Nev. Supreme Court Holds Hoa Foreclosure Statute Constitutional, Splits with Ninth Circuit

The Nevada Supreme Court has upheld the constitutionality of Nevada's pre-2015 statutory scheme for homeowners association (HOA) foreclosures. This decision contradicts the Ninth Circuit Court of Appeals' conclusion that the same statutory scheme violates due process.

Appellant Saticoy Bay LLC Series 350 Durango 104 (Saticoy) purchased a property at an HOA foreclosure sale. After the sale, Saticoy filed a quiet title action for, among other things, a declaration that the HOA foreclosure of its superpriority lien extinguished a deed of trust previously recorded against the property. Wells Fargo, the beneficiary of the deed of trust, moved to dismiss the complaint. Wells Fargo argued that NRS 116.3116 et seq., the statute that authorized the HOA's foreclosure, violated the Due Process Clause and the Takings Clause of the Nevada and U.S. Constitutions.

The district court agreed that NRS 116.3116 et seq. violated due process and dismissed the complaint, and Saticoy appealed. After considering both of Wells Fargo's constitutional arguments, the Nevada Supreme Court reversed and remanded. It held that an HOA foreclosure did not involve sufficient state action to implicate the 14th Amendment or the Takings Clause.

The court first addressed the state action requirement for due process, applying the two-part test set forth by the U.S. Supreme Court in Lugar v. Edmondson Oil Co.—a deprivation of life, liberty, or property was caused by the exercise of a right or privilege created by the state; and the party charged with the deprivation was a state actor. While the Nevada Legislature created the HOA's superpriority lien, the party actually charged with the deprivation—i.e., the HOA—was not a state actor. "[T]he Legislature's mere enactment of NRS 116.3116 does not implicate due process absent some additional showing that the state compelled the HOA to foreclose on its lien, or that the state was involved with the sale."

Next, the court held that NRS 116.3116 et seq. did not constitute a regulatory taking because the statute did not have an economic impact on a mortgagee; did not interfere with any legitimate investment-backed expectation; and merely altered the priority of certain liens.

Significantly, Saticoy contradicts the Ninth Circuit's conclusion that NRS 116.3116 et seq. violates due process. While the Nevada Supreme Court acknowledged the Ninth Circuit's Bourne Valley decision in a footnote, it declined to follow the federal court's holding that the statutory scheme implicated state action. The Saticoy court also declined to address whether NRS 116.3116 et seq. requires constitutionally sufficient notice. It thus remains to be seen whether the Nevada Supreme Court's interpretation of the state statute's notice requirements also will conflict with the interpretation of the federal courts.

- Lindsay C. Demaree, Joel E. Tasca and Abran Vigil


PHH Files Supplemental Response To Cfpb’s Rehearing Petition; Opposes State Ags’ Motion To Intervene

PHH has filed a supplemental response to the Consumer Financial Protection Bureau's (CFPB) petition for en banc rehearing and a response opposing the motion filed by Democratic Attorneys General of 16 states and the District of Columbia to intervene in the PHH appeal.

Supplemental Response. The D.C. Circuit invited the Solicitor General to file a response to the CFPB’s petition expressing the views of the United States. After the Department of Justice filed a response, PHH filed a motion for leave to file a supplemental response. In that motion, PHH asserted that because the DOJ had argued that the D.C. Circuit should grant the CFPB’s petition on several grounds that were not pressed in the CFPB’s petition, PHH was seeking an opportunity to be heard on the views expressed by the United States. Despite the CFPB’s opposition to PHH’s motion, the D.C. Circuit granted PHH’s motion and required PHH to file its supplemental response by January 27.

In its supplemental response, PHH asserts that the United States did not dispute the panel’s conclusion that the CFPB’s structure is unconstitutional or the panel’s remedy to address the constitutional violation (i.e. severance of the for-cause removal provision) but only challenged the panel’s reasoning in reaching that outcome. While rejecting the United States’ reading of U.S. Supreme Court precedent with regard to the role of separation of powers in protecting individual liberty, PHH also argues that even under “the United States’ crabbed reading of [such precedent], the panel undoubtedly reached the correct result.”  According to PHH, “the United States identifies no reason for the full Court to grant rehearing simply to retrace the panel’s steps and arrive at the same place.”

PHH also calls “passing strange” the United States’ suggestion for the en banc court to conclude that it should not reach the separation of powers issue under the doctrine of constitutional avoidance while simultaneously arguing that the en banc court should review the panel’s separation of powers analysis. PHH observes that the “United States cites no examples of an appellate court granting rehearing en banc for the purpose of not reaching an issue.” (emphasis provided). PHH argues that because the panel properly reached the separation of powers question, the court should reject the United States’ suggestion that the court should grant rehearing on the question but then decline to decide it.

PHH also observes in its supplemental response that the United States did not contest the D.C. Circuit’s RESPA interpretation or its due process holding and instead only addressed its separation of powers holding. PHH argues that the panel’s RESPA interpretation and due process holding were correct and that “there is no possible basis to rehear either the panel’s RESPA or due-process holdings.” 

Response to Motion to Intervene. Last week, a motion to intervene was filed with the D.C. Circuit by the Democratic Attorneys General of 16 states and the District of Columbia. In its response, PHH argues the motion should be denied for reasons including:

  • The motion was untimely because federal appellate rules require a motion to intervene to be filed within 30 days after a petition for review is filed and PHH filed its petition for review in June 2015. The state AGs’ argument that good cause exists to extend the deadline is “implausible” because the results of the presidential election are not relevant to the question of intervention and even if they were relevant, the state AGs did not explain the reason for “their additional two-and-a-half-month [post-election] delay before seeking to intervene.” In addition, “intervention would be grossly unfair to petitioners, who suddenly would be faced with the burden of litigating any further judicial proceedings against seventeen new (and sovereign) party opponents.”

  • The state AGs lack standing to intervene because they have no legally protected interest. With regard to RESPA, the state AGs’ involvement is not “necessary or appropriate to protect the Executive Branch’s interest in the interpretation and enforcement of RESPA.” With regard to the CFPB Director’s independence, the state AGs “have no standing to defend the constitutionality of a federal statutory provision that applies only to one federal Officer–the Director of the CFPB.” The panel’s decision does not, as the state AGs contend, “effectively giv[e] the President veto power over” the state AGs’ attempts to enforce the CFPA under Section 1042 because the CFPA merely requires the state AGs to notify the CFPB of an intended enforcement action before filing and allows the CFPB to intervene. The state AGs “remain free to pursue their own enforcement actions, and the courts would remain the ultimate arbiters of any disagreements.” The state AGs also provide no explanation for “their illogical and ultimately speculative contention that a constitutionally accountable CFPB would somehow ‘undermine’ regulatory coordination. To the contrary, states routinely coordinate with constitutionally accountable federal agencies, such as the Department of Justice.”

  • The motion “is simply an effort by the state AGs to intervene in order ‘to file a petition for certiorari,’ as they admit, in the event the Solicitor General does not.” The state AGs should not be given control over efforts to seek Supreme Court review. More specifically, granting intervention would circumvent the CFPA provision requiring the CFPB to seek approval from the United States AG to file a certiorari petition–which is “one of the only means that Congress provided the President to supervise litigation involving the CFPB.”

In addition to the state AGs’ motion, two other motions to intervene were filed last week. One motion was filed by Democratic lawmakers Senator Sherrod Brown and Representative Maxine Waters who are, respectively, the Ranking Members of the Senate Banking Committee and the House Financial Services Committee. The other motion was filed by Maeve Brown (who chairs the CFPB’s Consumer Advisory Board), Americans for Financial Reform, Center for Responsible Lending, Leadership Conference on Civil and Human Rights, Self-Help Credit Union, and United States Public Interest Research Group. In a footnote to its response, PHH states that it “will promptly and separately respond to those motions.”

- Barbara Mishkin


DOJ Files Redlining Lawsuit Against KleinBank

The U.S. Department of Justice (DOJ) recently commenced a redlining lawsuit against KleinBank, a state-chartered Minnesota bank subject to the regulatory authority of the Federal Deposit Insurance Corporation (FDIC). The complaint, which relates to the bank's residential mortgage lending business, alleges that KleinBank violated the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) by engaging in a pattern or practice of unlawful redlining of the majority-minority neighborhoods in the Minneapolis-St. Paul metropolitan area. From 2010 to at least 2015, the bank is alleged to have avoided serving the credit needs of individuals seeking residential mortgage loans in majority-minority census tracts in the Metropolitan Statistical Area encompassing Minneapolis and St. Paul (MSA).

The redlining claim is based, in part, upon an allegation that KleinBank established and maintained a discriminatory Community Reinvestment Act (CRA) assessment area that was "horseshoe-shaped," "include[d] the majority white suburbs, and carve[d] out the urban areas of Minneapolis and St. Paul that have higher proportions of minority populations." Specifically, the complaint alleges that the bank's main CRA assessment area excluded 78 of 97 majority-minority census tracks in the MSA, "all but two of which are located in Hennepin and Ramsey Counties." The excluded portion of Hennepin County was alleged to be "an area roughly consistent with the city limits of Minneapolis." The assessment area also allegedly excluded all 37 majority-minority census tracts of Ramsey County.

The DOJ alleged that, in addition to the main CRA assessment area of the bank, the "proper CRA assessment area would include the entirety of Hennepin and Ramsey Counties." Although KleinBank was subject to the regulatory authority of the FDIC, the complaint asserts that "[t]he FDIC has never conducted a redlining examination" of the bank and "has not commented on or approved" its CRA assessment area. We note, however, that the FDIC performed CRA compliance examinations of the bank more than once during the relevant time period and each time it received a satisfactory CRA rating. The DOJ thus appears to be alleging that the FDIC did not critique the bank-designated assessment area in its CRA compliance examinations of the bank.

The DOJ further alleged that all of KleinBank's branches are and have been located in majority-white census tracts and that the residential mortgage loan officers "conduct the bulk of their residential mortgage loan business" at the branch offices. Although the complaint further alleges that "[n]one of the Bank's residential mortgage loan officers maintains offices in majority-minority census tracts," it is the bank that establishes and maintains offices (including loan production offices). Its residential mortgage loan officers presumably are not at liberty to establish offices on their own. Finally, the allegation that the bank had engaged in unlawful "redlining of majority-minority census tracts within the MSA in the provision of its home mortgage lending" also was premised upon factual allegations that the bank:

  • engaged in limited marketing outside of its CRA assessment area, failed to advertise "meaningfully" in majority-minority neighborhoods, and "targeted a portion of its marketing efforts to within a limited radius of its branch locations" that excludes majority-minority neighborhoods;

  • received a lower percentage of residential mortgage loan applications relating to property located in majority-minority neighborhoods, lower than the percentage of such applications received by comparable lenders. The DOJ alleged that, during the period from 2010 to 2015, comparable lenders generated applications in majority-minority census tracts at more than five times the rate of the bank; and

  • made a lower percentage of residential mortgage loans secured by property located in majority-minority neighborhoods, lower than the percentage of such loans made by comparable lenders. The DOJ alleged that, during the period from 2010 to 2015, comparable lenders made loans in majority-minority census tracts at more than four times the rate of the bank.

The DOJ redlining allegations appear to be generally consistent with those made in the recent redlining complaints against Hudson City Savings Bank, BancorpSouth Bank, and, most recently, Union Savings Bank and Guardian Savings Bank.

Unlike recent redlining complaints, however, this complaint commenced a contested litigation. In a statement addressed to its customers and communities, the President and CEO of KleinBank stated that the bank "vigorously disputes" the alleged redlining claim and notes that Minneapolis and St. Paul are "highly competitive markets" that are "comprehensively served by well-established financial institutions with numerous branches and many years of history." The statement further asserts that "the complaint alleges . . . that [the bank] had a proactive duty to expand beyond [its] century-old roots in Carver County and western Minnesota to build branches in Minneapolis and St. Paul, which is a baseless and unprecedented reach by the government." Conversely, the DOJ press release asserts that "[c]ases like this one demonstrate [its] strong commitment to hold banks accountable for continuing and perpetuating historic trends of inequality in residential mortgage lending."

The DOJ's focus on redlining is consistent with the fair lending focus of the Consumer Financial Protection Bureau (CFPB), which recently identified redlining as one of its fair lending priorities for 2017. The CFPB, in the Fall 2016 edition of Supervisory Highlights, lists factors it considers when assessing redlining risk and explains how it performs an analysis of redlining risk, such as its use of Home Mortgage Disclosure Act and census data to assess an institution's lending patterns and its comparison of an institution to peer institutions. These factors, which are described in detail in the Interagency Fair Lending Examination Procedures, include the CRA assessment area and the market area more generally

- Consumer Financial Services and Mortgage Banking Groups


Community Banks Trade Group Asks Trump Administration to Curb Fair Lending Enforcement

The Independent Community Bankers of America issued a statement calling on the Trump administration “to rein in the overzealous application of fair lending laws.” ICBA stated that community banks are threatened by a recent trend of “unwarranted enforcement actions” that “harm community banks and the customers they serve by undermining the availability of credit in local communities and throughout the economy.”

Noting the commitment of community banks to fair lending, the ICBA’s president indicated that “community banks are experiencing enforcement overreach that diverts an abundance of resources from serving their local communities to complying with and responding to unwarranted fair lending allegations.”

The ICBA’s statement noted the DOJ’s recently-filed fair lending action against KleinBank, which it called “a misguided and baseless claim against [the] family-owned [bank], a 110-year-old institution that has never been cited for fair lending violations by its primary regulator, the Federal Deposit Insurance Corp.” The DOJ’s complaint, which relates to the bank’s residential mortgage lending business, alleges that KleinBank violated the Fair Housing Act and the Equal Credit Opportunity Act by engaging in a pattern or practice of unlawful redlining of the majority-minority neighborhoods in the Minneapolis-St. Paul metropolitan area. From 2010 to at least 2015, the bank is alleged to have avoided serving the credit needs of individuals seeking residential mortgage loans in majority-minority census tracts in the Metropolitan Statistical Area encompassing Minneapolis and St. Paul.  For a more detailed discussion of the DOJ’s redlining claim, see our legal alert.

According to the ICBA, the KleinBank action “and similar actions directly attack the community banking model, in which hometown financial institutions serve their local communities and economies.  Requiring community banks to expand their market presence into neighboring counties would force them to alter their model and sound business practices.”

The DOJ’s focus on redlining is consistent with the fair lending focus of the Conumer Financial Protection Bureau (CFPB), which recently identified redlining as one of its fair lending priorities for 2017. The CFPB, in the Fall 2016 edition of Supervisory Highlights, lists factors it considers when assessing redlining risk and explains how it performs an analysis of redlining risk, such as its use of Home Mortgage Disclosure Act and census data to assess an institution’s lending patterns and its comparison of an institution to peer institutions. These factors, which are described in detail in the Interagency Fair Lending Examination Procedures, include the CRA assessment area and the market area more generally.

- Barbara Mishkin


PLI 22nd Annual Consumer Financial Services Institute – 25 Percent Discount Available

We are pleased to invite you to the 22nd Annual Consumer Financial Services Institute, sponsored by the Practising Law Institute, March 27-28, 2017, in New York City (and by live webcast and groupcast in Atlanta and Philadelphia, Pittsburgh, and Mechanicsburg, Pennsylvania) and on May 4-5, 2017, in Chicago.

This year’s Institute will explore in detail a number of important developments in consumer financial services regulation and litigation. Alan S. Kaplinsky, Practice Leader of Ballard Spahr's Consumer Financial Services Group, is co-chairing the event once again, as he has for the past 21 years. PLI has made a special 25 percent discounted registration fee available to those who register using the link above or below.

The Consumer Financial Protection Bureau (CFPB) continues its active agenda, with the impact of the presidential election to be determined. As was the case last year, the leadoff morning session on the first day will feature a panel discussion titled "The CFPB Speaks," devoted to CFPB developments. The two-hour panel discussion will include three senior CFPB lawyers who are responsible for the most significant regulatory, supervisory, and enforcement activities at the CFPB. Mr. Kaplinsky will moderate the panel by questioning the CFPB panelists. Ballard Spahr's Christopher J. Willis will be part of the Chicago panel and James Kim, a lawyer with the firm who formerly served as a senior CFPB enforcement attorney, will substitute for Mr. Willis in New York City. Mr. Willis or Mr. Kim, joined by another industry lawyer, will provide an industry perspective.

The first day will also include a one-hour panel titled "Federal Regulators Speak: Priorities & Coordination," which will feature representatives of the Office of the Comptroller of the Currency and Federal Trade Commission, who will be joined by a Department of Justice representative at the New York City program.

The Institute will also focus on a variety of other cutting-edge issues and developments, including:

  • Impact of the election on the CFPB, other federal and state agencies
  • Privacy and data security
  • Fair lending
  • Mortgages
  • Emerging payments
  • State regulatory initiatives and developments
  • Class action developments and settlements
  • Debt collection
  • TCPA and FCRA

We hope you can join us for this informative and valuable program. For more information, contact Danielle Cohen at 212.824.5857 or dcohen@pli.edu. A complete description of PLI's 22nd Annual Consumer Financial Services Institute is also available at the link above or below.

PLI Registration – 25 Percent Discount


Did you know?

by Wendy T. Novotne

Colorado Amends MLO and Mortgage Companies Definitions

The Colorado Department of Regulatory Agencies, Division of Real Estate, has amended definitions in the Mortgage Loan Originators and Mortgage Companies Regulation. The following terms will have the same meaning as set forth in federal law (see 12 C.F.R. §1026.2(a) and 12 C.F.R. §1026.4(a)): advertisement, business day, creditor, finance charge, and application. The definition for “MLO Compensation Rule” has been removed.

These provisions are effective March 17, 2017.

Nevada Amends Mortgage Banker Provisions

The Nevada Commissioner of Mortgage Lending has amended several provisions related to mortgage lending including, but not limited to, the following:

  •  The definition for “control person” has been added as follows: “control person” means an executive officer, officer, general partner, partner, managing member, member, director, trustee, or shareholder of a licensee or applicant. The term includes, without limitation, a chief executive officer, president, vice president, chief financial officer, chief operating officer, chief legal officer, controller, or compliance officer or a natural person who holds any similar position.
  • Certain requirements of good faith and fair dealing and record retention requirements have been imposed upon a mortgage banker who acts as a mortgage servicer in certain circumstances.
  • Instead of providing a written notification with specific information, a person who claims an exemption from provisions of chapter 645E of NRS now has the broader burden of demonstrating that the person qualifies for such an exemption.
  • The additional application documentation required by an applicant has been clarified.
  • New application requirements for control persons have been added.
  • The Commissioner will start to annually charge and collect a fee for supervision from each mortgage banker.
  • Criteria for mortgage bankers wanting to maintain electronic records have been established.

These provisions are effective immediately.

Wyoming Adds Consumer Finance License and Supervised Lender License to NMLS

As of January 1, 2017, NMLS started receiving new applications for the Wyoming Sales Finance Company License and the Supervised Lender License. In addition, the Pawnbroker License and the Post Dated Check Casher License will be available on NMLS as well. By February 17, 2017, companies with any of these licenses must submit a license transition request on NMLS by filing a Company Form (MU1) and an Individual Form (MU2) for each control person.

More information can be found here.

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