On July 15, the U.S. District Court for the Central District of California dismissed a relator real estate agent’s suit against a group of lenders the relator alleged submitted claims for FHA insurance benefits to HUD based on false certifications of compliance with the National Housing Act. U.S. ex rel Hastings v. Wells Fargo Bank, No. 12-3624, Order (C.D. Cal. Jul. 15, 2014). The relator alleged on behalf of the U.S. government that loans where borrowers received assistance from seller-funded down payment assistance programs, such as the Nehemiah Program, did not satisfy requirements for gift funds, and as a result the lenders had falsely certified compliance with the National Housing Act’s three-percent down payment requirement when seeking FHA insurance for such loans. The government declined to intervene in the case. The court agreed with the lenders and held that the complaint could not survive the False Claims Act’s public disclosure bar—a jurisdictional bar against claims predicated on allegations already in the public domain. The court explained that the public disclosure standard is met if there were either (i) public allegations of fraud “substantially similar” to the one described in the False Claims Act complaint, or (ii) enough information publicly disclosed regarding the allegedly fraudulent transactions to put the government on notice of a potential claim. Here, the court determined that claims related to seller-funded down payment assistance programs were part of a “robust public debate” well prior to the time the complaint was filed in this case, and that the debate was sufficient to put the government on notice of the alleged conduct. The court also determined that the relator was not an “original source” of the public disclosures and as such could not overcome the public disclosure bar. Because the court concluded that amendment would be futile, the court dismissed the suit with prejudice. BuckleySandler represented one of the lenders in this case.
Ninth Circuit Holds Plaintiffs Not Required To Plead Tender Or Ability To Tender To Support TILA Rescission Claim
On July 16, the U.S. Court of Appeals for the Ninth Circuit held that an allegation of tender or ability to tender is not required to support a TILA rescission claim. Merritt v. Countrywide Fin. Corp., No. 17678, 2014 WL 3451299 (9th Cir. Jul. 16, 2014). In this case, two borrowers filed an action against their mortgage lender more than three years after origination of the loan and a concurrent home equity line of credit, claiming the lender failed to provide completed disclosures. The district court dismissed the borrowers’ claim for rescission under TILA because the borrowers did not tender the value of their HELOC to the lender before filing suit, and dismissed their RESPA Section 8 claims as time-barred.
On appeal, the court criticized the district court’s application of the Ninth Circuit’s holding in Yamamoto v. Bank of New York, 329 F.3d 1167 (9th Cir. 2003) that courts may at the summary judgment stage require an obligor to provide evidence of ability to tender. Instead, the appellate court held that borrowers can state a TILA rescission claim without pleading tender, or that they have the ability to tender the value of their loan. The court further held that a district court may only require tender before rescission at the summary judgment stage, and only on a case-by-case basis once the creditor has established a potentially viable defense. The Ninth Circuit also applied the equitable tolling doctrine to suspend the one-year limitations period applicable to the borrower’s RESPA claims and remanded to the district court the question of whether the borrowers had a reasonable opportunity to discover the violations earlier. The court declined to address two “complex” issues of first impression: (i) whether markups for services provided by a third party are actionable under RESPA § 8(b); and (ii) whether an inflated appraisal qualifies as a “thing of value” under RESPA § 8(a).
On July 10, the U.S. Court of Appeals for the Fourth Circuit affirmed a district court’s holding that the fees charged by a mortgage company jointly owned by a national bank and a real estate firm did not violate Maryland’s Finder’s Fee Act. Petry v. Prosperity Mortg. Co., No. 13-1869, 2014 WL 3361828 (4th Cir. Jul. 10, 2014). On behalf of similarly situated borrowers, two borrowers sued the bank, the real estate firm, and the mortgage company, claiming that the mortgage company operated as a broker that helped borrowers obtain mortgage loans from the bank. The borrowers alleged that all the fees that the mortgage company charged at closing were “finder’s fees” within the meaning of the Maryland Finder’s Fee Act, and, as such, the company—aided and abetted by the bank and the real estate firm—violated the Finder’s Fee Act (i) by charging finder’s fees in transactions in which it was both the mortgage broker and the lender and (ii) by charging finder’s fees without a separate written agreement providing for them.
After certifying the class the district court advised the borrowers that the fees did not qualify as finder’s fees under state law unless they had been inflated so that the overcharge could disguise the referral fee. When the borrowers acknowledged they could not prove the fees were inflated, the district court entered judgment for the defendants. On appeal, the court agreed with the district court’s conclusion as to the fees at issue, but held for the defendants on different grounds. The appeals court determined that because the mortgage company was identified as the lender in the documents executed at closing, it was not a “mortgage broker” under Finder’s Fee Act and therefore was not subject to the Act’s provisions. As such, the court further determined it need not decide whether the bank and real estate firm could be liable for the mortgage company’s alleged violations under theories of aiding and abetting.
On July 10, the U.S. District Court for the Southern District of Florida dismissed with prejudice the Fair Housing Act claims in three suits filed by the City of Miami against mortgage lenders. City of Miami v. Bank of Am., No. 13-cv-24506, 2014 WL 3362348 (S.D. Fla. July 9, 2014); City of Miami v. Wells Fargo & Co., No. 13-cv-24508 (S.D. Fla. July 9, 2014); City of Miami v. Citigroup Inc., No. 13-cv-24510 (S.D. Fla. July 9, 2014). The city alleged the lenders engaged in predatory lending in minority communities, that the allegedly predatory loans were more likely to result in foreclosure, and that foreclosures allegedly caused by those practices diminished the city’s tax base and increased the costs of providing municipal services.
The court held that under the U.S. Supreme Court’s recent decision in Lexmark Intern., Inc. v. Static Control Components, Inc., 134 S. Ct. 1377, 1387 (2014), purely economic injury is outside the zone of interest of the Fair Housing Act. The court explained that the “policy behind the Fair Housing Act (FHA) emphasizes the prevention of discrimination in the provision of housing” while the city’s alleged “economic injury from the reduction in tax revenue . . . [and] expenditures” in contrast is not “affected by a racial interest.” Thus, the court held that the city’s claim fell outside the FHA’s zone of interest and the city lacked standing to sue. The court explained that the recent decision in City of Los Angeles v. Bank of America, which allowed that city’s FHA claim to proceed, was not persuasive because, unlike in the Ninth Circuit, controlling Eleventh Circuit precedent requires the application of the zone of interest to FHA claims.
The court also held that the city could not establish proximate causation because it did not allege facts that isolated the lenders’ practices as the cause of any alleged lending disparity, citing the independent actions of a multitude of non-parties during the financial crisis that “break the causal chain.” The court rejected the city’s statistical correlations as insufficient to support a causation claim. Finally, the court held that the city’s FHA claims were time barred and that the continuing violation doctrine did not apply to extend the time limit. For further discussion of how courts should apply Lexmark to these types of municipal FHA cases the way the court did in this case, see the article published recently by BuckleySandler attorneys Valerie Hletko and Ann Wiles.
Pennsylvania Federal Court Holds Promissory Note Transfer Equivalent To A Mortgage Assignment And Must Be Recorded
On July 1, the U.S. District Court for the Eastern District of Pennsylvania held that in Pennsylvania the assignment or transfer of a promissory note secured by a mortgage on real estate is equivalent to a mortgage assignment and, as such, must be recorded. Montgomery County, Penn. Recorder of Deeds v. Merscorp, Inc., No. 11-6968, 2014 WL 2957494 (E.D. Pa. July 1, 2014). A Pennsylvania county recorder of deeds filed a putative class action against an electronic mortgage registry claiming the registry violated state law and unjustly enriched itself by failing to record conveyances of interests in real property. The recorder challenged the registry’s practice of serving as the mortgagee of record and as the nominee for a lender, which obviates the need to record the transfer of a note each time it is sold. The court held that although state law recognizes a clear distinction between a promissory note and a mortgage and that a promissory note generally may be transferred without recording, a promissory note still falls within the meaning of a “conveyance” under state law, and therefore must be recorded. The court further explained that notes and mortgages are legally inter-woven, and “whether effectuated via a writing or a mere ‘transfer of possession’ of a note, the result is the same by operation of law”—an interest in the property has been assigned and conveyed and therefore must be recorded. The court acknowledged evidence that the registry may have been unjustly enriched by avoiding recording fees on transfers the court now determined were required to be recorded, but declined to make that determination as a matter of law, let alone a determination as to the amount of damages. The court left those issues to be determined at trial. The decision is likely to be appealed to the Third Circuit.
Supreme Court Holds President May Make Recess Appointments During Intra-Session Recesses Of Sufficient Length
On June 26, the Supreme Court rejected the federal government’s challenge to a January 2013 decision by the D.C. Circuit that appointments to the National Labor Relations Board (NLRB) made by President Obama in January 2012 during a purported Senate recess were unconstitutional. NLRB V. Noel Canning, No. 12-1281, 2014 WL 2882090 (U.S. Jun. 26, 2014). A five-member majority of the Court held that Presidents are permitted to exercise authority under the Recess Appointments Clause to fill a vacancy during both intra-session and inter-session recesses of sufficient length, and that such appointments may fill vacancies that arose prior to or during the recess.
The Court determined that the phrase “recess of the Senate” is ambiguous, and that based on the functional definition derived from the historical practice of past presidents and the Senate, it is meant to cover both types of recesses. Further, the court held that although the Clause does not indicate how long a recess must be before a president may act, historical practice suggests that a recess less than 10 days is presumptively too short. The Court did not foreclose the possibility, however, that appointments during recesses of less than 10 days may be permissible in unusual circumstances. The Court also validated the Senate’s practice of using pro forma sessions to avoid recess appointments, holding the Senate is in session when it says it is, provided it retains capacity to conduct business. Because the Senate was in session during its periodic pro forma sessions, and because the recess appointments at issue were made during a three-day recess between such sessions, the appointments were invalid.
A minority of the Court concurred in the judgment, but endorsed a narrower reading of the President’s authority to make recess appointments and the Senate’s ability to avoid triggering the President’s recess-appointment power. Writing for that minority, Justice Scalia explained that the plain constitutional text limits the President’s recess appointment power to filling vacancies that first arise during the recess. The minority reading of the Clause also limits the President’s recess appointment power to recesses between legislative sessions, and not intra-session ones. CFPB Director Richard Cordray was appointed in the same manner and on the same day as the NLRB members whose appointments were at issue in this case, but was subsequently re-nominated and confirmed for the position. He later ratified CFPB actions taken during the period he served as a recess appointee.
On June 23, the U.S. Supreme Court rejected a challenge to the long-standing “fraud-on-the-market” theory, on which securities class actions often are based. Halliburton v. Erica P. John Fund Inc., No. 13-317, 2014 WL 2807181 (Jun. 23, 2014). Halliburton petitioned the Court after an appeals court relied on the theory to affirm class certification in a securities suit against the company, even after the appeals court acknowledged that no company misrepresentation affected its stock price. The theory at issue derives from the Court’s holding in Basic Inc. v. Levinson, 485 U.S. 224 (1988) that a putative class of investors should not be required to prove that each individual actually relied in common on a misrepresentation in order to obtain class certification and prevail on the merits. The petitioner argued that empirical evidence no longer supports the economic theory underlying the Court’s holding in Basic allowing putative class members to invoke a classwide presumption of reliance based on the concept that all investors relied on the misrepresentations when they purchased stock at a price distorted by those misrepresentations. The Court declined to upset the precedent set in Basic, holding that the petitioner failed to show a “special justification” for overruling presumption of reliance because petitioner had failed to establish a fundamental shift in economic theory and that Basic’s presumption is not inconsistent with more recent rulings from the Court. The Court also declined to require plaintiffs to prove price impact directly at the class certification stage, but agreed with the petitioner that a defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.
On June 24, the U.S. Court of Appeals for the Second Circuit held that a borrower failed to state a claim under RESPA because her purported qualified written requests (QWRs) did not trigger the servicer’s RESPA duties. Roth v. CitiMortgage, Inc., No. 13-3839, 2014 WL 2853549 (2d Cir. Jun 24, 2014). A borrower who defaulted on her second residential mortgage sued the servicer of the loan after the servicer threatened to take legal action. The borrower alleged that the servicer violated RESPA by failing to respond to three letters the borrower characterized as QWRs. The court agreed with a Tenth Circuit holding that Regulation X permits servicers to designate an exclusive address for QWRs, and held that the borrower’s letters did not trigger the servicer’s RESPA duties because they were not sent to the QWR address designated by the servicer and provided on the borrower’s mortgage statements. The court further explained that servicers are not prohibited from changing a QWR address. For the same reasons, the court rejected the borrower’s claim that the alleged inadequate QWR address notice violated state prohibitions on unfair and deceptive practices. Finally, the court held that the borrower’s FDCPA claim failed because the servicer did not acquire the debt after it was in default and therefore the servicer did not qualify as a debt collector subject to the FDCPA.
Michigan Supreme Court Holds Forwarding Companies Are Collection Agencies Subject To Licensing Rules
On June 13, the Michigan Supreme Court held that forwarding companies are collection agencies under state law and are subject to state licensing requirements. Badeen v. Par, Inc., No. 147150, 2014 WL 2686068 (Mich. Jun. 13, 2014). In this case, a state-licensed debt collection agency and an individual state-licensed collection agency manager filed a putative class action against a group of forwarding companies—companies that contract with creditors to allocate a collection to a collection agent in the appropriate location but do not contact the debtors themselves—alleging the companies are actually collection agencies and were operating in the state without first obtaining a collection agency license. The court explained that under state law, a collection agency is “a person directly or indirectly engaged in soliciting a claim for collection or collecting or attempting to collect a claim owed or due another or repossessing or attempting to repossess a thing of value owed or due another arising out of an expressed or implied agreement.” The court determined that under the plain meaning of the statute, the phrase “soliciting a claim for collection” means asking a creditor for any unpaid debts that the collection agency may pursue by allocating them to local collection agents, which the forwarding companies did by contracting with creditors. The court rejected the forwarding companies’ argument that they do not satisfy the definition because soliciting a claim for collection refers only to asking the debtor to pay his or her debt, which the forwarding companies did not do. The court determined it need not reach the issue of whether the forwarding companies indirectly collect or attempt to collect debts when they contract with a local collection agency. The court remanded for trial court consideration a separate issue of whether the forwarding companies satisfy a statutory exception to the licensing requirements applicable to collection agencies whose collection activities in the state are limited to interstate communications.
On June 16, the U.S. Supreme Court consolidated and agreed to hear two related cases regarding the Department of Labor’s (DOL) 2010 interpretation of its regulations under the Fair Labor Standards Act that mortgage loan officers are not exempt from minimum wage and overtime pay requirements. Perez v. Mortgage Bankers Assoc., No. 13-1041. In July 2013, the D.C. Circuit instructed the district court to vacate the DOL’s 2010 guidance, holding that the guidance significantly revised an earlier contrary agency interpretation of DOL regulations and, as such, required notice and comment rulemaking. The Supreme Court will address the question of “[w]hether a federal agency must engage in notice-and-comment rulemaking before it can significantly alter an interpretive rule that articulates an interpretation of an agency regulation.” The case will be argued and decided during the Court’s next term, which begins in October 2014 and ends June 2015.
On June 16, the U.S. Supreme Court vacated a Tenth Circuit holding that RMBS claims filed by the NCUA were timely and instructed the circuit court to reconsider that holding in light of the Supreme Court’s recent decision in an environmental case. National Credit Union Admin. Bd. v. Nomura Home Equity Loan, Inc., No. 13-576, 2014 WL 2675836 (U.S. Jun. 16, 2014). On June 9, the Court delivered its opinion in CTS Corp. v. Waldburger, an environmental case that addressed the difference between statutes of limitations and statutes of repose, which are both used to limit the temporal extent or duration of tort liability. In Waldburger, the Supreme Court held that under the environmental statute at issue, Congress intended to preempt state statutes of limitations but not statutes of repose. In light of that decision, the Court asked the Tenth Circuit to reconsider its holding that the federal extender statute supplants all other limitations frameworks, including both the one-year statute of limitations and the three-year statute of repose, included in the limitations provision of the Securities Act of 1933 and the similar state laws at issue in the case.
Eighth Circuit Holds Bank That Complied With Reasonable Security Procedures Not Responsible For Loss Of Funds From Fraudulent Payment
On June 11, the U.S. Court of Appeals for the Eighth Circuit held that under the Uniform Commercial Code a bank that complied with commercially reasonable security measures was not responsible for a customer’s loss resulting from a fraudulent payment. Choice Escrow & Land Title, LLC v. BancorpSouth Bank, No. 13-1879, 2014 WL 2598764 (8th Cir. Jun. 11, 2014). The customer sued the bank claiming that a $440,000 wire transfer from its account through the bank’s internet wire transfer system was fraudulently initiated by a third-party. The court explained that Article 4A of the Uniform Commercial Code permits a bank to take steps to protect itself from liability by implementing commercially reasonable security procedures, and if the bank complies with these procedures in good faith and in accordance with the customer’s instructions, the customer bears the risk of loss from a fraudulent payment order. The parties agreed that the bank complied with its security procedures in accepting the payment order that resulted in the loss for the customer, but disputed whether (i) the bank’s security procedures were commercially reasonable, (ii) the bank accepted the payment order in good faith, and (iii) the bank accepted the payment order in compliance with the customer’s written instructions. The court concluded that the bank’s security procedures, which included password protection, daily transfer limits, device authentication, and dual control, were commercially reasonable because the bank followed 2005 FFIEC guidelines and further enhanced its security to address threats not considered by that potentially outdated guidance. Moreover, the court held that the customer assumed the risk of failure of security procedures by declining some of those procedures. The court also held that in promptly executing a payment order that had cleared its commercially reasonable security procedures, and absent any independent reason to suspect the payment was fraudulent, the bank acted in good faith in processing the payment. Finally, the court determined that an inquiry from the customer as to whether it would be possible for the bank to stop foreign wire transfers did not constitute an instruction to the bank, and therefore the bank did not violate any written instruction from the customer. Based on these holdings, the court concluded that, under the UCC, the loss of funds from the customer’s account fall on the customer and not the bank.
On June 18, the U.S. Attorney for the District of Maryland announced that a federal judge ordered a bank to forfeit $560,000 in drug proceeds laundered through the bank on which the bank failed to file currency transaction reports. The DOJ claimed that a member of a drug trafficking organization asked a teller at a Maryland bank branch to convert the proceeds from the sale of illegal drugs from small denomination bills to $100 bills, and paid the teller a one percent fee for each transaction for making the exchange without filing a currency transaction report. The government filed a civil action in February 2014 seeking forfeiture and alleging that the money was subject to forfeiture because the bank failed to file currency transactions reports on bank transactions in amounts in excess of $10,000, as required by law. The teller admitted that on each occasion she converted the bills without filing or causing anyone else at the bank to file a currency transaction report. She was sentenced to a month in prison followed by eight months of home detention for failing to file currency transaction reports on suspected drug proceeds, and must perform community service and forfeit the $5,000 she was paid in the scheme.
Wisconsin Federal Court Holds Dodd-Frank Whistleblower Protections Not Available For Reported Violations Of Banking Laws
On June 4, the U.S. District Court for the Eastern District of Wisconsin held that a former bank executive cannot pursue a claim that, when the bank terminated his employment, it violated the whistleblower-protection provisions of the Dodd-Frank Act because those protections apply only to individuals who report violations of securities laws and not to those who report alleged violations of other laws, such as banking laws. Zillges v. Kenney Bank & Trust, No. 13-1287, 2014 WL 2515403 (E.D. Wis. June 4, 2014). A former bank CEO sued the bank and certain affiliated companies and individuals, and claimed that they conspired to terminate his employment and prevent him from earning stock options after he observed conduct that he believed violated federal banking laws and reported the allegedly illegal conduct to the bank’s board of directors, the FDIC, and the FTC. The court held that in order to qualify as a whistleblower under Dodd-Frank, the disclosure must relate to a violation of securities laws. Accordingly, because the whistleblower disclosed alleged violations of only banking laws, the whistleblower provisions of Dodd-Frank did not apply. In doing so, the court explicitly side-stepped the question of whether a person is a whistleblower subject to Dodd-Frank protections if he or she makes a protected disclosure to someone other than the SEC. The court acknowledged the disagreement on that issue, which involves the interplay between the statutory definition of “whistleblower” and the protected actions listed in the statute, explaining that although the statute requires a person to provide information to the SEC in order to qualify as a whistleblower, some of the protected activities do not necessarily involve disclosures to the SEC. To date, some courts have reasoned that Congress could not have intended this result and have concluded that a person who makes a disclosure that falls within the protected activities, whether the disclosure is made to the SEC or not, is a “whistleblower” within the meaning of Dodd-Frank, while other courts have concluded that a person is a “whistleblower” only if the person makes the disclosure to the SEC.
On June 11, the Ohio Supreme Court held that single-installment, interest bearing loans are permitted under the Mortgage Loan Act (MLA), and that the Short-Term Lender Act (STLA) does not prohibit registered MLA lenders from making such loans. Ohio Neighborhood Finance, Inc. v. Scott, 2013-0103, 2014 WL 2609830 (Ohio Jun. 11, 2014). In this case, an MLA-registered lender sued a borrower seeking to recover the unpaid principal balance on a single-installment loan, as well as interest and fees. The appellate court held that the MLA does not authorize payday-like single-installment loans and that, by enacting the STLA, the General Assembly intended to prohibit all loans of short duration outside the confines of the STLA. The Ohio Supreme Court reversed, holding that the MLA’s definition of “interest-bearing loan” does not require that such loans be multiple installment loans, and that here the loan agreement expressed the debt as the principal amount, and the interest was computed based upon the principal balance outstanding daily, in compliance with the MLA. The court also held that, although the STLA would not permit the loan at issue here because its terms would violate the STLA’s restrictions on the loan term, interest, and fees, the lender was not registered under the STLA, and nothing in the STLA limits the authority of MLA registrants to make loans permitted by the MLA.