Sheppard Mullin Financial Institutions Law Blog http://www.financialinstitutionlawblog.com/ en-us Copyright 2009 Wed, 01 Jul 2009 19:49:35 -0500 Wed, 01 Jul 2009 19:52:03 -0500 http://www.movabletype.org/?v=3.34 http://blogs.law.harvard.edu/tech/rss California Passes New Electronic Discovery Act Effective Immediately 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.

]]> Under the new Act, the party requesting production of electronically stored information (ESI) may specify the format in which it should be produced (e.g., native format, or TIFF, with or without certain metadata, etc.). If no format is specified, the responding party must produce the ESI in either the same format as it is ordinarily kept (likely in native format or an archived/compressed format) or in a "reasonably usable" form. The responding party need only produce the ESI in one form. If a requesting party fails to specify the format of production in its request, and the responding party produces the ESI in a "reasonably usable format," the requesting party cannot then compel a different form of production.

A responding party can resist production of ESI on the grounds that it is not “reasonably accessible.” The factors for determining inaccessibility are undue burden and cost. If a responding party claims that ESI is inaccessible, though, it must still identify the types or categories of sources of ESI that it asserts are not reasonably accessible.

A responding party can resist production of ESI that it claims is not reasonably accessible by moving for a protective order or by opposing or objecting to the subpoena or request. The responding party has the burden of proving that the ESI is not reasonably accessible. Once that burden is met, the burden shifts to the requesting party to show good cause for production despite the fact that the ESI is not reasonably accessible.

If good cause is shown, the court may still order production with conditions, including cost-shifting. The factors that the courts may consider in determining good cause are similar to the federal criteria, including: the existence of more accessible sources; duplicative nature of the discovery sought; the cost of accessing the ESI versus the party’s need for the discovery; the importance of the issues involved; the amount in controversy; and the parties’ resources.

]]> http://www.financialinstitutionlawblog.com/california-passes-new-electronic-discovery-act-effective-immediately-california-passes-new-electronic-discovery-act-effective-immediately.html http://www.financialinstitutionlawblog.com/california-passes-new-electronic-discovery-act-effective-immediately-california-passes-new-electronic-discovery-act-effective-immediately.html California Passes New Electronic Discovery Act Effective Immediately Wed, 01 Jul 2009 19:49:35 -0500 updates@antitrustlawblog.com (Sheppard Mullin) Helping Families Save Their Homes Act of 2009 Imposes New and Uncertain Disclosure Requirements On Buyers and Assignees of Home Loans 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.

]]> Section 404 of the new law amends TILA to require a "creditor" that purchases or takes by assignment a mortgage loan that is secured by the principal dwelling of the consumer to provide the consumer within 30 days after the date on which the sale or assignment occurs a written disclosure notifying the consumer of:

(i) the identity, address and telephone number of the new creditor;
(ii) the date of transfer;
(iii) how to reach an agent or party having authority to act on behalf of the new creditor;
(iv) the location of the place where transfer of ownership of the debt is recorded; and
(v) any other relevant information regarding the new creditor.

There are certain aspects of this new disclosure requirement that are unclear or confusing. First, there is no reasonable way for the purchaser or assignee to determine what "other relevant information" regarding the purchaser or assignee needs to be disclosed. Second, "creditor" is defined in Regulation Z to mean a person that regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments and to whom the obligation is initially payable. Since the purchaser or assignee of the home loan will not be the person to whom the obligation is initially payable, it appears that the use of the term "creditor" in Section 404 is misplaced, and it is also unclear whether the "creditor" is intended to be any purchaser or assignee, or only a purchaser or assignee that regularly extends consumer credit that is subject to a finance charge or payable by written agreement in more than four installments.

While Section 404 does not by its terms require new regulations, the Federal Reserve Board has general rulemaking authority under TILA, and a Federal Reserve spokesperson has indicated that the Fed staff will examine the provision and determine whether rules are needed. Rulemaking will likely be necessary to clear up the ambiguities in the new provision, because TILA imposes civil liability on creditors who fail to make the required disclosures. Consumers could also claim that a failure to properly provide the disclosure violates state unfair and deceptive practices laws such as California's, which does not require proof of actual damages in order for injunctive relief or civil penalties to be imposed, but also imposes treble damages in the event that a plaintiff (who could be representing a class) suffers actual damages, potentially subjecting purchasers or assignees of home loans to significant liability.

Since it is unclear when or if the Fed staff will propose rules interpreting the new law, it would seem prudent for all purchasers or assignees of home loans secured by a borrower's principal dwelling to provide the disclosure. While the disclosure is generally simple, the wild card is the requirement that the purchaser or assignee provide "any other relevant information." What might this be? The size of the portfolio of home loans owned by the purchaser or assignee? How likely the purchaser or assignee is to retain ownership of the home loan? Details on litigation to which the purchaser or assignee is subject? There is no way to know, and the relevant information could easily differ from purchaser to purchaser. It would probably be best for each purchaser to discuss this with its counsel.

The Real Estate Settlement Procedures Act and Regulation X have for a number of years required a notice to be provided by both the transferor and transferee servicer when a loan's servicing is transferred. The RESPA disclosure applies to all federally related mortgage loans, not merely loans secured by a borrower's principal dwelling. This means that if servicing is transferred in connection with the purchase or assignment of a home loan secured by the borrower's principal dwelling, both the RESPA disclosure and the new TILA disclosure will be required. If, however, there is no servicing transfer associated with the purchase or assignment of the loan secured by the borrower's principal dwelling, then only the TILA disclosure will be required.

If both the RESPA disclosure and the TILA disclosure are required in connection with a purchase or assignment of a home loan, the purchaser/assignee should consider whether the disclosures should be provided separately or consolidated. The RESPA disclosure must typically be provided within fifteen days after the effective date of the servicing transfer, whereas the TILA disclosure must be provided within thirty days following the sale or assignment; the sale of the loan and the servicing transfer may or may not be concurrent, depending upon the transaction. If the loan sale and servicing transfer are concurrent, and the purchaser/assignee and the new servicer are the same party or affiliated, it would be consumer friendly to consolidate the disclosures. Consolidation can be considered, but may not be practical if the purchaser/assignee and the new servicer are not affiliated.

Finally, in situations where the home loan is being purchased/assigned but servicing is not being transferred, we suggest that the TILA notice state something along the lines of "your loan has been purchased by or assigned to XYZ Corp, but your loan will continue to be serviced by ABC Servicing Company."

If you have questions about any of the foregoing, please call David Sands at (213) 617-5536 or Sherwin Root at (213) 617-5465.

]]> http://www.financialinstitutionlawblog.com/helping-families-save-their-homes-act-of-2009-imposes-new-and-uncertain-disclosure-requirements-on-b-helping-families-save-their-homes-act-of-2009-imposes-new-and-uncertain-disclosure-requirements-on-buyers-and-assignees-of-home-loans.html http://www.financialinstitutionlawblog.com/helping-families-save-their-homes-act-of-2009-imposes-new-and-uncertain-disclosure-requirements-on-b-helping-families-save-their-homes-act-of-2009-imposes-new-and-uncertain-disclosure-requirements-on-buyers-and-assignees-of-home-loans.html Helping Families Save Their Homes Act of 2009 Imposes New and Uncertain Disclosure Requirements On B Fri, 29 May 2009 15:12:48 -0500 updates@antitrustlawblog.com (Sheppard Mullin) House Financial Services Committee Votes to Suspend Use of New GFE and HUD-1 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.

]]> The amendment does not affect other portions of HUD's final RESPA rule, including HUD's new average charge pricing rules that took effect in January 2009 and a clarification that electronic disclosures are permitted under RESPA. In addition, the amendment does not affect the new definition of "required use" that effectively bans builder incentives. HUD separately has delayed the effective date of that provision and has sought comments on whether to withdraw it entirely.

The House Financial Services Committee will continue marking up the Act today. Once the amended Act is approved by the Committee, it will go to the House for a floor vote. The Senate is likely to introduce and pass its own mortgage reform bill (which may or may not include the suspension of the GFE and HUD-1 and the directive to HUD to work with the Federal Reserve Board on disclosures), after which the House and Senate must resolve any differences in a conference. 


Authored By:

Sherwin F. Root

(213) 617-5465

sroot@sheppardmullin.com  

]]> http://www.financialinstitutionlawblog.com/house-financial-services-committee-votes-to-suspend-use-of-new-gfe-and-hud1-house-financial-services-committee-votes-to-suspend-use-of-new-gfe-and-hud1.html http://www.financialinstitutionlawblog.com/house-financial-services-committee-votes-to-suspend-use-of-new-gfe-and-hud1-house-financial-services-committee-votes-to-suspend-use-of-new-gfe-and-hud1.html House Financial Services Committee Votes to Suspend Use of New GFE and HUD-1 Thu, 30 Apr 2009 15:04:37 -0500 updates@antitrustlawblog.com (Sheppard Mullin) Lender Liability: Taking Stock in Uncertain Times 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.

]]> Today, the number of lenders taking enforcement actions is once again on the rise. This will likely result in a corresponding increase in borrowers challenging, and courts probing, lender practices. For example, in response to the exercise of remedies by construction lenders against developers of troubled real estate projects, numerous lender liability claims have been brought by developers - not only to maximize their ultimate recoveries but also to increase leverage in workout negotiations. These claims mostly allege breach of contract and recycle familiar issues such as course of conduct and breach of the covenant of good faith and fair dealing. As the credit crisis spreads in 2009 to various industries and continues to affect all types of lending arrangements, lenders should take care to be aware of the most common lender liability claims (as well as new claims that will begin to evolve), including the following. 
 
Typical Lender Liability Causes of Action

• Breach of Contract. A lender-borrower relationship is a contractual relationship, which may result in a lender being held liable for breaching written, oral, and implied contracts or agreements. Some common breach of contract claims are that a lender failed to (a) lend after a loan commitment became legally binding, (b) extend a loan, honor loan modification terms or forbear from exercising remedies after promising to do so, or (c) take actions required under loan documents or interpret loan documents properly. In breach of contract claims, the courts have considered "course of conduct" between parties as a critical factor in interpreting the language of a contract.

• Breach of the Implied Covenant of Good Faith and Fair Dealing. Borrowers have also used traditional breach of contract claims to piggyback claims based on the evolving theory of breach of the implied covenant of good faith and fair dealing. In jurisdictions recognizing this covenant, lenders have been found liable for (a) refusing to release a deed of trust in an effort to pressure the borrower into paying off another loan and (b) manipulating the appraisal of the borrower's property to trigger a default and deliberately delaying foreclosure to increase the debt through interest accrual, thereby enabling the lender to take the entire collateral. Nonetheless, in most cases the obligation of good faith does not compel a lender to refrain from enforcing express contract terms as written.

• Fraud. Fraud is usually based upon an affirmative misrepresentation. Even where the law imposes no obligation upon a lender to answer an inquiry in the first place, a lender's voluntary response may trigger a duty to disclose additional, pertinent information in a truthful and complete manner. Even where a lender possesses no actual fraudulent intent, constructive fraud may arise if a relationship of confidence and trust exists between borrower and lender and the lender subsequently breaches its duty to the borrower. Additionally, silent fraud may be found if the lender has a duty to speak but chooses to remain silent.

• Economic Duress. In addressing these claims, the courts have drawn a distinction between a lender (a) making inappropriate threats or demands and (b) threatening to do that which it has a legal right to do or refusing to do that which it is not legally required to do. Since it is difficult to assess if a lender has made improper use of legitimate rights or remedies, courts have tended to find liability in cases where the lender's conduct was tainted with some additional fraud or other wrongdoing.

• Tortious Interference with a Contract. Tortious interference with a contract may arise when a lender intentionally induces breach of the borrower's contract with a third party. However, lenders who have interfered with contracts through the bona fide exercise of their rights and remedies have been deemed privileged to do so. Courts have taken varied approaches with regard to whether malice or a purposeful or improper motive are essential elements to this cause of action. Moreover, some courts have allowed lenders to interfere with contracts between borrowers and third parties if the lenders hold equal or superior interests in the subject matter.

• Instrumentality Theory. Under this theory, a lender may expose itself to direct liability to the borrower and third parties where the lender exercises such control over the borrower's day-to-day operations that, in effect, the lender becomes the borrower. Direct liability can also be found where total control of a borrower does not exist, but the lender may be characterized as an agent or principal of the borrower, or the lender's relationship with the borrower is more akin to a partnership or joint venture.

• Breach of Fiduciary Duty. In one recent decision, the court held that the elements to establish a fiduciary relationship between a bank and a debtor are (a) the borrower reposes faith, confidence, and trust in the bank, (b) the borrower is in a position of inequality, dependence, weakness or lack of knowledge, and (c) the bank exercises dominion, control, or influence over the borrower's affairs. Where a fiduciary duty is found, a lender will owe far greater duties to the borrower than those arising under a loan agreement.

• Statutory Violations. With respect to federal tax laws, a lender with sufficient control over a borrower may be liable under the Internal Revenue Code (IRC) for withholding federal taxes. Courts have also held lenders liable under the Racketeer Influenced and Corrupt Organizations Act (RICO) if they engage in activities prohibited thereunder. Also, a significant amount of lender litigation has occurred under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) in relation to lenders exercising a certain degree of control over the day-to-day operational aspects of a borrower's mortgaged property.

The causes of action listed above represent a mere sampling of potential lender liability claims that may be asserted against lenders in today's environment. Additionally, in a syndicated context, lead lenders also have duties to other lenders, the violation of which may expose lead lenders to liability. The foregoing summary is clearly not all-encompassing and only serves as a brief discussion of this vast and growing area of law.


Authored By:

Eugene C. Kim

(213) 617-5404

ekim@sheppardmullin.com

and

Gina Giang

(213) 617-5484 

ggiang@sheppardmullin.com

 

]]> http://www.financialinstitutionlawblog.com/lender-liability-taking-stock-in-uncertain-times-lender-liability-taking-stock-in-uncertain-times.html http://www.financialinstitutionlawblog.com/lender-liability-taking-stock-in-uncertain-times-lender-liability-taking-stock-in-uncertain-times.html Lender Liability: Taking Stock in Uncertain Times Mon, 20 Apr 2009 20:01:16 -0500 updates@antitrustlawblog.com (Sheppard Mullin) RESPA'S Required Use Rule Delayed The U.S. Department of Housing and Urban Development (HUD) today announced that it will once again delay the implementation date of the proposed changes in RESPA's new required use definition by 3 months, from April 16th until July 16th, and that HUD intends to seek further public comment on required use practices to determine whether HUD's proposed rule changes are necessary, or whether HUD should withdraw its new required use definition altogether. 

]]> The changes to the required use definition, which would have effectively banned the offering of incentives or discounts to a consumer in exchange for the use of a settlement service provider in which the builder had an equity interest, were originally due to take effect in January, but were delayed as a result of lawsuits filed against HUD challenging these changes. While the announcement today will affect the implementation date of the required use definition changes, the timetable of all other changes to RESPA remains unaffected. Click here for a link to the announcement from HUD. For further information on the other changes to RESPA that HUD has proposed, please click here.

Authored By: 

David H. Sands

(213) 617-5536

dsands@sheppardmullin.com

and

Sherwin Root

(213) 617-5465

sroot@sheppardmullin.com

]]> http://www.financialinstitutionlawblog.com/respas-required-use-rule-delayed-respas-required-use-rule-delayed.html http://www.financialinstitutionlawblog.com/respas-required-use-rule-delayed-respas-required-use-rule-delayed.html RESPA'S Required Use Rule Delayed Fri, 06 Mar 2009 18:20:08 -0500 updates@antitrustlawblog.com (Sheppard Mullin) Term Asset-Backed Securities Loan Facility The Term Asset‐Backed Securities Loan Facility (TALF) was unveiled by the U.S. Treasury on November 25, 2008. Through the TALF, the Federal Reserve Bank of New York (FRBNY) will finance the purchase of asset‐backed securities (ABS) in order to support lending to consumers and small businesses. The current credit crisis has driven interest rates on many consumer and small business loans to unaffordable levels, which has restrained the ability of the economy to recover. Since the ABS markets have historically funded a substantial portion of consumer and small business credit, the TALF is designed to improve lender liquidity so as to increase the availability of affordable financing for consumers and small businesses.

Click here to read more.

]]> http://www.financialinstitutionlawblog.com/term-assetbacked-securities-loan-facility-term-assetbacked-securities-loan-facility.html http://www.financialinstitutionlawblog.com/term-assetbacked-securities-loan-facility-term-assetbacked-securities-loan-facility.html Term Asset-Backed Securities Loan Facility Thu, 12 Feb 2009 19:07:40 -0500 updates@antitrustlawblog.com (Sheppard Mullin) Troubled Asset Relief Program - Update As part of their continuing efforts to promote financial stability and restore the health of the economy, the United States Treasury has continued to develop new applications for the funds allocated to the Troubled Asset Relief Program (TARP) established in October 2008 by the Emergency Economic Stabilization Act of 2008 (EESA). In mid-October 2008, the Treasury announced it would forgo its initial plan to buy troubled assets from financial institutions and would instead use TARP funds to inject capital directly into banks. To date, $195.3 billion has been invested directly into qualifying financial institutions, both publicly traded and non-public, under the Treasury's Capital Purchase Program (CPP). To date, CPP funds have been invested in 359 financial institutions in 45 U.S. states and Puerto Rico.

Click here to read more.

]]> http://www.financialinstitutionlawblog.com/troubled-asset-relief-program-troubled-asset-relief-program-update.html http://www.financialinstitutionlawblog.com/troubled-asset-relief-program-troubled-asset-relief-program-update.html Troubled Asset Relief Program Thu, 12 Feb 2009 18:35:32 -0500 updates@antitrustlawblog.com (Sheppard Mullin) HUD Delays Effective Date Of Builder Incentive Ban Since 1992, HUD has allowed all companies - including homebuilders, real estate brokers and mortgage lenders - to offer incentives to consumers as an inducement to the consumers to use the company's affiliated settlement service provider as long as the settlement service provider's service is separately offered and as long as the incentive is genuine, meaning it is not offset by higher prices elsewhere in the transaction. As part of its revisions to Regulation X implementing the Real Estate Settlement Procedures Act, HUD in November revised the rule effective January 16, 2009 to prohibit homebuilders from offering these incentives, while still permitting real estate brokers, mortgage lenders and other settlement service providers to offer certain forms of consumer incentives. On December 23, 2008, the National Association of Homebuilders ("NAHB") and certain of its members filed an action against HUD seeking to overturn the new consumer incentive rule.

]]> HUD announced today that it has decided to delay from January 16, 2009 until April 16, 2009 the effective date of its new ban on homebuilder consumer incentives that are tied to the consumer's use of the builder's affiliated settlement service provider. HUD's stated purpose of the delay is to allow it time to vigorously challenge the NAHB's lawsuit on the merits of the case, and not on procedural grounds.

Authored by:

Sherwin F. Root

(213) 617-5465

sroot@sheppardmullin.com

]]> http://www.financialinstitutionlawblog.com/hud-delays-effective-date-of-builder-incentive-ban-hud-delays-effective-date-of-builder-incentive-ban.html http://www.financialinstitutionlawblog.com/hud-delays-effective-date-of-builder-incentive-ban-hud-delays-effective-date-of-builder-incentive-ban.html HUD Delays Effective Date Of Builder Incentive Ban Thu, 08 Jan 2009 13:27:45 -0500 updates@antitrustlawblog.com (Sheppard Mullin) FCRA Completely Preempts California's CCRAA Question: Does the federal Fair Credit Reporting Act preempt all actions filed under California's Consumer Credit Reporting Agency Act?

Answer: Yes, according to the First District Court of Appeal, Division One, in Liceaga v. Debt Recovery Solutions, LLC (A120277), decided December 29, 2008.

]]> In this case, plaintiff Rebecca Liceaga's purse was stolen, and her identity was used to obtain a Sprint cell phone account.  Although Liceaga had never done business with Sprint, when the thief failed to pay, Sprint assigned the account to the defendant debt collection agency, which reported her "default" to various consumer credit reporting agencies.  Liceaga filed suit under California's Consumer Credit Reporting Agencies Act, alleging the debt collection agency furnished information it knew or should have known was inaccurate.

The trial court granted the collection agency's motion for judgment on the pleadings on the grounds the Fair Credit Reporting Act preempted Liceaga's claim under the CCRAA.  The First District affirmed, holding the express language of the FCRA granted all state laws "relating to the responsibilities of persons who furnish information to consumer reporting agencies" except, as to California, one specific subsection of the CCRAA (Civil Code section 1785.25(a)).  The First District concluded this "California exception" was, in fact, limited to the one enumerated subsection and "does not allow a private right of action."  According to the Court, "Congress has preempted state court private actions against furnishers of inaccurate credit information to credit reporting agencies, and no exclusion for California actions exists."

Authored by:

Robert J. Stumpf, Jr.

(415) 774-3288

rstumpf@sheppardmullin.com

]]> http://www.financialinstitutionlawblog.com/fcra-completely-preempts-californias-ccraa-fcra-completely-preempts-californias-ccraa.html http://www.financialinstitutionlawblog.com/fcra-completely-preempts-californias-ccraa-fcra-completely-preempts-californias-ccraa.html FCRA Completely Preempts California's CCRAA Tue, 06 Jan 2009 13:44:24 -0500 updates@antitrustlawblog.com (Sheppard Mullin) Capital Purchase Program - Non-Public Financial Institutions The United States Treasury has released a term sheet for the injection of capital into non-public qualifying financial institutions under the Treasury's Capital Purchase Program, implemented as part of the Troubled Asset Relief Program (TARP). The deadline for submitting applications under the Capital Purchase Program for publicly traded financial institutions was November 14, 2008, and as of the date of this memorandum, over 80 publicly traded financial institutions have announced their intent to participate in the Capital Purchase Program, accounting for almost $250 billion in investments by the Treasury. Non-public financial institutions are comprised of approximately 4,300 entities in the United States, far outnumbering the approximately 930 publicly traded financial institutions.

Click here to read more.

]]> http://www.financialinstitutionlawblog.com/capital-purchase-program-a-nonpublic-financial-institutions-capital-purchase-program-nonpublic-financial-institutions.html http://www.financialinstitutionlawblog.com/capital-purchase-program-a-nonpublic-financial-institutions-capital-purchase-program-nonpublic-financial-institutions.html Capital Purchase Program – Non-Public Financial Institutions Thu, 04 Dec 2008 13:32:43 -0500 updates@antitrustlawblog.com (Sheppard Mullin) Capital Purchase Program - Publicly Traded Financial Institutions As you are no doubt aware, the United States Treasury has decided to forgo its initial plan to buy troubled assets from financial institutions, and intends instead to use the funds made available under the Troubled Asset Relief Program (TARP) to inject capital directly into banks.  As of the date of this memorandum, over 80 publicly traded financial institutions[1] have announced their intent to participate in the Treasury's Capital Purchase Program, accounting for almost $250 billion in investments by the Treasury.

Click here to read more.


[1] Although the term "publicly traded" was not defined in the Emergency Economic Stabilization Act of 2008 or in the Capital Purchase Program materials initially released by the Treasury for publicly traded institutions, the Treasury issued a term sheet on November 17, 2008 for the privately-held financial institutions Capital Purchase Program which defined the term as "a company (1) whose securities are traded on a national securities exchange and (2) required to file, under the federal securities laws, periodic reports such as the annual (Form 10-K) and quarterly (Form 10-Q) reports with either the Securities and Exchange Commission or its primary federal bank regulator. A company may be required to do so by virtue of having securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, which applies to all companies that are traded on an exchange or that have $10 million in assets and 500 shareholders of record or Section 15(d) of the Exchange Act which requires companies that have filed a registration statement under the Securities Act of 1933, as amended, and have 300 or more securityholders of record of the registered class to file reports required under Section 13 of the Exchange Act, e.g., periodic reports."

]]> http://www.financialinstitutionlawblog.com/capital-purchase-program-a-publicly-traded-financial-institutions-capital-purchase-program-publicly-traded-financial-institutions.html http://www.financialinstitutionlawblog.com/capital-purchase-program-a-publicly-traded-financial-institutions-capital-purchase-program-publicly-traded-financial-institutions.html Capital Purchase Program – Publicly Traded Financial Institutions Fri, 21 Nov 2008 16:41:12 -0500 updates@antitrustlawblog.com (Sheppard Mullin) FDIC Changes Deposit Insurance Rules For Mortgage Loan Securitizations The Emergency Economic Stabilization Act of 2008 (the "Act") temporarily increased the standard maximum deposit insurance amount from $100,000 to $250,000, effective October 3, 2008, and ending December 31, 2009. After that date, barring further action by Congress and the President, the standard maximum deposit insurance amount will return to $100,000.

]]> Under regulations in effect prior to the passage of the Act, principal and interest payments on mortgage loans that were deposited into a Federal Deposit Insurance Corporation ("FDIC")-insured institution were treated as owned by the investors (and therefore insured as to the investors) that owned the mortgage loans, and taxes and insurance funds were insured to the mortgagors or borrowers on the theory that the borrower still owns the funds until the tax and insurance bills are actually paid by the loan servicer. Because principal and interest payments on mortgage loans that are part of a securitization may involve multi-layered securitization structures, the FDIC became concerned that it may prove difficult for the servicer holding a deposit account in the institution to identify every security holder in the securitization and determine his or her share. The FDIC also acknowledged that at any one time, billions of dollars in principal and interest funds may be on deposit at insured depository institutions, providing a significant source of liquidity for the institution and credit to the institution's community.

As a result, effective on October 10, 2008, the FDIC revised the deposit insurance rule to provide that principal and interest payments on mortgage loans will be determined for deposit insurance purposes on a per-mortgagor (or borrower) basis rather than a per-investor basis. This insurance coverage will not be aggregated with or otherwise affect the coverage provided to mortgagors in connection with other accounts the mortgagors might maintain at the same insured depository institution. This will likely result in all mortgage loan principal and interest payments deposited with an insured depository being fully insured. Amounts constituting payments of taxes and insurance premiums will continue to be insured on a pass-through basis as the funds of the mortgagor, and will be added to other individually owned funds held by each such mortgagor at the same insured institution and insured to the applicable limit.

Authored by:

Sherwin F. Root

(213) 617-5465

sroot@sheppardmullin.com

]]> http://www.financialinstitutionlawblog.com/fdic-changes-deposit-insurance-rules-for-mortgage-loan-securitizations-fdic-changes-deposit-insurance-rules-for-mortgage-loan-securitizations.html http://www.financialinstitutionlawblog.com/fdic-changes-deposit-insurance-rules-for-mortgage-loan-securitizations-fdic-changes-deposit-insurance-rules-for-mortgage-loan-securitizations.html FDIC Changes Deposit Insurance Rules For Mortgage Loan Securitizations Mon, 13 Oct 2008 16:37:09 -0500 updates@antitrustlawblog.com (Sheppard Mullin) Bank's Claim For Unjust Enrichment Governed By Three-Year Statute of Limitations Question: Is a bank's claim against its borrower for unjust enrichment arising out of the borrower's nonpayment of a promissory note governed by the four-year statue of limitations for breach of written contract?

Answer: No, according to the Fourth District Court of Appeal, Division One, in Federal Deposit Insurance Corporation v. Richard K. Dintino (D051447), decided October 2, 2008.

]]> In this case, the plaintiff bank mistakenly executed and recorded a full reconveyance of a deed of trust securing a home loan.  Thereafter, the borrower sold the property, retained the sale proceeds, and made no further payments.  The bank sued the borrower for breach of contract, money lent, and unjust enrichment.

The trial court ruled in the bank's favor on the unjust enrichment claim, ruling that the three-year statute of limitations under Code of Civil Procedure section 338, subd. (d) applied rather than the four-year statute for breach of a written contract.

The court of appeal agreed the three-year statute applied, reasoning that the bank's cause of action for unjust enrichment was "based on its mistaken request for recordation of the Reconveyance is not based on, and does not arise out of, a written contract (i.e., the Note), but rather is based on an obligation implied by law because of the equities in the circumstances of this case." 

In addition, the court reversed the trial court's denial of the borrower's motion for an award of attorney's fees he incurred in successfully defending against the bank's breach of contract claim.  According to the court of appeal, the trial court could not consider the bank's success on its noncontract causes of action (including unjust enrichment) in making its determination of which party, if any, prevailed on the contract cause of action.

Authored by:

Robert J. Stumpf, Jr.

(415) 774-3288

rstumpf@sheppardmullin.com

]]> http://www.financialinstitutionlawblog.com/banks-claim-for-unjust-enrichment-barred-by-threeyear-statute-of-limitations-banks-claim-for-unjust-enrichment-governed-by-threeyear-statute-of-limitations.html http://www.financialinstitutionlawblog.com/banks-claim-for-unjust-enrichment-barred-by-threeyear-statute-of-limitations-banks-claim-for-unjust-enrichment-governed-by-threeyear-statute-of-limitations.html Bank's Claim For Unjust Enrichment Barred By Three-Year Statute of Limitations Tue, 07 Oct 2008 15:09:25 -0500 updates@antitrustlawblog.com (Sheppard Mullin) Depository Bank Not Liable When Checks Were Deposited Into The Account Of A Related But Different Legal Entity Question:  If checks payable to one entity are presented and negotiated by a related but different legal entity, is the depository bank liable under the California Commercial Code or common law?

Answer: No, according to the Fourth District Court of Appeal in Mills v. U.S. Bank (D049805), decided September 10, 2008.

]]> In this case, the plaintiff investors in "Third Eye Systems, LLC" wrote checks to that entity to purchase their investment units.  The checks were negotiated by a related entity, "Third Eye Systems Holdings, Inc.," which deposited the checks in its account at the defendant bank.  Plaintiffs alleged they were injured because their entity was worth substantially less without the funds and because they could not access the assets of the related entity.  The trial court sustained demurrers to the plaintiffs' claims for statutory negligence and breach of the transfer warranties in section 4207 and 4208 of the Commercial Code.  It also granted summary judgment to the bank on plaintiffs' common law negligence claims.

The court of appeal affirmed.  As to the statutory presentment warranties under sections 4207 and 4208, the Court held that the warranties in those sections did not apply to the plaintiffs as drawers of the checks.  Nor did section 4205 apply, since that section merely creates warranties that the depository bank made a deposit into the "customer's" (not the "payee's") account.  Likewise, section 3404, 3405, and 3406, which apply to fraudulent and forged endorsements did not apply on the facts in this case.  Finally, the court held that because the managing partners of Third Eye Systems, LLC had the authority to supply endorsements payable on checks to that entity to be deposited into the related entity's account, the plaintiffs could not establish the bank was the legal cause of the damages they were claiming, and thus they could not prevail on their negligence claims.

Authored by:

Robert J. Stumpf, Jr.

(415) 774-3288

rstumpf@sheppardmullin.com

]]> http://www.financialinstitutionlawblog.com/depository-bank-not-liable-when-checks-were-deposited-into-the-account-of-a-related-but-different-le-depository-bank-not-liable-when-checks-were-deposited-into-the-account-of-a-related-but-different-legal-entity.html http://www.financialinstitutionlawblog.com/depository-bank-not-liable-when-checks-were-deposited-into-the-account-of-a-related-but-different-le-depository-bank-not-liable-when-checks-were-deposited-into-the-account-of-a-related-but-different-legal-entity.html Depository Bank Not Liable When Checks Were Deposited Into The Account Of A Related But Different Le Fri, 12 Sep 2008 12:45:13 -0500 updates@antitrustlawblog.com (Sheppard Mullin) HUD Audits Claim First Magnus Marketing And Volume-Based Incentive Arrangements Violated RESPA HUD's Office of Inspector General (OIG) recently completed audit reports with respect to marketing, noncompetition and volume-based incentive arrangements entered into by First Magnus Financial Corporation, and concluded that these arrangements violated the Real Estate Settlement Procedures Act ("RESPA").

]]> According to the report, the incentives took two forms. Under a percentage point system, First Magnus paid its brokers a certain percentage (typically .25%) of the loan volume it originated. Under a tiered bonus system, First Magnus paid its mortgage brokers incentives for loan volume that exceeded $1 million and reached $10 million with the amount of the incentive increasing from $500 at the low end and peaking at $8,000 at the high end. OIG concluded that First Magnus violated RESPA by issuing volume-based incentive payments to brokers in exchange for originating and processing federally related mortgage loans, including FHA-insured loans, since the payment of volume-based incentives constitutes a payment for referral of business.

During the years 2003-2005, First Magnus paid more than $753,000 in marketing fees and non-competition fees to builders and real estate companies in exchange for what OIG characterized as exclusive referrals of more than $937 million in federally related mortgage loans. Of those fees, OIG particularly focused on approximately $32,000 in marketing fees and noncompetition fees that were paid in exchange for the exclusive referral of 236 FHA-insured mortgages totaling more than $30 million. First Magnus paid the $32,000 in fees in exchange for exclusive promotion of its mortgage products and programs. First Magnus loan officers were on site at builders' and real estate companies' offices, and borrowers were directed to these First Magnus loan officers by the homebuilder sales agents and real estate agents. OIG concluded that these arrangements effectively limited affected borrowers' ability to comparison shop with other lenders and violated RESPA.

As part of the arrangement, homebuilders and real estate companies were required to exclusively distribute and display various First Magnus promotional and marketing materials, as well as provide First Magnus employees with exclusive access to their sales offices. Among the promotional and marketing materials homebuilders and real estate companies were required to distribute and display at their sales offices were business cards, flyers, and brochures covering various First Magnus mortgage products and services. First Magnus was also permitted to provide training presentations to builder sales staff, distribute its business cards to customers and display its signage and marketing materials in customer newsletters. First Magnus was supposed to pay a flat monthly fee for the marketing services, but there was evidence with respect to at least one homebuilder that the monthly fee was reduced due to (according to OIG) slower volume during the period. The agreements also stated that the fees paid to the homebuilder would be reviewed semi-annually to evaluate the mutual effectiveness of the agreement. OIG stated that these terms allowed First Magnus to terminate the arrangement if the volume of mortgages being referred by the builder did not justify the monthly referral payment, since either party was able to terminate the arrangement on 30 days notice.

First Magnus closed its doors in the summer of 2007, and filed for bankruptcy protection shortly thereafter. Therefore, First Magnus was unable to respond to HUD's charges.

Section 3500.14(b) of Regulation X (the RESPA regulations) states that "no person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person." Section 3500.14(g)(iv) states that RESPA permits "a payment to any person of a bona fide...compensation or other payment for goods or facilities actually furnished or for services actually performed."

It has generally been the view in the mortgage lending community that marketing arrangements are permissible if the value of the services provided by the service provider are reasonably related to the amount paid for those services by the lender. In fact, the provision from the First Magnus marketing agreement that permits a semi-annual review of the fees paid to the service provider is typically intended to enable the lender to adjust a marketing arrangement where the lender determines that it has been paying more in fees than the value of the services being provided.

OIG did not focus on the value of the services at all, but concluded that the exclusive nature of the arrangement resulted in the fees being for referrals of business. While OIG's conclusion related only to FHA-insured loans (since the purpose of the audit appeared to be to focus only on those loans), there is certainly reason to be concerned that HUD would reach the same conclusion on any similar arrangements with respect to all federally related mortgage loans. Therefore, it would seem prudent for lenders to make sure that their marketing arrangements are not exclusive in nature.

In addition to marketing payments, OIG also determined that payments totaling $150,000 were made to Long Realty in connection with an operating agreement involving a First Magnus affiliate, FMLC LLC, an entity that was owned 50.1% by First Magnus and 49.9% by Home Services America, the parent company of Long Realty. As part of this agreement, First Magnus paid Home/Long a noncompete fee of $50,000 per year in exchange for Home not entering into any similar agreement in three Arizona counties. Further, Home/Long would not let any other lender have access without appointment to Long Realty offices or its employees. This noncompete fee ensured an exclusive relationship between First Magnus and Home/Long in those counties and further prohibited Home from providing competitive lending services in the same counties. As a result, uninformed borrowers were directed to First Magnus, when better FHA mortgage terms may have been available from other lenders. OIG found this practice to be a violation of RESPA's prohibition against referral fees in exchange for FHA mortgage business.

Finally, in a separate audit, OIG found that from 2003 through 2005, First Magnus issued $102,840 in volume-based incentives or bonuses to brokers for originating and processing 326 federally related mortgage loans (FHA-insured and non-FHA-insured). Of the payments made to brokers, $58,571 in volume-based incentives was paid for originating and processing 169 FHA-insured mortgage loans.

This action relates to how volume compensation programs may get treated under HUD's RESPA Policy Statements on yield spread premiums and core title services. Each of the Policy Statements contain provisions that exempt compensation that is reasonably related to the value of services provided, but each also states that payments cannot be made for referrals of business and that when the payment is based on the volume of business, it is evidence of an agreement for the referral of business unless it is shown that the payments are for legitimate business reasons unrelated to the value of the referrals.

Again, First Magnus was unable to respond to the audit. Thus, it is unknown whether it would have tried to justify the volume payments under Section 8(c) of RESPA. This audit report would seem to indicate that HUD will regard payments for volume referrals as presumptively illegal under RESPA and will place the burden (which may well be a formidable one) on the persons engaging in this practice.

Authored by:

Sherwin F. Root

(213) 617-5465

sroot@sheppardmullin.com

]]> http://www.financialinstitutionlawblog.com/hud-audits-claim-first-magnus-marketing-and-volumebased-incentive-arrangements-violated-respa-hud-audits-claim-first-magnus-marketing-and-volumebased-incentive-arrangements-violated-respa.html http://www.financialinstitutionlawblog.com/hud-audits-claim-first-magnus-marketing-and-volumebased-incentive-arrangements-violated-respa-hud-audits-claim-first-magnus-marketing-and-volumebased-incentive-arrangements-violated-respa.html HUD Audits Claim First Magnus Marketing And Volume-Based Incentive Arrangements Violated RESPA Tue, 26 Aug 2008 15:45:55 -0500 updates@antitrustlawblog.com (Sheppard Mullin)