California Legislature Streamlines AG Investigations of Mortgage Fraud

The California Assembly and Senate unanimously passed identical bills to simplify the California Attorney General’s ability to launch and conduct statewide grand jury mortgage fraud investigations. The twin bills were sponsored by Attorney General Kamala D. Harris as part of a six-bill package titled the “California Homeowner Bill of Rights.” While some of the bills have been met with opposition, the bills to expand the Attorney General’s authority were unopposed. Governor Brown is expected to sign the bills into law.

With narrow exceptions, the investigative powers of grand juries in California are limited to the county in which the grand jury sits. The limitation is an historical check on prosecutors’ ability to “forum shop” by bringing investigations and cases where they believe the jury pool may be more favorable to the prosecution. This does, however, hobble the ability of prosecutors to investigate multi-county or statewide conduct.

According to Attorney General Harris, the statewide grand jury will enable her office “to investigate multi-jurisdictional financial crimes in an efficient and effective manner not possible under current law, providing protection to Californians at a time they need it most.”

The bills allow the attorney general to impanel special grand juries in any one of five counties: Fresno, Los Angeles, Sacramento, San Diego or San Francisco. The county chosen need not have any connection to the conduct being investigated; the location is left to the attorney general’s discretion and convenience. Once impaneled, a special grand jury will have the power to issue statewide subpoenas. The attorney general may issue subpoenas for documents and witnesses located anywhere in the state and then present that evidence to the special grand jury, regardless of the location of the witness or physical evidence at the time the subpoena was issued.

The increased flexibility should result in more nimble mortgage-related investigations in California. Attorney General Harris believes that California is “the epicenter of the mortgage and foreclosure crises, and scammers have been preying on vulnerable citizens who simply want to keep their homes.” As such, swift and aggressive investigations should be expected. But just in case those investigations do not proceed as swiftly as anticipated, the legislature also expanded the statute of limitations from one year to three years for mortgage-related crimes.

- Thomas W. McNamara

Lender’s Oral Promise to Postpone Foreclosure Unenforceable, Eighth Circuit Holds



A lender’s oral promise to postpone a foreclosure sale of a borrower’s home is a “credit agreement” that must be in writing to be enforceable under the Minnesota Credit Agreement Statute (MCA), the U.S. Court of Appeals for the Eighth Circuit has ruled.

The May 21, 2012, decision in Brisbin v. Aurora Loan Services, LLC, should deter attempts by borrowers to unwind foreclosure sales based on alleged oral promises by lenders or servicers. The MCA prohibits a debtor from suing on a “credit agreement” unless it is in writing and defines a “credit agreement” to mean “an agreement to lend or forbear repayment of money … to otherwise extend credit, or to make any other financial accommodation.”

Asserting the MCA did not bar her claim for promissory estoppel, the borrower argued that the lender’s promise to postpone the sale while it reviewed her request for a loan modification was not a forbearance agreement under the MCA because the lender retained its contractual right to foreclose after completing the review process. The Eighth Circuit disagreed, observing that a forbearance agreement “does not necessarily negate the underlying contractual obligation for eventual payment.”

The Eighth Circuit also rejected the plaintiff’s attempt to invalidate the foreclosure sale based on the lender’s alleged failure to comply with Minnesota’s foreclosure-by-advertisement statute that allows a mortgagee to postpone a scheduled foreclosure but requires notice of the postponement to be published by “the party requesting the postponement.”  The Eighth Circuit found that, even if the postponement had been requested by the lender rather than the plaintiff, the statute’s notice requirement was not triggered because the foreclosure sale was not actually postponed.

The plaintiff had also asserted claims for negligent and intentional misrepresentation, which the Eighth Circuit rejected based on “the overwhelming evidence that reinstatement of the mortgage was impracticable” and the plaintiff’s failure to provide “a more concrete statement” of how she would have raised the large sum necessary to reinstate the loan. Finally, the plaintiff also failed in her attempt—raised for the first time on appeal—to claim detrimental reliance. The Eighth Circuit found that the plaintiff had not identified any evidence in the record that she had considered filing for bankruptcy or invoking her statutory right to a five-month postponement of the foreclosure sale, or that the lender’s promise specifically induced her to forgo those options.

- Barbara S. Mishkin

NY Targets Force-Placed Insurance for Reform

Force-placed insurance is again under attack, with the New York Department of Financial Services recently launching an inquiry into how the industry operates.

Earlier this month, DFS held three days of hearings, which, according to the opening statement of Benjamin M. Lawsky, the New York Superintendent of Financial Services, were directed at exploring various “red flags” raised by the force-placed insurance market. The red flags he identified included (1) high premiums coupled with low loss ratios, (2) lack of competition, and (3) a “close and intricate web of relationships” between banks and insurance companies that result in large commissions being paid to banks “for what appears to be little work” or large profits that revert to banks through reinsurance agreements.

Mr. Lawsky indicated that DFS’s initial investigation raised the question of whether a “perverse incentive” exists that causes banks purchasing force-placed insurance, depending on their relationships with insurers, to find more expensive coverage rather than try to keep prices down. He also described potential reforms that might result from the DFS inquiry, including banning affiliate relationships between banks and insurers and requiring a minimum loss ratio that would trigger a refund of premiums to consumers if the ratio is not met.

At the hearings, DFS heard testimony from representatives of industry and consumers. As part of its inquiry, DFS’s website invites consumers to describe their experiences with force-placed insurance by completing an online form (similar to the forms used on the Consumer Financial Protection Bureau’s consumer complaint portal).

Force-placed insurance is also a focus of the CFPB’s mortgage servicing rules proposal that is expected to be issued this summer. The proposal is intended to implement provisions of Title XIV of the Dodd-Frank Act that give consumers additional rights in connection with the force-placement of insurance by servicers, including a requirement that servicers provide advance notice and pricing information before charging borrowers for the insurance. The CFPB has indicated that it is considering proposing additional content for the advance notice beyond the Dodd-Frank Act’s required content. (See our blog post for more information on the proposal.)

- Barbara S. Mishkin

Supreme Court To Decide Whether Bad Faith Needed for Award of Costs under FDCPA



The U.S. Supreme Court has agreed to decide whether the Fair Debt Collection Practices Act allows an award of costs to the prevailing defendant even without a finding that the suit was filed by the plaintiff in bad faith and for the purpose of harassment.

In Marx v. General Revenue Corp. (cert. granted, May 29, 2012), the U.S. Court of Appeals for the 10th Circuit affirmed the district court’s award of costs to a debt collector that had prevailed in an FDCPA suit, relying on Federal Rule of Civil Procedure 54(d), which provides that “[u]nless a federal statute, these rules, or a court order provides otherwise, costs—other than attorney’s fees—should be allowed to the prevailing party.”

The FDCPA allows an award of attorney’s fees and costs to a prevailing defendant only upon a finding that the action “was brought in bad faith and for the purpose of harassment.” The 10th Circuit held that the FDCPA provision did not “provide otherwise” than Rule 54(d), but instead merely recognized the long-standing rule that the prevailing party is entitled to reimbursement of the costs of suit. The 10th Circuit’s decision conflicts with a Ninth Circuit decision as well as Second Circuit dicta.

The Supreme Court declined to hear the second (and, to many, the more important) question presented by the petition for certiorari in Marx—whether the FDCPA’s limits on third-party communications cease to apply if a debt collector, when contacting a third party in connection with the collection of a debt, does not indicate the reason for the communication.

The FDCPA defines a “communication” as the “conveying of information regarding a debt directly or indirectly to any person through any medium.” In its decision, the 10th Circuit also affirmed the district court’s ruling that a fax sent to the petitioner’s employer was not a “communication” under the FDCPA because it did not indicate to the employer that the fax related to debt collection. To satisfy the FDCPA’s definition of a “communication,” the 10th Circuit held, the petitioner needed to show that her employer either knew or inferred that the fax involved a debt. (For more on the 10th Circuit’s decision in Marx, read our prior legal alert.)

As summarized in a prior legal alert, the Consumer Financial Protection Bureau has issued a proposal to supervise certain debt collectors and debt buyers as “larger participants.” The CFPB will soon be examining debt collectors and debt buyers who qualify as “larger participants” or who act as service providers to entities supervised by the CFPB, such as payday and private student loan lenders. We are currently conducting compliance reviews for debt collectors and debt buyers in anticipation of their first CFPB examinations.

- Barbara S. Mishkin

Debtor Cannot Revoke Consent to Creditor’s Autodialed or Prerecorded Cell Phone Calls

The Telephone Consumer Protection Act (TCPA ) does not permit a debtor to revoke consent given to a creditor for autodialed or prerecorded calls from the creditor to the debtor’s cellular telephone number, a federal judge in Pennsylvania has ruled.

The TCPA prohibits autodialed or prerecorded non-emergency calls to cell phone numbers unless the call is made with “the prior express consent of the called party.” In his May 29, 2012, decision in Gager v. Dell Financial Services, U.S. District Judge Robert T. Mariani of the Middle District of Pennsylvania held that a letter sent by the plaintiff asking the defendant to cease calling her cell phone number after she became delinquent on her account did not revoke her “prior express consent” given to the defendant to contact her at her cell phone number.

The debtor had provided her cell phone number on a separate form at the time she completed her application for credit to purchase computer equipment. Since the debtor did not have a land line, she supplied her cell phone number in response to the form’s request for a “house phone” number.

In arguing that the TCPA permitted her to withdraw her consent for the calls, the plaintiff pointed to the Federal Communications Commission’s interpretation of the “prior express consent” requirement. In a 2008 Declaratory Ruling, the FCC found that, by giving his or her cell phone number to a creditor as part of a credit application, a consumer provides “prior express consent” to be contacted at that number regarding the debt. The 2008 ruling referenced the 1992 order in which the FCC first adopted rules implementing the TCPA and in which the FCC stated that “absent instructions to the contrary,” a consumer’s knowing release of a phone number constitutes permission to be called at that number.

The plaintiff argued that her letter asking the defendant not to call her constituted “instructions to the contrary” that revoked her prior consent.

Judge Mariani rejected the plaintiff’s argument, finding that the phrase “absent instructions to the contrary” did not provide “a method of revocation” of consent, but instead referred to limitations on a creditor’s use of a cell phone number that the consumer establishes concurrently with providing the number to the creditor.

He also distinguished several cases from other federal district courts involving claims under both the Fair Debt Collection Practices Act (FDCPA) and the TCPA in which judges had construed the TCPA to allow written revocation of consent by relying on a provision of the FDCPA that allows a consumer to block debt collector communications by providing written notice.

Noting that those cases might apply if the defendant were subject to the FDCPA, Judge Mariani found them to be “irrelevant and inapposite” because the defendant was acting in its own name to collect its own debt and therefore was not a “debt collector” under the FDCPA. Judge Mariani also refused to follow other federal district court cases that have held that the TCPA permits oral revocation of consent.

We continue to see a high volume of class actions alleging TCPA violations. In part, this is because the penalties are draconian. Violations can yield damages of $500 per violation or actual damages—whichever is greater—with a tripling of damages for willful violations and unlimited class action liability.

In addition to our experience in defending all manner of TCPA lawsuits, Ballard Spahr attorneys have counseled a number of clients on establishing autodialing and monitoring protocols. Our lawyers also regularly consult with clients engaged in consumer debt collection on compliance with the FDCPA and state debt collection laws. As summarized in a prior legal alert, the Consumer Financial Protection Bureau has issued a proposal to supervise certain debt collectors and debt buyers as “larger participants.” The CFPB will soon be examining debt collectors and debt buyers who qualify as “larger participants” or who act as service providers to entities supervised by the CFPB, such as payday and private student loan lenders. We are currently conducting compliance reviews for debt collectors and debt buyers in anticipation of their first CFPB examinations.

- Barbara S. Mishkin

Colorado Clarifies Mortgage Company Definition



In a May 22, 2012, position statement, the Colorado Department of Regulatory Agencies, Division of Real Estate, clarified which entities are not required to be licensed as a mortgage company. In addition to exempting wholesale lenders, the statement also provides that mortgage insurance companies that provide contract underwriting services are not considered mortgage companies. Lead generation companies that do not, through employees or other individuals, take residential mortgage loan applications or offer or negotiate terms of a residential mortgage loan to prospective borrowers also do not meet the definition of mortgage company.

- Matthew Saunig

Michigan Amends the Mortgage Loan Originator Licensing Act

Effective May 30, 2012, Michigan has amended its Mortgage Loan Originator Licensing Act to, among others things, exclude loan modification personnel from the definition of mortgage loan originator. Michigan has also added the definition of sponsor, which will allow exempt entities to sponsor licensed mortgage loan originators.

- Matthew Saunig

Copyright © 2012 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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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.