On August 30, the New York Department of Financial Services extended through September 30, 2013 a temporary order directing New York lenders to disregard the mortgage insurance premium changes effectuated by HUD Mortgagee Letter 2013-04 when calculating APR and fully-indexed rates for purposes of determining whether a loan is a “subprime home loan” under the New York Banking Law.
On October 17, Nevada Attorney General (AG) Catherine Cortez Masto announced that she had finalized an agreement with a financial institution that requires the financial institution to pay $11.5 million, without admitting fault, to resolve the AG’s investigation into the financial institution’s role in purchasing and securitization of subprime, Alt-A, and payment option adjustable rate mortgages. The investigation focused on whether certain lenders had deceived borrowers about the actual interest rate and payments on their loans, and had originated loans with multiple risk features that led to approval of loans without proper consideration of the borrowers’ ability to repay. The investigation also examined the extent to which the financial institution was aware of the lenders’ allegedly deceptive practices when it bought the loans, and whether the financial institution facilitated these lending practices by financing and purchasing such loans. In addition to the monetary penalty, the agreement stipulates that the financial institution will: (i) only finance, purchase, or securitize subprime mortgage loans in Nevada if it has engaged in a review of such loans and determined that the loans comply with the Nevada Deceptive Trade Practices Act and (ii) not securitize loans where upon review it has reason to believe that the lender has not adequately disclosed to the borrowers the existence of an initial teaser rate, the potential for negative amortization on a loan, the maximum adjusted interest rate or payments, and the potential for payment shock if payments increase after a loan reset or recast.
New York Financial Regulator Issues Guidance on Determination of Subprime Home Loans Under State Law
On July 3, the New York Department of Financial Services (DFS) sent a letter to regulated institutions and issued a temporary order relating to the determination of thresholds for “subprime home loans” under Section 6-m of the New York Banking Law. Due to recent increases in interest rates, many lenders who utilize a loan’s closing date as the time period for determining the “fully indexed rate” feared that they may be originating loans that meet the definition of subprime home loans under Section 6-m. The letter reminds lenders that in 2009, DFS amended Section 6-m of the Banking Law to instruct lenders to use the date that they provide good faith estimates to borrowers as the date for calculating the “fully indexed rate.” The letter also states that the DFS believes that calculating the “fully indexed rate” properly should allay many lenders fears that they may be triggering Section 6-m. Relatedly, recent changes to the calculation of Mortgage Insurance Premiums mandated by the FHA in Mortgagee Letter 2013-04 has increased the annual percentage rate on subject loans and is causing them to fall under Section 6-m’s definition of subprime home loan. To address the issue, the DFS issued a temporary order that, for 60 days from the date of the order, directs lenders not to use the MIP changes effectuated by FHA when calculating the APR and fully indexed rates for purposes of Section 6-m.
On March 21, the Court of Appeals of Ohio, Eighth Appellate District, affirmed a trial court’s dismissal of a suit by the city of Cleveland, which sought damages from several financial institutions involved in the creation of mortgage-backed securities using subprime mortgages from Cleveland, Ohio, real estate. Cleveland v. JP Morgan Chase Bank, N.A., No. 98656, 2013 WL 1183332 (Oh. Ct. App. Mar. 21, 2013). The City alleged that the institutions engaged in a practice of encouraging subprime lending in order to package mortgages together and sell the MBS to investors, and that these practices caused a foreclosure crisis in Cleveland that damaged the City and created a public nuisance. The City also brought an Ohio Corrupt Practices Act (OCPA) cause of action alleging that one institution systematically filed false or misleading paperwork in foreclosure cases. On appeal, the court held that the causal connection between the securitizing institutions and the foreclosure crisis is too far removed, and, even under the most lenient of pleading requirements, the City’s complaint fails to state a valid claim under public nuisance or the OCPA.
On October 30, the U.S. District Court of the Northern District of California dismissed, without prejudice, claims brought by two borrowers alleging that their mortgage lender engaged in fraudulent loan practices which violated RICO. The court held that the claims were time-barred and that the complaint failed to allege facts about predicate acts and a pattern of activity necessary to sustain a civil RICO claim. Cabrera v. Countrywide Fin., No. 11-4869, 2012 WL 5372116 (N.D. Cal. Oct. 30, 2012). The court rejected the borrowers’ arguments that (i) the statute of limitations began to run not from the date they entered into their adjustable rate mortgage, but from the date the rate adjusted, and (ii) equitable tolling should apply because the borrowers’ could not have discovered their adjusted rate absent a forensic loan audit they obtained years into the contract. With regard to equitable tolling, the court held that the plain terms of the mortgage provide information about the rate at issue, which could have been uncovered by “a reasonably diligent investigation of the loan documents.” The court similarly dismissed the borrowers’ claims that the lender discriminated against minority borrowers in violation of the ECOA, as time-barred. It also held that the borrowers, who are Hispanic, failed to state a claim under ECOA in that, although they offered statistical evidence that Hispanics were given less favorable loans than white borrowers with the same risk characteristics, they failed to allege that they themselves qualified for better loans. The borrowers’ claim of unfair business practices under the state’s unfair competition law survived. The court held that the borrowers pled facts sufficient to support their claim that the lender’s effort to initiate a foreclosure while a loan modification was pending violated public policy reflected in the California Homeowner Bill of Rights, even though the specific provision of that statute that prohibits such practices was not codified until after the foreclosure occurred.