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

On June 20, 2011, the United States Supreme Court  agreed to hear a case brought under the Real Estate Settlement Procedures Act (RESPA) that could have widespread implications for consumer claims under RESPA, TILA and similar regulations. 

In First American Financial Corp. v. Edwards, the Supreme Court will review whether awarding treble damages to a borrower under RESPA's anti-kickback provisions, without proof of an actual injury (e.g., an overcharge because of the kickback), violates the "injury in fact" requirement included in Article 3 of the constitution.  RESPA provides that a person who is charged for a settlement service that violates RESPA's anti-kickback provisions is entitled to three times the amount of any charge paid.  There is no requirement that the borrower prove the charge is excessive or injurious to the borrower.  The Ninth Circuit decision under review held that Article 3's injury-in-fact requirement is not violated "[b]ecause the statutory text [of RESPA] does not limit liability to instances in which a plaintiff is overcharged..." for services that violate RESPA.

RESPA and TILA claims are a common source of litigation against lenders and servicing companies.  If the Supreme Court determines that proof of an actual injury is required, the decision could sharply curtail the number of such claims because of the frequent difficulty borrowers have showing actual damages caused by the purported violations.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

September 22, 2010 - The Treasury Department has released a sample 4-page form that will replace mortgage disclosure requirements of the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA). The proposed form can be found here.

Improving mortgage disclosures is a priority of the new Consumer Financial Protection Bureau.  "Moving quickly to improve mortgage disclosures is one in a series of concrete steps we're taking to implement the historic consumer protections included in the Dodd-Frank financial reform law," said Secretary Geithner in a press release.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the newly created CFPB is responsible for combining and simplifying two overlapping mortgage disclosure forms that TILA and RESPA require lenders to provide to applicants.  TILA and RESPA disclosures have been the source of a tremendous amount of litigation, particularly since the mortgage-melt down, where borrowers facing foreclosure have asserted various TILA and RESPA violations for damages or to rescind the loan.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

September 21, 2010 - The Obama administration designated July 21, 2011 as the date the Consumer Financial Protection Bureau (CFPB) will take over enforcement of federal consumer protection laws, including TILA and RESPA, that impact mortgage bankers.  The announcement was included in a Federal Registry Notice.  

Effective July 21, 2011, the CFPB will have full authority to prescribe rules or issue orders pursuant to any federal consumer financial law (as defined in the Dodd-Frank Act); officially receive staff transfers from the other agencies; and take over supervision responsibility of depository institutions with assets in excess of $10 billion.  The Federal Register Notice also states that, prior to July 21, 2011, the CFPB will begin conducting research on consumer financial products and services, develop its nationwide consumer complaint response center, and begin to plan implementation of its risk-based supervision of non-depository covered persons. The CFPB is planning a roundtable discussion to begin the process of merging Truth-in-Lending (TILA) and Real Estate Settlement Procedures Act (RESPA) disclosures.

The implementation of the CFPB will usher in a new era in consumer finance regulation and enforcement.  The broad CFPB authority will allow it to both write regulations and enforce those regulations in connection with consumer lending, including residental mortgage lending. 

On September 17, 2010, President Obama appointed Elizabeth Warren as Assistant to the President and Special Adviser to the Secretary of the Treasury.  Warren is expected to play a key role within the administration in organizing the CFPB.  In annoucing Warren's new role, President Obama stated "[t]he Consumer Financial Protection Bureau will crack down on the abusive practices of unscrupulous mortgage lenders [and] reinforce the new credit card law we passed banning unfair rate hikes."

Read more about Warren's appointment:  http://www.nytimes.com/2010/09/16/business/16consumer.html?_r=1&scp=2&sq=elizabeth%20warren&st=cse

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On July 15, 2010 the U.S. Senate passed, and on July 21 the President signed, the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Included in the new legislation are a number of provisions that will impact consumer lenders, and in particular, residential mortgage lenders:

• Lenders Must Ensure a Borrower’s Ability to Repay.  Establishes federal minimum underwriting standards for mortgages, including a requirement that lenders consider borrowers ability to repay. (Section 1411) 
• Prohibits Unfair Lending Practices.  Prohibits a number of lending practices that are commonly associated with "predatory lending," including the payment of “yield spread premiums” that lenders pay to brokers, and pre-payment penalties.  (Section 1403) 
• Establishes Penalties for Lending Violations.  Significantly increases penalties for lenders and mortgage brokers that violate new standards.  Also expands the statute of limitations for certain claims brought under TILA from one year to three years.  (Section 1416) 
• Expands Consumer Protections for "High-Cost Mortgages." Expands the number of loans subject to the enhanced disclosures and protections required for high-cost loans by lowering the interest rate and the points and fees that trigger those protections.  (Section 1431) 
• Requires Additional Disclosures. Additional disclosures are required by lenders and servicers, including disclose of the maximum a consumer could pay on a variable rate mortgage, with a warning that payments will vary based on interest rate changes.
• Housing Counseling: Establishes an Office of Housing Counseling within HUD to boost home ownership and rental housing counseling.  (Section 1441-1445)

The Act also creates the Consumer Finance Protection Bureau, which will have broad rulemaking, enforcement and regulatory authority:

• Independent Rule Writing.  The Bureau has rule making authority for consumer protections governing all financial institutions — banks and nonbanks — offering consumer financial services or products.
• Examination and Enforcement. The Bureau has authority to examine and enforce regulations for banks and credit unions with assets of over $10 billion, and all mortgage-related businesses, including lenders, servicers, mortgage brokers, in addition to student lenders and other large non-bank financial companies. Banks and Credit Unions with assets of $10 billion or less will be examined for consumer complaints by their appropriate regulator.
• Education.   Creates a new Office of Financial Literacy.
• Consumer Hotline. Creates a national consumer complaint hotline for consumers to  report problems with financial services.
• Consolidation.  Makes one office accountable for consumer protections over large banks and nonbank financial institutions.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

 A June 18, 2009 class action lawsuit filed against Washington Mutual Bank (“WAMU”) and its new parent, JPMorgan Chase (“Chase”), alleges that the banks violated the Truth-in-Lending Act by reducing or suspending millions of dollars of Home Equity Lines of Credit (HELOC) accounts by falsely claiming that customers' incomes had been reduced.   A similar class action filed a week earlier in federal district court in Los Angeles asserted similar claims against the banks.  An article posted on Seattle's King5.com reported that in the Los Angeles case, the banks are accused of relying on flawed automated valuation models to intentionally understate home values and create a pretext for freezing customers' HELOC accounts.  

Creditors are allowed to freeze or reduce a HELOC account in certain situations. Regulation Z, which implements TILA, lists three primary bases for doing so:  (1) if the value of the collateral declines significantly below the appraised value; (2) if the creditor reasonably believes that the consumer will be unable to make payments as agreed because of a material change in the consumer's financial circumstances; or (3) if the consumer is in default on a material term of the HELOC agreement. 12 C.F.R. 226.5(b)(f)(3)(vi).  Whether Chase and WAMU met these standards will be the focus of the lawsuits.  And it remains to be seen whether these cases signal the beginning of a wave of similar suits against other lenders that made similar decisions on HELOC accounts in the wake of the financial market crisis.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Federal Reserve's December 2008 revisions to Regulation Z (Truth in Lending Act) closed-end mortgage early disclosure requirements were to take effect October 1, 2009.  However, these changes were superseded by the enactment of the Mortgage Disclosure Improvement Act of 2008 (MDIA). As a result, the Federal Reserve has revised Regulation Z to incorporate the MDIA amendments.  Compliance with the revised early disclosure requirements is mandatory on July 30, 2009. 

According to the FDIC's release, the revisions will include provisions that:

• Expand Reg Z's disclosure requirements to all mortgage loans secured by any dwelling of a consumer, not only a consumer's "principal" dwelling, as wells as refinancings and home equity loans.
• Require lenders to deliver corrected disclosures at least three business days before loan consummation if the APR provided in the early disclosures changes beyond the tolerances provided in Section 226.22.
• Prohibit lenders from charging a consumer any fee, except to obtain a credit report, until after the early disclosures have been provided.
• Permit consumers to expedite the closing of a mortgage loan subject to the early disclosure provisions to address a personal financial emergency, such as foreclosure.
• Require lender to inform a consumer that he or she is not required to complete the transaction because the consumer has received the early disclosures or applied for a loan.

In the wake of the financial crisis, lawsuits alleging violations of consumer protection laws (such as TILA) and other subprime-related litigation, are at all time highs.  According to a report by Navigant Consulting, the number of subprime-related court filings reached an unprecedented level in 2008--totaling 576.  Many of these cases alleged improper disclosures and charges under TILA and RESPA.  Revised Reg Z provisions, including additional disclosures for more loan types, will present additional opportunities for single-plaintiff and class-action litigation.

 (Special thanks to Perkins Coie attorney Veronica McGregor for assisting with this posting)

• Email This
• Print
• Comments
• Trackbacks
• Share Link