Federal Court Refuses To Dismiss Government’s Statutory Claims against Mortgage Originators That Allegedly Defrauded HUD

A federal judge recently rejected motions to dismiss in a suit in which the U.S. government alleged that two mortgage originators and their officers defrauded the Department of Housing and Urban Development (HUD) into insuring risky mortgage loans.

In its complaint, the government alleged that the defendants set up a fraudulent scheme based on false statements, poor quality control, and "shadow branches" not approved by HUD. This caused HUD to believe that certain loans qualified for insurance, according to the complaint.

The government sought civil penalties and treble damages under the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). The defendants moved to dismiss on several grounds, but the court held that the complaint's allegations supported an inference of fraud by the defendants.

The case joins a growing list of suits brought by the United States under the False Claims Act and FIRREA against mortgage originators and their officers for alleged losses to the government. The government appears to be pursuing claims under FIRREA because it has a longer statute of limitations and lower burden of proof than many other laws targeting financial fraud.

Joel E. Tasca 

Another Case of Housing Whiplash in Nevada: New Homeowner Bill of Rights and Revisions to the Foreclosure Mediation Program

Nevada’s Homeowner Bill of Rights is expected to throw another sharp curve into the state’s troubled housing market. The new law, which took effect last week, places more restrictions on the exercise of the power of sale. This comes just a few months after Assembly Bill 300 (AB 300), which eased bank foreclosure compliance by clarifying the "personal knowledge" requirement in the affidavit of authority needed to exercise the power of sale under a deed of trust. The amendment provides that certain information in the affidavit can be based on "direct, personal knowledge" obtained from reviewing business records of the beneficiary of the deed of trust and recorded information from the County Recorder.

While AB 300 intends to provide some relief for foreclosing entities, the Homeowner Bill of Rights adds new obligations. The latest rules include the following:

  • The mortgage servicer, mortgagee, or beneficiary must provide certain information to the borrower regarding the borrower’s account, the foreclosure prevention alternatives offered, and a statement of facts supporting the right to foreclose at least 30 days before recording a notice of default or commencing a judicial foreclosure action and at least 30 days after the borrower’s default.

  • The mortgage servicer must contact, or attempt to contact, the borrower before recording a notice of default or commencing a judicial foreclosure action.

  • Dual tracking, the practice of continuing the foreclosure process while a loss mitigation application is pending or while the borrower is current on his obligations under a foreclosure prevention alternative, is prohibited.

  • The mortgage servicer must provide a single point of contact for the borrower who requests loss mitigation options, and servicers must meet time limits for responding to completed applications.

  • Homeowners are provided a private right of action for violations.

Another new piece of legislation, Senate Bill 389, allows the borrower to submit a written request for a certified copy of the note. If the servicer does not provide the requested documents within 60 days, or if the documents show that the beneficiary does not have a lien on the property, the borrower may bring a quiet title action against the servicer or beneficiary. If the borrower prevails, the court must issue an order declaring the borrower as the owner of the property free and clear of any liens and award damages, including, without limitation, attorneys’ fees.

Nevada also recently revised its provisions of the Foreclosure Mediation Program, including those governing enrollment in the program. Assembly Bill 273 revises Assembly Bill 284, which originally allowed the borrower to elect foreclosure mediation. Now, under the new law, a borrower will be automatically enrolled in the Foreclosure Mediation Program unless the borrower waives mediation or fails to pay the required fees. In addition, the trustee must provide copies of the document containing information on the program separately from and with the notice of default. These and other new Foreclosure Mediation Program provisions took effect on October 1, 2013.

Based on the latest developments, it appears that Nevada continues to struggle to find an appropriate balance between protecting homeowners who are behind on their mortgage payments and promoting a speedy recovery of the state’s housing market.

Arizona Decision May Complicate Foreclosure and Eviction Process for Lenders

A recent Arizona Court of Appeals decision could create new complexities for lenders exercising their power of sale under a deed of trust. In Grady v. Superior Court of Maricopa County, the Court of Appeals sided with the holdover owners and occupants (Occupants) who faced eviction from a property that had been purchased by a bank at a trustee’s sale.

The Occupants requested a stay of execution to prevent their eviction by the bank pending appeal. The trial court denied the stay, but the appellate court reversed, finding that a superior court must treat the Occupants as "tenants at sufferance." Under Arizona law, a tenant facing eviction has a statutory right to possession if the tenant files an appeal and posts a bond sufficient to cover the rental value of the property pending appeal. Accordingly, the Court of Appeals ordered the stay and sent the case back to the trial court to determine the proper amount of the bond.

The issue in Grady concerned only the stay on appeal, not the underlying merits of the foreclosure defenses. Still, Grady will likely add uncertainty and expense to the foreclosure and eviction process. Holdover owners must post a bond to obtain a stay, which may alleviate some loss in the short term, but it will not alleviate the uncertainty or the resulting effect that uncertainty will have on a still-recovering real estate market.

John G. Kerkorian and Elizabeth J. Lee

New Mexico Adopts the New National SAFE MLO Test with Uniform State Component

New Mexico is the latest state to announce that it will be adopting the new National SAFE Mortgage Loan Originator (MLO) Test with a Uniform State Test (UST). The New Mexico Financial Institutions Division will adopt the test effective January 1, 2014. The National SAFE MLO Test with a UST first became available on April 1, 2013. With this announcement, a total of 37 state mortgage agencies will have adopted the UST by the start of 2014. Remaining state agencies will continue to require new MLOs to take state-specific test components, although they may adopt the UST at a future date.

NMLS Adds Minnesota Money Transmitter License

The Minnesota Department of Commerce will begin accepting new applications and transition filings for Money Transmitter Licenses through NMLS starting October 1, 2013. Persons engaged in the business of selling or issuing payment instruments or engaging in the business of receiving money for transmission or transmitting money must obtain a license. A licensee may conduct business in Minnesota at one or more locations, or through one or more authorized delegates, or both, under a single license.

- 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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