New York DFS Extends Emergency Subprime Calculation Rule

The New York Department of Financial Services (DFS) recently extended for 90 days its emergency rule adjusting the criteria for determining when a Federal Housing Administration (FHA) mortgage loan is classified as subprime. The DFS has renewed the same emergency regulation numerous times to afford the state Legislature time to find a permanent solution. Most recently, the emergency rule was adopted again on June 22, 2014.

Specifically, the DFS’ rule raises the subprime threshold 75 basis points under Section 6-M of the New York Banking Law for those loans subject to the revised FHA life-of-loan mortgage insurance premium (MIP). Last year, the FHA revised its MIP policies, as described in Mortgagee Letter 2013-04. Among other things, the new policy required many borrowers to pay an MIP for the life of their mortgage loans and would have triggered subprime status for numerous home loans under Section 6-M of the New York Banking Law.

The DFS emergency rule does not apply to Title I home improvement loans, home equity conversion mortgages, and any FHA-insured loans that would have exceeded the subprime threshold before the date of the FHA rule change. In June, we wrote that the New York Assembly had passed legislation to permanently codify the DFS’ emergency rules. To date, however, Governor Andrew Cuomo, who supports the bill, has yet to sign it.

- Justin Angelo

District Court Issues Crucial Ruling on Pennsylvania's Recording Statute

The U.S. District Court for the Eastern District of Pennsylvania has held that the failure to create and record written instruments evidencing assignments of mortgages and transfers of promissory notes secured by mortgages on real property in Pennsylvania is a violation of the state’s recording law. The statute provides, in pertinent part: “All deeds, conveyances, contracts, and other instruments of writing wherein it shall be the intention of the parties executing the same to grant, bargain, sell, and convey any lands …shall be recorded …” In a ruling issued on June 30, 2014, the district court concluded that a mortgage assignment is a “conveyance” subject to the recording requirements.

As for the statute’s applicability to promissory notes, the district court rejected the argument that because the transfers at issue occur by delivery of promissory notes, they are not “written instruments” subject to the statute. The district court reasoned that whether a note is transferred by a writing or a transfer of possession, by operation of law, the result is the same: an interest in and/or title to real property that secures it has been assigned and conveyed by one party to another. The district court further held that Mortgage Electronic Registration Systems, Inc. as an “undisclosed agent” of the lenders for whom it acts as a nominee, could be held responsible for the fees purportedly lost by the county recorders by not filing all assignments and transfers of promissory notes.

- Anthony C. Kaye, Daniel JT McKenna, and Jenny N. Perkins

Condominium Unit Sales Exempt from Registration under ILSFDA

The sale of condominium units will no longer be subject to the registration requirements of the Interstate Land Sales Full Disclosure Act (the ILSFDA) under a bill passed by both houses of Congress. Barring a veto, the new exemption will take effect approximately six months from now.

In a time of partisan bickering on virtually every issue, the Senate unanimously approved H.R. 2600 on September 18, 2014, following the bill's similar unanimous passage in the House of Representatives last year. This represents a major victory for condominium unit developers in light of several judicial interpretations of the ILSFDA in recent years that were more favorable to unit buyers.

The new condominium unit exemption is not a complete exemption from the ILSFDA. Unless another full exemption applies, the sale of condominium units will remain subject to the law's antifraud provisions. However, once the new law goes into effect, condominium unit developers will no longer be required to register their projects under the ILSFDA or provide federal property reports to purchasers.

Most important, developers will no longer face demands and claims for unit sales contract rescission for failing to technically comply with certain obscure provisions of the ILSFDA. These provisions were never intended to apply to condominium unit sales when the ILSFDA was enacted in 1968 to curb abuses in the unregulated sale of swampland to unsuspecting consumers. The new exemption should also take away the bite of some consumer claims that condominium developers structured their projects to rely on existing exemptions solely for the purpose of "evading" the requirements of the ILSFDA, which could void the use of the existing exemptions.

Many recent court rulings concerning ILSFDA called into question whether it was possible for a condominium to be built and sold in complete conformance with the law. Exemption from the ILSFDA will not, of course, automatically exempt condominium unit sales from state and local registration and disclosure laws. Because some state registration laws exempt projects that are subject to the ILSFDA, the new exemption may impose new local requirements on developers in these states.

Until the new exemption goes into effect, condominium developers will need to determine whether they are eligible for an existing exemption under the ILSFDA and otherwise comply with the law’s applicable requirements. In addition, because the new exemption does not apply to more traditional "lot sales," developers will need to continue to evaluate how the ILSFDA applies to the sale of lots within their planned communities.

- Christopher W. Payne, Roger D. Winston, Timothy P. Martin and Joseph E. Lubinski

N.Y. Announces New Rules To Govern Default Judgments in Consumer Collection Lawsuits

The New York Court System has adopted new rules effective October 1, 2014, to obtain a default judgment in a consumer collection action, Chief Judge Jonathan Lippman announced recently. Debt collectors and debt buyers should review their record-keeping and document retention practices to prepare for the new requirements, which are expected to entail a significant volume of paperwork.

In May, we wrote about the New York Court System’s initial proposal to govern the collection of aged consumer debt that had been resold repeatedly. The proposal would have strengthened affidavit requirements, required additional proof of notice to the debtor, and required the collector’s attorney to file an affidavit swearing that the statute of limitations had not expired.

The final rule requires the plaintiff to file specific form affidavits to obtain a default judgment. In addition, the affidavits that are required depend on whether the plaintiff is the original creditor or a debt buyer. In a lawsuit brought by the original creditor, the plaintiff must file the following documents with the default judgment motion:

  • Affidavit of Facts by Original Creditor, which must identify the date and amount of the last payment and attach a copy of the underlying credit agreement. The affidavit must also itemize the amount owed on the account by identifying the charge-off balance, post-charge-off interest, and post-charge-off fees and charges less any credits.
  • Affirmation of Non-Expiration of Statute of Limitations, which is executed by the collector’s attorney and expressly alleges the date that the cause of action accrued and the applicable statute of limitations period.

Further, a debt buyer that moves for a default judgment to collect on debt purchased from an original creditor on or after October 1, 2014, must file the following documents:

  • Affidavit of Facts and Purchase of Account by Debt Buyer Plaintiff, which must identify the date that the plaintiff purchased the debt and provide the complete chain of title for the debt, including the dates of all prior debt sales.
  • Affidavit of Facts and Sale of Account By Original Creditor, which, among other things, must identify the date that the pool of accounts containing the defendant’s account was sold to the debt buyer and attach as an exhibit the bill of sale or written assignment of the account
  • Affidavit of Purchase and Sale of Account by Debt Seller, which is required for each debt seller that owned the debt before the plaintiff and must identify the dates that the accounts were purchased from the prior debt seller and sold to the debt buyer. The affidavit must include a copy of the bill of sale or written assignment of the account as an exhibit.
  • Affirmation of Non-Expiration of Statute of Limitations.

The rule also requires the plaintiff to file with the clerk, at the time of filing the proof of service of the summons and complaint, a stamped, unsealed envelope that contains in English and Spanish a notice informing the consumer of the nature of the lawsuit. The clerk then “promptly” mails the notice to the defendant. Further, a default judgment cannot be entered if 20 days have not passed since the Clerk mailed the notice, or the notice is returned to the clerk as undeliverable.

Given the amount of paperwork required by the new rule to obtain a default judgment, it is important that debt buyers and collectors ensure that they have the proper record-keeping and document retention procedures in place. In July, the New York Department of Financial Services (DFS) issued revised debt collection rules, and the Consumer Financial Protection Bureau is working on its own debt collection rule. A failure to have robust debt collection records will not only result in the inability to collect on pools of consumer debt, but also could invite an enforcement action from the DFS or Attorney General, which have targeted debt collectors and debt buyers repeatedly over the past year.

- Alan S. Kaplinsky, Marjorie J. Peerce and Justin Angelo

Third Circuit Rejects Class Certification in Yet Another Consumer Case

Consistent with its recent emphasis on the stringency of class certification requirements in consumer cases, the Third Circuit recently affirmed the denial of class certification in a consumer case involving alleged overbilling practices, which implicated differing laws of many states. This opinion will make it even more difficult for consumers to gain class certification of multistate classes when state law claims are being asserted.

In Grandalski v. Quest Diagnostics, Inc., the district court denied certification of a proposed nationwide class in an action arising out of alleged overbilling practices by Quest Diagnostics, Inc. The Grandalski plaintiffs then appealed the denial of class certification as to two claims—their state consumer fraud act and unjust enrichment claims.

On the consumer fraud claims, the district court engaged in a choice-of-law analysis to determine which states’ laws would apply to the proposed nationwide class. The court concluded that the law of each class member’s home state would apply. Because the differing consumer fraud statutes of so many states would apply, the court held, class treatment of the case would be unwieldy and therefore inappropriate. On appeal, the plaintiffs argued that the district court erred by engaging in a choice-of-law analysis at the class certification stage, citing the Third Circuit’s en banc prior decision in Sullivan v. DB Investments, Inc.

The Third Circuit in Grandalski distinguished Sullivan on the ground that it involved a settlement class, which does not pose potential manageability problems at trial as does a litigation class. Because Grandalski involved a litigation class, the Third Circuit held, it was reasonable—and, in fact, may have been indispensable—for the district court to analyze the choice-of-law issue at the class certification stage to determine whether the case would involve intractable management problems at trial.

The Third Circuit further upheld the district court’s conclusion that the plaintiffs had not met their burden of demonstrating that “grouping” the various state laws would ameliorate the manageability problems. The court noted that while such grouping generally may be a permissible approach to nationwide class litigation, the plaintiffs bear a “significant burden” to show that grouping is a workable solution. The Grandalski plaintiffs, the court held, failed to provide sufficient analysis to demonstrate how the grouped state laws would apply to the facts of the case.

Regarding the unjust enrichment claims, the district court denied class certification because individualized proof would be required to show that ostensible overbilling of each class member was actually fraudulent or unjust, given that there were numerous potential legitimate explanations for the amount of a bill. Although the Third Circuit did not agree with the district court’s decision to decide this issue under the class “ascertainability” requirement, the court nevertheless affirmed under Rule 23(b)(3)’s predominance requirement. The Third Circuit reasoned that the individual inquiries that would be required to determine whether an alleged overbilling constituted unjust enrichment are incompatible with a class action.

Grandalski adds to the recent trend in the Third Circuit—exemplified by such cases as Marcus v. BMW of North America, LLC, Hayes v. Wal-Mart Stores, and Carrera v. Bayer Corp.— in which the court has made clear that certification of consumer cases is becoming increasingly more difficult, regardless of whether the claims are asserted against manufacturers, retailers or consumer financial service providers.

- Joel E. Tasca and Burt M. Rublin

Vermont Updates Mortgage Broker Rules

The Vermont Department of Financial Regulation has adopted regulations that update the rules for the licensing and regulation of mortgage brokers. The regulation sets forth standards on:

  • Individuals who may be authorized to act as a mortgage loan originator (MLO) under the mortgage broker's license
  • Steps that a mortgage broker must take to surrender a license
  • The form of the contract between the mortgage broker and the prospective borrower
  • The maintenance of a segregated account for funds collected form the prospective borrower by the mortgage broker
  • The filing of quarterly mortgage call reports through the NMLS
  • Prohibited mortgage broker activities

Notably, the regulation provides that all individuals authorized to act as an MLO under the mortgage broker's license must be assigned to a mortgage broker’s licensed location. Under the law, MLOs must live within a reasonable commuting distance from the licensed location to which they are assigned. In addition, the regulation requires that all authorized individuals be employees of the mortgage broker (i.e., a W-2) employee and not an independent contractor. It also prohibits an individual from acting as an MLO under more than one mortgage broker license at a time.

The regulation becomes effective on October 1, 2014.

Oklahoma Amends SAFE Act Effecting Mortgage Brokers, Lenders, and MLOs

The Oklahoma Department of Consumer Credit amended provisions of the Oklahoma SAFE Act regulating mortgage brokers, mortgage lenders, and mortgage loan originators (MLOs). Among its various rule clarifications, the amendment sets forth requirements for mortgage lenders regarding the application, bond, minimum net worth, criminal background checks of control persons, and credit reports of control persons. The amendment also specifies that an MLO must also be designated to oversee any mortgage lender’s activity that satisfies the definition of a mortgage broker under the Oklahoma SAFE Act.

In addition, the amendment requires that an MLO designated to oversee origination activities for a mortgage broker or mortgage lender may not serve as the designated MLO for any other mortgage broker, mortgage lender, or branch office. Note that the amendment mandates that a mortgage lender that maintains more than one business location must obtain a branch office license for each location.

The amendment became effective on September 12, 2014.

Oklahoma Revises Rules for Supervised Lenders

The Oklahoma Department of Consumer Credit amended its rules regulating supervised lenders. First, the amendment revises the Department’s licensing provision to state that a supervised lender application that is not reviewed for any failure on the part of the applicant will be deemed to be a withdrawal and not a denial. Second, the amendment removes a provision regarding the refund of certain fees if a licensee applicant fails to comply with the application process. Third, the amendment removes a provision that requires a licensee to return a license when an address change is requested or when a business location is closed.

The amendment became effective on September 12, 2014.

- Marc D. Patterson

Copyright © 2014 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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