FHA Permits Electronic Signatures
FHA recently issued Mortgagee Letter 2014-03, which states that effective immediately, FHA will accept electronic signatures on a voluntary basis for the following documents:
- Mortgage Insurance Endorsement Documents – Electronic signatures will be accepted on all documents requiring signatures that are included in the case binder for mortgage insurance, except for the note. Effective December 31, 2014, however, FHA will accept electronic signatures on the note for forward mortgages.
- Servicing and Loss Mitigation Documentation – Electronic signatures will be accepted on any documents associated with servicing or loss mitigation services.
- FHA Insurance Claim Documentation – Electronic signatures will be accepted for any documents associated with the filing of a claim for FHA insurance benefits, including Form HUD-27011.
- HUD Real Estate Owned Documents – Electronic signatures will be accepted on the HUD REO Sales Contract and related addenda.
To be accepted by FHA, the electronic signatures are required to meet several requirements detailed in the Mortgagee Letter. The requirements cover the following aspects of an electronic signature:
- Associating an electronic signature with the authorized document
- ESIGN Act compliance
- Intent to sign
- Single use of a signature
- Credential loss management
- Integrity of records
- Quality control
- Record retention
- Reid F. Herlihy
Eleventh Circuit Clarifies Pre-Consummation Disclosure Requirements under TILA
Under the Truth in Lending Act (TILA), lenders are required to make certain disclosures to borrowers before consummating mortgage loans. If a lender fails to make these disclosures, the borrower may have the right to rescind the loan. Recently, the U.S. Court of Appeals for the Eleventh Circuit reaffirmed that to be entitled to rescind, a borrower must establish a lender's failure to make "material" pre-consummation disclosures, which are narrowly limited to those described in the controlling regulations promulgated under the TILA.
Specifically, the Eleventh Circuit upheld the lower court's dismissal of the plaintiffs' claim that they were entitled to rescind their mortgage loan under the TILA because the lender failed to make certain material disclosures before consummating the mortgage loan. To support this claim, the plaintiffs alleged, inter alia, that the mortgage company from which they obtained their loan failed to disclose the identity of the "real lender" of the loan; namely, the bank that provided funding for the loan. The plaintiffs also alleged various improper disclosures relating to the loan's yield spread premium and the lender's processing and administrative fees on the loan.
The court explained, however, that none of the lender's alleged disclosure errors constituted "material disclosures" under the TILA that would trigger the plaintiffs' rescission rights. Instead, as the Eleventh Circuit noted, the only information required to satisfy the TILA's pre-consummation disclosure requirements is:
- The loan's annual percentage rate
- Its finance charge
- The amount financed
- The total amount to be paid over the life of the loan
- The payment schedule
- Certain other disclosures referred to in 12 C.F.R. Sections 226.32(c)-(d) and 226.35(b)(2)
In this case, the court found that the lender properly disclosed each of these "material" factors. Consequently, it found that dismissal of the plaintiffs' rescission claim was appropriate because they failed to plead any allegations that would support their right to rescind under the TILA.
Moreover, the court explained that under 15 U.S.C. Sections 1635 and 1641, even when a lender or its assignee violates the TILA's disclosure requirements, such a violation will only give rise to a cause of action if the violation is "apparent on the face of the disclosure statement." Section 1641 provides that "a violation apparent on the face of the disclosure statement includes, but is not limited to (1) a disclosure which can be determined to be incomplete or inaccurate from the face of the disclosure statement or other documents assigned, or (2) a disclosure which does not use the terms required by this subchapter." The court concluded that because there were no material disclosures absent from the pre-consummation disclosure statement at issue in this case, there was no need to apply Section 1641 to determine whether any violation was "apparent on the face" of the statement so as to warrant the remedy of rescission.
Lenders should take note of this recent decision to ensure compliance with the TILA's pre-consummation disclosure requirements, and when defending against rescission actions that are similarly based upon a failure to disclose information that falls outside the scope of the TILA's express requirements.
- Joel E. Tasca and Stefanie H. Jackman
New York Attorney General Seeks To Hold Banks Responsible for Abandoned Properties
New York Attorney General Eric Schneiderman has announced his intention to introduce legislation to compel banks and mortgagees to maintain vacant properties that are abandoned because of delays in the foreclosure process. Mr. Schneiderman claims such legislation is warranted because certain lenders refuse to complete the foreclosure and take possession of properties, dubbed “zombie properties,” because of the financial costs of property maintenance.
Mr. Schneiderman asserts that homeowners often abandon the property before the foreclosure is complete, and that the banks are best positioned to care for it. According to RealtyTrac, a foreclosure in New York takes approximately three years, which is the longest in the nation.
Mr. Schneiderman asserts that action is necessary because zombie properties are susceptible to crime, vandalism, and arson and adversely affect the values of neighboring properties. The proposed legislation would, among other things, compel lenders to pay maintain delinquent properties once they are declared abandoned, and create a state zombie property registry to allow cities to track abandoned homes for code violations.
While we share Mr. Schneiderman’s concern that abandoned properties are a pressing issue for many communities, the proposed legislation has its flaws. Specifically, we are concerned about how the legislation would define the term “abandoned” and the process for declaring a property “abandoned.”
We expect this to be a major battle in the Legislature, as an ambiguous definition may actually increase litigation of foreclosures, as banks would have the financial incentive to dispute whether a property is abandoned. Ultimately, the legislation could actually increase the time to complete a foreclosure.
- Justin Angelo
Collection Letter Requiring Written Dispute Violated FDCPA, Fourth Circuit Holds
A collection letter violated the Fair Debt Collection Practices Act (FDCPA) because it stated that the debtor could only dispute the debt in writing, the U.S. Court of Appeals for the Fourth Circuit has ruled. The Fourth Circuit joins two other circuits that have made similar rulings.
In Clark v. Absolute Collection Service, Incorporated, the Fourth Circuit vacated the district court's dismissal of a putative class action complaint for failure to state a claim. Declining to "disregard the statutory text," the court held that the FDCPA does not require a written dispute to avoid an assumption by the debt collector that the debt is valid. The Fourth Circuit distinguished language in different portions of FDCPA Section 1692g, with certain portions requiring written disputes or requests from debtors for various rights to apply and another portion dealing with when a debt will be assumed to be valid.
Section 1692g requires a debt collector to send a written "validation notice" to a consumer within five days of the collector's initial collection attempt and specifies what information the notice must contain. This section requires the notice to include statements that if the consumer disputes a debt in writing or makes a written request for the name and address of the original creditor, the collector will provide verification of the debt or the requested information. This section also requires a debt collector to cease all collection efforts if it receives a written dispute or information request until the verification or information is provided.
Section 1692g also requires the validation notice to include a statement that the debt will be assumed to be valid by the debt collector unless the consumer disputes the debt within 30 days. It is silent, however, on what form the dispute must take to avoid that assumption.
The Fourth Circuit rejected the collector's argument that, for consistency with Section 1692g's other dispute mechanisms and to avoid consumer confusion, the section must be read to require a written dispute for a debt not to be assumed valid. It observed that an oral dispute triggers consumer protections that are independent of the protections triggered by other portions of Section 1692g that expressly require a written dispute. According to the Fourth Circuit, if a debt is orally disputed, a debt collector must disclose that the debt is disputed when communicating the debtor's credit information to others. If the debtor owes multiple debts, the collector cannot apply a payment made by the debtor to the disputed debt.
The Fourth Circuit also found that its conclusion was consistent with "well-established principles of statutory construction" that required the court to "give effect, if possible, to every clause and word of a statute." In the court's view, it would violate those principles if the court were to rely on the written dispute requirement in certain portions of Section 1692g to read such a requirement into the portion of Section 1692g that addresses when a debt will be assumed valid.
Observing that the issue of whether the FDCPA requires a written dispute was one of first impression in the Fourth Circuit, the court noted that its decision was consistent with decisions of the Second and Ninth Circuits in 2013 and 2005, respectively. (The Second Circuit decision was the subject of a prior legal alert.) It also noted that the Third Circuit had reached the opposite conclusion in a 1991 decision, ruling that a debtor must send a written statement to effectively dispute a debt. (Based on that decision, the Third Circuit held in a March 2013 decision that a collection letter violated the FDCPA because its invitation to call a toll-free number could be read to permit the debt to be effectively disputed by telephone.)
- Barbara S. Mishkin
DID YOU KNOW?
Maryland and Virginia Considering Legislation Affecting Residential Foreclosures and Transitional MLO Licensing
In 2014, state legislatures continue to be active in considering policy options that would impact the mortgage industry. The following are two examples of the legislative and regulatory agendas currently being debated across the country:
- Delegates in the Maryland House and Senate are considering legislation that would place a six-month emergency moratorium on all foreclosures on residential properties. Among other provisions, SB 755 and HB 1322 also seek to (1) create a penalty for a person who files an affidavit regarding a foreclosure notice when the person knows or has reason to know that the contents of the notice are inaccurate and (2) alter the time period during which a mortgagor or grantor of residential property may contest a foreclosure or cure a certain default to up to 30 days after the foreclosure sale occurs.
- The Virginia Senate and House have passed legislation regarding the creation of a transitional MLO license. The legislation would authorize the State Corporate Commission to issue a transitional MLO license to individuals who are either (1) licensed to originate mortgage loans in another state or (2) are formerly registered loan originators and are in the process of meeting the requirements necessary to obtain a MLO license. The proposed transitional MLO license would expire after 120 days. Senate Bill 118 and House Bill 954 have been sent to their opposite General Assembly chambers and are currently under consideration. If the proposals are enacted, Virginia would become the third state to grant transitional licenses to out-of-state MLOs and federally registered loan originators (to the extent permitted under federal law) pending their completion of any necessary licensing requirements. As we have previously reported, North Carolina and Ohio are the only two states that have created transitional licensing regimes thus far.
- Marc D. Patterson
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.