Mortgage Banking Update

DOJ Settles Action Alleging Bank Discriminated Against Disability Income Recipients

The U.S. Department of Justice (DOJ) recently entered into a consent order with Evolve Bank & Trust to settle charges that the bank discriminated against mortgage loan applicants on the basis of disability and receipt of public assistance in violation of the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA).

The DOJ's complaint alleged that the bank's policy was to require some mortgage applicants with a disability to document the continuation of Social Security Disability Insurance (SSDI) or other disability income by providing a doctor's letter or other information about the borrower's disability. The DOJ claimed that, in some cases, the bank denied the applications of borrowers who refused or were unable to provide such a letter or other information while not requiring borrowers with wage or salary income to document the continuation of income. The DOJ brought the action, which was the result of a referral from the Federal Reserve's Board of Governors, despite the complaint's apparent acknowledgment that the bank discontinued the challenged policy in March 2013.

The complaint alleged that the bank's written policy stated that it used industry standard automated underwriting systems, including those provided by Fannie Mae. According to the DOJ, while Fannie Mae's 2010 and 2011 selling guides required lenders to document the likelihood of continued receipt of income for at least three years, the guides indicated that lenders could conclude that SSDI income was likely to continue and were not expected to require additional documentation from applicants because SSDI benefits did not have defined expiration dates.

The FHA prohibits lenders engaged in "residential real estate-related transactions" from discriminating against any person "in making available such a transaction" because of "handicap." The ECOA prohibits lenders from discriminating against an applicant "with respect to any aspect of a credit transaction…because all or part of the applicant's income derives from any public assistance program." The complaint alleged that SSDI income constituted a "public assistance program" for purposes of the ECOA prohibition, and that by requiring additional documentation from mortgage applicants with SSDI or other disability income, the bank engaged in a pattern or practice of discrimination in violation of the FHA and ECOA prohibitions.

The consent order requires the bank to establish a settlement fund of $86,000 to compensate 50 borrowers or mortgage loan applicants identified by the DOJ as having been affected by the bank's disability income policy. Any funds not distributed to borrowers or applicants must "be distributed to one or more organizations that provide services including credit and housing counseling, legal representation of borrowers seeking to obtain a loan modification or to prevent foreclosure, financial literary, or other related programs." In addition, the bank must adopt and publish new policies regarding proper documentation of SSDI and other disability income when underwriting mortgage loans and conduct training of its employees involved in mortgage lending to ensure mortgage applicants with disability income are treated in a nondiscriminatory manner consistent with FHA and ECOA requirements.

The ECOA prohibition regarding discrimination based on an applicant's receipt of public assistance income was the subject of a Consumer Financial Protection Bureau (CFPB) bulletin. The bulletin discusses the fair lending concerns that can arise from requirements imposed by a creditor on mortgage loan applicants receiving SSDI income and other issues relevant to the consideration of applicants' SSDI income. While the DOJ action and the CFPB bulletin are focused on mortgage lending, it is important to note that the ECOA prohibition applies to both mortgage and non-mortgage credit.

- Alan S. Kaplinsky , Richard J. Andreano, Jr. , John L. Culhane, Jr., Mark J. Furletti, and Christopher J. Willis

Nevada Supreme Court Opinion Impacts HOA Foreclosure Litigation

The Nevada Supreme Court held in SFR Investments Pool 1, LLC. v. U.S. Bank, N.A. that a non-judicial foreclosure by an HOA generally extinguishes a first mortgage interest, however, it left several unresolved issues. For example, it did not address whether an HOA foreclosure is invalid if the first lienholder attempts to pay off the HOA lien, but the HOA refuses either to provide the amount of the lien or to allow the lender to tender payment. SFR also did not address whether an HOA foreclosure is invalid if the sale is not properly noticed by the HOA. Additionally, SFR did not address whether an HOA foreclosure is void if the sale price is grossly inadequate. Substantial litigation has ensued since the 2014 ruling over these and other unanswered questions.

The Court recently issued an opinion impacting HOA foreclosure litigation in Nevada by addressing some of the unresolved issues in SFR.

In Shadow Wood Homeowners Association, Inc.; and Gogo Way Trust v. New York Community Bancorp, Inc., the lender foreclosed on its first deed of trust but did not tender the nine months of superpriority assessments to the HOA. The Lender also failed to pay ongoing HOA assessments after it became the owner of the property. The HOA later foreclosed upon its HOA lien, ostensibly extinguishing the Lender’s rights to the property. The Court addressed four primary issues:

• Whether the HOA was entitled only to nine months of assessments and whether it acted unfairly and oppressively by insisting on more than that amount to cancel the sale
• Whether the “conclusive” presumptions provided by statute prevented the Lender from invalidating the HOA sale
• Whether the sale price was grossly inadequate, and
• Whether the purchaser of the property via the HOA’s foreclosure qualified for bona fide purchaser status.

Addressing these issues, the Court found each issue to be fact driven and could not resolve them as a matter of law—at least at the procedural stage from which appeal was taken in Shadow Wood.

Regarding whether an HOA is entitled only to a nine-month “super-priority” of assessments, the Court found the HOA was entitled to the nine-month super-priority lien as well as HOA dues from the time the lender foreclosed on the property (and became the property owner) to the date of the HOA foreclosure sale. The Court declined to address what fees and costs an HOA can recover because of an undeveloped factual record, but the Court alluded that some fees and costs may be recouped.

In a related argument and finding on whether the HOA acted unfairly and oppressively by providing inconsistent demands to the lender, the Court stressed that if the conduct rose to the level of misrepresentations and nondisclosures that prevented the lender from curing the default it might support setting aside the sale. However, such conduct must be weighed against a lender’s inaction (i.e. failure to attend the sale, failure to request arbitration to determine the amount owed, or failure to take action to enjoin the sale).

On the “conclusive” presumption issue, the Court held that district courts have power to grant equitable relief from a defective foreclosure sale when appropriate despite NRS 116.31166's "conclusive" recital language.

Addressing gross inadequacy of price, the Court found that it was not established as a matter of law in this case, and the Court did not hold that the argument was unavailable to lenders. In particular, the Court found that the property sold at the HOA foreclosure sale for 23 percent of the price paid at the lender's foreclosure sale. The Court cited the Restatement (Third) of Prop.: Mortgages § 8.3 cmt. b (1997) noting that a court is warranted in setting aside the sale when the price is less than 20 percent of fair market value and absent other defects is usually not warranted in invalidating a sale that yields in excess of that amount.

Finally, addressing whether a third party who buys property out of an HOA foreclosure sale can be a bona fide purchaser, the Court recited general legal principles governing bona fide purchaser status and emphasized that bona fide purchaser status can be crucial in determining whether to set aside a sale. Thus, factors such as the purchaser’s knowledge of the pre-sale dispute between the lender and the HOA and the potential harm to the purchaser must be taken into account when deciding whether to set aside the sale. The Court stated that a low sale price alone is not sufficient to put the purchaser on notice that something is amiss with the sale.

Given the procedural context of, and the issues addressed in Shadow Wood, it appears that litigants to these disputes must more fully develop factual records, perhaps even by way of trial, before being able to resolve HOA foreclosure related litigation.

- Ann Marie Hansen, Abran Vigil, and Joel E. Tasca

Florida District Court Holds That Successor and Assign of Original Lender Has Standing to Enforce Jury Trial Waiver While Loan Servicer Does Not

While California does not permit pre-dispute jury trial waivers, jury trial waivers are enforceable in many states. The U.S. District Court for the Southern District of Florida recently held in Thompson v. Caliber Home Loans, Inc., that the successor and assign of the original lender has standing to enforce a jury trial waiver contained in a mortgage while the loan servicer of that mortgage does not have standing to invoke the jury trial waiver.

In Thompson, the plaintiff obtained a loan and executed a mortgage containing a jury trial waiver in which plaintiff waived "any right to a trial by jury in any action, proceeding, claim or counterclaim, whether in contract or tort, at law or in equity, arising out of or in a way related to" the mortgage or note. The plaintiff filed a complaint against the current holder of the mortgage (Successor and Assign Defendant) and the loan servicer for the mortgage (the Loan Servicer Defendant) alleging that defendants engaged in illegal debt collection practices in violation of the Florida Consumer Collection Practices Act (FCCPA), the federal Fair Debt Collection Practices Act (FDCPA), and the Telephone Consumer Protection Act (TCPA). The complaint contained a jury trial demand. Each defendant filed a motion to strike the plaintiff's jury trial demand.

Applying contract principles, the Court separately considered whether each defendant had standing to invoke the jury trial waiver in plaintiff's mortgage. The Court held that the Loan Servicer Defendant did not have standing to enforce the provision because it was not a party to the mortgage. In contrast, the Court concluded that the Successor and Assign Defendant was entitled to enforce the jury trial waiver because the mortgage expressly provided that the covenants and agreements contained therein inured to the benefit of the original lender's successors and assigns.

Finally, the Court granted the plaintiff's request to try this case with an advisory jury under Federal Rule of Civil Procedure 39(c) and ruled that the plaintiff's claims against both defendants would be tried together. At trial, the jury will provide a binding verdict as to all claims against the Loan Servicer Defendant and is to provide an advisory opinion to the Court as to all claims against the Successor and Assign Defendant.

- Alan S. Petlak, Christopher N. Tomlin, and Jenny N. Perkins

New Jersey Enacts Provisions Concerning the Recording of Mortgages and Foreclosure of Mortgages

The state of New Jersey has enacted provisions related to the recording of mortgages and foreclosure of mortgages. A new provision permits only the established holder of a mortgage to take action to foreclosure on a mortgage. The “established holder of a mortgage” is defined as the person or entity who is:

• The record holder of the mortgage as established by the latest record of assignment or by the original mortgage recording in the records of the county clerk or the register of deeds and mortgages or
• Found to be the holder of the mortgage in a civil action joining as defendants the record holder of the mortgage, the mortgagor, and any other person known to have an interest in the mortgage

In addition, the definition of “mortgagee” has been amended to mean: the holder of the mortgage reflected in the latest record filed with the county recording office. If the entity that is recorded as the holder of the mortgage is no longer in existence, “mortgagee” shall mean the entity that was authorized to receive the latest payment on the mortgage.

A new provision requires the mortgage servicer to advise, in writing, each mortgagor whose mortgage the mortgage servicer is servicing of the name, address, and telephone number of the mortgage servicer. A foreclosure action cannot be based upon a payment made to the wrong mortgage servicer due to fraud or misinformation.

These provisions are effective on February 18, 2016.

- Wendy Tran