HOLA Does Not Preempt Fraud Claims against Mortgage Loan Servicer, California District Court Rules

The Southern District of California recently held that claims against a mortgage loan servicer are not preempted by the Home Owners Loan Act (HOLA) when they rely on "general allegations of misrepresentation" and are only "incidental" to the servicer's lending practices.

The case arose when a borrower brought claims against a lender and a servicer for fraud, negligent misrepresentation, promissory estoppel, and an accounting based on alleged representations made by a loan servicer regarding a potential modification. Specifically, the plaintiff claimed he was told he would have to default on the loan at issue to obtain a modification, that doing so would not affect his credit score, and that he would be eligible for a modification even though he received unemployment benefits. The plaintiff further alleged that he stopped paying his mortgage loan based on these representations but was eventually denied a modification because he was on unemployment.

The servicer moved to dismiss on the basis that all claims were preempted by HOLA because they involved loan servicing, and each claim also failed as a matter of law. In an opinion issued on August 23, 2013, the court disagreed that the claims were preempted by HOLA. It held that though the claims involved representations by a loan servicer, they invoked only the general duty not to commit fraud rather than imposing additional lending or servicing requirements on the defendants. Accordingly, the allegations were "only incidental to Defendants' lending practices" and not preempted by HOLA.

Further, though the court dismissed the plaintiff's negligent misrepresentation, promissory estoppel, and accounting causes of action for failure to state a claim, it disagreed that the plaintiff's fraud claim was not stated with sufficient specificity. Viewing the plaintiff's allegations in the most favorable light, the court held that the servicer's representations, including that the plaintiff was eligible for a modification and that he could qualify while on unemployment benefits, constituted actionable misrepresentations sufficient to state a claim for fraud.

The lending industry has faced lawsuits with similar allegations that lender representatives suggested borrowers default to be considered for modification programs. Given the survival of the plaintiff's fraud claim, lenders and consumer advocates alike will likely be watching this case closely.

- Robert A. Scott and Steven D. Burt

New York Department of Financial Services Issues Second Extension for Subprime Calculation

On August 30, 2013, the New York Department of Financial Services (DFS) issued a second order extending the time period for excluding revised mortgage insurance premiums from subprime loan calculations. A temporary order was initially issued on July 3, 2013, and was set to expire on September 2, 2013.

Earlier this year, the Federal Housing Administration (FHA) revised its policies concerning mortgage insurance premium (MIP), as described in Mortgagee Letter 2013-04. Effective June 3, 2013, some borrowers are required to pay MIP over the life of the loan.

Section 6-m of the New York Banking Law, which deals with subprime home loans, sets a formula to determine the Annual Percentage Rate (APR) threshold for subprime loans. The current criteria include MIP in the APR calculation, including the additional FHA life-of-loan premiums in effect as of June 3, 2013.

The new FHA life-of-loan MIP, together with increasing interest rates, has caused a disproportionate number of New York loans to be categorized as subprime. As a result of the restrictions on subprime loans under Section 6-m and the increased scrutiny that subprime lenders are facing from the state regulators and plaintiff class action lawyers, lenders are reluctant to close subprime loans, limiting the availability of mortgage credit in New York.

The DFS acknowledged this problem, and on July 3, 2013, issued a temporary order instructing lenders to leave revised MIP, as effectuated by Mortgagee Letter 2013-04, out of the calculations under Section 6-m. The temporary order was initially effective for 60 days and would have expired on September 2, 2013. Rather than allow the order to expire, the DFS enacted a temporary order on August 30, 2013, extending the time period to exclude MIP from subprime loan calculations until September 30, 2013.

It is unclear what steps the DFS plans to take after the extension expires at the end of September. Unless there is a long-term resolution to this issue, mortgage lending in New York will likely constrict when the temporary order expires.

- Justin Angelo

Loan Officers Petition D.C. Circuit To Review Decision Regarding Overtime Exemption

Three loan officers at Quicken Loans Inc. have petitioned the U.S. Court of Appeals for the District of Columbia Circuit for en banc reconsideration of a recent ruling that invalidated U.S. Department of Labor (DOL) guidance on the applicability of an "administrative exemption" to loan officers in determining eligibility for overtime pay under the Fair Labor Standards Act (FLSA). The petition follows a decision by a D.C. Circuit panel on July 2, 2013, in Mortgage Bankers Assn. v. Harris. The court held that the DOL had failed to follow proper rulemaking procedures when it issued a 2010 Administrator's Interpretation reversing its own longstanding "definitive interpretation" that loan officers can qualify as administrative employees exempt from the FLSA's overtime requirements.

The FLSA generally requires that employers compensate non-exempt employees at one and one-half times their regular rate of pay for all hours worked in excess of 40 hours per workweek. The FLSA exempts certain categories of employees from the overtime obligation, among them "any employee employed in a bona fide executive, administrative, or professional capacity." To qualify for the "administrative" exemption, an employee must:

  • be compensated on a salary or fee basis at a rate of not less than $455 per week;
  • have as a primary duty the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and
  • exercise discretion and independent judgment with respect to matters of significance in carrying out their job duties.

In a 2006 Opinion Letter, the DOL had applied the administrative exemption to employees performing a specified set of duties as loan officers, finding that they met the exemption and were not entitled to overtime. According to the letter, loan officers fall under the administrative exemption if they "market, service, and promote their employer's financial products," and "evaluate different courses of action and make decisions after various possibilities have been considered."

The DOL reversed its position in a 2010 Administrator's Interpretation, however, and found that this exemption should not apply to loan officers because their primary duties almost exclusively involve facilitating the sale of the employer's "marketplace offerings," rather than providing advice regarding internal operations. Under this interpretation, loan officers fall outside of the exemption.

This "flip-flop" led to a flood of FLSA lawsuits related to the payment of overtime to loan officers. The Mortgage Bankers Association (MBA) challenged the DOL's decision to reverse its 2006 interpretation through an Administrator's Interpretation, rather than through the formal rulemaking procedures set forth in the federal Administrative Procedures Act (APA). These procedures require notice to the public and an opportunity to comment. The D.C. Circuit agreed with the MBA, holding that the DOL's 2006 letter constituted a "definitive interpretation" of the law, which the agency could overturn only by following the APA's rulemaking requirements.

It is clear that we have not heard the last word in this dispute. The recent petition filed by three Quicken Loans employees asks the D.C. Circuit, sitting en banc, to review the Mortgage Bankers Assn. ruling, which was decided by three judges. The employees all have pending FLSA lawsuits for unpaid overtime. The petition urges critical reexamination of the decision, asserting that it is at odds with the majority of federal appellate courts that have examined a federal agency's authority to issue interpretations of its regulations. The petition further asserts that the decision has implications reaching far beyond the DOL and its interpretation of FLSA regulations, potentially affecting all federal agencies subject to APA rulemaking procedures.

The DOL has indicated that it is preparing its own petition for rehearing en banc, which is due no later than September 6 under a request for extension of time filed by the DOL.

- Brian D. Pedrow

New York Continues Pressure on Force-Placed Insurance

Force-placed insurance remains in the crosshairs of New York financial regulators. On August 21, the state's Department of Financial Services (DFS) sent a warning letter to all New York-licensed insurance producers about force-placed insurance tracking services.

The DFS sent the letter in response to reports that insurance producers unaffiliated with insurers were offering insurance tracking services to mortgage lenders and servicers for a reduced fee or no separately identifiable charge. According to the letter, the practice's purpose is "to induce the mortgage servicer or lender to procure force-placed insurance through the producer" upon notification that a borrower's insurance has lapsed or otherwise terminated.

The letter states that it is intended "to provide guidance and clarification" to insurance producers about this practice. It cites New York Insurance Law Section 2324(a), which prohibits a licensed insurance producer from paying a premium rebate to an insured or giving or offering to give "any valuable consideration or inducement, not specified in the insurance policy or contract" that exceeds $25 in value. It also cites an exception for services that directly relate to the sale or servicing of a policy that a producer sold, solicited, or negotiated.

Observing that "insurance tracking services likely exceed $25 in value," the DFS warns that any insurance producer, including an excess line broker, that is not affiliated with an insurer would violate Section 2324(a) by offering for a reduced fee or no separately identifiable charge to track insurance that the producer did not sell, solicit, or negotiate. (We note, however, that although Section 2324(a) has an express $25 exception to the prohibition against giving or offering any valuable consideration or inducement, there is no such express exception to the federal Real Estate Settlement Procedures Act's referral fee or fee-splitting prohibitions.)

Force-placed insurance has been a major focus of the DFS since it launched an investigation of the industry in 2011 and held hearings in 2012. Earlier this year, the DFS entered into settlements with the nation's largest and second-largest force-placed insurers. Those settlements included provisions requiring the insurers to make refunds to consumers, addressing permissible loss ratios for setting premium rates, and prohibiting certain commission and reinsurance practices.

Force-placed insurance is also a focus of the Consumer Financial Protection Bureau's new mortgage servicing rules that become effective January 10, 2014. Those rules implement provisions of Title XIV of the Dodd-Frank Act that give consumers additional rights concerning the force placement of insurance by servicers. The rules include a requirement that servicers provide advance notice and pricing information before charging borrowers for the insurance.

- Barbara S. Mishkin and Justin Angelo

Consumer Can Revoke Consent to Autodialed or Prerecorded Cell Phone Calls

The Telephone Consumer Protection Act (TCPA) permits a consumer to revoke consent given for autodialed or prerecorded calls to the consumer's cellular telephone number and does not limit the timing of revocation, the U.S. Court of Appeals for the Third Circuit has ruled. The Third Circuit's August 23, 2013, decision in Gager v. Dell Financial Services, LLC represents the first decision by a federal appellate court on both issues.

The TCPA prohibits autodialed or prerecorded non-emergency, non-telemarketing calls to cell phone numbers unless the call is made with "the prior express consent of the called party." (As discussed in our prior legal alert, effective October 16, 2013, the TCPA will require a signed, written agreement in which the consumer expressly consents to autodialed or prerecorded telemarketing calls to the consumer's cell phone.)

The Third Circuit was unwilling to conclude that the absence of an express statutory right of revocation in the TCPA meant that the plaintiff did not have the right to revoke her consent. As support for its decision, the court pointed to "the basic common law principle that consent is revocable." It also found its decision to be consistent with the TCPA's remedial purpose of protecting consumers from unwanted calls. In addition, it found that a 2012 Federal Communication Commission (FCC) ruling that a text message confirming an opt-out request is permissible under the TCPA supported the plaintiff's argument that the TCPA allows a consumer to revoke her prior consent.

The plaintiff had provided her cell phone number to the defendant at the time she completed her application for credit to purchase computer equipment. A 1992 FCC ruling provided that "absent instructions to the contrary," a consumer's knowing release of a phone number constitutes permission under the TCPA to be called at that number. Based on that ruling, the defendant argued that, to revoke her consent, the plaintiff had to provide "instructions to the contrary" concurrently with providing her number to the defendant. The Third Circuit, however, was unwilling to find that any temporal limit exists on when a consumer can revoke her prior express consent.

The Third Circuit's decision cannot be reconciled with the fact that, in contrast to several other federal statutes, the TCPA does not contain any provision authorizing the revocation of consent. For example, the Junk Fax Protection Act of 2005 expressly allows for the revocation of consent. Since Congress knew how to provide for revocation when it desired, the absence of such a provision in the TCPA clearly indicates a contrary Congressional intent. Indeed, the Third Circuit noted that the 2012 FCC ruling on which it primarily relied "never articulated a rationale for deciding why the TCPA affords consumers the right to revoke their prior express consent." The Third Circuit's decision also leaves unresolved whether, as a number of federal district courts have ruled, consent may only be revoked in writing and not orally.

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.

Ballard Spahr will present a free webinar on Thursday, September 12, 2013, from 12 p.m. to 1 p.m. ET, "So What if You Didn't Touch That Dial? Avoiding Liability under the TCPA before and after October 16, 2013."

- Barbara S. Mishkin

Welcome to Justin Angelo

We are pleased to welcome Justin Angelo, an experienced consumer financial services and mortgage banking litigator, as the newest member of our Mortgage Banking Group. Justin is of counsel in the firm's New York office and defends banks and nonbanks against claims under various residential mortgage and other consumer laws.

Justin's arrival is part of the firm's strategic plan to further expand its consumer financial services and mortgage banking capabilities in New York. Ballard Spahr opened its 14th office in Manhattan on July 1 when the firm joined with Stillman & Friedman, a boutique litigation firm.

Our attorneys are preparing to handle a high volume of consumer financial services and mortgage banking litigation in New York. We expect this will occur as a result of referrals from existing clients for whom we handle this type of litigation in our other offices, increased rulemaking by the Consumer Financial Protection Bureau, and recent regulatory and enforcement activity involving the New York State Department of Financial Services and the State Attorney General.

Texas Amends Pre-Licensing Education Requirements for MLOs

The state of Texas recently amended licensing requirements for residential MLOs. Under the amendment, MLOs must complete three hours of Texas-specific education in addition to 20 hours of NMLS approved education classes to meet pre-licensing education requirements. The amendment is effective September 5, 2013.

North Carolina Relaxes Examination Requirements for MLOs

North Carolina relaxed its requirements relating to examinations for its Mortgage Loan Originator License. Under the new amendment, MLOs who are applying for a license must have passed the licensing exam within five years of applying. Previously, an MLO was required to have passed the examination within three years of the application date. The amendment became effective on August 23, 2013.

- Marc D. Patterson

 Copyright © 2013 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.

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