Author Archives: David Reiss

Servicing Fraud Claim Survives Motion To Dismiss

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Judge Gonzalez Rogers issued an opinion in Ellis v. J.P. Morgan Chase, No. 4:12-cv-03897-YGR (N.D. Cal. June 13, 2013) in which she denied a motion to dismiss a fraud claim in this class action lawsuit arising from Chase’s servicing business. The plaintiffs allege that “Chase engaged in fraudulent practices by charging marked-up or unnecessary fees in connection with Defendants’ home mortgage loan servicing businesses.” (1)

The opinion states that

Plaintiffs have alleged numerous instances where deficient information was provided and could have been revealed—namely, in the mortgage agreements themselves, in the mortgage statements reflecting the marked-up fees, or during communications with Chase where it told Plaintiffs that the fees were in accordance with their mortgage agreements.  Plaintiffs provide specific dates for statements in which they believe they were charged the marked-up fees, and allege they paid the fees without knowing their true nature.  Plaintiffs describe the content of the omission as the failure to inform them that the fees were marked-up and that the majority of the fees ultimately went to Chase, and not third-party vendors performing the services.  As discussed above, Plaintiffs have also sufficiently alleged that they did pay the marked-up fees. (36)

It continues,

Defendants allegedly demanded payment for fees that, in some cases, were never actually incurred. Moreover, Plaintiffs allege that false representations were made to borrowers when Chase told them that the fees were in accordance with their mortgage contracts—this is distinguishable from an omission. As alleged, the fraud is equally about the failure to disclose material information as it is that the amounts demanded on mortgage statements were false because they did not correspond to the actual amounts owed pursuant to the mortgage agreements relied upon by Defendants. Based on the alleged nature of the fraudulent scheme, the lack of an explicit “duty to disclose” is not dispositive in light of affirmative fraud that is also alleged. (37, citations omitted)

Denying the motion to dismiss this claim exposes servicers to great potential liability for their acts and omissions.

The Devil is in the Statute of Limitations

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NY Supreme Court Justice Kornreich (N.Y. County) issued an opinion ACE Securities Corp. v. DB Structured Products Inc., No. 650980/2012 (May 13, 2013) that diverges in approach from an earlier SDNY opinion as to whether the statute of limitations runs “from the execution of the contract.” (5) The case concerns allegations that an MBS securitizer made false representations about the loans that underlay the MBS.

Kornreich held that the statute of limitations begins to run when the MBS securitizer (a Deutsche Bank affiliate) “improperly rejected the Trustee’s repurchase demand” so long as the Trustee did not “wait an unreasonable time to make the demand.” (7) (On a side note, Kornreich also held that the plaintiff in such a case is not required “to set forth which of the specific loans are affected by false” representations in a breach of contract claim. (7))

This really opens up the statute of limitations under NY law. There has been a lot of speculation that the flood of lawsuits arising from the Subprime Boom would have to come to an end because the statute of limitations covering many of the claims was six years.  A variety of developments has extended the possibility of filing a suit.  There is FIRREA‘s ten year statute of limitations. There is NY’s Martin Act, with its lengthy statutes of limitation. And now there is this expansive reading of NY’s statute of limitations for breach of contract actions.

Although one might think that all of the good cases have been filed already, you never know. And with the ACE Securities Corp. case, we can see how a case can be filed more than six years after the contract was entered into, under certain circumstances.

 

CFPB Complaints Vary by State, Unsurprisingly

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The Baltimore Sun quoted me today in Marylanders Aren’t Shy About Complaining: New Federal Consumer Agency Finds State Residents Quick to Gripe About Mortgages, Credit Cards, Banks. The story opens,

Marylanders are big complainers.

At least when it comes to the financial services they receive.

Maryland ranked No. 2 in the nation in mortgage complaints per capita, second only to New Hampshire, for grievances lodged with the Consumer Financial Protection Bureau. The state came in third for grousing about credit cards and placed fifth for gripes about banks and service.

The CFPB’s database, launched toward the end of 2011, catalogs thousands of gripes about banking, credit cards and mortgages that the newfound agency has received. The agency forwards complaints — ranging from disputes about billing and interest rates on credit cards to incorrect information on credit reports and problems with loan payments — to the businesses involved. Not all complaints are resolved.

Why are Marylanders more motivated to complain? Experts point to the state’s higher education levels, relative wealth and proximity to the do-gooders in Washington, D.C.

“Education level predicts complaint behavior, and this is a very well-educated area,” said Rebecca Ratner, a professor of marketing at the University of Maryland’s Robert H. Smith School of Business.

The more educated consumers are the more likely they are to feel that they can affect outcomes and know what steps to take to complain, Ratner said.

Consumers here also are more aware of the new agency because of our proximity to Washington, the CFPB’s home, she said.

Indeed, Washingtonians also are big whiners, ranking No. 1 in complaints about bank accounts and credit cards and coming in third for mortgage grievances.

Consumers near the Beltway also may have more faith in the government to correct problems, given that they are likely to have friends and neighbors who work for Uncle Sam, said David Reiss, a professor at Brooklyn Law School with an expertise in consumer finance.

“The federal government has a face when you live in Maryland and D.C.,” he said.

Maryland also has the highest median income in the country. Moneyed consumers, Reiss said, are more inclined to speak up when there’s a problem.

“Wealthier people are more likely to expect more from financial institutions,” he said.

They also know that financial institutions are regulated and can be held accountable, he said.

The rest of the story is here.

Why We Need The CFPB

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Judge Illston (N.D. CA.) has preliminarily approved a settlement of a class action in Jordan et al. v. Paul Financial LLC et al., No. 3:07-cv-04496 (June 14, 2013). The class action arises from lender practices during the Subprime Boom of the early 2000s.  The class is composed of

All individuals who within the four-year period preceding the filing of Plaintiffs’ original complaint through the date that notice is mailed to the Class (the “Class Period”), obtained an Option ARM loan from Paul Financial, LLC that either (a) was secured by real property located in the State of California, or (b) was secured by real property located outside the State of California where the loan was approved in or disseminated from California, which loan had the following characteristics: (i) the yearly numerical interest rate listed on page one of the Note is 3.0% or less; (ii) in the section entitled “Interest,” the Promissory Note states that this rate “may” instead of “will” or “shall” change, (e.g., “The interest rate I will pay may change”); (iii) the yearly numerical interest rate listed on page one of the Note was only effective through the due date for the first monthly payment and then adjusted to a rate which is the sum of an “index” and “margin;” and (iv) the Note does not contain any statement that paying the amount listed as the “initial monthly payment(s),” will definitely result in negative amortization or deferred interest. (2)

Of the problems alleged by the lead plaintiffs and given credibility by the judge’s order, the most disturbing is that the lender described a rate that was fixed for only one month as a “yearly” one. It is hard to see how consumers can parse the language of a mortgage note on their own, especially in California where borrowers typically are not represented by counsel in a residential real estate transaction.

Many commentators claim that more disclosure and financial education are all that are necessary to ensure that consumers have access to credit on reasonable terms.  But residential finance transactions are too complex under the best of circumstances. And they  become just plain abusive when lenders describe an interest rate that adjusts after one month as “fixed.”  And they become too predatory when an interest rate that adjusts monthly is described as a “yearly” one.

This case, arising from lender behavior during the Boom, reminds us why we now have the Consumer Financial Protection Bureau, post-Bust.  When pundits inevitably claim that even reasonable consumer protection regulation initiatives are too paternalistic and too restrictive of credit, let’s remind them of this case and the many others like it.

These Are A Few of My Favorite Things

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Along with raindrops on roses and whiskers on kittens, reforming Government-Sponsored Enterprises and rationalizing rating agency regulation are two of my favorite things. The Federal Housing Finance Agency noticed a proposed rulemaking to remove some of the references to credit ratings from Federal Home Loan Bank regulations. This is part of a broader mandate contained in Dodd Frank (specifically, section 939A) to reduce the regulatory privilege that the rating agencies had accumulated over the years. This regulatory privilege resulted from the rampant reliance of ratings from Nationally Recognized Statistical Rating Organizations (mostly S&P, Moody’s and Fitch) in regulations concerning financial institutions and financial products.

The proposed new definition of “investment quality” reads as follows:

Investment quality means a determination made by the Bank with respect to a security or obligation that based on documented analysis,including consideration of the sources for repayment on the security or obligation:

(1) There is adequate financial backing so that full and timely payment of principal and interest on such security or obligation is expected; and

(2) There is minimal risk that that timely payment of principal or interest would not occur because of adverse changes in economic and financial conditions during the projected life of the security or obligation. (30790)

The FHFA expects that such a definition will preclude the FHLBs from relying “principally” on an NRSRO “rating or third party analysis.” (30787)

This definition does not blaze a new path for the purposes of Dodd Frank section 939A as it is in line with similar rulemakings by the NCUA, FDIC and OCC. But it does the trick of reducing the unthinking reliance on ratings by NRSROs for FHLBs. Forcing financial institutions to “apply internal analytic standards and criteria to determine the credit quality of a security or obligation” has to be a good thing as it should push them to look at more than just a credit rating to  make their iinvestment decisions. (30784) This is not to say that we will avoid bubbles as a result of this proposed rule, but it will force FHLBs to take more responsibility for their decisions and be able to document their decision-making process, which should be at least a bit helpful when markets become frothy once again.

When the cycle turns, when greed sings
When I’m feeling sad,
I simply remember
my favorite things
and then I don’t feel so bad!

Shaky South Carolina Opinion Finds That Bank Owned Note in Foreclosure Action

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The South Carolina Court of Appeals held in Bank of America v. Draper et al., no. 5140 (June 5, 2013) that Bank of America had standing in a foreclosure action and had proved that it owned the mortgage note.  The Court stated that under South Carolina law, a mortgagee who has the note and the mortgage can elect to bring an action on either. The Court also stated that under South Carolina law, the servicer has standing to bring an action on behalf of the beneficial owner. Because Draper admitted that Bank of America was the servicer, the Court held that Bank of America had standing in this foreclosure action.

Draper also argued that Bank of America failed to prove that it was the owner or holder of the mortgage note. Relying on South Carolina UCC section 301, the Court found that the bank was a “person entitled to enforce.” (8) The Court reached this result because Draper did not contest the Bank’s evidence that it owned the note through a series of “transfer and mergers.” (8) The bank considered as relevant evidence of the Bank’s ownership a “ledger of payments” that showed “all transactions on the account.” (8)

One does not have a sense that this case was well briefed because the Court seems to take a lot of shortcuts.  For instance, the Court apparently assumed that the mortgage note was negotiable and thus subject to Article 3 of the UCC. There is a fair amount of controversy relating to this assumption, something that I will blog about soon.

 

(HT April Charney)

Don’t Show Me The Note in Georgia!

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The Georgia Supreme Court recently decided You v. JP Morgan Chase, No. S13Q0040 (May 20, 2013) which held that the “law does not require a party seeking to exercise a power of sale in a deed to secured a debt [a deed of trust] to hold, in addition to to the deed, the promissory note evidencing the underlying debt.” (1) The Georgia Supreme Court thus joins the Arizona Supreme Court which reached the same result in Hogan v. Wash. Mut. Bank, 277 P.3d 781 (Ariz. 2012). I discuss Hogan and cases reaching the opposite result in Show Me The Note!

The Georgia Supreme Court reached this result after reviewing the history of non-judicial foreclosure in Georgia.  It found nothing in recent statutory enactments that was inconsistent with the longstanding practice of allowing foreclosure on the mortgage alone.  The Court dismissed a number of arguments, including the contention that the UCC “prohibits a party who does not hold the note from exercising the power of sale in the deed securing the note.” (12) The Court notes that Chase is just seeking to enforce the deed of trust, not the note. The Court also acknowledges that it might be more sensible not to split the note from the mortgage, but it also notes that the Georgia legislature did not take that approach.

The court concludes the opinion with something of a cri de coeur, the type of statement one sees from a court that feels that its conscience is being constrained by binding authority:

As members of this State’s judicial branch, it is our duty to interpret the laws as they are written. See Allen v. Wright, 282 Ga. 9(1), 644 S.E.2d 814 (2007). This Court is not blind to the plight of distressed borrowers, many of whom have suffered devastating losses brought on by the burst of the housing bubble and ensuing recession. While we respect our legislature’s effort to assist distressed homeowners by amending the non-judicial foreclosure statute in 2008, the continued ease with which foreclosures may proceed in this State gives us pause, in light of the grave consequences foreclosures pose for individuals, families, neighborhoods, and society in general. Our concerns in this regard, however, do not entitle us to overstep our judicial role, and thus we leave to the members of our legislature, if they are so inclined, the task of undertaking additional reform.

 

 

 

 

(HT William Hart)