Financial Institutions Law Blog

California Department of Corporations States That Wholesale Account Executive Who Does Not Deal With Consumers Is Not A Mortgage Loan Originator

updates@antitrustlawblog.com (Sheppard Mullin) — Tue, 24 Apr 2012 17:09:55 -0500

The California Department of Corporations recently added a question to its on-line frequently asked questions on mortgage loan originators which made clear that wholesale lender account executives who do not deal with the public (but only with correspondent lenders) do not need to be licensed as mortgage loan originators with the NMLS. Here is the text of the entire question and answer:]]> Are account executives employed by wholesale lenders required to obtain an MLO License?

Whether an individual is considered to be an MLO is not based on the title or position of the person, but rather whether the activity of the person fits within the definition of MLO. The definition of an MLO can be found in Section 22013(a) of the CFLL and Section 50003.5 of the CRMLA, which states in a pertinent part: "Mortgage loan originator" means an individual who, for compensation or gain, or in the expectation of compensation or gain, takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan…"

Subsection (b)(7)(ii) of Appendix A of HUD’s final rule provides that offering or negotiating terms of a loan does not include offering or negotiating loan terms solely through a third-party licensed loan originator, so long as the nonlicensed individual does not represent to the public that he or she can or will perform covered activities and does not communicate with the borrower or potential borrower. For example, an individual who works solely for a lender, when the individual offers loan terms exclusively to third-party licensed loan originators and not to borrowers or potential borrowers. (Federal Register Vol. 76, No. 126, June 30, 2011)

Therefore, any account executive or person who works solely for a lender that offers or negotiates loan terms solely through third-party licensed mortgage loan originators and not to borrowers or potential borrowers is not required to be licensed as a mortgage loan originator.

This reverses the position previously taken by the Department of Corporations. It is important to note that in order to be eligible for this exemption, the account executive can neither represent to the public that he or she performs activities that would require a license, or communicate with borrowers or potential borrowers in any respect.

If you have any questions about the foregoing, please contact David Sands at 213.617.5536 or Sherwin Root at 213.617.5465.

A "Loan Workout Plan" Is Not An Agreement To Modify A Loan

updates@antitrustlawblog.com (Sheppard Mullin) — Tue, 13 Mar 2012 15:13:16 -0500

By Alejandro Moreno and Shannon Petersen

In Nungaray v. Litton Loan Servicing, LP (2011) 200 Cal.App.4th 1499, the California Court of Appeal held that (i) a Loan Workout Plan is not an enforceable agreement to modify a loan and (ii) a bank does not violate the "one-form-of-action" rule by accepting payments under such a Plan, then proceeding with foreclosure.]]>

The Nungarays then filed suit arguing that the Plan was an enforceable loan modification and that the defendants violated the "one-form-of-action." The trial court granted summary judgment in favor of the defendants and the Nungarays appealed.

The Court of Appeal rejected the Nungarays' arguments. The Court found that that there was no enforceable agreement to modify the loan because the Plan expressly stated that it was "not a modification" and that a modification would not be granted unless the Nungarays met all conditions required, which they failed to do. Equitable estoppel did not apply because the Nungarays were not led to believe that a permanent modification would be forthcoming. The Court also rejected the Nungarays "one-form-of-action" argument, holding that banks can negotiate and receive payments pursuant to loan workout plans without forfeiting their right to foreclose on the property due to default.

Default Judgment Is Not Available In Actions To Quiet Title

updates@antitrustlawblog.com (Sheppard Mullin) — Mon, 09 Jan 2012 17:08:25 -0500

In Harbour Vista, LLC v. HSBC Mortgage Services Inc., 2011 WL 6318525 (Cal.App. 4 Dist. 2011), the California Court of Appeal held that plaintiffs may not obtain default judgments in quiet title actions.

Harbour owned a ground lease under a condo complex. Julie Nugent purchased a condo and paid her mortgage to Fieldstone Mortgage Company. She also subleased from and paid rent to Harbour. Both the mortgage and the sub-lease were secured by the condo. Nugent eventually defaulted on both her rent and mortgage. After HSBC purchased the condo from Fieldstone at a foreclosure sale, Harbour filed a complaint to quiet title. HSBC failed to respond to the complaint and Harbour obtained a default judgment. HSBC then moved to set aside the default judgment, but the trial court denied the motion. HSBC appealed.]]>
Though a defaulted defendant has a right to appear at the evidentiary hearing, a plaintiff has no obligation to provide notice to the defaulted defendant of this hearing. Nor does the plaintiff have any obligation "to serve documents or give notice of any future court dates" to the defaulted defendant. If the defaulted defendant nevertheless learns of the evidentiary hearing and appears, it may be heard. If it does not appear, the Court will proceed and render judgment without the participation of the defaulted defendant. Following the evidentiary hearing, the Court should issue a judgment resolving all issues as to title.

Other causes of action and claims for relief will not be addressed at this evidentiary hearing and are not affected by this rule. If a defendant defaults as to other claims, normal procedures for obtaining entry of default and default judgment apply.

Harbour Vista, LLC v. HSBC Mortgage Services Inc., 2011 WL 6318525 (Cal.App. 4 Dist. 2011)

Authored by:

Alejandro E. Moreno
(619) 338-6664
amoreno@sheppardmullin.com

Shannon Z. Petersen
(619) 338-6656
spetersen@sheppardmullin.com

Massachusetts Supreme Judicial Court Holds That Bad Foreclosure = Bad Title For Bona Fide Purchaser

updates@antitrustlawblog.com (Sheppard Mullin) — Mon, 24 Oct 2011 12:05:24 -0500

The Massachusetts Supreme Judicial Court ruled this week that owners of property whose titles have been rendered defective due to improper foreclosures cannot bring a court action to clear their titles under the “try title” procedure in the Massachusetts Land Court. The Court, which in January found that banks can’t foreclose on a house if they don’t own the mortgage, went one step further in a closely watched case and said a sale after that foreclosure doesn’t transfer the property. Therefore, the buyer couldn’t bring his court action against a previous owner, the Court ruled. Left open, however, was whether owners could attempt to put their chains of title back together and conduct new foreclosure sales to clear their titles. Unfortunately, the Court did not provide the real estate community with any further guidance as to how best to resolve these complicated title defects.]]>
“By alleging that U.S. Bank was not the assignee of the mortgage at the time of the purported foreclosure, Bevilacqua is necessarily asserting that the power of sale was not complied with, that the purported sale was invalid, and that his grantor’s title was defective,” the Court wrote. “In light of its defective title, the intention of U.S. Bank to transfer the property to Bevilacqua is irrelevant and he cannot have become the owner of the property pursuant to the quitclaim deed.”

While the long term implications of this case on the Massachusetts real estate market are certainly ominous, buyers in other jurisdictions need to also consider the potential implications of this case. If the Court's ruling were to be adopted by other state courts, any purchaser of property at a foreclosure sale or as REO property directly from a bank, will need to examine (or hire someone to examine) a preliminary title report for the property prior to completing the purchase, in order to determine that the chain of title on the property is proper. What's more, this concern could extend to anyone who is purchasing property that was sold at any time at a foreclosure sale or as REO property. Mr. Bevilacqua was in the process of converting his property to condominiums. What if he had sold the condominiums? Would the purchasers also have faulty title? Based on the Court's analysis, it is difficult to come up with an answer other than yes.

This decision is to be contrasted with the Ninth Circuit's decision in Cervantes v. Countrywide Home Loans, Inc., which was discussed in our most recent blog. Unlike the Massachusetts decision, the Ninth Circuit appeared to honor substance over form and take the equities into account in making its decision.

Bevilacqua v. Rodriguez, 10880, Supreme Judicial Court of Massachusetts (Boston).

Authored By:

Sherwin F. Root
(213) 617-5465
SRoot@sheppardmullin.com

No Need To Record An Assignment Of A Deed Of Trust Prior To Foreclosure

updates@antitrustlawblog.com (Sheppard Mullin) — Fri, 21 Oct 2011 12:08:34 -0500

In Calvo v. HSBC Bank USA, --- Cal.Rptr.3d ----, 2011 WL 4035791 (Cal.App. 2 Dist. 2011), the California Court of Appeal affirmed the longstanding rule that an assignee of a beneficiary under a deed of trust need not record its beneficial interest prior to initiating foreclosure. In Calvo, the plaintiff argued the foreclosure sale of her property was void because HSBC did not record the assignment of the beneficial interest from the original lender to HSBC. She claimed this violated California Civil Code Section 2932.5. Like the lower court, the Court of Appeal found "no merit" to her claims.]]>
Calvo v. HSBC Bank USA, --- Cal.Rptr.3d ----, 2011 WL 4035791 (Cal.App. 2 Dis. 2011)

Authored by:

Alejandro E. Moreno
(619) 338-6664
amoreno@sheppardmullin.com

Shannon Z. Petersen
(619) 338-6656
spetersen@shepparmullin.com

Dispelling the Myth of MERS as a "Sham" Beneficiary

updates@antitrustlawblog.com (Sheppard Mullin) — Tue, 18 Oct 2011 17:58:57 -0500

In the current flood of mortgage litigation, plaintiffs often rely on myth to avoid paying their debts. One of the most pervasive concerns the Mortgage Electronic Registration System (MERS). Plaintiffs accuse MERS of being a "sham" entity, lacking authority to foreclosure and used by lenders to engage in fraud. In Cervantes v. Countrywide Home Loans, Inc., No. 09-17364 (9th Cir. Sept. 7, 2011), the Ninth Circuit Court of Appeals joins other recent courts in dispelling the Myth of MERS.]]>
Further, the deed of trust—"an essentially private contractual agreement"—spells out MERS' role. By signing it, the plaintiffs agreed to its terms, including those concerning MERS. So long as MERS acted consistently with the terms of the deed of trust, which it did, there can be no fraud.

Finally, the Ninth Circuit held that any amendment by plaintiffs would be futile. Even if MERS acted fraudulently or without authority—and it did not—plaintiffs admittedly defaulted on their loans. The lender was entitled to foreclose even if MERS was not.

Try as they might, there is no mythical loophole recognized by law to avoid paying a mortgage debt.

Authored by:

Mark G. Rackers
(619) 338-6648
mrackers@sheppardmullin.com

Shannon Z. Petersen
(619) 338-6656
spetersen@shepparmullin.com

HUD Revamps FHA Lending Requirements

updates@antitrustlawblog.com (Sheppard Mullin) — Fri, 14 Oct 2011 16:04:02 -0500

On September 23, 2011, HUD issued Mortgagee Letter 2011-34 (the "Letter"). The provisions of the Letter, which became effective immediately upon the Letter's release, dramatically revamp requirements for FHA-approved lenders. Most significantly, HUD has expanded the single family origination lending area of each home office and registered branch office to include all HUD field office jurisdictions. Previously, a specific office could only make loans in a particular geographic lending area. Under the rules set forth in the Letter, an FHA single-family lender may make loans on a nationwide basis out of any home or registered branch office, provided that the lender independently meets the loan origination requirements of each state in which the loans are made. This represents a major expansion of the ability of FHA lenders to make loans nationally, and for those lenders able to meet the net worth and other requirements of the FHA now and in the future, will facilitate nationwide FHA lending activities.]]>
The Letter also reiterates HUD's position on net branching arrangements. Typically, net branching is a practice whereby a party other than the FHA-approved lender (often the branch manager) pays some or all of the branch office's expenses (including through escrow arrangements), is responsible for losses of the branch office, or may be a lessor or sublessor of the branch office or branch office equipment. HUD disallows these arrangements, and requires FHA-approved lenders to pay all operating expenses of each of their home, branch and direct lending offices. Apparently some lenders are still engaging in prohibited net branching arrangements, as HUD reaffirmed in the Letter that FHA-approved lenders may not engage in prohibited net branching activities.

The Letter made a number of additional technical changes with respect to applications for FHA approval, including the manner in which officers and owners of the applicant are to be identified, and the background information that must be submitted for officers.

For further information on these new requirements, please contact David Sands at (213) 617-5536 or Sherwin Root at (213) 617-5465.

Too Little, Too Late For Plaintiff's Fraud-Based Mortgage Lawsuit

updates@antitrustlawblog.com (Sheppard Mullin) — Tue, 20 Sep 2011 11:40:22 -0500

In Vaca v. Wachovia Mortgage Corporation, --- Cal.Rptr.3d ----, 2011 WL 3659938 (Cal.App. 4 Dist. 2011), the California Court of Appeal affirmed the dismissal of a fraud claim on statute of limitations grounds. In 2005, the plaintiff sued her ex-husband, claiming he created false credit histories for their children and used those histories to refinance their mortgages with Wachovia. That case soon settled and, in 2009, the plaintiff sued Wachovia and its successor, Wells Fargo, claiming they participated in her ex-husband's fraud.]]>
On appeal, the plaintiff argued that the defendants' participation in her husband's fraud constitutes a "continuing wrong" for which she suffered harm through 2010. The Court of Appeal rejected this argument, holding that a continuing injury from a completed wrongful act does not extend the limitations period. The Court also rejected the plaintiff's argument that the defendants fraudulently concealed their identities. According to the Court, even if true, this would not toll the statute of limitations. Any claim of equitable estoppel failed because, despite the initial concealment, the plaintiff admittedly discovered defendants' identities one year before the running of the statute of limitations. The plaintiff had an obligation to file her complaint within this one-year time frame.

Vaca v. Wachovia Mortgage Corporation, --- Cal.Rptr.3d ----, 2011 WL 3659938 (Cal.App. 4 Dist. 2011)

Authored by:

Alejandro E. Moreno
(619) 338-6664
amoreno@sheppardmullin.com

Shannon Z. Petersen
(619) 338-6656
spetersen@shepparmullin.com

The California Court Of Appeal Again Rejects A Claim For Wrongful Foreclosure At The Pleading Stage

updates@antitrustlawblog.com (Sheppard Mullin) — Thu, 01 Sep 2011 12:54:49 -0500

The recent published decision of Fontenot v. Wells Fargo Bank, N.A. (Cal.App.1 Dist., August 11, 2011) --- Cal.Rptr.3d ----. 2011 WL 3506177, adds several more arrows to a secured lender's quiver of arguments challenging wrongful foreclosure claims at the pleading stage. First, the Court explains in detail how and why publicly recorded documents can be judicially noticed to defeat contradictory allegations. Second, the Court holds MERS properly has all the authority to act on behalf of a lender or beneficiary under the terms of the agency agreement between MERS and the lender. Third, plaintiffs must plead "actual prejudice" to set aside a foreclosure sale based on irregularities in the foreclosure process. Here, even if MERS lacked authority to assist with the foreclosure, the only prejudice would be to the lender or the beneficiary, not the borrower. Fourth, if a plaintiff pleads breach of contract, it cannot also plead promissory estoppel based on that contract. If the contract claim fails, the estoppel claim must also fail.]]> Fontenot, the plaintiff alleges that she obtained a $1 million promissory note, secured by a deed of trust on real property. MERS was the nominee of the lender in the deed of trust. After the plaintiff defaulted, Wells Fargo (the servicer on the plaintiff's loan) foreclosed on the property and sold it. Wells Fargo and MERS filed demurrers, which the trial court sustained without leave to amend.

The Court of Appeal affirmed. To begin with, it explained in detail how publicly recorded documents may be judicially noticed in a wide variety of contexts. A court "may take judicial notice of the fact of a document's recordation, the date the document was recorded and executed, the parties to the transaction reflected in the recorded document, and the document's legally operative language." Accordingly, despite the allegations, the publicly recorded documents showed beyond a doubt that MERS was the beneficiary of the Deed of Trust and the authorized assignee of the lender.

The Court also rejected the plaintiff's contention that MERS lacked the authority to assign the note because it had no interest in the note. It is not necessary for MERS to have a possessory interest in the note to have the power to assign the note. Instead, MERS's authority to assign the note is limited only by the terms of the agency agreement between MERS and the lender.

The Court held the complaint failed to show that the assignee did not receive a proper assignment of the debt. To proceed with this theory, the plaintiff must plead that the assignee did not receive a valid assignment of the debt in any manner. Unlike an assignment of the security interest underlying the debt, the lender could have assigned the promissory note to assignee in an unrecorded document.

Even if MERS lacked the authority to transfer the note, the plaintiff would have to plead some prejudice to proceed with her cause of action for wrongful foreclosure. "If MERS … lacked the authority to make the assignment, the true victim was not plaintiff but the original lender, which would have suffered the unauthorized loss of a $1 million promissory note."

The Court also held that Wells Fargo did not breach a forbearance agreement because the plaintiff did not comply with its terms. Further, if a plaintiff's allegations regarding promissory estoppel show that there was a contract between the parties, then the plaintiff is limited to suing on a breach of contract claim.

Fontenot v. Wells Fargo Bank, N.A. (Cal. App.1 Dist., August 11, 2011) --- Cal.Rptr.3d ----. 2011 WL 3506177

Authored by:

Alejandro E. Moreno
(619)-338-6664
amoreno@sheppardmullin.com

Shannon Z. Petersen
(619) 338-6656
spetersen@shepparmullin.com

The California Court Of Appeals Weighs In On Option ARM Class Actions

updates@antitrustlawblog.com (Sheppard Mullin) — Wed, 31 Aug 2011 17:01:12 -0500

In a pyrrhic victory for plaintiffs, the California Court of Appeal has held that an Option ARM class action survives the pleading stage. See Boschma v. Home Loan Center, Inc. (August 10, 2011) --- Cal.Rptr.3d ---, 2011 WL 3486440. This is the first published California case to address Option ARM cases in such detail. These cases are part of the wave of mortgage litigation flooding the courts in recent years.]]> Boschma, as in similar cases, the plaintiffs complain that disclosures pertaining to the payment options of their Adjustable Rate Mortgage loans are misleading. In particular, they complain that following one or more of the payment options will lead to negative amortization—the monthly payments will be so low that they will not keep up with the interest charged, so that the balance owed actually increases over time, rather than decreases. The loan disclosures specifically state that, depending on the payment option chosen by the borrower, negative amortization may occur. Nevertheless, plaintiffs complain that such disclosures are confusing, and therefore unfair, fraudulent, and unlawful.

In Boschma, the plaintiffs sued their lender, Home Loan Center, Inc. for fraudulent omissions and violation of Business and Professions Code Section 17200 et seq. ("Section 17200"). The trial court sustained the lender's demurrer without leave to amend – noting that the loan documents repeatedly warned of the possibility of negative amortization. Noting the very liberal pleading standard, however, the Court of Appeal reversed.

While giving plaintiffs a chance to fight another day, the Court's holdings show that any such fight will be short lived. The Court expressed serious doubts about whether plaintiffs could ever prove their allegations, much less certify a class.

To begin with, the Court did not find the written disclosures misleading as a matter of law, and noted the many warnings about the possibility of negative amortization. According to the Court, "the mere fact that borrowers took out Option ARMS does not necessarily prove they were misled by disclosures." The court then went on to list several real-world examples of situations where a borrower would intentionally seek out an Option ARM loan given the advantages such loans provide. To prove liability, plaintiffs will need to establish that they actually read the disclosures, that those disclosures were fraudulent, and that the plaintiffs were misled by the disclosures to their detriment.

The Court also emphasized the difficulty plaintiffs will have in proving damages. It held that negative amortization, in and of itself, does not constitute damages. The court noted that in exchange "for gradually declining equity, plaintiffs retained liquid cash that they otherwise would have paid to defendant (or another lender)." Justice Rylaarsdam was even more forceful in his concurring opinion: "I want to emphasize that, to prove they were damaged, plaintiffs must show more than the fact that, as a result of the negative amortization, their loan balances increased. This does not constitute damages." Instead, to show damages plaintiffs will need to prove that they would have obtained a different, "better" loan were it not for the purportedly misleading disclosures.

The decision also shows how difficult, if not impossible, it will be to certify a class of Option ARM borrowers. As the Court appears to suggest, detrimental reliance cannot be universally inferred from the disclosures themselves. Indeed, most borrowers probably never read the written disclosures. What they may have been told about the terms of the loan will of course vary from borrower to borrower. The motivations of the borrowers in obtaining Option ARM loans will also vary. Damages will also vary, as each putative class member would have to show he or she would have obtained a "better" loan were it not for the purportedly misleading negative amortization disclosures.

In sum, clever class counsel may be able to artfully plead an Option ARM claim to survive a challenge at the pleading stage. As the Court in Boschma makes clear, however, proving such allegations and certifying Option ARM classes will be very difficult.

Authored by:

Isaiah Weedn
(714) 424-2828
iweedn@sheppardmullin.com

Shannon Z. Petersen
(619) 338-6656
spetersen@shepparmullin.com

More Teeth For The Tender Rule

updates@antitrustlawblog.com (Sheppard Mullin) — Thu, 16 Jun 2011 18:14:58 -0500

In the current flood of mortgage litigation, the so-called "tender rule"—that a borrower generally cannot set aside a foreclosure unless he or she tenders the full amount owed on the loan—poses a significant obstacle for many plaintiffs. The rationale behind this rule is that a borrower should not be able to avoid foreclosure when the borrower cannot pay his or her debt and any procedural errors could be cured. In Ferguson v. Avelo Mortgage, LLC (Cal.App. 2 Dist. Jun. 1, 2011) --- Cal.Rptr.3d ---, 2011 WL 2139143, the Court of Appeal again affirmed the tender rule and, by doing so, took an additional step favorable to lenders.

]]> In Ferguson, the plaintiffs attempted to avoid the tender rule by arguing it did not apply. In particular, they challenged the authority of Avelo Mortgage, LLC to foreclose. Mortgage Electronic Registration Systems (MERS), the original beneficiary under the deed of trust, assigned its interest in the property to Avelo. The plaintiffs sued to quiet title and set aside the foreclosure. The trial court sustained Avelo's demurrer on the ground the plaintiffs failed to tender.

On appeal, the plaintiffs argued MERS did not have the authority to foreclosure because MERS never held the original promissory note. The court disagreed. Relying on Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149, it held that possession of the original note was unnecessary. It reasoned that because MERS unquestionably had the authority to assign its beneficial interest, Avelo thus had the right to foreclose under the deed of trust. The court then applied Gomes to the tender rule, holding that "it does not follow that a beneficiary may initiate non-judicial foreclosure proceedings under a deed of trust without the original promissory note, but cannot seek tender from a defaulting borrower attempting to set aside the foreclosure."

The court's decision, which is consistent with several recent federal court decisions, thus upholds a beneficiary's authority to foreclose and invoke the tender rule even when the beneficiary is not the holder of the original promissory note—a significant holding that cuts off the argument that plaintiffs have been making in courts throughout California to avoid the tender rule.

Authored by:

Mark G. Rackers
(619) 338-6648
mrackers@sheppardmullin.com

Shannon Z. Petersen
(619) 338-6656
spetersen@sheppardmullin.com

To Avoid Assuming Fiduciary Duties, Mortgage Lenders Should Take Care to Avoid Acting as Mortgage Brokers

updates@antitrustlawblog.com (Sheppard Mullin) — Thu, 14 Apr 2011 12:01:10 -0500

"A mortgage broker has fiduciary duties to a borrower. A mortgage lender does not." A decision published on March 28, 2011 by the California Court of Appeals (2 Dist.) clarifies the differences between duties owed to a borrower by a mortgage broker and those owed by a mortgage lender. To avoid potential lawsuits for breach of fiduciary duty or negligence, mortgage lenders should take care not to assume the mantle a mortgage broker (e.g. soliciting lenders or negotiating loans with third party lenders on behalf of a borrowers for a fee).

]]> In Smith v. Home Loan Funding Inc. (2011) 192 Cal.App. 1131, the California Court of Appeal affirms the lower court's award of damages based on breach of fiduciary duty and misrepresentation against a mortgage lender that acted as a broker. The Court found that Home Loan Funding, Inc., ("HLF") acted as a mortgage broker when its agent represented that he was a mortgage broker, would "shop" Smith's home equity loan to other lenders, and would secure the best loan available to Smith. In addition, the Court considered the fact that HLF conceded that it had placed some if its loans with brokers and that HLF's agent admitted that, during his employment, he had placed loans with other lenders. Under these circumstances, the Court of Appeal found that there was ample evidence to support the trial court's finding that HLF acted as a mortgage broker and had, therefore, assumed fiduciary duties to Smith, which HLF breached.

In response, HLF argued that it could not have acted as a mortgage broker when the loan documents identify HLF as the lender. The Court was not persuaded. "That HLF ultimately persuaded Smith to accept one of its loans, hardly negates that HLF undertook to act as Smith's broker. Instead, it is evidence of HLF's and Baden's self-dealing at the expense of Smith." The Court awarded damages based on the difference in interest between the loan made by HLF and the best loan that would have been available to Smith had HLF lived up to its fiduciary duties by shopping the loan.

This decision reaffirms the general rule that mortgage lenders typically owe no fiduciary or other duties to borrowers. However, this general rules does not apply if the mortgage lender acts as a broker. In such circumstances, the lender/broker opens itself up to claims of breach of fiduciary duty and/or negligence.

Authored by:

Alejandro E. Moreno
(619) 338-6664
amoreno@sheppardmullin.com

and

Shannon Z. Petersen
(619) 338-6656
spetersen@sheppardmullin.com

A Borrower May Not Bring An Action To Determine Whether The Owner Of A Mortgage Note Has Authorized A Nonjudicial Foreclosure

updates@antitrustlawblog.com (Sheppard Mullin) — Tue, 12 Apr 2011 12:37:39 -0500

Civil Code sections 2924 to 2924k provide a comprehensive framework for regulating nonjudicial foreclosure sales under deeds of trust. A recent decision by the California Court of Appeal (4th Dist.) finds that, under California’s statutory framework regulating nonjudicial foreclosures, borrowers cannot challenge the authority of a trustee, mortgagee, beneficiary, nominee, or other agent of the lender or holder of the note to pursue nonjudicial foreclosure. To hold otherwise would, “fundamentally undermine the nonjudicial nature of the process and introduce the possibility of lawsuits filed solely for the purpose of delaying valid foreclosure.”

]]> In Gomes v. Countywide Home Loans, Inc., 192 Cal.App.4th 1149 (2011), the California Court of Appeal affirmed the lower court’s decision to sustain defendants’ demurrer without leave to amend. At the lower court, plaintiff attempted to plead a cause of action for wrongful foreclosure by alleging that MERS (the nominee of the note holder) “did not have authority to initiate the foreclosure because the current owner of the note did not authorize MERS to proceed with the foreclosure.” Plaintiff also pled a related cause of action for declaratory relief asking the court to determine whether Civil Code section 2924(a) allows a borrower, before his or her property is sold, to bring a civil action in order to test whether the person electing to sell the property is authorized by the note holder to foreclose the property. The Court of Appeal found that a borrower cannot bring such claims.

The Court of Appeal held that California’s nonjudicial foreclosure statute does not require a nominee of a note holder to demonstrate that it is authorized to initiate a foreclosure. “Because California’s nonjudicial foreclosure statute is unambiguously silent on any right to bring the type of action identified by Gomes, there is no basis for the courts to create such a right.” To recognize such a right “would be inconsistent with the policy behind nonjudicial foreclosure of providing a quick, inexpensive and efficient remedy.”

Moreover, the Court of Appeal rejected plaintiff’s argument that, by “necessary implication,” Civil Code section 2924(a) created a cause of action to test whether the person initiating the foreclosure has the authority to do so. The plain language of the statute states that a “trustee, mortgagee, or beneficiary, or any of their authorized agents” may initiate the foreclosure process. As nominee of the note holder, MERS was authorized to initiate foreclosure.

This decision reaffirms the comprehensive nature of the statutory scheme in California for nonjudicial foreclosure. It clarifies that, under California law, a borrower may not bring suit to determine whether the nominee or other agent of the note holder has authority to proceed with a foreclosure. Certain dicta, however, leaves open the possibility that California may recognize a cause of action when a borrower can actually allege facts showing that the wrong party initiated the foreclosure process. See Ohlendorf v. Am. Home Mortgage Servicing (E.D. Cal.) 2010 U.S. Dis. Lexis 31098. To eliminate risk, lenders should include language in the deed of trust explicitly permitting the nominee to foreclose through the power of sale provision and giving the nominee the right to conduct the foreclosure process under Civil Code section 2924.

Gomes v. Countywide Home Loans, Inc., 192 Cal.App.4th 1149 (2011)

Authored by:

Alejandro E. Moreno
(619) 338-6664
amoreno@sheppardmullin.com

and

Shannon Z. Petersen
(619) 338-6656
spetersen@sheppardmullin.com

Brokers - Thou Shalt Not Accept Payments From More Than One Source In Connection With a Mortgage Loan

updates@antitrustlawblog.com (Sheppard Mullin) — Fri, 18 Feb 2011 21:05:06 -0500

Mortgage lenders and brokers are aware that the new regulations on loan originator compensation (part of Regulation Z) will go into effect on April 1. One aspect of those regulations that has received little attention until just recently is that if the consumer pays the loan originator directly (which may be the case with mortgage brokers, but will not be the case with loan originators who are employed by the creditor), the regulations prohibit any other person from providing any compensation to a loan originator, directly or indirectly, in connection with that particular transaction. This means that, if a mortgage broker is paid by the consumer, (i) the mortgage broker cannot receive additional compensation from the lender, and (ii) the lender cannot also pay compensation to any of its internal loan originators in connection with that loan (with the possible exception of an hourly wage). It is also worth noting that payments to a loan originator made out of loan proceeds are considered compensation received directly from the consumer. There is some question as to whether this is exactly the result that the Federal Reserve Board intended. We understand that the Mortgage Bankers Association of America is seeking clarification from the Fed on this provision, so it is possible that some modification will be forthcoming. Barring that, though, mortgage lenders should be prepared to comply with the above limitations commencing April 1.

]]> Mortgage lenders should strongly consider reviewing all Good Faith Estimates and HUD-1 Settlement Statements to make sure that they show payments to the mortgage broker from either the lender or the consumer, but not both. A GFE or HUD-1 that shows payments to the mortgage broker by both the consumer and the lender will be evidence of a Regulation Z violation, and likely result in a violation of a loan representation or warranty in the event that the lender sells the loan to an investor, resulting in a likely repurchase demand in the event that the borrower defaults on the loan.

In addition, mortgage lenders that are paying brokers in connection with a mortgage loan should make sure that the broker does not have the consumer sign anything that says that the consumer will ever pay or be responsible for paying any sum to the broker for its services. Conversely, any agreement between the broker and the consumer should then specify that the full consideration payable to the broker for the services provided by the broker will be paid by the mortgage lender.

Authored By:

Sherwin F. Root
(213) 617-5465
sroot@sheppardmullin.com

Banks Lose Important Foreclosure Case In Massachusetts High Court

updates@antitrustlawblog.com (Sheppard Mullin) — Thu, 13 Jan 2011 19:38:25 -0500

Massachusetts' highest court issued an opinion in a foreclosure case last week that will likely make foreclosures more difficult in Massachusetts, and could also influence other courts in the clash between bank foreclosure practices and state real estate law.

]]> The state Supreme Judicial Court upheld a judge's decision holding that two foreclosures were invalid because the banks did not prove they owned the mortgages. In both cases, the mortgage was pooled with other mortgages into a trust and converted into mortgage-backed securities that can be bought and sold by investors. US Bank was the trustee of one of the trusts, and Wells Fargo was the trustee of the other trust. In both cases, the back-up documentation provided to the court did not clearly demonstrate that the mortgage had been transferred to the trust. In fact, in both cases a written assignment of the mortgage to the trust was executed and recorded months after the completion of the foreclosure. The assignment to Wells Fargo as trustee declared an effective date that preceded the publication of the notice of sale (one of the conditions for a foreclosure in Massachusetts) and the foreclosure sale. In upholding the lower court's decision, the court stated that "the judge did not err in concluding that the securitization documents submitted by [US Bank and Wells Fargo] failed to demonstrate that they were the holders of the...mortgages...at the time of the publication of the notices [of sale] and the sales. The judge, therefore, did not err in rendering judgments against [US Bank and Wells Fargo]." A judge in a concurring opinion added that he was surprised by "the utter carelessness with which [US Bank and Wells Fargo] documented the titles to their assets."

One of the arguments made by US Bank and Wells Fargo was that, because they held the mortgage note, they had a sufficient financial interest in the mortgage to allow them to foreclose. The law of many states provides that the mortgage follows the note, so that if a party has possession of the note, it is presumed to have good title to the mortgage. Massachusetts, however, is not one of those states. In Massachusetts, where a note has been assigned but there is no written assignment of the mortgage underlying the note, the assignment of the note does not carry with it the assignment of the mortgage. Rather, the holder of the mortgage holds the mortgage in trust for the purchaser of the note, who has an equitable right to obtain an assignment of the mortgage, which may be accomplished by filing an action in court and obtaining an equitable order of assignment. In the absence of a valid written assignment of a mortgage or a court order of assignment (neither of which were provided by either US Bank or Wells Fargo), the mortgage holder remains unchanged.

While it remains to be seen whether banks and other mortgage lenders will face a similar result in states where the law is that the mortgage follows the note, this decision nevertheless should serve as a warning to mortgage lenders to have their recordkeeping in order prior to commencing foreclosure proceedings.

U.S. Bank v. Ibanez, 10694, Supreme Judicial Court of Massachusetts (Boston)

Authored by:

Sherwin F. Root
(213) 617-5465
sroot@sheppardmullin.com