Friday, March 14, 2014

FYI: NW Sup Ct Holds HLPA Not Preempted by National Bank Act, HLPA Requires "Ability to Repay" Analysis, Loan Owner Lacked Standing to Foreclose

The Supreme Court of New Mexico recently reversed and remanded a foreclosure action, with instructions to vacate the judgment of foreclosure and dismiss the action for lack of standing. 


In so ruling, the Court held that: (1) the foreclosing loan owner did not have standing to foreclose under a twice-indorsed note; (2) under the “reasonable, tangible net benefit” requirement of the New Mexico Home Loan Protection Act (“HLPA”), the lender must determine the borrower’s ability to repay the home mortgage loan; and  (3) the HLPA is not preempted by the National Bank Act.


A copy of the opinion is available at:  Link to Opinion


The borrowers (“Borrowers”) alleged that their originating lender urged them to refinance their home and access their equity to pay off other debts.  The loan was a No-Income-No-Asset loan extended in 2006, and the terms of the new loan were not an improvement over the Borrowers’ existing loan terms.  The Borrowers eventually defaulted under the new loan.  In April of 2008,  the asset securitization trust loan owner (hereinafter, the “Lender”) filed suit seeking to foreclose as the holder of the note and mortgage.


The Borrowers argued, among other things, that the Lender lacked standing to foreclose because nothing in the complaint established the Lender as the holder of the note and mortgage.  According to the Borrowers, Securities and Exchange Commission filings showed that their loan certificate series was once owned by another entity and not the Lender (the “Third Party”).  The Borrowers also raised several counterclaims, only one of which is relevant to this appeal:  that the loan supposedly violated the anti-flipping provisions of the New Mexico HLPA, Section 58-21A-4(B) (2003).


The Lender responded by providing:  (1) a document showing that MERS assigned the Borrowers' mortgage loan to Lender three months after the Lender filed the foreclosure complaint; and (2) the affidavit of a senior vice president for the servicer, stating that the original lender intended to transfer the note and assign the mortgage to the Lender prior to Lender’s filing of the foreclosure complaint.  However, the Lender admitted that the servicer did not begin servicing the Borrowers’ loan until seven months after the foreclosure complaint was filed.


At a bench trial, the servicer testified on behalf of the Lender and asserted that the Lender had physical possession of both the note and mortgage at the time it filed the foreclosure complaint.  The Borrowers objected and argued that the servicer lacked personal knowledge to make these claims given that servicer did not begin servicing for the Lender until after the foreclosure complaint was filed and the MERS assignment occurred. 


The Borrowers also pointed out that the copy of the "original" note purportedly authenticated by the servicer was different from the "original" note attached to the Lender's foreclosure complaint.  Although the note attached to the complaint as a true copy was not indorsed, the "original" admitted at trial was indorsed twice:  first, with a blank indorsement by the originating lender, and second, with a special indorsement made payable to the Third Party. 


The trial court determined that the servicer’s testimony and the assignment of the mortgage established the Lender as the proper holder of the Borrowers' note, and concluded that the loan did not violate the HLPA because the cash payment to the Borrowers provided a reasonable, tangible net benefit.  The trial court also determined that because the Lender was a national bank, the National Bank Act preempted the protections of the HLPA.


On appeal, the Court of Appeals affirmed the district court's rulings but did not address whether the National Bank Act preempted the HLPA.  The Supreme Court of New Mexico granted Borrowers’ petition for writ of certiorari.


First, the New Mexico Supreme Court considered the Lender’s argument that Borrowers waived their challenge of the Lender's standing by failing to provide the evidentiary support required by Rule 12-213(A)(3) NMRA.  The Court noted that, under New Mexico law, lack of standing is a potential jurisdictional defect which may not be waived and may be raised at any stage of the proceedings, even sua sponte by the appellate court.  Thus, the Court addressed the standing issue based on prudential concerns.


Under the New Mexico's Uniform Commercial Code (UCC), a lender must demonstrate that it had standing to foreclose at the time it filed suit.  Section 55-3-301 of the UCC provides three ways in which a third party can enforce a negotiable instrument such as a note: (i) the holder of the instrument, (ii) a nonholder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to enforce the lost, destroyed, stolen, or mistakenly transferred instrument.


The UCC recognizes two types of indorsements for the purposes of negotiating an instrument.  A blank indorsement, as its name suggests, does not identify a person to whom the instrument is payable but instead makes it payable to anyone who holds it as bearer paper.  See NMSA 1978, § 55-3-205(b) (1992).  By contrast, a special indorsement "identifies a person to whom it makes the instrument payable." Section 55-3-205(a).


Although the New Mexico Supreme Court agreed that if the Borrowers' note contained only a blank indorsement from the original lender, that blank indorsement would have established Lender as a holder because the Lender would have been in possession of bearer paper.  However, the Borrowers' note contained two indorsements – the indorsement in blank, and a special indorsement to the Third Party. 


The Court held that the restrictive, special indorsement to the Third Party established the Third Party as the proper holder of the Borrowers' note absent some evidence by Third Party to the contrary.  Because the Third Party did not subsequently indorse the note, either in blank or to the Lender, the Court held that the Lender could not establish itself as the holder of the Borrowers' note simply by possession.


Likewise, the Court also rejected the Lender’s argument that it was entitled to enforce the Borrowers’ note as a non-holder in possession of the instrument.  The servicer did not begin servicing for the Lender until seven months after the foreclosure was initiated.  Therefore, the New Mexico Supreme Court held that the servicer had no personal knowledge to support its testimony regarding the transfer of the note and such evidence in inadmissible for lack of personal knowledge.  Furthermore, the Court noted that the assignment by MERS did not explain the conflicting special endorsement to the Third Party.  The assignment was also executed three months after the filing of the foreclosure suit, and the Court held that nothing in the record substantiated the Lender’s claim that the MERS assignment memorialized an earlier transfer to Lender.


Accordingly, because the Court held that the Lender did not introduce evidence demonstrating that it was a party with the right to enforce the Borrowers' note either by an indorsement or proper transfer, the Court concluded that the Lender did not have standing to initiate foreclosure at the time it the complaint was filed.


Second, the New Mexico Supreme Court turned to the issue of the alleged violation of the HLPA, under which lenders are required to consider a borrower’s ability to repay under the “antiflipping” provisions:


“No creditor shall knowingly and intentionally engage in the unfair act or practice of flipping a home loan. As used in this subsection, ‘flipping a home loan’ means the making of a home loan to a borrower that refinances an existing home loan when the new loan does not have reasonable, tangible net benefit to the borrower considering all of the circumstances, including the terms of both the new and refinanced loans, the cost of the new loan and the borrower's circumstances.” 


Section 58-21A-4(B) (2003).


In 2004, regulations were adopted to clarify that "[t]he reasonable, tangible net benefit standard in Section 58-21A-4 B NMSA 1978, is inherently dependent upon the totality of facts and circumstances relating to a specific transaction," NMAC, and that "each lender should develop and maintain policies and procedures for evaluating loans in circumstances where an economic test, standing alone, may not be sufficient to determine that the transaction provides the requisite benefit," NMAC. 


The Lender argued that it was not required to ask the borrowers for proof of their income, but rather that the Borrowers were required to provide it.  In rejecting this argument, the Court stated that “[a] lender's willful blindness to its responsibility to consider the true circumstances of its borrowers is unacceptable. A full and fair consideration of those circumstances might well show that a new mortgage loan would put a borrower into a materially worse situation with respect to the ability to make home loan payments and avoid foreclosure, consequences of a borrower's circumstances that cannot be disregarded.”


The Court further explained that the HLPA was enacted to prevent the kinds of practices the Borrowers alleged:  actively soliciting vulnerable homeowners and offering tempting incentives such as up-front cash to induce them to refinance their mortgages with unfavorable terms or without regard for the borrowers' ability to repay the loans and avoid loss of their homes. Whether the Borrowers' allegations were true and accurate was not before the New Mexico Supreme Court, but the Court held that “a court must consider the allegations in order to determine whether the lender violated the HLPA.”


Third, the Court considered whether the National Bank Act preempted the protections of the HLPA.


The Lender argued that the National Bank Act preempts the HLPA.  In fact, the Lender noted that the regulatory provisions of the New Mexico Regulation and Licensing Department's Financial Institutions Division recognize that "[e]ffective February 12, 2004, the [federal Office of the Comptroller of Currency] published a final rule that states, in pertinent part: `state laws that obstruct, impair, or condition a national bank's ability to fully exercise its federally authorized real estate lending powers do not apply to national banks' (the `OCC preemption')" and concluding that "[b]ased on the OCC preemption, since January 1, 2004, national banks in New Mexico have been authorized to engage in certain banking activities otherwise prohibited by the [HLPA]." NMAC.


The Court again disagreed, finding that neither the Lender nor the New Mexico administrative code addressed the actions taken by Congress since 2004 to in the Court’s words “disavow the OCC's broad preemption statement.”


The New Mexico Supreme Court noted that, in 2010, Congress explicitly clarified state law preemption standards for national banks in Pub. L. No. 111-203, § 1044, 124 Stat. 1376 (2010) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The Court held that preemption of state consumer financial laws under the Dodd-Frank Act occurs in only three circumstances: (1) if application of the state law "would have a discriminatory effect on national banks, in comparison with the effect of the law on a bank chartered by that State," (2) in accordance with the legal standard set forth in Barnett Bank of Marion Cnty., N.A. v. Nelson, 517 U.S. 25 (1996), when the state law "prevents or significantly interferes with the exercise by the national bank of its powers," or (3) by explicit federal preemption.  See id.; 12 U.S.C.A. § 25b(b)(1)(A)-(C) (2010).


Even though the loan was extended in 2006, and the foreclosure filed in 2008, the Court held that “[n]either Dodd-Frank nor the corrected OCC regulations [from July of 2011] created new law concerning the scope of national bank preemption but instead clarified preexisting requirements of the NBA and the 1996 opinion of the United States Supreme Court in Barnett.” 


Applying the Dodd-Frank standard to the HLPA, the Court concluded that the National Bank Act does not preempt the HLPA. 


First, the Court held that the National Bank Act reveals no express preemption of state consumer protection laws such as the HLPA.  Second, the Court held that the Lender provided no evidence that conforming to the dictates of the HLPA prevents or significantly interferes with a national bank's operations.  Third, the Court held that the HLPA does not create a discriminatory effect; rather, the HLPA applies to any "creditor," which the 2003 statute defines as "a person who regularly [offers or] makes a home loan." Section 58-21A-3(G) (2003). 


Thus, the Court concluded that “[a]ny entity that makes home loans in New Mexico must follow the HLPA, regardless of whether the lender is a state or nationally chartered bank.”  See § 58-21A-2 (providing legislative findings on abusive mortgage lending practices that the HLPA is meant to discourage).


Accordingly, the Court held that the HLPA is a state law of general applicability that is not preempted by the National Bank Act.  The Court further recommended that New Mexico's Administrative Code be updated to reflect clarifications of preemption standards since 2004.


The Court reversed the decisions below and remanded the matter to the trial court with instructions to vacate its judgment of foreclosure and dismiss the foreclosure.





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
(312) 551-9320
(312) 284-4751
(312) 493-0874


Admitted to practice law in Illinois



          McGinnis Wutscher Beiramee LLP





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