Mortgage-Related Litigation Declined in Q4, But Remains at Historic Levels

 

Mortgage Daily's Fourth Quarter 2012 Litigation Index indicates that while litigation activity in the mortgage industry has been declining, there are signs that it could remain above historic levels as foreclosure, investor, and regulatory litigation persists.

The index shows that there were 934 reported cases of litigation in 2012, a 15 percent increase over 2011, but that litigation numbers declined in both the third and fourth quarters of this year. There were 223 cases reported in the fourth quarter, about 5 percent fewer than the preceding quarter and 15 percent fewer than the record 264 cases in the second quarter of 2012.

A Ballard Spahr white paper analyzing the litigation index found that although the total number is gradually decreasing, the current magnitude of mortgage litigation is still higher than it was during any period since 2007. The six highest total litigation numbers in the index were recorded in the last six quarterly periods.

It is tempting to link the decrease in overall litigation numbers with the decline in foreclosures and mortgage delinquencies. However, the “foreclosure” category in the index, which represents more than half of the cases reported, increased by nearly 30 percent in 2012, compared with 2011.

The data suggests that foreclosure activity is converting into litigation at a higher rate than previously existed. It is likely that the accumulated weight of continued publicity, government enforcement actions, and evolving theories of liability for mortgage servicers are all contributing to this trend. This means that even though mortgage delinquencies and foreclosure numbers are moving in a lower direction, litigation spawned by foreclosures and delinquencies may continue at its current high level.

- Christopher J. Willis


CFPB Expands Public Consumer Complaint Database

 

The Consumer Financial Protection Bureau has expanded its public Consumer Complaint Database to include complaints about mortgages, bank deposit products and services, student loans, and other consumer loans (which category includes complaints about auto loans and leases). The database was previously limited to credit card complaints.

The CFPB uses complaint data to establish supervision, enforcement, and market monitoring priorities. It also shares complaint data with the Consumer Sentinel Network, an online database of consumer complaints maintained by the Federal Trade Commission that can be accessed by federal, state, and local law enforcement agencies. The database expansion means that the added complaints will now also be available to plaintiffs’ lawyers who can mine the data for potential litigation targets. Ballard Spahr will be conducting a webinar on the expansion’s implications for the consumer financial services industry; details will be provided in the near future.

Effective March 28, 2013, the CFPB’s action expands the database from about 19,000 complaints to more than 90,000. A breakdown issued by the CFPB provides statistics about the complaints now in the database (such as the number of complaints by product and sub-product), and details on the 12 fields of complaint information disclosed by the database.

In addition to complaints about the products covered by the expanded database, the CFPB takes complaints about credit reporting through its Consumer Response operations. In its press release announcing the database expansion, the CFPB indicated that it plans to include credit reporting complaints in the database in the near future and, when it begins taking complaints about other financial products and services, to add them to the database eventually. That means complaints about debt collection and payday loans, which the CFPB is expected to begin taking in 2013, also will be included.

In addition, the CFPB has issued a final Disclosure of Consumer Complaint Data Policy Statement, a Consumer Response Annual Report, and a Snapshot of Complaints Received. Highlights are summarized below.

Policy Statement

The Policy Statement sets forth the conditions under which a complaint will be included in the database. Those conditions do not require the CFPB to validate a complaint’s factual allegations (which the industry has strongly criticized). They only require that the complaint not duplicate another CFPB complaint from the same consumer, not be a whistleblower complaint, involve a consumer product or service within the CFPB’s jurisdiction, and be submitted by a consumer “with an authenticated commercial relationship with the identified company.” The last condition is typically satisfied by verifying an account number provided by the consumer.

The Policy Statement lists the complaint information fields that will be uploaded to the database and describes the CFPB’s process and timelines for including data about a given complaint. It also describes the database’s functionality and indicates that although consumer and company response narratives are not currently included, the CFPB will be studying how it might include those narratives in a way that addresses privacy and other concerns.

Snapshot and Annual Report

The Snapshot analyzes complaints received by the CFPB from July 21, 2011, through February 28, 2013, while the Annual Report only covers complaints received in 2012. Both reports indicate the most common types of complaints for each product and how complaints have been handled. Except for credit reporting complaints, they provide the median amount of monetary relief paid to consumers.

Through February 28, 2013, the CFPB received about 131,300 complaints, with about 91,000 of them received in 2012. Based on the CFPB’s breakdown of the number of complaints received in each category, credit card and mortgage complaints accounted for 70 percent of all 2012 complaints and 72 percent of all complaints received through February 28, 2013 (approximately 94,300 complaints).

The Snapshot indicates that about 48 percent of the complaints received by the CFPB through February 28, 2013, were submitted via the CFPB’s website, 9 percent via telephone calls, 32 percent via referrals from other agencies and regulators, and the balance via mail, e-mail or fax. The three most common credit card complaints involved billing disputes (15 percent), APR or interest rate (10 percent), and identity theft/fraud/embezzlement (8 percent). Sixty-one percent of the mortgage complaints involved problems when a consumer is unable to pay (loan modification, collection, or foreclosure) and 22 percent involved making payments (servicing, payments, or escrow).

The Annual Report makes clear that a company’s failure to provide a timely response or a consumer’s dispute of a company’s response could lead to further CFPB review and investigation. The CFPB states that, as a result of such investigations, complaints have been referred by Consumer Response to “colleagues in the CFPB’s Division of Supervision, Enforcement, and Fair Lending & Equal Opportunity for further action.”

- Barbara S. Mishkin


Federal Banking Agencies Issue Flood Insurance Guidance

 

The federal banking agencies, together with the Farm Credit Administration, have issued joint guidance on amendments to the Flood Disaster Protection Act of 1973 (FDPA). The amendments were part of the Biggert-Waters Flood Insurance Reform Act of 2012 (Act), enacted on July 6, 2012. Participating in the guidance were the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and the National Credit Union Administration.

In Financial Institution Letter 14-2013, the agencies state that the Act’s increased penalties for FDPA violations became effective on July 6, 2012. The Act increased the maximum civil penalty for a FDPA violation from $350 to $2,000 and removed the maximum annual penalty cap of $100,000.

For loans required to be insured by the FDPA, a lender or servicer must notify the borrower of the need to purchase flood insurance if the borrower’s coverage lapses or is less than the required amount. If the borrower fails to purchase the insurance within 45 days of notification, the lender or servicer must force place the insurance. According to the guidance, effective July 6, 2012, the Act amended the FDPA’s force placement provisions to:

  • Expressly authorize a lender or servicer to charge the borrower premiums and fees for coverage beginning on the date the insurance lapsed or provided insufficient coverage

  • Require a lender or servicer, within 30 days of receiving confirmation of the borrower's coverage, to terminate any force-placed insurance and refund premiums and fees the borrower paid for any period in which the borrower’s coverage and the force-placed insurance overlapped

  • Require a lender or servicer to accept, as confirmation of a borrower’s policy, a declarations page that includes the existing policy number and insurer or agent contact information

The agencies indicate that they plan to propose new regulations to implement the Act’s provisions dealing with private flood insurance and escrows and take the position that “until regulations are issued,” those provisions are not effective. (Presumably, this is a reference to final regulations.) The Act’s private flood insurance provision amended the FDPA’s mandatory purchase requirement to require lenders to accept private insurance with coverage that satisfies the FDPA’s standards and make certain related disclosures.

The escrow provision, which only applies to loans secured by residential improved real estate or mobile homes, requires lenders and servicers, subject to certain limitations, to escrow flood insurance premiums and fees. The guidance states that the agencies “intend to publish escrow regulations in sufficient time for the industry to implement them prior to July 2014.”

Finally, the guidance addresses the Act’s impact on the agencies’ Interagency Questions and Answers Regarding Flood Insurance.

On May 29, 2013, from 12 p.m. to 1 p.m. ET, Ballard Spahr will hold a webinar, “Regulatory and Litigation Challenges to Lender-Placed Insurance.” More information on the webinar and a link to register can be found here.

- Barbara S. Mishkin


CFPB Issues Second Annual Report on FDCPA Activities

 

The Consumer Financial Protection Bureau’s second annual report to Congress on enforcement of the Fair Debt Collection Practices Act (FDCPA) confirms that debt collection will continue to be a major CFPB focus in 2013.

The report also underscores the expanding reach of the CFPB’s supervisory authority in the debt collection arena. Since issuing its first FDCPA report in 2012, the CFPB finalized its rule defining debt collectors and debt buyers with more than $10 million in annual receipts as “larger participants.” The Dodd-Frank Act gave the CFPB supervisory authority over service providers to large insured depository institutions as well as service providers to nonbank mortgage originators, payday lenders, and private student loan lenders. Those service providers can include third-party debt collectors, regardless of the collector’s size.

As the report notes, while first-party creditors generally are not subject to the FDCPA, the Dodd-Frank Act prohibits them from engaging in unfair, deceptive, or abusive acts or practices (UDAAP) in their own collection activity. The FDCPA also does not apply to servicers when collecting debts that were current when servicing began. The CFPB now supervises mortgage servicers and servicing by large banks, and it has proposed to supervise nonbank servicers of private and federal student loans as “larger participants.” Accordingly, the CFPB can evaluate collection activity by creditors and servicers it supervises for UDAAP compliance.

Highlights of the CFPB report include the following:

  • Since the CFPB has not yet expanded its complaint system to include debt collection (although it is expected to do so in the first half of 2013), the data discussed in the report is based on the complaints submitted to the Federal Trade Commission through its Consumer Sentinel database in 2012. The report states that the FTC continues to receive more complaints about the debt collection industry than any other specific industry.

  • For the first time in five years, the most common category of FDCPA complaint received by the FTC was “demanding an amount other than is permitted by law or contract.” This category includes complaints claiming a debt collector was attempting to collect a debt the consumer did not owe at all (including a debt discharged in bankruptcy) or a larger debt than what the consumer owed.

  • The only CFPB enforcement action described in the FDCPA report was against American Express. The action arose from first-party debt collection activity that was alleged to have violated the Dodd-Frank UDAAP prohibition. The October 2012 settlement of that action, which represented the CFPB’s first public enforcement action involving debt collection practices, is summarized in our legal alert. The report notes that the CFPB “is also conducting several non-public investigations of companies to determine whether they engaged in collection practices that violate the FDCPA or the Dodd-Frank Act.”

  • Drawing on information in an FTC letter to the CFPB dated February 1, 2013, (included as an appendix) the report describes the FTC’s debt collection enforcement efforts in 2012. In its letter, the FTC indicated that it continues to focus “on bringing a greater number of cases and obtaining stronger monetary relief and injunctive remedies against debt collectors that violate the law.” According to the FTC, the seven debt collection cases it brought or resolved in 2012 matched the highest number of debt collection cases it has brought or resolved in any single year.

  • Among the practices targeted by the FTC was “phantom debt collection,” meaning attempts by debt collectors “to collect on debts (often related to payday loans) that either do not exist or are not owed” to them. Another target was misleading practices in connection with attempts to collect time-barred debts. Both the CFPB report and FTC letter noted that “what debt collectors must tell consumers” concerning the collection of such debts remains an “ongoing issue in the debt collection industry.”

Ballard Spahr’s Mortgage Banking and Consumer Financial Services Groups have formed a Collection Documentation Task Force that conducts extensive reviews of collection procedures and counsels on best documentation practices. The task force brings together litigators in the Group with experience defending mortgage lenders and other consumer lenders in documentation-related lawsuits nationwide and regulatory lawyers in the Group with deep knowledge of the Office of the Comptroller of the Currency’s national bank foreclosure review process and federal and state debt collection laws.

- Barbara S. Mishkin


Welcome to John D. Sadler

 

We are pleased to welcome John D. Sadler, a commercial litigator who focuses on complex commercial litigation matters and the representation of commercial lenders in workout and restructuring matters, as of counsel in our Bethesda office.

John has significant experience in matters involving default servicing, debt recovery, lien perfection, judgment enforcement, and lender defense. He handles real estate disputes, creditors’ rights, corporate disputes, mechanics’ liens, breaches of contract, construction, and leasing disputes. He also advises creditors, debtors, and trustees in litigation before bankruptcy courts.

John assists lenders in planning, negotiating, and documenting commercial debt restructurings and represents creditors and financial distressed entities in all phases of the workout and restructuring process. He is a member of the Litigation Department and the Bankruptcy, Reorganization and Capital Recovery; Commercial Litigation; and Commercial Real Estate Recovery Groups.


Correction

 

A summary of the case Ademiluyi v. PennyMac Mortgage Investment Trust Holdings published in the March 21, 2013, Mortgage Banking Update incorrectly identified PennyMac Holdings as the mortgage servicer. PennyMac Holdings should have been identified as the owner of the loan in question. The corrected article is available on our website.


Colorado Adds Provision Concerning Loan Modifications and Transfers of Servicing Rights

 

In a recent statutory amendment, Colorado added provisions concerning transfers of servicing rights and loan modifications. At the time of a transfer or sale of servicing rights, the transferor/seller is obligated to inform the buyer/transferee as to whether a loan modification is pending. The new servicer is obligated to accept and continue processing any pending loan modification requests and honor any trial and permanent loan modification agreements entered into by the prior servicer. These new provisions apply to loan modifications made on or after March 15, 2013.

Mississippi Amends Exemption Relating to Owner Financing

 

Mississippi recently amended the owner financing exemption to its mortgage loan originator (MLO) licensing requirements to clarify what effect a violation of the provision would have on a purchaser's/borrower's title. Under existing law, anyone who owner finances no more than the greater of 10 residential mortgage loans or 20 percent of their total residential units sold is exempt from MLO licensing requirements. The amendment provides that, should a person exceed this threshold without a license, there will be no effect on the title or obligations of the purchaser/borrower. This amendment is effective July 1, 2013.

- Matthew Saunig


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