable for any actual damages sustained by a consumer as a result of the CRA’s negligence, including costs and attorneys fees associated with any lawsuit. The new law becomes effective on August 28, 2008. For a copy of H.B. 1384/H.B. 2157, please see http://www.house.mo.gov/billtracking/bills081/billpdf/truly/HB1384T.PDF.
Ohio Governor Signs Security Freeze Bill. Ohio Governor Ted Strickland recently signed H.B. 46 into law, which allows consumers to order a security freeze on their credit reports to prevent identify theft. Under the new law, which provides a detailed procedure for requesting such security freezes, credit reporting agencies (CRA’s) must place a security freeze on a consumer’s account within three days after receipt of a proper request. The CRA is required to keep the security freeze in place until the consumer properly requests to have it lifted, either on a temporary or permanent basis. Under the new law, individual consumers are permitted to bring a civil action against a CRA if the CRA willfully or negligently fails to comply with the security freeze requirements. H.B. 46 becomes effective on August 5, 2008. For a copy of H.B. 46, please see http://www.legislature.state.oh.us/BillText127/127_HB_46_EN_N.pdf.
Securities
SEC Examinations Find Shortcomings in Credit Rating Agencies’ Practices and Disclosure to Investors. On July 8, the Securities and Exchange Commission (SEC) released findings from 10-month examinations of three major credit rating agencies that uncovered weaknesses in ratings practices and the need for remedial action by the firms to provide meaningful ratings and the necessary levels of disclosure to investors. The SEC conducted examinations of Fitch Ratings Ltd., Moody’s Investor Services Inc., and Standard & Poor’s Ratings Services to evaluate whether they are adhering to their published methodologies for determining ratings and managing conflicts of interest. The SEC’s examinations found that rating agencies struggled significantly with the increase in the number and complexity of subprime residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) deals since 2002. The examinations uncovered that none of the rating agencies examined had specific written comprehensive procedures for rating RMBS and CDOs. Furthermore, significant aspects of the rating process were not always disclosed or even documented by the firms, and conflicts of interest were not always managed appropriately. The report summarizes generally the remedial actions that credit rating agencies are expected to take as a result of the examinations, and includes observations by the SEC’s Office of Economic Analysis about conflicts of interest that are unique to these products. For the Summary Report of Issues Identified in the Commission Staff’s Examinations of Select Credit Rating Agencies, please see http://www.sec.gov/news/studies/2008/craexamination070808.pdf .
SEC, FRB Sign Agreement to Enhance Information Sharing. On July 7, the Securities and Exchange Commission (SEC) Chairman Christopher Cox and the Federal Reserve Board (FRB) Chairman Ben Bernanke signed a memorandum of understanding (MOU) between the two agencies that is intended to enhance information sharing and cooperation. Under the MOU, the SEC and the FRB would share information and cooperate across a number of areas of common interest, including anti-money laundering, bank brokerage activities under the Gramm-Leach-Bliley Act, and clearance and settlement in the banking and securities industries. For a copy of the MOU, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080707a1.pdf .
Delaware Supreme Court to Resolve SEC Question Regarding Shareholder Election Proposal. On July 1, the Delaware Supreme Court granted a June 27 Securities and Exchange Commission (SEC) certification to resolve a dispute regarding whether a shareholder election proposal violates state law. Earlier this year, CA Inc. asserted to the SEC that an American Federation of State, County and Municipal Employees proposal requiring the company to reimburse stockholders for successfully running at least one director in a contested election violates various subdivisions of Rule 14a-8 and should therefore be excluded from proxy materials. The SEC declined to issue a no-action letter upon finding that the proposal neither conflicts with Exchange Act Rule 14a-7, nor relates to a procedure for the election of directors. However, the SEC deferred to the Delaware Supreme Court as to whether the proposal is proper under Delaware law, taking advantage of a 2007 enactment by Delaware’s General Assembly authorizing the Delaware Supreme Court to resolve questions of state law upon SEC certification. This is the first time the SEC has requested a certification under the new law. A portion of the SEC letter can be found at http://www.sec.gov/divisions/corpfin/cf-noaction/2008/ca062708-14a8.htm .
Insurance
RESPA Captive Reinsurance Complaint Survives Motion to Dismiss. On June 30, a federal district court in Pennsylvania refused to dismiss a class action complaint alleging violations of the Real Estate Settlement Procedures Act (RESPA) by a mortgage lender and its captive mortgage reinsurer. Alexander v. Washington Mutual, Inc., No. 07-4426, 2008 WL 2600323 (E.D. Pa. June 30, 2008). The borrowers in the case alleged that their mortgage lender directed them and other borrowers to private mortgage insurance providers that had agreed to reinsure the borrowers’ mortgage insurance with the lender’s captive reinsurance company. According to the borrowers, the lender and its captive reinsurer violated RESPA by collecting illegal referral or kickback payments in the form of reinsurance premiums. The court found that RESPA’s safe harbor provision – which permits payment for goods or facilities actually furnished or for services actually performed – did not preclude the lawsuit, as the plaintiffs alleged that the reinsurance premiums at issue constituted payments for services not actually performed. To support this claim, the plaintiffs alleged that, from 2000 to 2005, the lender’s captive reinsurer had received over $295 million in reinsurance premiums, but had never paid for a single loss. The lenders argued that, because Pennsylvania law requires that rates for property insurance policies be filed with the Department of Insurance (in part to ensure that they are not excessive), mortgage insurance rates are per se reasonable and unassailable in a judicial proceeding. According to the court, however, the filed rate doctrine did not bar the plaintiffs’ RESPA complaint, as the plaintiffs were not challenging the reasonableness of any rate set by the state, but were alleging that the defendants’ captive reinsurance arrangement involved an illegal kickback or fee-splitting scheme. The court also ruled that the plaintiffs’ failure to allege an overcharge for settlement services did not preclude a finding of injury in fact for purposes of Article III standing. For a copy of the opinion, please see http://www.buckleykolar.com/documents/AlexandervWashingtonMutual.pdf.
Litigation
Eleventh Circuit Issues 3 RESPA Fee Decisions. On July 3, the U.S. Court of Appeals for the Eleventh Circuit issued three unpublished opinions holding that § 8(b) of the Real Estate Settlement Procedures Act (RESPA) does not govern excessive fees because the provision is not a mechanism for price control. Williams v. Countrywide Home Loans, No. 08-10303 (11th Cir. July 3, 2008); Moody v. Commonwealth Land Title Ins. Co., No. 07-14999 (11th Cir. July 3, 2008); Morrisette v. Novastar Home Mortgage, Inc., No. 08-10036 (11th Cir. July 3, 2008). The court rejected the notion that courts should break single fees into various “components” for evaluation. Moreover, the court reiterated its position that § 8(b) requires a plaintiff to allege that no services were rendered in exchange for a settlement fee. In each of these cases, the court found that the plaintiffs merely claimed that they were charged an inflated fee for a service that was indisputably provided. As such, the court held that each of the plaintiffs’ claims are beyond the purview of RESPA. For a copy of the Williams, Moody, and Morrisette opinions, please see http://www.buckleykolar.com/documents/WilliamsvCountrywideHomeLoans.pdf,http://www.buckleykolar.com/documents/MoodyvCommonwealthLandTitleInsCo.pdf, andhttp://www.buckleykolar.com/documents/MorrisettevNovastarHomeMortgage.pdf, respectively.
Washington State Regulator Sues Countrywide Home Loans. On June 25, the Washington Department of Financial Institutions (the Department) Division of Consumer Services filed suit against Countrywide Home Loans seeking to revoke the lender’s license and reclaim up to $6 million in fines, fees, and back assessments. In its statement of charges, the Department claims Countrywide engaged in racially discriminatory pricing and failed to comply with disclosure requirements related to Good Faith Estimates, annual percentage rates, prepayment penalties, loan servicing, and home equity lines of credit. In addition, the complaint alleges that Countrywide underreported loan volume to reduce its state assessment fees and failed to notify the Department of significant developments regarding investigations by other regulators. The complaint also claims that Countrywide failed to correctly file data on 25% of the applications the Department reviewed for home purchase loans and refinances, in violation of the Home Mortgage Disclosure Act. For a copy of the complaint, please see http://www.dfi.wa.gov/CS%20Orders/C-08-030-08-SC01.pdf.
District Court Finds Debt Collection Company Violated FDCPA By Harassing Consumer. On July 2, a federal district court in Maine found that a debt collection company violated the Fair Debt Collection Practices Act (FDCPA) and Maine Fair Debt Collection Practices Act (MFDCPA) by harassing a consumer through two direct telephone calls within a brief period and one later telephone message to the consumer’s attorney. Sweetland v. Stevens & James, Inc., No. CV-07-161-B-W (D. Me. July 2, 2008). The consumer plaintiff had sustained a heart attack approximately six months before the harassing calls and fell behind on her bills. During the calls, the plaintiff attempted to explain that she was filing for bankruptcy, but she claimed that the debt collector was threatening and rude to her and allegedly caused her to suffer anxiety attacks, as well as ongoing anxiety, after each call. The debt collector also left a message with the plaintiff’s law firm that was alleged to be abusive and threatening. The plaintiff claimed damages under the FDCPA and the MFDCPA, but because the statutory remedies were identical under both laws, the court proceeded under the FDCPA, which authorized the court to award any actual damage up to $1,000, and “attorney’s fees. Noting that courts have interpreted “actual damages” to include damages for emotional distress caused by a debt collector’s statutory violation, the court awarded $2,500 in actual damages, $250 in additional damages, and $3,520 in attorney’s fees and costs. Plaintiff originally demanded $15,000 in actual damages, but given the confined period within which the two calls were made, the fact that the calls and other contact ceased entirely, and the fact that the claim was limited to emotional damages alone, the court found that $15,000 was excessive. For a copy of this opinion, please see http://www.buckleykolar.com/documents/SweetlandvStevensJamesInc.pdf.
Federal District Court Grants Motion to Dismiss Based Upon Federal Preemption. On July 1, a federal district court in Missouri granted a defendant’s motion to dismiss a claim preempted by the National Bank Act (NBA) and the authority of the Office of the Comptroller of the Currency (OCC) pursuant to the Federal Trade Commission Act (FTCA). Weiss v. Wells Fargo Bank, No. 07-5037-CV-SW-WAK (W.D. Mo. July 1, 2008). In this case, the borrower obtained a mortgage and enrolled in an accelerated ownership plan (AOP) with the lender. The AOP allowed Wells Fargo to withdraw one-half of the borrower’s monthly mortgage payment every two weeks while Wells Fargo only made mortgage payments on behalf of the borrower every four weeks. However, the plaintiff understood that his payments would be applied to the mortgage every two weeks and thus claimed that (i) Wells Fargo did not adhere to local advertising and disclosure requirements, and (ii) Wells Fargo made false and misleading statements, as defined by the Missouri Merchandising Practices Act (MPA). The court held that the NBA preempted local advertising and disclosure requirements, citing Franklin National Bank v. New York, 347 U.S. 373 (1954), and Bank One, Utah National Association v. Guttau, 190 F.3d 844 (8th Cir. 1999).The court further held that the MPA was preempted, reasoning that the OCC must enforce the FTCA’s provisions regarding false and misleading statements, and that providing a separate remedy and suit under the MPA would be inconsistent with a uniform federal standard. For a copy of the opinion, please see http://www.buckleykolar.com/documents/WeissvWellsFargoBank.pdf.
RESPA Captive Reinsurance Complaint Survives Motion to Dismiss. On June 30, a federal district court in Pennsylvania refused to dismiss a class action complaint alleging violations of the Real Estate Settlement Procedures Act (RESPA) by a mortgage lender and its captive mortgage reinsurer. Alexander v. Washington Mutual, Inc., No. 07-4426, 2008 WL 2600323 (E.D. Pa. June 30, 2008). The borrowers in the case alleged that their mortgage lender directed them and other borrowers to private mortgage insurance providers that had agreed to reinsure the borrowers’ mortgage insurance with the lender’s captive reinsurance company. According to the borrowers, the lender and its captive reinsurer violated RESPA by collecting illegal referral or kickback payments in the form of reinsurance premiums. The court found that RESPA’s safe harbor provision – which permits payment for goods or facilities actually furnished or for services actually performed – did not preclude the lawsuit, as the plaintiffs alleged that the reinsurance premiums at issue constituted payments for services not actually performed. To support this claim, the plaintiffs alleged that, from 2000 to 2005, the lender’s captive reinsurer had received over $295 million in reinsurance premiums, but had never paid for a single loss. The lenders argued that, because Pennsylvania law requires that rates for property insurance policies be filed with the Department of Insurance (in part to ensure that they are not excessive), mortgage insurance rates are per se reasonable and unassailable in a judicial proceeding. According to the court, however, the filed rate doctrine did not bar the plaintiffs’ RESPA complaint, as the plaintiffs were not challenging the reasonableness of any rate set by the state, but were alleging that the defendants’ captive reinsurance arrangement involved an illegal kickback or fee-splitting scheme. The court also ruled that the plaintiffs’ failure to allege an overcharge for settlement services did not preclude a finding of injury in fact for purposes of Article III standing. For a copy of the opinion, please see http://www.buckleykolar.com/documents/AlexandervWashingtonMutual.pdf.
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Louisiana Enacts Bill Requiring Periodic Records Review of Mortgage Lenders. On June 30, Louisiana Governor Bobby Jindal signed S.B. 253, which requires the Louisiana Office of Financial Institutions to review the books, records, and accounts of all licensed residential mortgage lenders at least once every three years. The bill also reduces the continuing education requirements for licensed mortgage brokers, lenders, and originators from ten hours to eight hours. The bill became effective on June 30. For a copy of the bill, please see http://www.legis.state.la.us/billdata/streamdocument.asp?did=503687.