InfoBytes, May 22, 2009
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Federal Issues
President Signs Helping Families Save Their Homes Act of 2009. On May 20, President Obama signed the Helping Families Save Their Homes Act of 2009. Principally, the Act amends the operation of the Hope for Home Owners Program (H4H program). These amendments include, among other things: (i) putting the HUD Secretary in charge of the program, (ii) capping upfront and annual fees at 3% and 1.5% respectively, (iii) permitting payments to servicers and underwriters for successful modifications; (iv) eliminating extraneous LTV restrictions on use of second lien loans to maintain property, and (v) barring borrowers with a net worth of more than $1 million from participation in the program. All costs associated with the amended H4H program will be paid for by use of $2.3 billion of TARP funds. In addition to the H4H amendments, the Act proposes two important legal changes. First, it states that there should be a moratorium on foreclosures of all first mortgages secured by an owner’s principal dwelling until loss mitigation programs, such as the H4H program are fully implemented. Next, the Act amends § 131 of Truth in Lending Act (TILA) requiring assignees of mortgage loans to notify borrowers of any assignment in writing no later than 30 days after completion of the transaction. To enforce the section, the Act also amends § 130 of TILA to create a private right of action against assignees for noncompliance with the new disclosure obligation. This action would allow consumers to recover actual damages, as well as statutory damages of no more than (i) $4,000 in individual actions, or (ii) the lesser of $500,000 or 1% of a creditor’s net worth in a class action. In addition, the Act also creates a safe harbor from liability for persons agreeing to modify loans under the program. This safe harbor denies investors the right to sue for losses occurring because of participation in the program if (i) a default on a mortgage occurred or was "reasonably foreseeable," (ii) the home was owner occupied, and (iii) the lender "reasonably and in good faith" believed that more money would be recovered through a loan modification or workout plan than foreclosure. The Act also enhances the powers of the FDIC and NCUA by extending the temporary increase in deposit insurance for both entities until 2013 and by . increasing the borrowing authority of both entities. Further, the Act grants both institutions authority to replenish their insurance funds through industry assessments. For a copy of the Act, please see http://www.buckleysandler.com/Helping_Families_Save_Their_Homes_Act_of_2009.pdf.
President Signs Credit Card Accountability Responsibility and Disclosure Act. On May 22, President Obama signed the Credit Card Accountability Responsibility and Disclosure Act of 2009, H.R. 627. This legislation puts into statutory form many of the protections for cardholders contained in the Federal Reserve Board Regulations issued in December of 2008 (as reported in InfoBytes, Dec. 19, 2008) and some additional section. The legislation prohibits credit card companies from raising interest rates on existing balances until a borrower’s payment is at least 60 days delinquent and requires the interest rate to revert to its original rate when a cardholder has paid his bill on time for the six months following the raise. The Act also prohibits companies from charging (i) “pay to pay” fees, which are charges incurred by the cardholder for making payments over the phone or online, and (ii) “over the limit” fees, unless the cardholder expressly elects to make a charge over their limit. Additionally, if a cardholder has two or more balances with different interest rates, companies must apply payments to the balance with the highest interest rate first. Finally, the Act imposes several disclosure requirements. First, in order to increase interest rates on future purchases, credit card companies must notify customers of the pending increase at least 45 days before the increase takes effect. The Act also requires creditors to post credit card agreements on the Internet so that cardholders may view the agreement’s terms at any time. Furthermore, creditors must provide customers with an amortization and cost schedule that is based on a customer making only the required minimum monthly payment. For the full text of the bill, please see http://www.buckleysandler.com/Credit_Card_Accountability_Responsibility_and_Disclosure_Act.pdf.
White House Releases Memorandum Outlining the Obama Administration’s Federal Preemption Policy. On May, 20, the White House Office of the Press Secretary released a memorandum from President Obama outlining his administration’s policy on federal agencies issuing regulations that preempt state law. The administration’s general preemption policy, as set forth in the memorandum, is “preemption of State law by executive departments and agencies should be undertaken only with full consideration of the legitimate prerogatives of the States and with a sufficient legal basis for preemption. Executive departments and agencies should be mindful that in our Federal system, the citizens of the several States have distinctive circumstances and values, and that in many instances it is appropriate for them to apply to themselves rules and principles that reflect these circumstances and values.” Among other directives aimed at new regulations, the memorandum provides that “heads of departments and agencies should review regulations issued within the past 10 years that contain statements in regulatory preambles or codified provisions intended by the department or agency to preempt State law, in order to decide whether such statements or provisions are justified under applicable legal principals governing preemption.” If such statements are not justified under the principles outlined in the memorandum, the department or agency head should initiate appropriate action, possibly including amendment to the relevant regulation. For a copy of the memorandum, please see http://www.buckleysandler.com/White_House_Preemption_Memorandum.pdf.
FDIC Adopts Final Rule Approving Special Assessments on Assets Rather Than Deposits. On May 22, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) voted in favor of a final rule authorizing a special assessment on insured depository institutions. Unlike prior assessments, which were based on the amount of deposits an institution held, this assessment will be based on an institution’s assets. Under the rule, the FDIC will impose a 5 basis point assessment on each institution’s assets minus its Tier 1 capital as reported to the FDIC on June 30, 2009. However, the maximum contribution from each institution is capped at 10 basis points times the institution’s deposit base. Additionally, the final rule authorizes the FDIC to make additional assessments in the third and fourth quarters of 2009 if the FDIC estimates that its Deposit Insurance Fund reserve ratio will fall to a level that will shake that public’s confidence in the fund. Like the current assessments, these future assessments would also cap the maximum contribution from each institution at 10 basis points times the institution’s deposit base. The authority for the FDIC to make special assessments under this final rule will terminate on January 1, 2010. For a copy of the final rule, please see http://www.fdic.gov/news/board/May22no2.pdf.
FHFA Issues Annual Report to Congress. On May 18, James B. Lockhart, Director of the Federal Housing Finance Agency (FHFA), released a report detailing the results of the agency’s 2008 annual examinations of Fannie Mae, Freddie Mac, the 12 Federal Home Loan Banks (FHLBanks), and the Office of Finance. This report is the agency’s first to Congress since it was established by the Housing and Economic Recovery Act of 2008 (HERA) to replace the Office of Federal Housing Enterprise Oversight (OFHEO). Among other things, the report makes several broad conclusions. First, with respect to Fannie Mae and Freddie Mac, the report concludes that the Enterprises face significant challenges in correcting the operational and credit management weaknesses that led to their being placed in conservatorship in September of 2008. Chief among these challenges is the need for both Enterprises to rebuild and retain qualified staffs. Next, with respect to the FHLBanks, the report concludes that the FHLBanks’ advance business continues to operate safely and soundly with no credit losses, despite the failures of some member institutions. Finally, the report concludes that, for most of the entities it examined, the deterioration of private-label mortgage-backed securities remains a significant challenge. For a copy of the FHFA’s report, please see http://www.fhfa.gov/webfiles/2331/FHFAReportToCongress2008final.pdf.
FTC Obtains Restraining Order Against Deceptive Mortgage Relief Internet Ads. On May 18, the Federal Trade Commission (FTC) obtained an order from the U.S. District Court for the District of Columbia barring an Internet-based operation from using the web address “MakingHomeAffordable.gov” or representing that they were affiliated with the United States government. The action arose after the defendants allegedly purchased “sponsored links” for their advertising on results pages of several search engines. When consumers conducted a search for “making home affordable” or similar terms, the defendants’ ads prominently and conspicuously displayed a link to “MakingHomeAffordable.gov” However, instead of being taken to the government’s official website, consumers who followed the link were redirected to web sites soliciting applications for paid loan modification services. These commercial web sites, which are not affiliated with the U.S. government, required consumers to enter personal identification and confidential financial information. Since the defendants are currently unknown, the court order also requires the four search engine providers to identify the parties who placed the ads. Additionally, the order restrains the search engines from allowing advertisers to use the “.gov” domain name in any of their advertisements. For a copy of the FTC’s press release, please see http://www.ftc.gov/opa/2009/05/mortgageads.shtm.
FTC to Host Debt Collection Litigation and Arbitration Roundtable. On May 18, the Federal Trade Commission (FTC) announced that it will co-host a roundtable event with the Searle Center on Law, Regulation, and Economic Growth at Northwestern University School of Law. The roundtable, titled “Protecting Consumers in Debt Collection Litigation and Arbitration: A Roundtable Discussion,” will be held in Chicago, Illinois, on August 5 and 6 and will focus on how the debt collection regulatory system in the United States should be reformed and modernized. For the FTC’s press release on the event, please see http://www.ftc.gov/opa/2009/05/debtcollection.shtm.
State Issues
New York State Banking Department Proposes Regulations for Mortgage Loan Servicers. On May 13, the New York State Banking Department (NYSBD) issued proposed regulations that would impose registration, financial responsibility, and business background requirements on mortgage loan servicers doing business in the state. Under the proposed rules, any entity engaging in the business of servicing mortgage loan must register with the NYSBD Superintendent, unless the entity is specifically exempted under the regulations. Currently, the proposed regulations exempt state and federally regulated financial institutions, New York licensed mortgage bankers and mortgage brokers, and their employees. The proposed regulations seek to impose financial responsibility requirements that would be applicable to registrants and exempt entities alike. Under these requirements, all servicers must have (i) an adjusted net worth of at least 1% of the outstanding principal balance of loans serviced, but never less than $250,000, (ii) a ratio of adjusted net worth to total assets of at least 5%, (iii) a corporate surety bond, and (iv) an Errors & Omissions bond that varies based on the dollar amount of the loans serviced. Apart from registration and financial responsibility requirements, non-exempt entities would also need to satisfy the proposed rules’ business background and character and fitness requirements, including proof of five year experience in the mortgage servicing business. The NYSBD is currently accepting public comment on the rules, but expects to exercise its emergency authority to adopt final regulations on or before July 1, 2009. For a copy of the proposed regulations, please see http://www.buckleysandler.com/NYSBD_Proposed_Regulations.pdf.
D.C. Settles Lawsuit against Title Lenders. On May 15, D.C. Mayor Adrian Fenty and D.C. Attorney General Peter Nickles announced that the District has settled its claims against auto title lenders Loan Max and CashPoint. The Office of the Attorney General first brought suit against the lenders in March of this year, charging them with violations of D.C.’s Consumer Protection Act. Specifically, the District alleged that the lenders actively solicited D.C. consumers to the lenders’ stores in Virginia, and then issued them short term consumer loans with interest rates that greatly exceeded D.C.’s maximum consumer interest rate cap of 24% APR. Under the terms of the settlement, the lenders will refund any interest on loans paid by District residents between November 24, 2007 and May 2009, and they will return any vehicle in their possession or refund the sale price of any vehicle, which was repossessed and sold over the same period. Finally, both companies have agreed to cease all lending activities in the District and they will make a contribution to the District’s Consumer Protection Fund. For a copy of the press release from the D.C. Office of Attorney General, please see http://newsroom.dc.gov/show.aspx/agency/occ/section/2/release/17070/year/2009.
Washington State Implements SAFE Act for Mortgage Brokers. On May 18, Washington Governor Christine Gregoire signed HB 1749 regarding the regulation of mortgage broker business practices in order to assure compliance with the federal Safe and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). The bill amends the Mortgage Broker Practices Act to implement the mandate of the SAFE Act by providing for the licensing of all mortgage loan originators under the Nationwide Mortgage Licensing System. In addition to technical amendments, the bill prescribes loan originator requirements relating to licensing, prior and continuing education, testing, minimum net worth, and surety bond coverage. This is the second piece of SAFE Act implementing legislation signed by Governor Gregoire. In April, the Governor signed HB 1621, which relates to the business practices of Washington consumer loan companies. Both bills become effective July 1, 2010, with certain provisions becoming effective January 1, 2010. For the full text of the bill, please see http://www.buckleysandler.com/Washington_SHB_1749.pdf.
Oregon Enacts Legislation Enhancing Protections Available under the Servicemembers Civil Relief Act. On May 8, Oregon Governor Ted Kulongoski signed into law HB 2303, an Act that supplements the rights given to members of the armed forces under the federal Servicemembers Civil Relief Act (SCRA). Among other things, the SCRA limits the interest that can be charged on debts incurred by servicemembers before they enter into active duty and restricts the rights of landlords and creditors in eviction and foreclosure proceedings against servicemembers. Oregon’s legislation enhances these protections by allowing a servicemember to enforce the SCRA without regard to arbitration or choice of law provisions. Additionally, if a servicemember makes a written demand on the opposing party for relief under the SCRA within 10 days of commencing an action or filing a counterclaim, then the court may award the servicemember attorneys fees and the greater of $1,000 or actual damages. Finally, if an opposing party willfully violates SCRA, the court can award additional damages equaling the lesser of $5,000 or treble damages. The Act was passed under emergency authority and is effective immediately. For a copy of the Act, please see http://www.leg.state.or.us/09reg/measpdf/hb2300.dir/hb2303.intro.pdf.
Washington Enacts Foreclosure Law Requiring Contact With Borrowers Before Filing Notice of Default. Washington Governor Christine Gregoire recently signed a bill, SB 5810, prohibiting trustees, beneficiaries, or authorized agents from filing a notice of default until at least 30 days after contacting the borrower or attempting with due diligence to contact the borrower. The new contact requirements apply only to deeds of trust made from January 1, 2003, to December 31, 2007 that are recorded against owner-occupied residential real property. Under the new law, a trustee or beneficiary must contact or diligently attempt to contact the borrower by letter and by telephone in order to assess the borrower’s financial ability to pay the debt secured by the deed of trust and explore options for the borrower to avoid foreclosure. Any notice of default subsequently filed must include a declaration stating that contact was made or diligently attempted. In addition, the new law requires trustees, prior to recording a notice of sale with respect to residential real property, to have proof that the beneficiary is the owner of any promissory note or other obligation secured by the deed of trust. Lastly, the new law provides that a tenant or subtenant in possession of a residential real property at the time the property is sold in foreclosure must be given sixty days’ written notice to vacate before the tenant or subtenant may be removed from the property. The bill becomes effective July 26, 2009. The provisions regarding contact with a borrower in default are set to expire on December 31, 2012. For a copy of SB 5810 as signed by Governor Gregoire, please see http://www.buckleysandler.com/Washington_SB_5810.pdf.
Alabama Emergency Regulation Caps Loan Modification Fees at $500. On May 5, the Alabama State Banking Department issued Emergency Regulation 2009-1A capping the fee that loan modification service providers are allowed to charge borrowers at $500. Mortgagees on loans that are being modified are not “engaged in the business of providing consumer mortgage loan modification services” under Emergency Regulation 2009-1A. In addition, attorneys acting on behalf of a borrower are not subject to this fee limitation. Prior to the issuance of Emergency Regulation 2009-1A, Alabama did not regulate the fees that loan modification providers could charge borrowers. Emergency Regulation 2009-1A went into effect immediately. For a full text of Emergency Regulation 2009-1A, please see http://www.buckleysandler.com/Alabama_Emergency_Rule.pdf.
Courts
Ohio Federal Court Denies City’s Public Nuisance Claim against Underwriters of Mortgage-Backed Securities. On May 15, the U.S. District Court for the Northern District of Ohio granted a motion to dismiss for failure to state a claim for relief filed by various corporate defendants in a case in which the plaintiff, the City of Cleveland (the City), sued the defendants for public nuisance arising out of their “alleged role in securitizing subprime loans into mortgage-backed securities.” City of Cleveland v. Ameriquest Mortgage Securities, Inc., No. 1:08 cv 139, 2009 WL 1373141 (N.D. Ohio May 15, 2009). In its complaint, the City asserted that it was entitled to damages for increased foreclosures resulting from the defendants’ securitization activity, including tax revenue loss based on diminished property values and costs associated with maintaining and demolishing foreclosed properties. In granting the defendants’ motion to dismiss, the court determined that the City’s public nuisance claim failed because it was preempted by Ohio state law and because it was barred by the economic loss rule. Additionally, the court reasoned that the subprime lending underlying the City’s claim did not constitute a public nuisance under Ohio law because such activity was permitted and encouraged by federal and state regulation (and the City did not allege that the defendants failed to comply with these regulatory schemes). Finally, the court determined that the City failed to demonstrate that the defendants’ alleged misconduct was the proximate cause of the City’s alleged damages. According to the court, the City’s damages were tied to foreclosures which were, at best, an indirect result of the defendants’ securitization activity. The court emphasized that individual subprime borrowers, as the owners of the properties that were foreclosed upon, stood in closer proximity to the defendants’ securitization activity. For a copy of the court’s memorandum and order, please see http://www.buckleysandler.com/City_of_Cleveland_v_Ameriquest.pdf.
Firm News
Jon Jerison will be presenting at an audio conference on June 4, “The HELOC Balancing Act – Consumer Laws and Agency Guidance”. For additional details about this conference sponsored by AS Pratt, please see http://www.aspratt.com/store/10100609.php.
Margo Tank will be speaking in an audio conference series entitled "Building Effective Electronic Records and Electronic Records Management Systems: Navigating the Legal Traps" on June 10, 2009. For more information on this conference, please see http://www.alexinformation.com/store/39N.php#author.
Mortgages
President Signs Helping Families Save Their Homes Act of 2009. On May 20, President Obama signed the Helping Families Save Their Homes Act of 2009. Principally, the Act amends the operation of the Hope for Home Owners Program (H4H program). These amendments include, among other things: (i) putting the HUD Secretary in charge of the program, (ii) capping upfront and annual fees at 3% and 1.5% respectively, (iii) permitting payments to servicers and underwriters for successful modifications; (iv) eliminating extraneous LTV restrictions on use of second lien loans to maintain property, and (v) barring borrowers with a net worth of more than $1 million from participation in the program. All costs associated with the amended H4H program will be paid for by use of $2.3 billion of TARP funds. In addition to the H4H amendments, the Act proposes two important legal changes. First, it states that there should be a moratorium on foreclosures of all first mortgages secured by an owner’s principal dwelling until loss mitigation programs, such as the H4H program are fully implemented. Next, the Act amends § 131 of Truth in Lending Act (TILA) requiring assignees of mortgage loans to notify borrowers of any assignment in writing no later than 30 days after completion of the transaction. To enforce the section, the Act also amends § 130 of TILA to create a private right of action against assignees for noncompliance with the new disclosure obligation. This action would allow consumers to recover actual damages, as well as statutory damages of no more than (i) $4,000 in individual actions, or (ii) the lesser of $500,000 or 1% of a creditor’s net worth in a class action. In addition, the Act also creates a safe harbor from liability for persons agreeing to modify loans under the program. This safe harbor denies investors the right to sue for losses occurring because of participation in the program if (i) a default on a mortgage occurred or was "reasonably foreseeable," (ii) the home was owner occupied, and (iii) the lender "reasonably and in good faith" believed that more money would be recovered through a loan modification or workout plan than foreclosure. The Act also enhances the powers of the FDIC and NCUA by extending the temporary increase in deposit insurance for both entities until 2013 and by increasing the borrowing authority of both entities. Further, the Act grants both institutions authority to replenish their insurance funds through industry assessments. For a copy of the Act, please see
http://www.buckleysandler.com/Helping_Families_Save_Their_Homes_Act_of_2009.pdf.
FTC Obtains Restraining Order Against Deceptive Mortgage Relief Internet Ads. On May 18, the Federal Trade Commission (FTC) obtained an order from the U.S. District Court for the District of Columbia barring an Internet-based operation from using the web address "MakingHomeAffordable.gov" or representing that they were affiliated with the United States government. The action arose after the defendants allegedly purchased "sponsored links" for their advertising on results pages of several search engines. When consumers conducted a search for "making home affordable" or similar terms, the defendants’ ads prominently and conspicuously displayed a link to "MakingHomeAffordable.gov" However, instead of being taken to the government’s official website, consumers who followed the link were redirected to web sites soliciting applications for paid loan modification services. These commercial web sites, which are not affiliated with the U.S. government, required consumers to enter personal identification and confidential financial information. Since the defendants are currently unknown, the court order also requires the four search engine providers to identify the parties who placed the ads. Additionally, the order restrains the search engines from allowing advertisers to use the ".gov" domain name in any of their advertisements. For a copy of the FTC’s press release, please see http://www.ftc.gov/opa/2009/05/mortgageads.shtm.
New York State Banking Department Proposes Regulations for Mortgage Loan Servicers. On May 13, the New York State Banking Department (NYSBD) issued proposed regulations that would impose registration, financial responsibility, and business background requirements on mortgage loan servicers doing business in the state. Under the proposed rules, any entity engaging in the business of servicing mortgage loan must register with the NYSBD Superintendent, unless the entity is specifically exempted under the regulations. Currently, the proposed regulations exempt state and federally regulated financial institutions, New York licensed mortgage bankers and mortgage brokers, and their employees. The proposed regulations seek to impose financial responsibility requirements that would be applicable to registrants and exempt entities alike. Under these requirements, all servicers must have (i) an adjusted net worth of at least 1% of the outstanding principal balance of loans serviced, but never less than $250,000, (ii) a ratio of adjusted net worth to total assets of at least 5%, (iii) a corporate surety bond, and (iv) an Errors & Omissions bond that varies based on the dollar amount of the loans serviced. Apart from registration and financial responsibility requirements, non-exempt entities would also need to satisfy the proposed rules’ business background and character and fitness requirements, including proof of five year experience in the mortgage servicing business. The NYSBD is currently accepting public comment on the rules, but expects to exercise its emergency authority to adopt final regulations on or before July 1, 2009. For a copy of the proposed regulations, please see http://www.buckleysandler.com/NYSBD_Proposed_Regulations.pdf.
Washington State Implements SAFE Act for Mortgage Brokers. On May 18, Washington Governor Christine Gregoire signed HB 1749 regarding the regulation of mortgage broker business practices in order to assure compliance with the federal Safe and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). The bill amends the Mortgage Broker Practices Act to implement the mandate of the SAFE Act by providing for the licensing of all mortgage loan originators under the Nationwide Mortgage Licensing System. In addition to technical amendments, the bill prescribes loan originator requirements relating to licensing, prior and continuing education, testing, minimum net worth, and surety bond coverage. This is the second piece of SAFE Act implementing legislation signed by Governor Gregoire. In April, the Governor signed HB 1621, which relates to the business practices of Washington consumer loan companies. Both bills become effective July 1, 2010, with certain provisions becoming effective January 1, 2010. For the full text of the bill, please see http://www.buckleysandler.com/Washington_SHB_1749.pdf.
Oregon Enacts Legislation Enhancing Protections Available under the Servicemembers Civil Relief Act. On May 8, Oregon Governor Ted Kulongoski signed into law HB 2303, an Act that supplements the rights given to members of the armed forces under the federal Servicemembers Civil Relief Act (SCRA). Among other things, the SCRA limits the interest that can be charged on debts incurred by servicemembers before they enter into active duty and restricts the rights of landlords and creditors in eviction and foreclosure proceedings against servicemembers. Oregon’s legislation enhances these protections by allowing a servicemember to enforce the SCRA without regard to arbitration or choice of law provisions. Additionally, if a servicemember makes a written demand on the opposing party for relief under the SCRA within 10 days of commencing an action or filing a counterclaim, then the court may award the servicemember attorneys fees and the greater of $1,000 or actual damages. Finally, if an opposing party willfully violates SCRA, the court can award additional damages equaling the lesser of $5,000 or treble damages. The Act was passed under emergency authority and is effective immediately. For a copy of the Act, please see http://www.leg.state.or.us/09reg/measpdf/hb2300.dir/hb2303.intro.pdf.
Washington Enacts Foreclosure Law Requiring Contact With Borrowers Before Filing Notice of Default. Washington Governor Christine Gregoire recently signed a bill, SB 5810, prohibiting trustees, beneficiaries, or authorized agents from filing a notice of default until at least 30 days after contacting the borrower or attempting with due diligence to contact the borrower. The new contact requirements apply only to deeds of trust made from January 1, 2003, to December 31, 2007 that are recorded against owner-occupied residential real property. Under the new law, a trustee or beneficiary must contact or diligently attempt to contact the borrower by letter and by telephone in order to assess the borrower’s financial ability to pay the debt secured by the deed of trust and explore options for the borrower to avoid foreclosure. Any notice of default subsequently filed must include a declaration stating that contact was made or diligently attempted. In addition, the new law requires trustees, prior to recording a notice of sale with respect to residential real property, to have proof that the beneficiary is the owner of any promissory note or other obligation secured by the deed of trust. Lastly, the new law provides that a tenant or subtenant in possession of a residential real property at the time the property is sold in foreclosure must be given sixty days’ written notice to vacate before the tenant or subtenant may be removed from the property. The bill becomes effective July 26, 2009. The provisions regarding contact with a borrower in default are set to expire on December 31, 2012. For a copy of SB 5810 as signed by Governor Gregoire, please see http://www.buckleysandler.com/Washington_SB_5810.pdf.
Alabama Emergency Regulation Caps Loan Modification Fees at $500. On May 5, the Alabama State Banking Department issued Emergency Regulation 2009-1A capping the fee that loan modification service providers are allowed to charge borrowers at $500. Mortgagees on loans that are being modified are not "engaged in the business of providing consumer mortgage loan modification services" under Emergency Regulation 2009-1A. In addition, attorneys acting on behalf of a borrower are not subject to this fee limitation. Prior to the issuance of Emergency Regulation 2009-1A, Alabama did not regulate the fees that loan modification providers could charge borrowers. Emergency Regulation 2009-1A went into effect immediately. For a full text of Emergency Regulation 2009-1A, please see http://www.buckleysandler.com/Alabama_Emergency_Rule.pdf.
Ohio Federal Court Denies City’s Public Nuisance Claim against Underwriters of Mortgage-Backed Securities. On May 15, the U.S. District Court for the Northern District of Ohio granted a motion to dismiss for failure to state a claim for relief filed by various corporate defendants in a case in which the plaintiff, the City of Cleveland (the City), sued the defendants for public nuisance arising out of their "alleged role in securitizing subprime loans into mortgage-backed securities." City of Cleveland v. Ameriquest Mortgage Securities, Inc., No. 1:08 cv 139, 2009 WL 1373141 (N.D. Ohio May 15, 2009). In its complaint, the City asserted that it was entitled to damages for increased foreclosures resulting from the defendants’ securitization activity, including tax revenue loss based on diminished property values and costs associated with maintaining and demolishing foreclosed properties. In granting the defendants’ motion to dismiss, the court determined that the City’s public nuisance claim failed because it was preempted by Ohio state law and because it was barred by the economic loss rule. Additionally, the court reasoned that the subprime lending underlying the City’s claim did not constitute a public nuisance under Ohio law because such activity was permitted and encouraged by federal and state regulation (and the City did not allege that the defendants failed to comply with these regulatory schemes). Finally, the court determined that the City failed to demonstrate that thedefendants’ alleged misconduct was the proximate cause of the City’s alleged damages. According to the court, the City’s damages were tied to foreclosures which were, at best, an indirect result of the defendants’ securitization activity. The court emphasized that individual subprime borrowers, as the owners of the properties that were foreclosed upon, stood in closer proximity to the defendants’ securitization activity. For a copy of the court’s memorandum and order, please see http://www.buckleysandler.com/City_of_Cleveland_v_Ameriquest.pdf.
White House Releases Memorandum Outlining the Obama Administration’s Federal Preemption Policy. On May, 20, the White House Office of the Press Secretary released a memorandum from President Obama outlining his administration’s policy on federal agencies issuing regulations that preempt state law. The administration’s general preemption policy, as set forth in the memorandum, is "preemption of State law by executive departments and agencies should be undertaken only with full consideration of the legitimate prerogatives of the States and with a sufficient legal basis for preemption. Executive departments and agencies should be mindful that in our Federal system, the citizens of the several States have distinctive circumstances and values, and that in many instances it is appropriate for them to apply to themselves rules and principles that reflect these circumstances and values." Among other directives aimed at new regulations, the memorandum provides that "heads of departments and agencies should review regulations issued within the past 10 years that contain statements in regulatory preambles or codified provisions intended by the department or agency to preempt State law, in order to decide whether such statements or provisions are justified under applicable legal principals governing preemption." If such statements are not justified under the principles outlined in the memorandum, the department or agency head should initiate appropriate action, possibly including amendment to the relevant regulation. For a copy of the memorandum, please see http://www.buckleysandler.com/White_House_Preemption_Memorandum.pdf.
FDIC Adopts Final Rule Approving Special Assessments on Assets Rather Than Deposits. On May 22, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) voted in favor of a final rule authorizing a special assessment on insured depository institutions. Unlike prior assessments, which were based on the amount of deposits an institution held, this assessment will be based on an institution’s assets. Under the rule, the FDIC will impose a 5 basis point assessment on each institution’s assets minus its Tier 1 capital as reported to the FDIC on June 30, 2009. However, the maximum contribution from each institution is capped at 10 basis points times the institution’s deposit base. Additionally, the final rule authorizes the FDIC to make additional assessments in the third and fourth quarters of 2009 if the FDIC estimates that its Deposit Insurance Fund reserve ratio will fall to a level that will shake that public’s confidence in the fund. Like the current assessments, these future assessments would also cap the maximum contribution from each institution at 10 basis points times the institution’s deposit base. The authority for the FDIC to make special assessments under this final rule will terminate on January 1, 2010. For a copy of the final rule, please see http://www.fdic.gov/news/board/May22no2.pdf.
FHFA Issues Annual Report to Congress. On May 18, James B. Lockhart, Director of the Federal Housing Finance Agency (FHFA), released a report detailing the results of the agency’s 2008 annual examinations of Fannie Mae, Freddie Mac, the 12 Federal Home Loan Banks (FHLBanks), and the Office of Finance. This report is the agency’s first to Congress since it was established by the Housing and Economic Recovery Act of 2008 (HERA) to replace the Office of Federal Housing Enterprise Oversight (OFHEO). Among other things, the report makes several broad conclusions. First, with respect to Fannie Mae and Freddie Mac, the report concludes that the Enterprises face significant challenges in correcting the operational and credit management weaknesses that led to their being placed in conservatorship in September of 2008. Chief among these challenges is the need for both Enterprises to rebuild and retain qualified staffs. Next, with respect to the FHLBanks, the report concludes that the FHLBanks’ advance business continues to operate safely and soundly with no credit losses, despite the failures of some member institutions. Finally, the report concludes that, for most of the entities it examined, the deterioration of private-label mortgage-backed securities remains a significant challenge. For a copy of the FHFA’s report, please see http://www.fhfa.gov/webfiles/2331/FHFAReportToCongress2008final.pdf.
President Signs Helping Families Save Their Homes Act of 2009. On May 20, President Obama signed the Helping Families Save Their Homes Act of 2009. Principally, the Act amends the operation of the Hope for Home Owners Program (H4H program). These amendments include, among other things: (i) putting the HUD Secretary in charge of the program, (ii) capping upfront and annual fees at 3% and 1.5% respectively, (iii) permitting payments to servicers and underwriters for successful modifications; (iv) eliminating extraneous LTV restrictions on use of second lien loans to maintain property, and (v) barring borrowers with a net worth of more than $1 million from participation in the program. All costs associated with the amended H4H program will be paid for by use of $2.3 billion of TARP funds. In addition to the H4H amendments, the Act proposes two important legal changes. First, it states that there should be a moratorium on foreclosures of all first mortgages secured by an owner’s principal dwelling until loss mitigation programs, such as the H4H program are fully implemented. Next, the Act amends § 131 of Truth in Lending Act (TILA) requiring assignees of mortgage loans to notify borrowers of any assignment in writing no later than 30 days after completion of the transaction. To enforce the section, the Act also amends § 130 of TILA to create a private right of action against assignees for noncompliance with the new disclosure obligation. This action would allow consumers to recover actual damages, as well as statutory damages of no more than (i) $4,000 in individual actions, or (ii) the lesser of $500,000 or 1% of a creditor’s net worth in a class action. In addition, the Act also creates a safe harbor from liability for persons agreeing to modify loans under the program. This safe harbor denies investors the right to sue for losses occurring because of participation in the program if (i) a default on a mortgage occurred or was "reasonably foreseeable," (ii) the home was owner occupied, and (iii) the lender "reasonably and in good faith" believed that more money would be recovered through a loan modification or workout plan than foreclosure. The Act also enhances the powers of the FDIC and NCUA by extending the temporary increase in deposit insurance for both entities until 2013 and by increasing the borrowing authority of both entities. Further, the Act grants both institutions authority to replenish their insurance funds through industry assessments. For a copy of the Act, please see http://www.buckleysandler.com/Helping_Families_Save_Their_Homes_Act_of_2009.pdf.
President Signs Credit Card Accountability Responsibility and Disclosure Act. On May 22, President Obama signed the Credit Card Accountability Responsibility and Disclosure Act of 2009, H.R. 627. This legislation puts into statutory form many of the protections for cardholders contained in the Federal Reserve Board Regulations issued in December of 2008 (as reported in InfoBytes, Dec. 19, 2008) and some additional section. The legislation prohibits credit card companies from raising interest rates on existing balances until a borrower’s payment is at least 60 days delinquent and requires the interest rate to revert to its original rate when a cardholder has paid his bill on time for the six months following the raise. The Act also prohibits companies from charging (i) "pay to pay" fees, which are charges incurred by the cardholder for making payments over the phone or online, and (ii) "over the limit" fees, unless the cardholder expressly elects to make a charge over their limit. Additionally, if a cardholder has two or more balances with different interest rates, companies must apply payments to the balance with the highest interest rate first. Finally, the Act imposes several disclosure requirements. First, in order to increase interest rates on future purchases, credit card companies must notify customers of the pending increase at least 45 days before the increase takes effect. The Act also requires creditors to post credit card agreements on the Internet so that cardholders may view the agreement’s terms at any time. Furthermore, creditors must provide customers with an amortization and cost schedule that is based on a customer making only the required minimum monthly payment. For the full text of the bill, please see http://www.buckleysandler.com/Credit_Card_Accountability_Responsibility_and_Disclosure_Act.pdf.
FTC to Host Debt Collection Litigation and Arbitration Roundtable. On May 18, the Federal Trade Commission (FTC) announced that it will co-host a roundtable event with the Searle Center on Law, Regulation, and Economic Growth at Northwestern University School of Law. The roundtable, titled "Protecting Consumers in Debt Collection Litigation and Arbitration: A Roundtable Discussion," will be held in Chicago, Illinois, on August 5 and 6 and will focus on how the debt collection regulatory system in the United States should be reformed and modernized. For the FTC’s press release on the event, please see http://www.ftc.gov/opa/2009/05/debtcollection.shtm.
D.C. Settles Lawsuit against Title Lenders. On May 15, D.C. Mayor Adrian Fenty and D.C. Attorney General Peter Nickles announced that the District has settled its claims against auto title lenders Loan Max and CashPoint. The Office of the Attorney General first brought suit against the lenders in March of this year, charging them with violations of D.C.’s Consumer Protection Act. Specifically, the District alleged that the lenders actively solicited D.C. consumers to the lenders’ stores in Virginia, and then issued them short term consumer loans with interest rates that greatly exceeded D.C.’s maximum consumer interest rate cap of 24% APR. Under the terms of the settlement, the lenders will refund any interest on loans paid by District residents between November 24, 2007 and May 2009, and they will return any vehicle in their possession or refund the sale price of any vehicle, which was repossessed and sold over the same period. Finally, both companies have agreed to cease all lending activities in the District and they will make a contribution to the District’s Consumer Protection Fund. For a copy of the press release from the D.C. Office of Attorney General, please see http://newsroom.dc.gov/show.aspx/agency/occ/section/2/release/17070/year/2009.
Oregon Enacts Legislation Enhancing Protections Available under the Servicemembers Civil Relief Act. On May 8, Oregon Governor Ted Kulongoski signed into law HB 2303, an Act that supplements the rights given to members of the armed forces under the federal Servicemembers Civil Relief Act (SCRA). Among other things, the SCRA limits the interest that can be charged on debts incurred by servicemembers before they enter into active duty and restricts the rights of landlords and creditors in eviction and foreclosure proceedings against servicemembers. Oregon’s legislation enhances these protections by allowing a servicemember to enforce the SCRA without regard to arbitration or choice of law provisions. Additionally, if a servicemember makes a written demand on the opposing party for relief under the SCRA within 10 days of commencing an action or filing a counterclaim, then the court may award the servicemember attorneys fees and the greater of $1,000 or actual damages. Finally, if an opposing party willfully violates SCRA, the court can award additional damages equaling the lesser of $5,000 or treble damages. The Act was passed under emergency authority and is effective immediately. For a copy of the Act, please see http://www.leg.state.or.us/09reg/measpdf/hb2300.dir/hb2303.intro.pdf.
Washington Enacts Foreclosure Law Requiring Contact With Borrowers Before Filing Notice of Default. Washington Governor Christine Gregoire recently signed a bill, SB 5810, prohibiting trustees, beneficiaries, or authorized agents from filing a notice of default until at least 30 days after contacting the borrower or attempting with due diligence to contact the borrower. The new contact requirements apply only to deeds of trust made from January 1, 2003, to December 31, 2007 that are recorded against owner-occupied residential real property. Under the new law, a trustee or beneficiary must contact or diligently attempt to contact the borrower by letter and by telephone in order to assess the borrower’s financial ability to pay the debt secured by the deed of trust and explore options for the borrower to avoid foreclosure. Any notice of default subsequently filed must include a declaration stating that contact was made or diligently attempted. In addition, the new law requires trustees, prior to recording a notice of sale with respect to residential real property, to have proof that the beneficiary is the owner of any promissory note or other obligation secured by the deed of trust. Lastly, the new law provides that a tenant or subtenant in possession of a residential real property at the time the property is sold in foreclosure must be given sixty days’ written notice to vacate before the tenant or subtenant may be removed from the property. The bill becomes effective July 26, 2009. The provisions regarding contact with a borrower in default are set to expire on December 31, 2012. For a copy of SB 5810 as signed by Governor Gregoire, please see http://www.buckleysandler.com/Washington_SB_5810.pdf.
Litigation
Ohio Federal Court Denies City’s Public Nuisance Claim against Underwriters of Mortgage-Backed Securities. On May 15, the U.S. District Court for the Northern District of Ohio granted a motion to dismiss for failure to state a claim for relief filed by various corporate defendants in a case in which the plaintiff, the City of Cleveland (the City), sued the defendants for public nuisance arising out of their "alleged role in securitizing subprime loans into mortgage-backed securities." City of Cleveland v. Ameriquest Mortgage Securities, Inc., No. 1:08 cv 139, 2009 WL 1373141 (N.D. Ohio May 15, 2009). In its complaint, the City asserted that it was entitled to damages for increased foreclosures resulting from the defendants’ securitization activity, including tax revenue loss based on diminished property values and costs associated with maintaining and demolishing foreclosed properties. In granting the defendants’ motion to dismiss, the court determined that the City’s public nuisance claim failed because it was preempted by Ohio state law and because it was barred by the economic loss rule. Additionally, the court reasoned that the subprime lending underlying the City’s claim did not constitute a public nuisance under Ohio law because such activity was permitted and encouraged by federal and state regulation (and the City did not allege that the defendants failed to comply with these regulatory schemes). Finally, the court determined that the City failed to demonstrate that thedefendants’ alleged misconduct was the proximate cause of the City’s alleged damages. According to the court, the City’s damages were tied to foreclosures which were, at best, an indirect result of the defendants’ securitization activity. The court emphasized that individual subprime borrowers, as the owners of the properties that were foreclosed upon, stood in closer proximity to the defendants’ securitization activity. For a copy of the court’s memorandum and order, please see http://www.buckleysandler.com/City_of_Cleveland_v_Ameriquest.pdf.
Credit Cards
President Signs Credit Card Accountability Responsibility and Disclosure Act. On May 22, President Obama signed the Credit Card Accountability Responsibility and Disclosure Act of 2009, H.R. 627. This legislation puts into statutory form many of the protections for cardholders contained in the Federal Reserve Board Regulations issued in December of 2008 (as reported in InfoBytes, Dec. 19, 2008) and some additional section. The legislation prohibits credit card companies from raising interest rates on existing balances until a borrower’s payment is at least 60 days delinquent and requires the interest rate to revert to its original rate when a cardholder has paid his bill on time for the six months following the raise. The Act also prohibits companies from charging (i) "pay to pay" fees, which are charges incurred by the cardholder for making payments over the phone or online, and (ii) "over the limit" fees, unless the cardholder expressly elects to make a charge over their limit. Additionally, if a cardholder has two or more balances with different interest rates, companies must apply payments to the balance with the highest interest rate first. Finally, the Act imposes several disclosure requirements. First, in order to increase interest rates on future purchases, credit card companies must notify customers of the pending increase at least 45 days before the increase takes effect. The Act also requires creditors to post credit card agreements on the Internet so that cardholders may view the agreement’s terms at any time. Furthermore, creditors must provide customers with an amortization and cost schedule that is based on a customer making only the required minimum monthly payment. For the full text of the bill, please see http://www.buckleysandler.com/Credit_Card_Accountability_Responsibility_and_Disclosure_Act.pdf.