Financial Services Litigation & Investigation Monitor : Financial Services Lawyer & Attorney : Perkins Coie Law Firm : Government Investigations, Class Actions

October 3, 2011.  Arizona U.S. District Judge James Teilborg dismissed 72 lawsuits, including six class actions, against Mortgage Electronic Registration Systems Inc. (MERS) that challenged MERS' role as a beneficiary on deeds of trust.  The plaintiffs in the consolidated actions claimed that because MERS is not a proper beneficiary the deeds of trust to which they agreed are unenforceable, leaving the underlying loan unsecured.  Relying largely on a recent 9th Circuit Court of Appeals Decision (Cervantes v. Countrywide Home Loans), Judge Teilborg wrote in his decision that "'[t]his court does not find legal support for the proposition that the MERS system of securitization is so inherently defective so as to render MERS deed of trust completely unenforceable and unassignable."

A MERS press release said

"The Court's dismissal of these 72 cases against MERS, including six class actions, is an extremely significant ruling and shows that claims being made against MERS and MERSCORP alleging fraud, or that security interests are unenforceable, or alleging that foreclosures are inappropriate due to MERS’ presence as a party, are meritless,” said Janis Smith, MERSCORP Vice President for Corporate Communications. “The Court's clearly-worded order affirms the validity of the MERS business model and the exercise of powers associated with it."

IN RE Mortgage Electronic Registration Systems (MERS) Litigation, MDL Docket No. 09-2119-JAT

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On July 20, 2011 the Federal Reserve Board issued a cease and desist order, including an $85 million fine against Wells Fargo & Co. in connection with its subprime mortgage lending.   The Fed's Press Release stated that the action is the largest consumer-protection action of this kind ever by the central bank, and the first major FRB enforcement action related to subprime mortgage lending. The Fed's order addresses allegations that Wells Fargo steered potential prime borrowers into more costly subprime loans.  There are also allegations that Wells employees falsified income information in mortgage applications. In addition to the civil money penalty, the order requires that Wells Fargo compensate affected borrowers. 

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On May 26, 2011, the U.S. Department of Justice announced a $20 million settlement with units of Bank of America and Morgan Stanley to resolve allegations of improper foreclosures on about 160 military members between 2006 and 2009.  The government alleged that the foreclosures, many concerning foreclosures that were taken or started by Countrywide Mortgage prior to Bank of America's acquisition, violated the Servicemembers Civil Relief Act (SCRA).  In April, JPMorgan Chase & Co. agreed to settle similar allegations in a lawsuit filed in federal court in South Carolina.

The agreement is included in a "Memorandum of Agreement Between the United States of American and Bank of America Corporation."  No litigation was filed.

The DOJ's Civil Rights Division has added scores of lawyers and other professionals to its Housing & Civil Enforcement Section, which is charged with enforcing the SCRA and Fair Lending laws, including the Fair Housing Act and Equal Credit Opportunity Act.  Continued, aggressive prosecution of cases involving mortgage lending is expected out of that section for the foreseeable future.

Read DOJ Press Release.

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Full Opinion.

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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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New York has a new law that allows prevailing homeowners in many foreclosure actions to claim attorney fees from lenders.  According to supporters of the new law, the Access to Justice in Lending Act will encourage attorneys to take cases for homeowners facing foreclosure, many of them who cannot afford to hire their own lawyers. 

The new law, codified as part of Real Property Law §282, provides that all mortgage agreements giving prevailing lenders the right to attorney fees, must be read to also grant that right to borrowers that prevail.  The law takes effect 60 days after its signing, and applies to all mortgages in effect on or after Oct. 20 and all proceedings begun on or after that date.

The law was opposed by the state Bankers Association.  In its memorandum specifying the reasons for its opposition, the association's lawyers argued the bill was unconstitutional in its application to existing mortgages. The memo also noted that the two most common laws used by homeowners to fight foreclosure, the federal Truth in Lending Act, 15 USC Sec. 1640, and the federal Fair Debt Collection Practices Act, 15 USC Sec. 1692k, already allowed the recovery of attorney's fees and thus further legislation was unnecessary.  Association lawyers also warned that the bill's broad language could open up the possibility of homeowners being awarded attorney's fees to which they had no right.

The significance and impact of the New York attorney fee-shifting law for foreclosures will be judged by the amount of new cases filed on behalf of borrowers seeking to avoid foreclosure.  The law may create further incentives for borrowers to initiate litigation, and flood the courts with petitions to review foreclosure practices.  It may also lead to the passage of similar statutes in other states.

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October 7, 2010 -  The New York Times reports that Wells Fargo agreed to pay $24 million to resolve investigations by eight state attorneys general into whether lenders acquired by the bank made risky mortgages to consumers without disclosing the risks.   Wells reached the agreement was with attorneys general in Arizona, Colorado, Florida, Illinois, Nevada, New Jersey, Texas and Washington.  The AGs were investigating the lending practices of Wachovia Corporation and a California company it acquired, World Savings Bank. Wells bought Wachovia in late 2008, after Wachovia had already stopped making the loans under investigation.  

The AGs were investigating whether the lenders had engaged in deceptive practices in connection with option adjustable-rate loans, or "pick-a-payment" mortgages as marketed by Wachovia. Those controversial loan products allowed borrowers to defer some interest payments and add them to the principal balance.  Many contend that the option adjustable-rate mortgages were one of the most toxic mortgage products available in the marketplace.  The balance and interest reset caused by deferring interest payments often causes a significant jump in the loan's monthly payments and can result in a mortgage that is underwater.

As part of the settlement, Wells agreed to offer loan assistance potentially worth more than $770 million to more than 8,700 borrowers. The $24 million will be used to help states reach out to customers who may benefit from the loan assistance program.  The agreement includes no admission of wrongdoing by Wells.

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June 24, 2010 - Marketwatch.com reports that Morgan Stanley & Co. agreed to pay $102 million to  settle allegations that it aided and abetted subprime lender New Century Financial Corp. in taking advantage of consumers.  Massachusetts Attorney General Martha Coakley's office announced the settlement on Thursday.  According to its press release, the AG "alleged that Morgan entered the subprime arena in Massachusetts by offering funding to retail lenders that specialized in loans to less-qualified borrowers. Morgan provided billions of dollars to subprime lender New Century, which used Morgan funds to target lower-income borrowers and lure them into loans that consumers predictably could not afford to pay...Some Morgan Stanley investment bankers referred to New Century as Morgan’s 'partner' in the subprime lending business."

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The Florida attorney general's office has launched a civil investigation against Fidelity National Financial Inc. and Lender Processing Services Inc. to review allegations that the companies used fabricated assignments in foreclosure cases.  According to the AG's summary of the case, the office is reviewing whether "bogus assignments" of mortgages were created in order that foreclosures may go through more quickly and efficiently.

Over the last several years, borrowers in default have alleged that a lender or assignee may not foreclose without producing the original note.  Courts have generally rejected the "show me the note" defense by applying basic legal principles applicable to negotiable instruments.  See, e.g., Diessner v. Mortgage Electric Registration Services, 618 F.Sup.2d 1184, 1187 (D.Ariz. 2009)("...district courts have routinely held that Plaintiff's 'show me the note' argument lacks merit.")  The Florida AG's investigation, regardless of the outcome, may spawn yet another basis for defaulting borrowers to delay or defeat loss mitigation efforts of lenders and servicers.  

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According to a June 7, 2010 New York Times article, the FTC announced that two Countrywide mortgage-servicing companies agreed to pay $108 million to resolve charges that they collected excessive fees from homeowners.  The FTC alleged that Countrywide charged excessive fees to homeowners who were behind on their mortgage payments, in some cases asserting that borrowers were in default when they were not.

In addition, the FTC said in its statement announcing the settlement that Countrywide at times imposed a new round of fees on homeowners who had recently emerged from bankruptcy protection, sometimes threatening the consumers with a new foreclosure.   The case was brought with the assistance of the U.S. Trustee.

The FTC charge alleges that when homeowners fell behind on mortgage payments and were in default on their loans, Countrywide ordered property inspections, lawn mowing, and other services meant to protect the lender’s interest in the property.  However, according to the FTC complaint, rather than hire third-party vendors to perform the services, Countrywide created subsidiaries to hire the vendors that marked up the price of the services charged by the vendors.  The mark-ups were then passed on to the borrower. The complaint alleges that the company’s strategy was to increase profits from default-related service fees in bad economic times.

The settlement requires Countrywide to pay $108 million for refunds to homeowners that the FTC alleges Countrywide overcharged before July 2008.

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Sen. Dodd rolled out his vision of consumer financial services regulatory reform this week and, among other things, it threatens to further consolidate oversight of banks into a single federal agency.
 

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Maloney-Frank bill will implement credit card reforms immediately upon enactment

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The Credit Card Act of 2009 was set to go into effect in February, 2010, but Congressman Frank and Congresswoman Maloney want it to go into effect December 1, 2009.

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The Federal Reserve announced last week that it would begin examining nonbank subsidiaries of bank holding companies for compliance with consumer protection laws.  A September 14 letter from Sandra F. Braunstein, the agency's Director of Consumer and Community Affairs states:  

This letter establishes, effective immediately, a policy for conducting risk-focused consumer compliance supervision of, and the investigation of consumer complaints against, nonbank subsidiaries of bank holding companies (BHCs) and foreign banking organizations (FBOs) with activities covered by the consumer protection laws and regulations the Federal Reserve has the authority to enforce. This policy is designed to enhance our understanding of the consumer compliance risk profile of nonbank subsidiaries and to guide our supervisory activities for these entities. It leverages existing consumer compliance supervision policies and procedures as well as the existing prudential supervision processes for Large Complex Banking Organizations (LCBOs), FBOs, Regional Banking Organizations (RBOs), and Community Banking Organizations (CBOs).

The consumer compliance and full-scope examinations of nonbank subsidiaries will result in ratings based on the "Consumer Compliance Risk Management rating system (Strong, Satisfactory, Fair, Marginal, or Unsatisfactory) that is included in the draft Risk-Focused Consumer Compliance Supervision Program," according to the letter.

The Feds announced this move a day after President Obama publicly reiterated his support for a new consumer protection enforcement agency.

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Rep. Barney Frank, the sponsor of H.R. 3126, has sent a memo to House Democrats outlining his proposals for amendments to the proposed Consumer Financial Protection Agency Act.

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In a highly anticipated decision, a divided U.S. Supreme Court  authorized states to investigate national banks for lending discrimination, thus rejecting the OCC's position that its regulatory authority preempted states' enforcement powers.   In the 5-4 opinion authored by Justice Scalia, the high court in Cuomo v. Clearing House Association, LLC held that federal banking regulations did not pre-empt states from enforcing their own fair-lending laws.

The ruling decided a dispute between the OCC and the New York attorney general's office, which had initiated investigations into national banks' residential real-estate lending practices.  Former Attorney General and Governor Eliot Spitzer initiated the investigation of several banks, including Wells Fargo, JPMorgan Chase and Citigroup, based on mortgage data he claimed showed black and Hispanic borrowers received a larger percentage of high-interest home loans than white borrowers.

CNN reported the mixed reactions to the ruling.  The American Bankers Association issued a statement contending that the ruling "changes over 140 years of settled law," and expressed concern that national banks will  "face a patchwork of duplicative and conflicting federal and state regulation and enforcement actions."  On the other hand, current New York Attorney General Cuomo said the ruling "reaffirms the vital role state attorneys general play in protecting consumers from illegal and improper practices by our country's biggest and most powerful banks."  Similarly, the Lawyers' Committee for Civil Rights Under Law applauded the decision, stating in a press release that the the decision "will unshackle the oversight muscle of state attorneys general whose attempts to enforce fair lending laws against national banks were thwarted when most needed." 

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