Loan Defects, Fraud and Misrepresentation Activity Rising in 2018

Multiple mortgage industry publications and reports have noted a spike in the frequency of defects, fraud, and misrepresentation in the information submitted in mortgage loan applications over the first quarter of 2018. These reports come after Fannie Mae released its 2017 Mortgage Fraud Trends report which announced a steep increase in 2nd and 3rd Qtr. 2017 fraud tips and a doubling of fraud tips received in 4th Qtr. 2017 over the 1st Qtr. 2017. Fannie Mae reports that Forgery was the top fraud tip they received followed by Occupancy, ID Theft, Liabilities Fraud with Credit Fraud closing out the top 5. The states identified by Fannie Mae as being those most at risk of fraud are: California Florida New York Texas Illinois New Jersey Pennsylvania Georgia Maryland Washington The Servion Group, a mortgage services provider based in Minnesota, reports in their March 2018 Servion Mortgage Newsletter that they have seen an uptick in the incidence of Occupancy and Undisclosed Debt misrepresentations. The newsletter offers useful tips for educating borrowers about the importance of occupying their new home within 60 days of closing and avoiding taking on any new debt before closing. In addition, it also stresses the importance of educating borrowers about the legal consequences and financial impact such misrepresentations can have on them and their lender/investor. According to the First American Loan Application Defect Index for February 2018, First American reports that although the frequency of defects, fraud and misrepresentation remained the same as in December 2017, the year on year results over January 2018 showed a large increase in the incidence rate of 13.7%. The report highlights... read more

Mortgage Lenders and Servicers Are “Debt Collectors” Under California’s Rosenthal Fair Debt Collection Practices Act

On March 13, 2018, the California Court of Appeal held that the definition of “debt collectors” under California’s Rosenthal Fair Debt Collection Practices Act (Rosenthal Act) includes mortgage servicers and lenders who attempt to collect on a mortgage debt. The Court of Appeal noted there is a split of authority among the many federal district courts that have considered the issue, and there is “a paucity of California authority addressing the question.” A class action plaintiff, Edward Davidson, alleged that he and others had been the victims of harassing and excessive phone calls from Seterus, Inc., a mortgage service company formed by International Business Machines, Inc., in violation of the Rosenthal Act. The defendants demurred to Davidson’s complaint, arguing that neither of them was a “debt collector” who engages in “debt collection” under the Rosenthal Act. The trial court sustained the defendants’ demurrer, concluding that the defendants “are not ‘debt collectors’ because servicing a mortgage is not a form of collecting ‘consumer debts.’ ” On appeal, Davidson contended the trial court erred in determining that mortgage servicers were not “debt collectors” under the Rosenthal Act. Following the general principle that the Rosenthal Act is a civil statute, which was enacted for the protection of the public and should be broadly construed in favor of that protective purpose, the Court of Appeal concluded that mortgage lenders and mortgage servicers are “debt collectors” under the Rosenthal Act. The Court of Appeal further acknowledged that the alleged conduct by Seterus — harassing phone calls at all hours of the day, and threats of negative credit reporting and threats of foreclosure — is... read more

Ninth Circuit Rejects Bank of America’s Dodd-Frank Preemption Argument and Allows Class Action for Violation of California’s Mortgage Escrow Law Requiring Interest Payments to Proceed

The Ninth Circuit Court of Appeals recently ruled that California resident Donald Lusnak can proceed with a proposed class action against Bank of America for its failure to pay interest on mortgage escrow accounts. The Court’s unanimous three judge panel decision rejected Bank of America’s argument that the National Banking Act preempted California’s state escrow law, which was enacted in 1976, is found in section 2954.8(a) of the California Civil Code and requires financial institutions to pay borrowers at least two percent annual interest on the funds held in the borrowers’ escrow accounts. Plaintiff sued Bank of America because it does not pay borrowers any interest on the positive balance in their escrow accounts. The Ninth Circuit’s ruling reversed the district court’s dismissal of the putative class action, which concluded that California’s escrow interest law prevents or significantly interferes with banking powers and therefore is preempted by the National Banking Act that was enacted in 1864 and established a dual banking system. The Ninth Circuit noted that the United States Supreme Court has often ruled on the scope of state authority to regulate national banks and that Congress has enacted legislation to prevent inconsistent intrusive state regulation from impairing the national system The Ninth Circuit explained that Dodd-Frank merely codified the existing preemption standard, which is that state consumer financial law is preempted only if it prevents or significantly interferes with the exercise by the national bank of its powers. The Ninth Circuit examined Dodd-Frank’s requirement in 15 U.S.C. section 1639d(g)(g)(3) that a creditor pay interest to the consumer on the amount held in an escrow account if doing... read more

LBHI Round Three Claims Expected After New York Bankruptcy Court Ruling Concluded in March

On March 8, 2018, U.S. Bankruptcy Court Judge Shelley Chapman held after 22 days of trial that the claims brought by RMBS trustees in Lehman Brother Holdings, Inc.’s (LBHI) bankruptcy were valued at around $2.38 billion, agreeing with LBHI’s estimate, not the trustees’ estimate of $11.4 billion. This is the beginning of round three of claims LBHI will be making against lenders and brokers, which are understood to be much larger than LBHI’s claims relating to its settlements with the GSEs that are now pending before Judge Chapman in New York. Judge Chapman’s 100-page decision, which took six hours to read into the record, rejected the RMBS trustees’ accounting of the claims primarily because the trustees failed to meet their evidentiary burden of establishing the breaches and connecting them to credible evidence. Judge Chapman issued her decision on March 8 following a trial that began in November 2017 and wrapped up in early February 2018. The trial was a Bankruptcy Court-assisted process to evaluate claims against Lehman Brothers for allegedly selling billions of dollars of loans containing misrepresentations that were securitized before its 2008 collapse. Around 70,000 loan files were at-issue in the dispute. The trustees asserted that $8.8 billion of their $11.4 billion estimate consisted of alleged contractual breaches based on alleged misrepresentations borrowers made in their mortgage applications regarding their income, debt and occupancy, or the big four breaches. The trustees asserted an additional $370 million of their claim consisted of alleged breaches related to misrepresentations regarding borrowers’ ratio of debt to income, and other breaches related to additional representations and warranties Lehman Brothers made to the... read more

CFPB Investigation of Zillow

In Zillow’s August 8 earnings call, they announced that the CFPB had concluded their two-year investigation and intends to pursue further action if discussions don’t result in a settlement. At issue are co-marketing agreements between LOs and RE Agents to split Zillow ad costs. CFPB has not commented on the matter and we will continue to monitor the matter and provide updates on future... read more

August HMDA Changes

The CFPB proposed changes to HMDA in April and July which became final August 24. Most importantly, they have temporarily increased the threshold for collecting and reporting data with respect to open-end lines of credit from 100 to 500 for calendar years 2018 and 2019. Other changes include a reporting exception for certain transactions related to New York CEMAs, clarification of transactions excluded as temporary financing, the definition of multifamily dwelling, reporting requirements for home improvement loans secured by mixed-use property, the meaning of Automated Underwriting System, and the meaning of income. Finally, further clarification is provided regarding the collection of Race and Ethnicity Information. We invite you to reach out to us for further detail on any of these... read more

LBHI Litigation Status Update: Court Considers Motions to Dismiss and Transfer Venue

Having now filed both Motions to Dismiss and Motions to Transfer Venue, most of the litigants are now waiting for LBHI to file its Oppositions. The next two Phases of the LBHI litigation will begin upon completion of the hearings on this venue transfer motion and the fully briefed motion to dismiss. Phase II will begin once the Court rules or postpones the disposition of the Phase I motions to dismiss and transfer. The parties have thirty days after the Court rules or postpones the motions, to submit another scheduling order. In this second Phase, the court will set an answer deadline for the remaining parties who will then proceed to discovery with LBHI. Thereafter, Phase III will then commence on the date set forth in the Phase II Scheduling Order as will be agreed to by the parties. It is contemplated that Phase III will include dispositive motions and trial. Although AMLG representing the largest bloc of defendants in these LBHI suits, it has been and continues to be working with the rest of the joint defense counsel to research the best approach to possible handle the denial of the Phase I motions to dismiss and transfer venue if in fact that occurs. The choice depends on whether the Court a) denies the motion, b) submits a report and recommendation to the U.S. District Court or refuses to do so on a denial, and c) what the U.S. District Court does with the recommendation or request for one. The idea is that if the US Bankruptcy Court Judge denies the motion on subject matter jurisdiction, which is a... read more

District Judge in Minnesota sets Initial Summary Judgment Briefing Schedule for the In Re: RFC and ResCap Liquidating Trust Litigation

United States District Judge Susan Nelson set an initial briefing schedule for summary judgment motions in the In Re: RFC and ResCap Liquidating Trust Litigation matter at the August 24, 2017 Case Management Conference. Per the order, all “First Wave” (meaning the “First Wave” of cases filed by the Trust) common-issue summary judgment motions and motions pertaining to the exclusion of certain evidence at trial are to be filed no later than March 16, 2018 and will be heard by the court on June 14, 2018. Judge Nelson also extended the deadline for the completion of expert discovery in “First Wave” cases to January 31, 2018. Judge Nelson also set an initial trial date in one of the matters for October 1, 2018 should any cases survive summary judgment. RFC and the ResCap Liquidating Trust filed this “First Wave” of cases in December 2013, which means that some lenders will have litigated this matter for nearly 5 years before reaching any kind of conclusion. This briefing schedule is significant for any lenders facing pre-litigation demands from the ResCap Liquidating Trust as it means we likely will not see a ruling from the court on whether ResCap’s claims are time-barred until Summer 2018-almost one year from now. If you have received a pre-litigation demand from the ResCap Liquidating Trust and would like to discuss how this most recent development could affect your company, please feel free to contact Jack... read more

Eastern District of Missouri Sides with Correspondent Lenders, in part, in matter with CitiMortgage, Inc.

A recent ruling out of the Eastern District of Missouri on cross-summary judgment motions filed by CitiMortgage, Inc. (“Citi”) and Equity Bank, N.A. gave a partial win to correspondent lenders in defending against repurchase demands from Citi. In a decision that broke from some of the recent precedent out of the Eastern District, Magistrate Judge Shirley Padmore Mensah agreed with an argument previously set forth by the American Mortgage Law Group in prior motions for summary judgment against Citi-that Citi could not, per the terms of the entire Correspondent Agreement Form 200, pursue any “repurchase” demands for loans that had been liquidated prior to Citi issuing a demand. The standard definition of the word, “repurchase”-“to buy (something) again”-formed the basis of this decision because if a loan has been liquidated, there is no loan for a correspondent lender to “repurchase” pursuant to Citi’s demand. This decision affected 6 of the 12 loans at-issue in the litigation. American Mortgage Law Group’s local counsel in Missouri was involved in this decision. If you would like learn more about how this opinion could affect your company in any dispute with Citi, please feel free to contact Jack Valinoti or Tracy... read more

Lender Concerns as Hurricane Irma Approaches

With the Atlantic’s most powerful hurricane ever approaching the Florida coast, lenders may be wondering how to handle loans in their pipeline with closings scheduled over the next few days. No lender wants to close a loan only to have the secured property subsequently destroyed with no insurance to make them whole. One factor to consider in the “to fund or not to fund” decision is the actual terms, conditions, and stipulations of the loan commitment. Those conditions probably have language regarding home insurance which, as Irma gets nearer, may be impossible to obtain. Florida, for example, allows insurers to suspend the binding of policies due to approaching hurricanes. The FAR/BAR Real Estate Sales Contract contains language regarding closing extensions where insurance is unavailable due to these situations. Additionally, it essentially puts the risk of loss on the seller for damage to the property. If the lender refuses to fund and the property is destroyed, for lender liability to arise, the seller would first have to establish a case against the borrower for specific performance and then the borrower would have to establish the lender’s duty to fund. The closer Irma gets, the less risk to the lender of not funding so it’s all about timing. As you weigh the risks involved, AMLG is here to help you make the best... read more

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