Borrower Must File Suit before Foreclosure To Exercise Rescission Rights, Eighth Circuit Holds



The Eighth Circuit recently held that a borrower must file suit before foreclosure to exercise rescission rights under TILA. The court now joins the Ninth and Tenth Circuits in holding that notice alone is not sufficient. In Hartman v. Smith, the Eighth Circuit found because the borrowers failed to file a rescission action before the sale, the right of rescission expired upon the sale of the property.

The case involved three borrowers who filed suit against the defendants, a bank and a real estate finance firm, asserting violations of TILA and state law. The bank moved to foreclose after the borrowers failed to make payments. After the property was sold at a sheriff’s sale, the borrowers sued to rescind the loans under TILA on the ground they had provided written notice of rescission prior to the foreclosure sale.

The district court granted summary judgment in favor of the defendants and dismissed the borrowers’ TILA rescission claim and state law claims; the borrowers appealed. On appeal, the bank argued that because the borrowers failed to file suit before the foreclosure sale, their rescission claim failed. The court noted the circuits are split on the question of whether a borrower must file suit within the repose period to exercise the right to rescind. While the Fourth Circuit has found notice sufficient for rescission to occur, the Ninth and Tenth Circuits have disagreed, requiring borrowers to file suit to rescind.

Applying its recent holding in Keiran v. Home Capital, Inc., the Eighth Circuit found that notice by itself, while necessary, was insufficient to exercise rescission, and that a borrower seeking rescission under TILA must file suit within three years to preserve the right of rescission. Here, where the foreclosure sale occurred within the three-year rescission period, the court held that the borrowers were required to file a rescission action before the foreclosure sale. Because the borrowers failed to do so, the court held that their rescission claim was barred.

Judge Melloy wrote a concurring opinion noting that the Consumer Financial Protection Bureau recently weighed in on this issue in courts across the country as amicus curiae and argued that sending notice is all that is required.

Melanie J. Vartabedian and Anthony C. Kaye



New York Department of Financial Services Issues Emergency Regulations Revising Subprime Calculation



On September 30, 2013, the New York Department of Financial Services (DFS) adopted emergency regulations revising the calculation for subprime loans and sent a letter to supervised institutions explaining the revisions.

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

The DFS previously issued two temporary orders excluding the revised FHA life-of-loan MIP from New York’s subprime loan calculations under Section 6-m of the New York Banking Law. The last of those temporary orders was set to expire on September 30, 2013.

Rather than continuing to issue temporary orders, the DFS adopted emergency regulations revising the calculation for loans subject to the revised FHA life-of-loan MIP. Under the emergency regulations, the subprime threshold for certain loans subject to the FHA life-of-loan MIP was raised by 75 basis points. Certain loans are excluded from the higher threshold, including Title I Home Improvement Loans, Home Equity Conversion Mortgages, and any FHA-insured loans that would have exceeded the subprime threshold before the implementation of the FHA life-of-loan MIP.

In a letter to supervised institutions, the DFS includes a decision tree, which can be used for determining whether loans exceed the subprime threshold under Section 6-m as amended. For loans that are not subject to the FHA life-of-loan MIP, the analysis of whether or not the loan is subprime under Section 6-m is unchanged by the emergency regulations.


Natural Gas Boom Fuels Requests for Partial Releases from Mortgage Liens



Residential lenders and servicers are continuing to see a larger impact from the natural gas boom, and it is not just from properties hosting drilling operations. More lenders are seeing increasing numbers of borrowers adjacent to or near drilling operations who are attempting to sell oil gas and mineral estates in fee and seeking partial mortgage releases from their lenders as a result.

Lenders receiving such requests can generally protect themselves by releasing any lien interest in oil gas and mineral estates (subject to investor guidelines) on the condition that the buyer of the subsurface estate will not be permitted to use the surface of the property for anything associated with extraction of minerals, oil or gas. However, lenders should also be conscious of the risk to the collateral value of the surface estate presented by the mere presence of an oil and gas operation on neighboring properties. In addition to aesthetic issues, noise, air, and water pollution could pose problems for neighbors.

In exchange for the release of the lien, lenders could consider bargaining for setbacks of the neighboring drilling operation from the still-encumbered property line. Particularly in areas with no public water service, lenders may also want to have the benefit of a pre-drilling water test to establish a present baseline should the water supply later become tainted and diminish the surface estate’s collateral value.

This situation should not be confused with one where a driller seeks to lease the oil and gas from a property owner's subsurface estate—by far the most typical situation lenders may confront. In that case, the language of the mortgage should serve as the guide, and lenders should be certain that mortgagors be required to obtain consent from the bank to lease the subsurface estate, particularly where the lessee/driller seeks to locate a well-drilling operation on the property. In practice, however, it has been rare for the mortgagor to seek such pre-approval even if required by the mortgage documents.

Harry Weiss and Daniel JT McKenna

HUD Rule Allowing Lenders To Demand Immediate Reverse Mortgage Repayments from Widowers Violates Federal Law, Court Holds

A Washington, D.C., District Court ruled recently that a Housing and Urban Development (HUD) regulation allowing lenders to demand that widowers immediately repay reverse mortgage loans upon the death of their spouses violates federal law. In Bennett et al., v. Donovan, a group of widowers faced foreclosure following the deaths of their spouses, who were holders of reverse mortgage loans. The reverse mortgage loans were federally insured, and therefore controlled by various federal statutes and regulations through HUD. Under the terms of the loans, the lender could demand immediate payment on the loan if the "borrower dies and the property is not the principal residence of at least one surviving borrower." This meant that if the borrower died, but was survived by a spouse who was not named on the deed to the home or the loan, the lender could seek to foreclose on the property. The language in the loans permitting foreclosure under these circumstances was taken from a regulation promulgated by HUD. The plaintiffs, who were represented by AARP Foundation Litigation attorneys, claimed that the HUD regulation violated federal law because it did not protect them as non-mortgagor spouses. Specifically, the plaintiffs relied on a federal statute providing that HUD may not insure a reverse mortgage unless the obligation to satisfy the loan was deferred until the "homeowner's" death. This same statute expressly defined the term "homeowner" to include the "homeowner's spouse." Consequently, the plaintiffs argued that they were statutorily protected from repayment requirements and foreclosure and demanded that HUD be required to take immediate action to stop lenders from disregarding this protection. The court found that HUD violated the statute by insuring reverse mortgages of the plaintiffs' spouses in a manner that permitted the lender to declare the loan obligations immediately due even if the plaintiffs' spouses were still alive. As a result, the court agreed with plaintiffs that HUD's regulation was inconsistent with federal law. The court also found, however, that it did not have the authority to require HUD to take any particular action to remedy its error. The court remanded the case to HUD so that HUD, in its discretion, could fashion appropriate relief consistent with the opinion. - Robert A. Scott, Hilary H. Adams, and Stefanie H. Jackman 

NMLS Expansion Update

As noted in prior editions of the Mortgage Banking Update, states are transitioning non-mortgage licenses to the NMLS. Most recently, the Wyoming Division of Banking began receiving new applications for Money Transmitter Licenses through the NMLS on September 30. Persons engaged in the business of advertising, offering, or providing services to Wyoming residents for personal, family, or household use, through any medium—including the Internet or other electronic means—must obtain a license. A licensee may conduct business in Wyoming at one or more locations, or through one or more authorized delegates, or both, under a single license.

Puerto Rico Adopts New National SAFE MLO Test with Uniform State Test



Another mortgage agency has announced that it will be adopting the new National SAFE Mortgage Loan Originator Test with the Uniform State Test (UST). The Puerto Rico Office of the Commissioner of Financial Institutions will adopt the test effective January 1, 2014. With this announcement, a total of 38 state and territorial mortgage agencies will have adopted the UST by the start of 2014. See our prior legal alert for a discussion on the impact of state adoption of the UST on MLOs.

- 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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