FYI: Implementation of FRB's LO Compensation Rule Stayed

The U.S. District Court for the District of Columbia denied the motions of the National Association of Independent Housing Professionals, Inc. ("NAIHP") and the National Association of Mortgage Brokers ("NAMB") for a temporary restraining order and preliminary injunction to enjoin the Board of Governors of the Federal Reserve System ("FRB") from implementing the loan officer compensation rule, effective on April 1, 2011, that restricts certain compensation practices of loan originators relating to mortgage loans.  A copy of the District Court's Opinion is attached.

As you may recall, in their consolidated actions against the FRB, the NAMB and NAIHP allege that the FRB exceeded its authority under the Truth in Lending Act ("TILA") and the Home Ownership and Equity Protection Act ("HOEPA") in promulgating the loan officer compensation rule.  Alternatively, the trade groups assert, if the FRB did have authority to issue the final rule, the final rule is arbitrary and capricious.

Following the denial of their requests for a TRO and preliminary injunction in the lower court, the trade groups appealed the U.S. Circuit Court of Appeals for the District of Columbia Circuit.  The trade groups also filed an emergency motion for expedited relief and emergency motion to stay implementation of final rule pending appeal.

The DC Circuit ordered that the implementation of the final rule under review in the consolidated cases be stayed pending further order of the Court, in order to provide "sufficient opportunity to consider the merits of the motions for emergency relief."  The Court specifically noted that the stay "should not be construed in any way as a ruling on the merits of those motions."  A copy of the Circuit Court's Order is also attached.

The DC Circuit set a briefing schedule on the motions.  The FRB must file a combined response to both motions by 12:00 noon, Monday, April 4, 2011.  The trade groups were allowed until 10:00 a.m., Tuesday, April 5, 2011.

Thus, implementation of the loan officer compensation rule is stayed at least until April 5, 2011.
 

Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois  60602
Direct:  (312) 551-9320 
Fax:  (312) 284-4751
Mobile:  (312) 493-0874
RWutscher@kw-llp.com
http://www.kw-llp.com

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

FYI: Feds Issue Proposed Rule re: Dodd-Frank "Risk Retention" Requirements

The federal financial regulators issued the widely anticipated proposed
rule regarding the risk-retention requirements of the Dodd-Frank Wall
Street Reform and Consumer Protection Act.

A copy of the proposed rule is available at:
http://www.occ.gov/news-issuances/news-releases/2011/nr-ia-2011-39a.pdf

As you may recall, section 15G of Dodd-Frank generally requires the
securitizer of asset-backed securities to retain not less than 5% of the
credit risk of the assets collateralizing the asset-backed securities.
Section 15G includes a variety of exemptions from these requirements,
including an exemption for asset-backed securities that are collateralized
exclusively by residential mortgages that qualify as "qualified
residential mortgages" ("QRM"), a term to be defined by rule.

QRMs:

The proposed rule would define QRMs as those loans meeting certain
underwriting standards, such as: (1) maximum front-end and back-end
debt-to-income ratios of 28 percent and 36 percent, respectively; (2) a
maximum loan-to-value (LTV) ratio of 80 percent in the case of a purchase
transaction (with a lesser combined LTV permitted for refinance
transactions); (3) a 20 percent down payment requirement in the case of a
purchase transaction; and (4) credit history restrictions.

The proposed rule also includes investor disclosure requirements regarding
material information concerning the sponsor's retained interests in a
securitization transaction. According to the federal agencies, the
disclosures would provide investors and the agencies with an efficient
mechanism to monitor compliance with the risk-retention requirements of
the proposed rules.

Certain Commercial, Auto ABS:

The proposed rule also has a zero percent risk-retention requirement for
ABS collateralized exclusively by commercial loans, commercial mortgages,
or automobile loans that meet certain underwriting standards. As with
QRMs, the federal agencies state that the underwriting standards for such
ABS were "designed to be robust and to ensure that the loans backing the
ABS are of very low credit risk."

GSE Exclusion:

The proposed rule would also exempt Fannie Mae (the Federal National
Mortgage Association) and Freddie Mac (the Federal Home Mortgage Loan
Corporation) as sponsors of mortgage-backed securities for as long as they
are in conservatorship or receivership with capital support from the U.S.
government.

Options for Meeting the 5% Risk Retention:

The proposed rule provides several ways in which a securitizer might meet
the 5% risk retention requirement, including:
(1) "Vertical risk retention": whereby the sponsor or other entity
retains a specified pro rata piece of every class of interests issued in
the transaction;
(2) "Horizontal risk retention": whereby the sponsor or other entity
retains a subordinate interest in the issuing entity that bears the first
losses on the assets, before any other classes of interests;
(3) "L-shaped risk retention": whereby the sponsor essentially uses an
equal combination of vertical risk retention and horizontal risk retention
as a means of retaining the required five percent exposure to the credit
risk of the securitized assets;
(4) "Revolving asset master trusts" or "seller's interest": whereby the
sponsor or other entity holds a separate interest that is pari passu with
the investors' interest in the pool of receivables (unless and until the
occurrence of an early amortization event); or
(5) "Representative sample": whereby the sponsor retains a representative
sample of the assets to be securitized that exposes the sponsor to credit
risk that is equivalent to that of the securitized assets.

The rule is proposed by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation,
the U.S. Securities and Exchange Commission, the Federal Housing Finance
Agency, and the Department of Housing and Urban Development.

The agencies request comments on the proposed rule by June 10, 2011.

Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@kw-llp.com
http://www.kw-llp.com

NOTICE: We do not send unsolicited emails. If you received this email in
error, or if you wish to be removed from our update distribution list,
please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com

The information transmitted (including attachments) is covered by the Electronic Communications Privacy Act, 18 U.S.C. 2510-2521, is intended only for the person(s) or entity/entities to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient(s) is prohibited. If you received this in error, please contact the sender and delete the material from any computer.

Notice Under U.S. Treasury Department Circular 230: To the extent that this e-mail communication and the attachment(s) hereto, if any, may contain written advise concerning or relating to a Federal (U.S.) tax issue, United States Treasury Department Regulations (Circular 230) require that we (and we do hereby) advise and disclose to you that, unless we expressly state otherwise in writing, such tax advise is not written or intended to be used, and cannot be used by you (the addressee) or other person(s), for purposes of (1) avoiding penalties imposed under the United States Internal Revenue Code or (2) promoting, marketing or recommending to any other person(s) the (or any of the) transaction(s) or matter(s) addressed, discussed or referenced herein. Each taxpayer should seek advice from an independent tax advisor with respect to any Federal tax issue(s), transaction(s) or matter(s) addressed, discussed or referenced herein based upon his, her or its particular circumstances.

FYI: 7th Cir Says FDCPA Prohibits Misleading Representations Only to "Consumers and Those Who Stand in the Consumer's Shoes" (and Not Judges)

 The U.S. Court of Appeals for the Seventh Circuit recently held that the provisions of the federal Fair Debt Collection Practices Act ("FDCPA") regulating false or deceptive communications from a debt collector (15 U.S.C. 1692e) extend only to "consumers and those who stand in the consumer's shoes," which does not include judges.  A copy of the opinion is attached.

Palisades Acquisition XVI ("Palisades") filed an action to collect a credit card debt in state court.  Palisades's complaint attached an exhibit resembling a credit card statement.  The exhibit included a statement closing date several months before the complaint was filed, and listed Palisades as the issuing party.  Although the exhibit looked like an authentic credit card statement, Palisades admitted that it had never sent the document to the debtor before filing the complaint.

When the debtor appeared in court to challenge Palisades's collection action, Palisades voluntarily dismissed its complaint.  The debtor subsequently sued Palisades in federal court, alleging that Palisades violated that the FDCPA by attaching to its complaint a document resembling a credit card statement, which the debtor claimed was materially false, deceptive, and misleading to a state court judge viewing the document in the context of granting a default judgment.

The Seventh Circuit rejected this argument, holding that the FDCPA provisions apply only to consumers and those who stand in consumers' shoes, and held that state court judges do not stand in a consumer's shoes.  Noting that the FDCPA's purpose is to protect consumers, the Seventh Circuit found that the Act's prohibitions "are clearly limited to communications directed to the consumer and do not apply to state judges."

The Court specifically stated that "drawing the line at communications directed at consumers . . . gives consumers the full breadth of protection that the [FDCPA] permits and keeps us from reading into the Act whatever implausible ends [the debtor's] lawyers can conjure up."

The majority explained as follows:

"As a general matter, the Act and its protections do not extend to third parties. Although courts have extended the Act's prohibitions to some statements made to a consumer's attorney, Evory v. RJM Acquisitions Funding L.L.C., 505 F.3d 769, 773-75 (7th Cir. 2007), and to others who can be said to stand in the consumer's shoes, Wright v. Fin. Serv. of Norwalk, Inc., 22 F.3d 647, 650 (6th Cir. 1997) (en banc) (holding that executrix could sue because the Act applies to anyone who "stand[s] in the shoes of the debtor [with] the same authority as the debtor to open and read the letters of the debtor"), none has extended the Act to persons who do not have a special relationship with the consumer. In fact, the Eighth Circuit rejected an argument that the Act applied to representations that were not directed to the consumer: "The weight of authority applying section 1692e does so in the context of a debt collector making a false, deceptive, or misleading representation to the plaintiff." Volden v Innovative Financial Systems, Inc., 440 F.3d 947, 954 (8th Cir. 2006) (emphasis in the original) (the false statements at issue were not made to the consumer but between a check guarantee company and a returned-check processor).

Thus, the Act is limited to protecting consumers and those who have a special relationship with the consumer— such that the Act is still protecting the consumer— from statements that would mislead these consumers. The Act is not similarly interested in protecting third parties. Id.; see also Guerrero v. RJM Acquisitions, LLC, 499 F.3d 926, 934 (9th Cir. 2007) (noting "Congress did not view attorneys as susceptible to the abuses that spurred the need for the legislation")."

 

Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois  60602
Direct:  (312) 551-9320 
Fax:  (312) 284-4751
Mobile:  (312) 493-0874
RWutscher@kw-llp.com
http://www.kw-llp.com

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

FYI: Ind App Ct Says Closing Agent Entitled to Rely in Good Faith on Payoff Statement, Despite Contrary Indications

The Court of Appeals of Indiana recently held that Indiana law requires the release of a mortgage, where the written mortgage payoff statement misstates the amount of the payoff and is relied upon in good faith by a closing agent, even though the closing agent might have reason to believe the payoff statement is inadequate.  A copy of the opinion is attached. 

A new lender agreed to fund the borrower's refinance.  Before closing of the refinance transaction, the mortgage broker sought a formal payoff statement.  The Payoff Statement included the representation that the payoff on the borrower's loan was $268,000.  The closing on the refinance loan occurred the day after the mortgage broker received the Payoff Statement.  The mortgage broker and closing agent presented evidence that they believed that the new refinance mortgage would be first in priority, paying off and replacing a prior mortgage loan.

The lender on the prior mortgage loan accepted the $268,000 in proceeds from the refinance, but did not release the prior mortgage.  Instead, two months later, the lender on the prior mortgage loan had the borrower execute a modifications to the older note and mortgage.  The prior lender did not inform the mortgage broker, closing agent, or new lender of this post-refinance activity. 

Thereafter, the borrower defaulted on the newer mortgage loan by failing to make payments when due. Consequently, the investor as to the newer mortgage loan filed a complaint to foreclose against the borrower and the old lender as to its unreleased mortgage.

The lender on the prior mortgage loan filed a counter- and cross-complaint asserting, among other things, its right to foreclose the older mortgage and asserting that it was in first lien position on the subject property.  The lender argued that the old note still existed and that additional amounts were owed on that note in connection with the post-refinance modification. 

The parties filed cross-motions for summary judgment, wherein the investor on the new loan asked the trial court to hold that the lender on the older loan was precluded from withholding the release of its mortgage pursuant to Indiana Code Section 32-29-6-13 ("Section 13"). 

Section 13 provides in relevant part as follows:

"A creditor or mortgage servicer may not withhold the release of a mortgage if the written mortgage payoff statement misstates the amount of the payoff and the written payoff is relied upon in good faith by an independent closing agent without knowledge of the misstatement. . . .

In the alternative, the investor asked that the newer mortgage be deemed to have priority over the older mortgage through the doctrine of equitable estoppel. The lender on the older mortgage argued that its lien had priority based solely on the order of recording."

The trial court granted summary judgment in the older lender's favor and ordered that its mortgage had priority over the newer mortgage.  The appellate court reversed.

On appeal, the court cited the language of Section 13, noting that it was "undisputed that the Payoff Statement misstated the amount of the payoff."  As a result, the only question was "whether it can be held as a matter of law that. . . [the closing agent] relied upon the Payoff Statement in good faith and without knowledge of the misstatement."  The closing agent and mortgage broker both attested via affidavit that their representatives relied upon the payoff amount contained within the Payoff Statement. 

The lender on the older loan did not point to any evidence directly contradicting the affidavits, instead noting a number of circumstances that it contended could lead to a conclusion that the closing agent and mortgage broker did not rely upon the Payoff Statement in good faith or that they had knowledge of the misstatement. 

The lender on the older loan argued that because its mortgage contained a cross-collateralization provision, the mortgage broker and closing agent should have been on notice that its mortgage secured other debt as well.  The lender also noted that it sent the mortgage broker a mortgage verification form indicating that the current balance on its mortgage was $346,000, while the later-sent Payoff Statement indicated that the payoff of the loan was $268,000, arguing that the discrepancy should have put the mortgage broker and closing agent on notice that there was an error in the Payoff Statement.

In rejecting the older lender's arguments, the appellate court found that "the point of a payoff statement is to assure the parties hoping to pay off the loan of the final, total amount needed to pay off the loan."  Toward that end, the appellate court held that the mortgage broker and closing agent "were entitled to rely on the Payoff Statement." 

Additionally, the Court held that the older lender was "attempting to equate 'in good faith' with 'non-negligently,' which is not borne out by the relevant authority."  The Court stated that "'Good faith' means 'a state of mind indicating honesty and lawfulness of purpose; belief in one's legal right; and belief that one's conduct is not unconscionable.'"  Under this standard, the Court found that mortgage broker, closing agent, and newer lender all acted in good faith. 

Therefore, the Court held that the investor on the newer loan was entitled to a release of the older mortgage pursuant to Section 13, and summary judgment in its favor was warranted.

 

Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois  60602
Direct:  (312) 551-9320 
Fax:  (312) 284-4751
Mobile:  (312) 493-0874
RWutscher@kw-llp.com
http://www.kw-llp.com

 
NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

 

FYI: Penn Sup Ct Allows Evidentiary and Other Rulings Against Debt Collector to Stand

In a case involving collection on a credit card debt, the Superior Court of Pennsylvania allowed the trial court's evidentiary and other rulings against the plaintiff to stand, including: (1) the trial court's refusal to allow the admission of certain of the plaintiff's business records to stand;  (2) the trial court's finding that the plaintiff had failed to prove the existence of a contract, and thus failed on its breach of contract claim; and (3) the lower court's refusal to award sanctions for defendant's failure to appear at trial despite having received a Notice to Attend from plaintiff.

A copy of the opinion is available online at: http://www.pacourts.us/OpPosting/Superior/out/a26038_10.pdf.

Plaintiff Commonwealth Financial Systems ("CFS") filed suit against defendant Ms. Smith in 2004 for breach of contract and quantum meruit on an alleged credit card debt seeking $5, 435.93 plus interest at 23.99%, and attorney fees at a 20% rate plus costs.  When the case proceeded to arbitration the arbitrators entered an award in Smith's favor despite her failure to appear. 

On appeal from the arbitration award, CFS attempted to introduce evidence at trial that Citibank had issued Smith a revolving credit line, which she had used for thirteen years, that Smith had defaulted on her payments to Citibank in 2002, and that CFS was the current owner of the debt.

The Superior Court noted that CFS attempted to introduce at trial:  billing statements from 2002 stating that Smith owed a balance on her card in excess of $2,000; "an unsigned, standard form copy of a 1996 "Citibank Card Agreement," which was issued seven years after Smith opened the account; and bills of sale establishing a chain of ownership of the alleged debt in question from Citibank eventually to CFS.

The Court first addressed CFS' argument that the above documents should have been admitted to establish their breach of contract claim.  The Court noted that the question of "whether computerized files of an original creditor are admissible as the business records of a successor debt buyer appears to be one of first impression in this Commonwealth." 

Despite this fact, the Court found that the standard of review concerning admission of evidence was "quite clear" and decisions on such are "within the sound discretion of the trial court and will not be overturned absent an abuse of discretion or misapplication of law."  Based on this standard, the Court held they were "constrained to affirm the trail court's decision." 

Noting that Pennsylvania Rule of Evidence 803(6) "requires the proponent of documentary evidence to establish circumstantial trustworthiness", the Court found no abuse of discretion in the lower court's finding that "the sources of information, method, and time of preparation" were not sufficient to allow admission of CFS' exhibits. 

For example, CFS produced as a witness "the vice-president responsible for overseeing CFS' portfolio collection division", who testified that "CFS' sole business is debt purchasing and collection."  The Court noted that the witness had not been considered "a qualified witness" as he did not know whether the Citibank Card Agreement was applicable to defendant's account, or whether "industry standards had actually been followed in the preparation" of the pertinent records "because, simply put, he was never in a position to know."

Stating that the lower court "[a]s the finder of fact". .  . was in the best position to determine the trustworthiness of CFS' documentary evidence" the Court further noted that this judgment was also borne out by the outdated and occasionally inaccurate evidence CFS produced.  Therefore, despite the existence of a "nationwide trend" or "clear federal precedent" allowing the introduction of business records that include documents produced by third parties, the Court "declined CFS' invitation" to follow this rule of incorporation of documents.

The Court then addressed CFS' contention that the lower court had erred in its ruling that CFS had not established the existence of a contract.  The Court distinguished the instant case from another ruling in which it had found that the failure of a creditor to produce a cardholder agreement and other documentation was fatal to their breach of contract claim.  Nevertheless, because the lower court did not err in excluding CFS' evidence, "CFS did not establish its right to a judgment based on the claims set forth in the complaint."

Lastly, the Court disagreed with CFS' contention that the lower court erred by not imposing sanctions on the defendant for failure to appear at trial.  The Court conceded that despite the lower court's finding otherwise, CFS had not waived this issue by failure to formally object to the court's denial of its Motion for Sanctions, as it was clear from the record that CFS was so objecting.  However, the Court concurred with the lower court's finding that CFS' Notice to Attend was not timely, as they had known for nearly a week the date of trial, but had delayed several days in sending the Notice to defense counsel or "soliciting an order of court." 

Furthermore, the Court found that CFS' efforts to blame defense counsel for not preparing the defendant for trial were "disingenuous," as "his trial strategy was not to call her." 

Thus, the Pennsylvania Superior Court upheld the lower court's judgment.

Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois  60602
Direct:  (312) 551-9320 
Fax:  (312) 284-4751
Mobile:  (312) 493-0874
RWutscher@kw-llp.com
http://www.kw-llp.com

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com