Financial Services Bulletin: Federal Reserve Seeks Comment on Two Proposals

Posted on April 22, 2011 by Fred Rivera

Read Perkins Coie LLP's 4/21/2011 Financial Service Bulletin regarding two proposed rules for which the Federal Reserve is seeking comment: Financial Services Bulletin (4/21/2011).

One of the proposed rules includes significant changes under Regulation Z, which implements the Truth-in-Lending Act.  Under the proposed rule, creditors must determine a consumer's ability to repay a mortgage before making a loan.  The proposed rule also implements certain other requirements under the Dodd-Frank Act, including a limitation on prepayment penalties.

The Board is soliciting comment on the proposed rule until July 22, 2011. However, general rulemaking authority for TILA is scheduled to transfer to the new Consumer Financial Protection Bureau on July 21, 2011.  Therefore, the Board acknowledged in its press release that this Regulation Z rulemaking will not be finalized by the Board.

TILA and Regulation Z have long been a significant source of consumer lending litigation.  The increased regulation of mortgages in the proposed Regulation Z amendments may lead to yet another wave of consumer protection litigation tied to residential mortgages.  How impactful the amendments will be, and how they will be enforced and regulated, are important questions that will be answered in time.

 

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Notebook on MBS Litigation

Posted on April 12, 2011 by Fred Rivera

The Securities and Exchange Commission could be going to school on private litigation being brought against MBS issuers.

In a recent article from the April 2011 issue of  Mortgage Banking Magazine, Perkins Coie attorneys Pravin Rao and Suleen Lee discuss recent MBS litigation trends and related SEC enforcement priorities.  The article discusses how mortgage-backed securities have become a significant priority for the Securities and Exchange Commission's (SEC) investigative resources.  It also describes what might constitute a potential SEC action against banks, and suggests proactive measures banks should take to ensure they do not become ensnared by regulatory or private litigants.

Read "Notebook on MBS Litigation" article from Mortgage Banking Magaznine.

 

 

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VA Federal Court: HOLA Preempts Tort Claims Alleging Savings Bank Posed as Lender to Collect Fees

Posted on April 11, 2011 by Fred Rivera

April 4, 2011 - The U.S. District Court for the Eastern District of Virginia held that the Home Owner's Loan Act (HOLA) preempts state tort law claims alleging that Flagstar Bank F.S.B. improperly represented itself as as a lender to collect brokerage fees on a home mortgage (Down v. Flagstar Bank F.S.B., E.D. Va., No. 3:10-cv-847, 4/4/11). 

The plaintiff (borrower) asserted "bait and switch" claims under Virginia law, alleging that Flagstar used a Good Faith Estimate to pose as the lender in order to collect brokerage fees.  The borrower claimed that he paid fees and rates than he could have avoided by dealing directly with the lender, First National Bank of Arizona. 

Flagstar removed the case to federal court, arguing that HOLA preempts the Virginia claims.  The federal court (J. O'Grady) agreed. Although HOLA regulations (12 C.F.R §560.2(c)(4)) includes an exception to the normal preemption for tort law claims that only "incidentally affect the lending operations," the exception did not apply in this instance because  Flagstar's representations about its role and the loan transaction are “inextricably linked to one another.”
 
“If a plaintiff were permitted to allege fraud and to receive the return of fees required to be disclosed by RESPA in state court, state courts would be left to interpret the RESPA statute and regulations, analyzing a defendant's compliance in each individual case—and this is precisely what federal preemption intends to avoid.”
 
The Court's holding recognizes the broad reach of HOLA preemption, and evidences a federal court's willingness reject one of the special preemption exceptions in the post Dodd-Frank era.

Full Opinion.

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Class Action Alleges Loan Servicer Abused HAMP

Posted on April 8, 2011 by Fred Rivera

A class action filed against Saxon Mortgage alleges that the company uses the Home Affordable Modification Program to lure customers into making "trial" payments on loans it has no intention to modify on a permanent basis.  The lawsuit, filed in the U.S. District Court for Northern District of California,  alleges that Saxon engaged in a pattern of collecting trial payments, delaying the processing of loan modifications, and then denying the application altogether for demonstrably false reasons.  The Complaint in Gaudin v. Saxon Mortgage Services Inc., advances claims for breach of contract, rescission and restitution, and deceptive debt collection practices in violation of California's Rosenthal Fair Debt Collection Practices Act (the Rosenthal Act), as well as fraudulent, unlawful, and unfair business practices under California's unfair competition law.

Several courts have held that HAMP does not create a private right of action or any type of entitlement for borrowers.  (See, e.g. Vida v. OneWest Bank, F.S.B., 2010 WL 5148473 (D.Or.2010); Hoffman v. Bank of America, N.A., 2010 WL 2635773 (N.D.Cal.2010)).  Trial payments, which are consistent with HAMP, are vital to determine a borrower's willingness and ability to service the loan under the modified terms.

Review the National Mortgage News for more information. 

 

 

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Investor Lawsuits Over MBS Loan Quality Continue to Mount

Posted on April 8, 2011 by Fred Rivera

Litigation by investors regarding the quality of loans in Mortgage Backed Securities continue to pile up.  In an April 4, 2011 complaint filed in the U.S. District Court for the Southern District of New York, Union Central Life Insurance Co. alleged that Credit Suisse Securities (USA) LLC and affiliated entities made false statements and omitted information about the quality of loans included in its MBS pools.  According to a Law360 article, the suit claims that  Credit Suisse First Boston Mortgage Securities Corp. and certain of its directors ignored consultants who found that 37% of the loans in the pools failed to conform to stated loan underwriting guidelines.  According to the Complaint, the lenders originating the underlying mortgages regularly granted exceptions to loan guidelines; pressed appraisers to inflate home values; and failed to verify borrowers' income and monitor loan officer activity.  The suit advances claims of fraud, negligent misrepresentation, unjust enrichment and purported violations of securities law.

The Union Central Life Insurance  case is yet another example of continued litigation surrounding subprime lending.  While the first wave of litigation primarily concerned consumer claims, more recent litigation brought by MBS investors have attacked the institutions who underwrote the securitized vehicles. 



 

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