Shaking up the Title Industry


The United States Court of Appeals for the 9th Circuit issued an opinion in Edwards v. The First American Corporation et al., No. 13-555542 (Aug. 24, 2015) that may shake up how the title insurance industry works. As the court notes,

The national title insurance industry is highly concentrated, with most states dominated by two or three large title insurance companies. See U.S. Gov’t Accountability Office, Title Insurance: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers 3 (Apr. 2007). A “factor that raises questions about the existence of price competition is that title agents market to those from whom they get consumer referrals, and not to consumers themselves, creating potential conflicts of interest where the referrals could be made in the best interest of the referrer and not the consumer.” Id. Kickbacks paid by the title insurance companies to those making referrals lead to higher costs of real estate settlement services, which are passed on to consumers without any corresponding benefits. (9)

The Real Estate Settlement Procedures Act (RESPA) is intended to eliminate illegal kickbacks in the real estate industry. In this case, the 9th Circuit has reversed the District Court’s denial of class certification in a case in which home buyers alleged that First American engaged in a scheme of paying title agencies for referring title insurance business to First American in violation of RESPA. The reversal does not get to the merits of the underlying claims, but it does open up a can of worms for title companies.

The title industry is not only highly concentrated but it is also highly profitable. In some jurisdictions like NY its prices are set by regulation at rates that greatly exceed the actuarial risks they face. Regulators like the NYS Department of Financial Services have begun to pay more attention to the title insurance industry. This is a welcome development, given that title insurance is one of the most expensive closing costs a homeowner faces when buying a home or refinancing a mortgage.

Unfair Loan Mod Negotiations

The Ninth Circuit issued an Opinion in Compton v. Countrywide Financial Corp. et al., (11-cv-00198 Aug. 4, 2014).  The District Court had dismissed Compton’s unfair or deceptive act or practice [UDAP] claim because she had failed to allege that the lender had “exceeded its role as a lender and owed an independent duty of care to” the borrower. (14) The Court of Appeals concluded, however, that the homeowner/plaintiff had

sufficiently alleged that BAC engaged in an “unfair or deceptive act or practice” for the purpose of withstanding a motion to dismiss. As previously noted, Compton does not base her UDAP claim on allegations that BAC failed to determine whether she would be financially capable of repaying the loan. Rather, the gist of Compton’s complaint is that BAC misled her into believing that BAC would modify her loan and would not commence foreclosure proceedings while her loan modification request remained under review. As a result of these misrepresentations, Compton engaged in prolonged negotiations, incurred transaction costs in providing and notarizing documents, and endured lengthy delays. The complaint’s description of BAC’s misleading behave or sufficiently alleges a “representation, omission, or practice” that is likely to deceive a reasonable consumer.(15)

This seems to be an important clarification about what a reasonable consumer, or at least a reasonable consumer in Hawaii, should be able to expect from a lender with which she does business.

While the Court reviews a fair amount of precedent that stands for the proposition that a lender does not owe much of a duty to a borrower, Compton seems to stand for the proposition that lenders must act consistently, at least in broad outline, with how we generally expect parties to behave in consumer transactions: telling the truth, negotiating in good faith, minimizing unnecessary transaction costs; and minimizing unnecessary delays.

In reviewing many cases with allegations such as these, it seems to me that judges are genuinely shocked by lender behavior in loan modification negotiations. It remains to be seen whether such cases will change UDAP jurisprudence in any significant way once we have worked through all of the foreclosure crisis cases.

NJF and UCC and Contract Law, Oh My!

Parsing how a court should approach a particular deed of trust foreclosure case can put you to sleep faster than crossing the poppy fields next to the yellow brick road.  Does the Non-Judicial Foreclosure (NJF) statute govern? Does the state’s Uniform Commercial Code (UCC) govern? Does the contract terms of the deed of trust itself govern? Or, more likely, do all three govern? And, if so, how do they interact with each other?

Brad Borden and I have recently noted that while

“show me the note” does come up in federal cases, federal courts defer to the applicable state law in reaching their results.  [T]he courts’ holdings tend to flow from a careful reading of the relevant state foreclosure statute, so a particular state’s law can have a big effect on the outcome.  We would note that many scholars and leaders of the bar are befuddled by courts’ failure to do a comprehensive analysis under the UCC as part of their reasoning in mortgage enforcement cases, but judges make the law, not scholars and members of the bar.  See Report of The Permanent Editorial Board for The Uniform Commercial Code Application of The Uniform Commercial Code to Selected Issues Relating to Mortgage Notes at 1 (Nov. 14, 2011).

Zadrozny v. Bank of New York Mellon, No. 11-16597 (June 28, 2013), a recent 9th Circuit case demonstrates the problem of an incomplete analysis in an Arizona non-judicial foreclosure case.  The Court notes that

The PEB [Permanent Editorial Board] Report [] clarifies:

the UCC does not resolve all issues in this field. Most particularly, the enforcement of real estate mortgages by foreclosure is primarily the province of a state’s real property law (although determinations made pursuant to the UCC are typically relevant under that law).

Given the PEB Report’s recognition that state law is typically controlling on foreclosure issues, the Zadroznys are unable to allege a cause of action premised on the PEB Report . . ..(14-15, citation omitted)

This is confusing in a few ways.  First, the UCC is state law, adopted with variants by all of the states’ legislatures.  What the PEB is calling for is for courts to apply state UCC law as appropriate.

Second, state foreclosure law does not “control” foreclosure issues in some inchoate and expansive way. It governs it to the extent that it governs it and not one bit more. So if state UCC law governs one facet of a foreclosure case, it is not trumped by the states’ foreclosure law. Or if the terms of the deed of trust were to govern, it would not be trumped by the foreclosure law either (so long as it did not violate it).

Finally, it is just plain weird to say that the Zadroznys would have a “cause of action premised on the PEB report.” How would that work?!?  The PEB report is merely an interpretation of general UCC principles. The Court should be asking how the Arizona UCC applies to this case.

I am not saying that the Court reached the wrong result under Arizona law in this regard, but the Court’s incomplete analysis offers no clarity to litigants, no more than the Wizard of Oz offered real solutions to his supplicants’ pleas. But judges decide the cases, not me and not you . . ..