Sheppard Mullin Financial Institutions Law Blog

Question: May a Bank who made a construction loan secured by real property seek a right to attach order and writ of attachment against a third party guarantor on its unsecured guaranty security?

Answer: Yes, according to the Fourth District Court Of Appeal, Division Three, in United Central Bank v. Superior Court (G042247), decided November 17, 2009.

The last few years have presented many challenges for mortgage lenders. The latest challenge may be coming from an unlikely source - private mortgage insurance policies. Private mortgage insurance, or PMI, is the insurance that mortgage lenders purchase, or cause their borrowers to purchase, when the borrower does not make a down payment of at least 20% when purchasing a home. The PMI policy is intended to protect the lender in the event of a default by the borrower.

The author is a member of the Firm's Government Contracts & Regulated Industries Practice Group. For additional articles and postings concerning this and related topics, please refer to Sheppard Mullin's Government Contracts Blog, which can be found at www.governmentcontractslawblog.com.

I.  INTRODUCTION
 

Without a doubt, the False Claims Act ("FCA") has been dramatically changed in the last few months. As will be discussed in more detail herein, it certainly appears that the FCA has been retooled so that the playing field is now stacked in favor of the government and qui tam plaintiffs. There is also every indication that lenders who have federally insured mortgages, redevelopment funding, or other financial support from the government, are at risk of being sued for false claims unless they take certain precautions to educate and protect themselves.

The Federal Reserve Board on July 23 proposed significant changes to Regulation Z, the Truth in Lending Act regulation, including new consumer protections for receiving home mortgages and home equity lines of credit. These changes include a prohibition of payments to a mortgage broker or loan officer that are based on the loan's interest rate or other terms (often referred to as "yield spread premiums" or "overages"), and a prohibition of a mortgage broker or loan officer "steering" consumers to transactions that are not in the consumer's best interest in order to increase the mortgage broker's or loan officer's compensation. The Board maintains that consumers rely on the professional expertise of brokers and other loan originators and expect they will act fairly. These expectations, however, are not met when the consumer is steered into a more expensive loan. As a result, the Board's proposal went beyond disclosure revisions and suggested these substantive protections. However, the proposal stopped short of imposing on the originator a fiduciary duty to the customer. Such a responsibility would require that the originator find the “best” loan to meet a consumer's requirements. The proposal only prohibits the originator from steering a customer to a more expensive or risky loan to increase the originator's own fees, but does not require the extra step of requiring the originator to seek out the best available loan product.

Section 3500.5(b)(7) of Regulation X states that a bona fide transfer of a loan obligation in the secondary market is not covered by the Real Estate Settlement Procedures Act (RESPA). That section goes on to state that "in determining what constitutes a bona fide transfer, HUD will consider the real source of funding and the real interest of the funding lender."

In a memorandum opinion, a United States District Court for the Northern District of Alabama has held that a real estate broker that charges its customers a percentage based commission and a separate administrative brokerage commission of $149 that is not shared with its sales agents violates Section 8(b) of the Real Estate Settlement Procedures Act (RESPA), because the additional $149 fee was not for services actually performed. JRHBW Realty, Inc. (d/b/a RealtySouth) split its real estate brokerage charge into two components, and showed them on separate lines of the HUD-1 Settlement Statement. The District Court held that the $149 portion of the charge (the administrative brokerage commission) was in essence charged for the same services for which RealtySouth charged its percentage based commission, and therefore was not charged for "services actually performed," and was an unearned fee that violated Section 8(b) of RESPA.

On June 29, 2009, Governor Schwarzenegger signed into law California's Electronic Discovery Act, which is effective immediately. All discovery propounded or responded to must now comply with the new law. These rules are very similar to the recent revisions to the Federal Rules of Civil Procedure, and bring California in line with the federal e-discovery standards.

On May 20, 2009, President Obama signed into law the Helping Families Save Their Homes Act of 2009. While the primary purposes of the new law include revamping the FHA's Hope for Homeowners program, providing a safe harbor for servicers who modify home loans and giving the Federal Deposit Insurance Corporation and the National Credit Union Association an expanded credit line with the U.S. Treasury, it also imposes a new disclosure obligation under the Truth in Lending Act upon purchasers and assignees of certain home loans that is effective immediately.

The House Financial Services Committee yesterday voted to amend the Mortgage Reform and Anti-Predatory Lending Act (the "Act") to require HUD to suspend the implementation of its new Good Faith Estimate and HUD-1 Settlement Statement, and instead to work with the Federal Reserve Board to publish a proposed joint rule with comparable Real Estate Settlement Procedures Act ("RESPA") and Truth in Lending Act ("TILA") disclosures within six months of enactment of the Act, and a final joint rule with comparable RESPA/TILA disclosures within one year of its enactment.

Although we have seen little change in the area of lender liability law over the past decade, today's unprecedented slowdown in the global economy is proving to be fertile ground for disputes among lenders, borrowers, guarantors, and other third parties. During the widespread defaults of the 1980s and early 1990s, lenders pursuing remedies were met by a massive upsurge in claims directed at them. During the mid-1980s, California courts expanded the theories under which lenders could be held liable and often awarded substantial damages to plaintiffs. The late 1980s and early 1990s saw a reversal in this trend, where courts limited some of the more far-reaching lender liability theories and reversed a number of high-profile judgments from previous years.