Schain Law Firm

PA Upholds Taxing Principal and Interest Discharged in Foreclosure

2012-01-31T12:18:00.000-08:00

Mortgage lenders have a new friend, Pennsylvania’s Department of Revenue.

In last month’s Marshall v. Commonwealth, --- A.3d ---, 2012 WL 8704 (Pa. Cmwlth. 2012) opinion, the Commonwealth Court ruled that principal and unpaid interest discharged in a property’s foreclosure is subject to Pennsylvania’s personal income tax (“PIT”).

Pennsylvania’s PIT taxes each dollar of income at 3.07% for both residents (applying to all income received in a taxable year) and nonresidents (applying only to income from sources within the Commonwealth).

The Marshall dispute stemmed from the Department requiring a nonresident and limited partnership investor to pay PIT on his share of $2.6 billion of accrued and unpaid interest that was discharged in the foreclosure of the partnership’s apartment building.

The partnership had financed $308 million of the building’s purchase price with a “nonrecourse purchase money mortgage note”, the only remedy for nonpayment of which was foreclosure.

After determining that his distributive share of the $2.6 billion of unpaid interest was $3.9 million and that the partnership used $121.6 million to offset income that would have been subject to PIT, the Department assessed plaintiff $165,000.

In upholding the assessment, the Commonwealth Court cited the CIR v. Tufts, 461 U.S. 300 (1983) holding that when a lender forecloses on property securing a nonrecourse loan, the full amount of the nonrecourse obligation is subject to federal income tax.

Beyond spanking an out-of-state tax scofflaw, the Marshall v. Commonwealth ruling imposes consequences on commercial real estate investors skipping out on loans.

Because unpaid accrued interest is now deemed a gain following the taxable event of a foreclosure, an incentive exists for commercial borrowers not to default upon mortgage loans.

Further, because the Marshall v. Commonwealth ruling reaches through a partnership and across to state lines to assess a Texas investor’s gain, shifty investments hiding behind the shell of a fishy partnership will now enjoy less protection.

2011 Amherst Bowl

2011-12-21T09:45:00.000-08:00

Years ago I put together a father son Thanksgiving football game hoping to fill those empty morning hours and hang out with my son.

I succeeded beyond my wildest dreams.

Celebrating its 8th year, the tournament, christened "The Amherst Bowl", has swollen to 127 players spanning 6 football fields and 12 teams playing 5 continuous football games in authentic AFC or NFC team jerseys.

The trash talk begins on Labor Day and echoes through our Township’s lunchrooms and playing fields with kids wearing prior years’ jerseys like badges of glory.

During Thanksgiving’s wet early morning hours, we map out and line the fields and set up tables overflowing cakes, hot chocolate and coffee.

The horde shows up at around 8:00 a.m. eager to learn the team to which to they’ve been assigned, whom their teammates will be, and how gloriously muddy the fields are.

Shirts are distributed, rules are explained, and at 9:00 a.m. the carnage begins.

During the ensuing rigidly timed five games, fathers put their middle-aged bodies at risk, re-live their youth and play football with their sons.

Throughout the morning used soccer gear is collected by "Heads Up Soccer" which transports and distributes it to impoverished third world youth.

Additionally, monies raised are donated to "Katie at the Bat" http://www.katieatthebatteam.org/ (improving inner-city youths’ lives through athletics, literacy, nutrition and health, and the arts), "Adam Spandorfer Memorial Fund" http://www.adamsfield.org/ (raising monies for Variety Club Camp at which children with disabilities can play baseball), and Hope with Heart http://hopewithheart.com/ (providing a summer camp and building a community for children with moderate to severe heart problems).

Although, at the Tournament’s end, some need help getting off of the field, that evening’s Thanksgiving tables are abuzz with boasts of heroic plays, grudges revisited, and glorious victories.

Until next year, when we do it bigger and better.

Regulator’s Burdensome Foreclosure Abuse Investigation Resolution “Proposal”

2011-03-31T12:47:00.000-07:00

To resolve ongoing foreclosure abuse investigations, federal regulators and 50 state attorneys general recently proposed settlement terms to the 5 largest mortgage servicers ("Proposal").

The Proposal requires modification eligibility based on valuation formulas, bars simultaneous foreclosing and modifying of a residential mortgage, requires independent “modification denial” reviews, and sets forth requirements for foreclosure affidavits and internal policies to ensure settlement compliance.

The Proposal also creates significant oversight authority in the Consumer Financial Protection Bureau ("Bureau") including enforcing compliance with the Proposal’s terms, receiving information regarding servicers' loan modification policies and activities, and providing input into each servicers' Proposal compliance procedures.

Expands Modification Options and Independent Review of Modification Denials

Loss mitigation programs presently are voluntary either through independent agreements or federal initiatives like the Home Affordability Modification Program ("HAMP").

The Proposal requires servicers to offer some form of loss mitigation based on loan's "net present value" ("NPV") as defined by servicer and used in creating a “modification determination standard” of whether modification will lead to a greater NPV than foreclosure.

Further, even where not mandated by NPV or HAMP, servicers must consider loan modifications including reducing “principal” in "appropriate circumstances to provide for sustainable modifications”, offering "performance-based reductions" in lieu of principal forbearance, and forgiving 1/3 of forborne amount for borrowers complying with modification terms over a 3 year period.

The proposal also requires independent review of denied modifications through an ombudsman reviewing servicers’ files and basis for modification denial.

The Bureau will oversee loan modifications and independent review process including reviewing servicers’ modification files and NPV formula.

Bar on Dual Tracking

The Proposal eliminates "dual tracking", i.e., simultaneously foreclosing upon, and attempting to modify, a residential mortgage.
The Proposal also halts initiating a foreclosure - - or filing a motion for relief from, objecting to Chapter 13 plan confirmation in, or moving to dismiss a bankruptcy case - - while a good faith modification evaluation proceeds or restarting foreclosure activity before applicant receives a “written loss mitigation denial notice”.

This dual tracking prohibition and loan modification requirement imposes duties on servicers including providing adequate staffing and systems for tracking documents, a "single point of contact" including "email address and direct toll-free telephone number with a voicemail box”, a “designated employee” responsible for handling all loss mitigation communications, and “electronic documentation” of every foreclosure, loan modification, bankruptcy, or other servicing file action including all communications with the borrower.

Servicers must cease all collection efforts while borrowers apply for modification or make timely trial modification payments and all “judicial foreclosure state” servicers must submit an affidavit detailing their loss mitigation efforts and the results.

Enhanced Foreclosure Documentation Required

In response to "robo-signing" allegations, the Proposal increases foreclosure documentation requirements.

Affidavits must include a detailed description of affiant's basis of personal knowledge and employers must implement "standards for qualifications, training, and supervision" which, along with training materials, videotaped copies of standard training sessions, and related operational manuals shall be made available to both the attorneys general and the Bureau.

The Proposal requires servicers to conduct independent audits regarding the accuracy of their financial systems’ “mortgage information”, audit the accuracy of the information contained in foreclosure affidavits, and provide audits results to the attorneys general and Bureau.

Bureau’s Compliance, Monitoring, and Enforcement Authority

The Bureau will monitor servicers' compliance efforts and enforcement of the agreement.

The Proposal provides that servicers must adopt "enhanced" corporate governance procedures to monitor agreement compliance and provide the attorneys general and Bureau with "regular state-specific data reports” on agreement compliance with loan modification efforts and “remedial actions" including foreclosure actions court orders.

Additionally, the attorneys general and Bureau may select, and receive regular reports from, independent third parties monitoring servicers' agreement compliance and have input on servicers' procedures for resolving borrower “noncompliance with agreement” complaints.

Further, because the Proposal states that material agreement violation constitutes an “unfair and deceptive trade practice” and “duty of good faith and fair dealing” breach, the Bureau could enforce agreements through Dodd-Frank’s “prohibiting unfair and deceptive trade practices” authority.

New Jersey Courts Require Original Note and Endorsements in Mortgage Lending Proceedings

2011-02-24T11:25:00.000-08:00

New Jersey courts keep putting the screws to mortgage lenders in bankruptcies and foreclosures.

The recent In re Kemp, 440 B.R. 624 (Bkrtcy D.N.J. 2010) and Bank of New York v. Raftogianis, 10 A.3d 236 (N.J. Super. Ch. 2010) opinions refused to let a “securitized” mortgage proof of claim or foreclosure proceed without demonstrable possession of the note at “filing” or satisfying New Jersey’s Uniform Commercial Code (“UCC”) requirements.

In re Kemp involved a Countrywide Home Loans securitized mortgage loan, i.e., pooled with other mortgages into a trust consisting of mortgage loans and proceeds, that was sold to the Bank of New York as trustee. Although the pooling agreement stated that the note would be transferred with an appropriate endorsement, neither the transfer nor endorsement occurred.

After borrower filed for Chapter 13 bankruptcy, Countrywide filed a proof of claim acting as Bank of New York’s servicer but did not locate the note until trial and the endorsement, via execution of an “allonge” that is supposed to be affixed to the note, did not occur until several weeks before trial.

The In re Kemp court disallowed the proof of claim ruling that the note could not be enforced because UCC-required possession and endorsement were lacking and, while reflecting ownership, the recorded mortgage assignment did not transfer enforcement rights because the note memorializing the underlying debt was not transferred or endorsed to the Bank of New York when the mortgage was assigned.

Similarly, Bank of New York v. Raftogianis also involved a securitized mortgage loan winding up in the Bank of New York as trustee’s hands.

After the borrower defaulted, the bank filed the foreclosure and moved for summary judgment, but did not present the original note until oral argument and arguing that New Jersey Rule of Court Rule 4:34-3 allowed a case to continue by the original party following a transfer of interest.

In denying summary judgment, the Raftogianis Court held that Rule 4:34-3 did not apply in actions involving negotiable instruments like mortgage notes where plaintiffs should be able to establish possession of the note at the complaint’s filing or face dismissal.

After holding that the bank failed to prove it had the original note at the case’s filing and refusing a presumption of “possession at filing” based on bank’s ability to produce the note at trial, the Bank of New York v. Raftogianis court dismissed the foreclosure without prejudice specifying that the re-filed complaint must contain a certification confirming possession of the original note as of re-filing date and stating note’s physical location and name of entity in possession.

Both opinions reflect the increasing level of scrutiny to which mortgage lender are being subjected in New Jersey proceedings and the decreasing level playing field in which banks must defend their interests.

Yield Spread Premiums Not Governed by TILA

2010-10-26T09:20:00.000-07:00

In its September 20, 2010 Opinion, the Third Circuit Court of Appeals affirmed the trial court’s holding that yield spread premiums do not form Truth-in-Lending Act, 15U.S.C. §1601, et seq. (“TILA”) “finance charges” nor inclusion in the annual percentage rate (“APR”) calculation. Abbott v. Washington Mutual. Finance, Inc., 2008 WL 756069 (E.D. Pa. 2008).

By way of background, Barbara Abbott borrowed $130,000 from loan originator Loan City, Inc. (“Loan City”) in a loan brokered by Priority Mortgage Group (“Loan”), the HUD 1 for which notes that Loan City paid Priority a $1596.60 “yield spread premium”, i.e., monies lenders pay mortgage brokers outside of the distribution of loan proceeds for originating a loan at an interest rate higher than the lender’s minimum.

Ms. Abbott filed a Complaint demanding TILA rescission for failing to disclose or include the $1,596.40 yield spread premium as a “finance charge” or as part of Truth in Lending Disclosure Statement’s APR.

Following a bench trial, the trial court entered judgment for the lender ruling that because the lender - - and not Ms. Abbott - - paid the $1,596.40 Yield Spread Premium, TILA disclosure was not required. 2008 WL 756069, *2.

Ms. Abbott appealed arguing that the Yield Spread Premium required disclosure beyond being set forth on HUD 1 and inclusion in finance charge calculation.

Yield Spread Premium Requires No Separate Disclosure Nor Finance Charge Inclusion

TILA, as implemented by Regulation Z, 12 C.F.R. §§ 226.1 et seq., requires creditors making loans secured by borrowers’ principal dwelling to provide "material disclosures" including “annual percentage rate”, “finance charge”, and “amount financed”. In re Community Bank of Northern Virginia, 418 F.3d 277, 304-305 (3d Cir. 2005); 12 C.F.R. §226.23. Both TILA and Regulation Z expressly excludes “bona fide”, “reasonable” and “real-estate related fees from the finance charge’s computation. Davis v. Deutsche Bank Nat. Trust Co., 2007 WL 3342398, at *4-5 (E.D. Pa. 2007) citing 15 U.S.C. §1605 (e) and 12 C.F.R. §226.4( c)(7)(1).

“Yield spread premiums” are defined as a bonus paid to a broker when it originates a loan at an interest rate higher than the minimum interest rate approved by the lender for a particular loan. Escher v. Decision One Mortg. Co., LLC, 2009 WL 3127753, *4 (E.D.Pa. 2009). As long as it is disclosed on the HUD-1, and because it is already included in the disclosed interest rate, TILA and its implementing regulations do not require lenders to disclose yield spread premiums as part of a loan's finance charge or explain its impact on the interest rate. Id., *4. District Courts have uniformly held that a yield spread premium need not be separately disclosed or included as a pre-paid finance charge because it is already included in the interest rate and should not be double counted. Id., *4-*5.

Charge Was a Yield Spread Premium and Disclosed on the HUD 1

Yield spread premiums are monies lenders pay mortgage brokers outside of the distribution of loan proceeds calculated by multiplying the loan’s principal amount by the “above par value”, i.e., the percentage amount above par for which the loan’s originator can sell the loan. The “yield spread” - - or amount above par that Loan City was able to sell the Loan - - was 1.228%. The 1.228% yield spread multiplied by the Loan’s $130,000 principal equals the $1,596.40 yield spread premium that Loan City paid to Priority.

Although on January 28, 2003, Ms. Abbott “locked in” at the 6% interest rate, on that day Loan City was offering rates between 5.625% and 6.375% and between January and February 2003 interest rates between 5% and 6.75%. Thus, because Ms. Abbott was eligible for a rate of interest as low as 5% (“Approved Minimum”), 6% was not her Approved Minimum.

Because Priority originated this Loan at an interest rate higher than Loan City’s minimum rate, i.e., Ms. Abbott’s 5% Approved Minimum, Loan City paid it a $1596.60 yield spread premium outside of the loan’s proceeds.

Mortgage Reform and Anti-Predatory Lending Act

Although the Third Circuit adopted in whole the trial court’s analysis, the recently enacted Mortgage Reform and Anti-Predatory Lending Act prohibits yield spread premiums payment for referral of a loan to a lender at a higher than par interest rate.

However, the Act but does not bar pre-enactment yield spread premiums or payments passed on to third parties for bona fide charges not retained by lender or broker or impact compensation that secondary market purchasers pay for closed loans.

Mortgage Reform and Anti-Predatory Lending Act

2010-09-02T09:20:00.000-07:00

The Federal Reserve recently issued a final rulemaking regarding Title XIV of the Dodd-Frank Act ("Act") prescribing new residential mortgage loan standards, creating stringent consumer protections, and greatly increasing loan originators’ underwriting burdens.

Beyond creating incentives for lenders to only offer prime quality "vanilla" loan products, the Act and its regulations will reduce credit availability to the non-prime lending sector.

Increased Underwriting Requirements

The Act amends the Truth-in-Lending Act’s ("TILA") "mortgage originator” definition to any person, who for direct or indirect compensation, takes a residential mortgage loan application, assists a consumer in obtaining or applying to obtain a residential mortgage loan or offers or negotiates terms of a residential loan.

Excluded from the definition are persons performing "purely administrative or clerical tasks" or solely real estate brokerage activities if properly licensed, and persons making 3 or fewer fully amortized purchase money loans in any 12 month period where borrower has a reasonable ability to repay loan.

Section XIV’s core is a TILA amendment mandating that consumers be offered loans reasonably reflecting their ability to repay, that are understandable and not unfair, deceptive or abusive, and requiring originators be appropriately licensed and adhere to Secured and Fair Enforcement for Mortgage Licensing Act of 2008 requirements.

“Steering” Prohibition

The Act prohibits mortgage lenders and brokers from giving or receiving compensation that varies with loan terms (other than principal amount) and payment of yield spread premiums for referral of a loan to a lender at a higher than par interest rate but does not bar payment to lenders ultimately passed on third parties for bona fide charges not retained by lender or broker or impact compensation that secondary market purchasers pay for closed loans.

The Act directs the newly created Bureau of Consumer Financial Protection ("Bureau") to prescribe regulations prohibiting mortgage originators from steering consumers to a residential mortgage loan that they lack a reasonable ability to repay, has predatory characteristics or effects (i.e., equity stripping, excessive fees or abusive terms), is a non-qualified mortgage when consumer was eligible for a qualified mortgage, or have abusive or unfair lending impact promoting disparities among consumers of equal credit worthiness of different race, ethnicity, gender or assets.

Further, the Act prohibits mortgage originators from mischaracterizing consumer credit history or residential mortgage loans available to consumer, mischaracterizing appraised value of property securing credit extension, and discouraging consumer from seeking a loan secured by their principal dwelling from another originator if unable to suggest, offer or recommend to consumer a loan that is not more expensive than a loan for which the consumer qualifies.

“Duty of Care” and “Steering” Violations Liability

Mortgage originators violating duty of care and steering provisions are subject to TILA liability up to the greater of actual damages or 3 times the total of compensation earned by mortgage, plus litigation costs including reasonable attorney's fees.

The Act increases TILA violations statutory civil liability from current $100 – $1,000 for individual actions to $200 – $2,000 and class actions from current $500,000 to $1,000,000.

Further, the statute of limitations for bringing steering and ability to pay provisions claims is expanded from 1 to 3 years.

Additionally, borrowers may assert a defense to foreclosures brought by creditor or assignees if creditor violated anti-steering and ability to repay provisions.

Regulation Promulgation

The Act authorizes the Bureau to promulgate regulations prohibiting:
○abusive, unfair, deceptive, predatory acts or practices necessary or proper to ensure that responsible, affordable mortgage credit remains available; and
○creditors from making residential loans unless they make a reasonable and good faith determination based on verified information that, at the time loan is consummated, consumer has a reasonable ability to repay loan, according to its terms, all applicable taxes and insurance (including mortgage guarantee insurance), and assessments.

In determining “ability to repay a residential mortgage loan”, creditor must consider credit history, current income, expected income consumer is reasonably assured of receiving, current obligations, debt-to-income ratio or residual income consumer will have after paying non-mortgage debt and other mortgage-related obligations, employment status, and other financial resources other than consumer's equity in property securing loan’s repayment.

Safe Harbor and Rebuttable Presumption

Creditors and their assignees are subject to a rebuttable presumption of “repayment ability” compliance if originated loan is a “qualified mortgage” defined as any residential mortgage loan with no negative amortization or balloon payments, verified and documented income and financial resources, loan’s underwriting process is based on a payment schedule fully amortizing loan over loan’s term (or, if adjustable rate loan, underwriting process based on maximum rate permitted for first 5 years) taking into account taxes and insurance, complies with all Federal Reserve debt-to-income ratios pronouncements, total points and fees do not exceed 3 percent of total loan amount and term not exceeding 30 years.

HOEPA Expansion

The Act expands the primary federal anti-predatory lending law Home Ownership and Equity Protection Act’s ("HOEPA") scope currently applying to loan refinances with points and fees exceeding 8% of the "total loan amount" or $592.

The Act increases HOEPA coverage to purchase money loans and home equity lines of credits and creates a new APR test based on an undefined "average prime offer rate" instead of currently used yield on a Treasury Security of comparable maturity to the loan term. Under this new test, first lien loans either not secured by personal property or in amounts of $50,000 or greater will be subject to HOEPA if APR at consummation exceeds average prime offer rate by 6.5 percentage points and for subordinate lien loans if APR at consummation exceeds average prime offer rate by 8.5 percentage points.

The Act creates a new HOEPA threshold triggered if total points and fees, other than bona fide third party charges exceed in a transaction of $20,000 or more, 5 percent of "total transaction amount" or, if less than $20,000, lesser of 8% of the "total transaction amount" or $1,000.

The Act provides that a creditor or assignee, when acting in good faith, may correct a HOEPA violation if:
○within 30 days of loan’s closing and prior to institution of any action, it notifies consumer, makes "restitution" and adjustments either rendering loan compliant with HOEPA or no longer subject to statute; or
○within 60 days of creditor's discovery or receipt of notification of an unintentional violation or bona fide error, it notifies consumer and makes "restitution" and adjustments either rendering loan compliant with HOEPA or no longer subject to statute.

Restoring American Financial Stability Act

2010-05-26T09:26:00.000-07:00

On May 20, 2010, the Senate passed the Restoring American Financial Stability Act, (“Act”),
viewable, with amendments, at http://thomas.loc.gov/cgi-bin/bdquery/z?d111:s.03217:.

A comprehensive financial regulatory reform bill, the Act consolidates existing consumer protection authorities into a new Consumer Financial Protection Bureau, establishes a council to monitor and address systemic risk, and implements a resolution authority to prevent firms from being considered “too big to fail”.

Consumer Financial Protection Bureau

The Act establishes the Consumer Financial Protection Bureau, an independent entity housed within the Federal Reserve.

The Act authorizes the Bureau to write consumer protection rules for banks and nonbank financial firms offering consumer financial services or products, and examine and enforce regulations for banks and credit unions with greater than $10 billion in assets, all mortgage-related businesses (i.e., lenders, servicers, and mortgage brokers), and large non-bank financial companies (i.e., payday lenders, debt collectors, and consumer reporting agencies).

Interestingly, the Act prohibits the Bureau from defining “insurance” as a financial product or service and excludes from its authority insurance, accountants and tax preparers, attorneys, persons regulated by a state insurance regulator, merchants, retailers, other sellers of non-financial services, real estate brokerage activities, manufactured home retailers and modular home retailers.

Instead, the Act creates Office of National Insurance within the Treasury Department to monitor the insurance industry, coordinate international prudential insurance issues, and conduct a study and report to Congress on modernizing insurance regulation.

Financial Stability Oversight Council

The Act also creates the Financial Stability Oversight Council to identify, monitor, and address systemic risk and make recommendations to the Federal Reserve for heightened capital, leverage, liquidity, and risk management standards.

The Act mandates minimum leverage and risk-based capital requirements for insured depository institutions, depository institution holding companies, and for nonbank financial firms identified by the Council.

Creation and Enforcement of Consumer Rights

The Act amends the Truth In Lending Act by requiring lenders to determine a borrower’s “reasonable ability to repay” before making a mortgage and prohibits loan originator compensation that varies with loan terms other than the principal amount thereby prohibiting yield spread premiums.

The Act also requires that credit bureaus provide consumers with numerical credit scores contained in a credit report used to deny credit and allows state attorneys general to sue national banks for failure to comply with state laws or for violating Bureau issued regulations.

Financial Institution Oversight

The Act merges the Office of Thrift Supervision into the Office of the Comptroller of the Currency and the Federal Reserve will retain supervision of bank holding companies and state-chartered banks and become supervisor of savings and loan holding companies.

The Act will also require large, complex companies to periodically submit “funeral plans” for their rapid and orderly shutdown/wind-down in the event of economic failure and redefines how the Federal Deposit Insurance Company calculates the deposit insurance premiums it charges by basing premiums on the risks posed by those institutions.

The Act does not address Fannie Mae and Freddie Mac’s future and must be reconciled with H. R. 4173, the House-passed financial regulatory reform bill.

PA Supreme Court Not Making In-House Counsel’s Life Easier

2010-04-30T13:02:00.000-07:00

The Pennsylvania Supreme Court’s recent Nationwide Mut. Ins. Co. v. Fleming --- A.2d ----, 2010 WL 336171 (Pa. 2010) decision provides little guidance on the attorney-client privilege’s applicability to in-house counsel communications to his client involving more than legal advice.

Instead, the evenly split Supreme Court left standing the Superior Court’s controversial Nationwide Mutual Insurance Company v. Fleming decision denying attorney-client privilege protection to in-house counsel’s confidential communication to the corporate client containing legal advice regarding litigation.

At issue was Nationwide’s in-house attorney’s memorandum to its officers regarding the defection of Nationwide’s agents, providing the strategy behind Nationwide’s lawsuits against former agents and their new agencies, and opining as to the litigation’s likely outcome.

Although not invoking the work product doctrine, Nationwide asserted that the document was protected from disclosure by the attorney-client privilege.

Defendants argued that because two other attorney-client communications contained the same “agent defection” subject matter Nationwide had waived privilege, i.e., a director’s memorandum to Nationwide officers, employees, and attorneys outlining its response to the agents’ defections which was not labeled privileged and/or confidential; and a “Privileged and Confidential” labeled memorandum from an in-house attorney to officers, managers, and attorneys outlining counsel’s understanding regarding departing agents and the need to obtain information to assess legal options.

The trial court found that Nationwide had waived its privilege by improperly using the attorney-client privilege as both a sword and a shield through disclosing favorable “agent defection” communications while withholding an unfavorable one as privileged.

In its appeal, Nationwide argued that because the other documents were unprivileged routine business communications not revealing any protected communications to its counsel, their disclosure could not waive the attorney-client privilege as to the subject document.

The Superior Court affirmed holding that the subject document was never privileged. Instead, it
interpreted the attorney-client privilege statute as only protecting confidential communications made by a client to counsel in connection with the provision of legal services and would only protect the subject document to the extent the communications “contain and would thus reveal confidential communications from the client.”

The Superior Court found that the subject document reveal[ed] no confidential facts communicated by to counsel,” and, as a result, was not protected by the attorney-client privilege.

Because the four-member Supreme Court of Pennsylvania panel considering the appeal was equally divided, the Superior Court’s decision was affirmed.

In his opinion supporting affirmance, Justice Eakin concluded that the matter turned on waiver, finding that Nationwide “waived attorney-client privilege with respect to the subject of agent defections upon disclosing in the follow up documents, and cannot claim the privilege applies to the subject document containing the same subject matter, as well as potentially damaging admissions.”

Justice Saylor’s opinion supporting reversal concludes that all the Justices agreed that the subject document “reveals confidential client communications” and “exemplifies the substantial difficulty with a narrow approach to the attorney-client privilege rigidly centered on the identification of specific client communications, in that attorney advice and client input are often inextricably intermixed.”

Because of this unavoidable intertwining, Justice Saylor expressed a preference for protecting all confidential attorney-client communications providing legal advice instead of only client-to-attorney communications.

The lesson appears to be pare down every communication for which attorney client protection will be sought to exclusively those providing legal advice and analysis.

Further, the Nationwide Mut. Ins. Co. v. Fleming opinion suggests that to preserve the privilege, in house counsel must somehow prevent its “privilege seeking communication’s” subject matter from ever being disseminated by it or the client.

Appraisers and Appraisals: Dodging Civil and Criminal Landmines

2010-03-29T05:35:00.000-07:00

While not the only culprit, fishy appraisers have caused a tidal wave of predatory lending, mortgage foreclosure and real estate litigation, and, more recently, blistering criminal prosecutions.

Understanding appraisals’ parameters, methodology and time value, appraisers’ licensure and standards, and what is meant by “intended use” is critical to consumer finance litigation.

Real Estate Appraisals and Appraisers

An “appraisal” is an opinion of value of a parcel of land and any structures and improvements.

Although the “actual value” cannot be ascertained until the lot is sold, appraisals should be independent, impartial and objective opinions of market value based upon facts and circumstances known to the appraiser at the time.

Some appraisers specialize in residential or commercial properties, some value both, while others offer comprehensive business valuations including valuing personalty and intellectual property.

Standards for Appraisals

Appraisal practice is governed by the Uniform Standards of Professional Appraisal Practice, (“USPAP”), and any appraisal done in connection with any federally related transaction must be in accordance with USPAP.

USPAP is overseen by The Appraisal Foundation, a private nonprofit organization establishing appraisal licensure‘s minimum qualifications, which, in turn, is overseen by the Congressionally created Appraisal Subcommittee.

Although requiring appraisers to arrive at an opinion of value using a methodology consistent with these standards, industry practice and the appraisal assignment, USPAP does not dictate exactly how an appraisal must be performed.

Methodology for Appraising

Appraisals commence with information gathering - - including a site visit and taking photographs - - to ascertain recent sales of other comparable market properties, any income and expenses the property is generating, and cost of repairing any damage.

Next, appraisers determine an opinion of value using “sales comparison approach” (analyzing past comparable sales in the market), “income approach” (analyzing value based upon income the property produces), or “cost approach” (analyzing cost of rebuilding premises).

The task’s scope, intended user’s identity and nature of intended use factor into which approaches is used. For example, the sales comparison approach is heavily used in valuing single-family residential real estate, while the income approach is employed to value rental properties or businesses.

Time Value of Appraisals

Just as a picture only depicts its subject at a moment in time, an appraisal’s opinion of value may become stale immediately after its effective date.

For example, because both the market and property’s condition may rapidly change, a cluster of area foreclosures, extensive wind and water damage, or skyrocketing labor and/or building materials costs may quickly moot an otherwise valid opinion of value.

Similarly, hidden or latent defects unknown to the appraiser which are not visible upon inspection may also diminish the appraisal’s validity.

What is Meant By Intended Use

Because USPAP requires that each appraisal is performed with a specific, stated use in mind, an appraiser may utilize, ignore or weigh differently any of the approaches to value depending on the intended use.

For example, valuing a building for insurance purposes versus an outright sale may lead to applying different methodologies, which may produce differing opinions of value.

USPAP also requires that an appraisal identify its intended users. For example, in a traditional residential real estate financing setting, an appraisal is commissioned by the lender, who is the intended user for purposes of ensuring that if a mortgage default occurs the loan is sufficiently collateralized.

Joint Defense Privilege: Strength Lies in Numbers

2010-02-27T06:59:00.000-08:00

The recent In re Condemnation by City of Philadelphia, 981 A.2d 391 (Pa.Cmwlth.2009) opinion demonstrates what a powerful tool the Joint Defense Privilege is for limiting legal costs and resolving multi defendant disputes quickly, cheaply and efficiently.

The "joint defense" - - or "common interest" - - privilege extends the attorney-client privilege to information-sharing and developing joint litigation strategies between and among counsel for co-defendants.

As the In re Condemnation Court noted:

[T]he joint defense doctrine is highly desirable because it allows for greater efficiency in the handling of litigation. Frequently, co-defendants with essentially the same interests must retain separate counsel to avoid potential conflicts over contingent or subsidiary issues in the case. To avoid duplication of efforts, such defendants should be able to pool their resources on matters of common interest. This can be done most effectively if both counsel can attend and participate in interviews with each other's clients.

981 A.2d at 397.

To fall within the privilege’s protection defendants must “share a common legal, as opposed to a mere commercial or business, interest in the matter” and demonstrate that the: (1) communications were made in the course of a joint defense effort; (2) statements were designed to further that effort; and (3) privilege has not been waived. In re Condemnation, 981 A.2d at 397, n4.

Unfortunately, because of a lack of case law, including the absence of any Pennsylvania Supreme Court authority, issues surrounding the Joint Defense Privilege’s scope and availability remain unresolved.

To best invoke this tool, and cut needless legal expense incurred by duplicative communications and resolution of secondary issues amongst and between defendants, the following must be done. First, ascertain if a true common legal interest exists among or between the parties with whom the communications are to be shared. Second, execute a written joint defense agreement confirming that the participating defendants understand and agree as to the joint legal interests and to what communication the privilege extends.

Through pooling resources, joint interviewing of clients and witnesses, and unification of defense efforts, the Joint Defense Privilege streamlines and focuses litigation and profoundly reduces the costs incurred in defense.

Res Judicata Bars TILA Recovery

2010-01-27T13:35:00.000-08:00

In the recent Stuart v. Decision One Mortg. Co., LLC, 975 A.2d 1151 (Pa.Super. 2009) opinion, Pennsylvania's Superior Court barred defaulting mortgage foreclosure defendants from asserting Truth In Lending Act, 15 U.S.C.A. §1601 et seq. (“TILA”) rescission claims in a subsequent proceeding under res judicata.

Specifically, after allowing a default judgment to be entered against them in a mortgage foreclosure in which they failed to assert any counterclaims or defenses, the Stuart v. Decision One Mortg. Co., LLC plaintiffs asserted TILA rescission and money damages claims against their mortgage lender in a separate proceeding.

In affirming the trial court’s “judgment on the pleadings” grant, the Superior Court ruled that “rescission relates to the very transaction that formed the basis of the foreclosure action to which a default judgment was entered”, “res judicata applies not only to claims that were made but also to claims that could have been made” and that “a successful TILA claim would . . . undermine the {mortgage foreclosure} default judgment”. 975 A.2d at 1152-1153.

Further, Pennsylvania’s Superior Court adopted the R.G. Financial Corp. v. Pedro Vergara-Nunez, 446 F.3d 178 (1st Cir. 2006) ruling in holding that because the Stuart v. Decision One Mortg. Co., LLC plaintiffs “had the opportunity to raise rescission as a defense to the foreclosure and failed to do so” they “cannot sit out one cause of action and then force the opposing party into another action over an issue that both could and should have been raised in the first place”. 975 A.2d at 1154.

The Stuart v. Decision One Mortg. Co., LLC opinion’s impact for mortgage lenders will be enormous.

Default judgments in mortgage foreclosures will hereafter eviscerate TILA rescission claims throughout the Commonwealth of Pennsylvania.

Amherst Bowl Father Son Football Tournament

2009-12-10T13:33:00.000-08:00

Several years ago I put together a father son Thanksgiving Day football game hoping to fill those empty morning hours and hang out with my son.

I succeeded beyond my wildest dreams.

Celebrating its 6th year, the tournament, christened "The Amherst Bowl", has swollen to 127 players spanning 6 football fields and 12 teams playing 5 continuous football games in authentic AFC or NFC team jerseys.

The trash talk begins on Labor Day and echoes through our Township’s lunchrooms and playing fields with kids wearing prior years’ jerseys like badges of glory.

During Thanksgiving’s wet early morning hours, we map out and line the fields and set up tables overflowing with cakes, water, hot chocolate and coffee.

The horde shows up at around 8:00 a.m. eager to see to which to team they have been assigned, whom their teammates will be, and exactly how gloriously muddy the field is.

Shirts are distributed, rules are gone over, and at 8:30 a.m. the carnage begins.

During the ensuing rigidly timed five games, fathers put their middle aged bodies at risk while relieving their youth and playing football with their sons.

Throughout the morning soccer balls, cleats and shin guards are collected and donated to "Heads Up Soccer" which transports and distributes them to impoverished third world youth.

Additionally, monies raised are donated to "Katie at the Bat"

(http://www.katieatthebatteam.org/), improving inner-city youths’ lives through athletics, literacy, nutrition and health, and the arts, and "Adam Spandorfer Memorial Fund" (http://www.adamsfield.org/), raising monies for Variety Camp where children with disabilities can play baseball.

Although, at the Tournament’s end, some dads needed help getting off of the field, Thanksgiving tables were abuzz that evening with boasts of heroic plays, grudges revisited, and glorious victories.

Until next year, when we do it bigger and better and raise more equipment and money.

Recent Circuit Opinions Curtail RESPA Exposure

2009-10-28T12:14:00.000-07:00

In the recent Hazewood v. Foundation Financial Group, LLC, 551 F.3d 1223 (11th Cir. 2008) and Arthur v. Ticor Title Ins. Co. of Fla., 2009 U.S. App. LEXIS 13090 (4th Cir. 2009) opinions, the 11th and 4th Circuit limited lenders and tile insurers’ Real Estate Settlement Procedures Act ("RESPA") 12 U.S.C. § 2601, et seq. exposure.

RESPA protects consumers "from unnecessarily high settlement charges caused by certain abusive practices". RESPA’s prohibitions are limited to "certain abusive practices" (but not excessive fees in general) and bars settlement service providers from giving "kickbacks" for referrals or charging or splitting fees for unperformed services.

Fortifying Filed Rate Doctrine Defense

Although some argue that it provides broad relief for "overcharges" and is aimed at reducing real estate settlement services costs, RESPA is silent on whether a violation occurs for charging fees above the market rate, above the rate filed with and approved by a state regulatory authority ("Filed Rate"), or otherwise excessive.

In affirming the RESPA claim dismissal, the Hazewood court held that RESPA "does not provide a cause of action for excessive fees—that is, charges where a service was performed, but the plaintiff feels she was overcharged by the service provider."

Although the Hazewood plaintiff alleged charging fees in excess of the rates defendant had filed with, and approved by, the state, the 11th Circuit rejected dividing fees into "reasonable" and "unreasonable" portions by ruling that plaintiffs’ conceding "that a service is actually performed in exchange for a settlement fee" may not avoid RESPA claim dismissal "by arguing that the 'excessive' portion of the fee was 'unearned'".

While unremarkable on its face - - RESPA is neither a "price-control statute" nor prohibits overcharges or fees exceeding provider's Filed Rate- - Hazewood is helpful when viewed in light of the Filed Rate defense, i.e., that a plaintiff who is not overcharged for settlement services—as measured by service provider's filed rate—cannot pursue a RESPA claim.

Hazewood extends this approach in holding that, even if defendant charges above the state- regulated Filed Rate, there is no RESPA violation because any claim must be brought under state law.

Relaxation of Title Insurers’ RESPA Exposure

The Arthur v. Ticor Title Ins. Co. of Fla. Court held that a title insurer is not liable under RESPA despite splitting fees and charging fees above its Filed Rate when both the insurer and "split fees recipient" performed settlement services.

Like the Hazewood Court, the 4th Circuit rejected the argument that fees could be divided into a reasonable, legal portion (the Filed Rate amount) and unreasonable, illegal portion (the amount exceeding the Filed Rate) ruling that RESPA "does not authorize a court to divide charges into valid and invalid parts and to decide that the invalid part is not for services performed" or "create liability for improper pricing".

The 4th Circuit also rejected the assertion that fee-splitting constituted a "kickback" in violation of RESPA because the split fees agents "indisputably performed settlement services".

Mortgage Loan Industry Licensing and Consumer Protection Law

2009-09-30T10:38:00.000-07:00

The recently enacted Mortgage Loan Industry Licensing and Consumer Protection Law, 7 Pa C.S.A. §6101, Et Seq. (“MLILCP”) - - repealing much of the Mortgage Bankers and Brokers and Consumer Equity Protection Act (“MBBA”) and all of the Secondary Mortgage Loan Act (“SMLA”) - - tightens regulation of individuals soliciting mortgage loans, increases education requirements for mortgage professionals, and enhances the Pennsylvania Department of Banking’s (“DOB”) powers.

“Mortgage Originator” Licensing

MLILCP establishes a new licensing category of "mortgage originator" defined as an individual not otherwise licensed soliciting, negotiating or accepting mortgage loan applications having direct contact with consumers.

Mortgage originators are prohibited from engaging in the mortgage loan business unless employed and supervised by a licensed mortgage broker, mortgage lender or mortgage loan correspondent and assigned to a licensed location.

Employer licensees must maintain a list of all current and former originators and, if they suspect illegal activity, provide the DOB with written notification and proposed corrective measures.

Increased Education and Test Requirements

MLILCP substantially expands mortgage licensees’ current education requirements.

To obtain a new license, a mortgage originator license applicant must have successfully completed a minimum of 12 hours of professional education instruction and passed a new testing program regarding first and secondary mortgage loan business and various relevant federal and state laws.

To maintain a license, a mortgage broker, mortgage lender or mortgage loan correspondent must demonstrate that at least one person from each licensed office who is not a mortgage originator and all mortgage originators employed by the licensee have attended at least six hours of continuing education per year.

Licensing Scope Expanded

MLILCP expands the coverage of Pennsylvania's mortgage banking laws including repealing the MBBA’s licensing exemption for persons originating less than three first mortgage loans per year and the SMLA’s licensing exemption for a person originating two or fewer secondary mortgage loans per year.

Mortgage Loan Payoff Procedure

MLILCP requires a mortgage lender upon payment in full to cancel any insurance, stamp any note "paid in full" or "canceled," and return the loan agreement or note to the consumer within 60 days.

Restrictions on First Mortgages

Whereas the MBBA did not restrict fees a licensee could charge, MLILCP now specifies which fees a licensees may charge on first mortgage loans for title examination, credit reports, appraisals, notaries, tax service and other fees actually related to the processing of a mortgage loan application or making a mortgage loan when such fees are actually paid or incurred by the licensee.

Additionally, MLILCP limits application fees to not more than 3% of the original principal and bars charging a non-refundable "application fee" to cover overhead processing costs beyond 3% application fee that can only be charged on closed loans.

MLILCP also limits delinquency charges on second mortgage loans of $20, or 10 percent of each payment, whichever is greater for a payment which is more than 15 days late.

Additionally, beyond requiring that payment and acceptance of a broker's fee comply with the Real Estate Settlement Procedures Act, (“RESPA”), MLILCP requires compliance with laws including RESPA, Truth in Lending Act, and Equal Credit Opportunity Act.

Higher Penalties

MLILCP increases penalties for violations from $2,000 to $10,000 per offense.

Court Invalidates Mortgage Prepayment Provision

2009-08-19T11:26:00.000-07:00

A Pennsylvania court recently rejected a foreclosing lender's prepayment premium claim in In re Atrium View, LLC, 2008 WL 5378293 (Bkrtcy.M.D. Pa. 2008).

Nineteen (19) months after the loan’s origination, the mortgage lender sought enforcement of Note’s prepayment provision requiring “six (6) months interest” on any principal balance being repaid within three (3) years of the closing.

After reiterating dual criteria for enforcing prepayment premium demand - - that prepayment must be reasonable under state law and, as required by 11 U.S.C. §506(b), be contained in loan documents and “reasonable” - - the Court determined that Pennsylvania law did not bar prepayment premiums and focused on “reasonability”.

The Court noted that prepayment premium’s purpose is ensuring that a lender “obtains the benefit of the bargain by protecting it against falling interest rates” and the burden of establishing “reasonableness” requires demonstrating how accurately the premium “predicts actual losses that will be incurred” if obligation is paid before the term’s end.

The Court ruled that because its "[i]n the current residential subprime mortgage industry, a typical prepayment premium is six months' interest” argument provided no “prepayment premium approximates reasonably predicted losses” evidence, the lender failed to establish premium’s reasonableness and rejected the prepayment claim.

Unfortunately, the In re Atrium View holding ignores the impact of failing to protect against declining interest rates.

Like insurance companies and investment funds committed to maintaining investors’ returns based on anticipation of long-term cash flow for mortgage investments, lenders often make commitments based on anticipated interest returns.

If high-yielding mortgages are prepaid when interest rates have fallen, lenders may be unable to maintain yield commitments to their investors, including guaranteed annuity payments.

Another inequity the In re Atrium View ruling imposes is that junior lenders might receive funds otherwise used to pay senior lender’s prepayment fee.

Because junior lenders advance money with the awareness of the senior mortgage’s terms, including the prepayment premiums, In re Atrium View places junior lenders in a stronger secured position at the senior lender’s expense, which, in turn, encourages senior lenders to prohibit secondary lending.

Home Improvement Consumer Protection Act

2009-07-22T10:43:00.000-07:00

On July 1, 2009, the Home Improvement Consumer Protection Act, 73 P.S. §§517.1, Et. Seq (“HICPA”) went into effect to curtail home improvement abuses.

As described below, HICPA requires contractors to resister with the Attorney General’s office, maintain at least $50,000 of property damage and personal injury insurance, prohibits “home improvement fraud”, defines what must be included - - and excluded - - from home improvement contracts, and imposes severe criminal and civil penalties.

“Contractor” Under HICPA

HICPA applies to contractors performing over $5,000 of annual “home improvements” including “construction, replacement, installation or improvement” of driveways, pools, central heating, air conditioning and solar energy systems, pool houses, garages, roofs, siding, insulation, security systems, flooring, patios, fences, gazebos, sheds, cabanas, painting, doors, windows, waterproofing, and storm windows or awnings.

Registration Requirements

HICPA requires contractors to register with the Attorney General every two (2) years and provide information including name, home address, telephone number, driver’s license numbers, social security numbers, prior “home improvement businesses” names, criminal convictions relating to a home improvement transaction, fraud, theft, deception or fraudulent business practices, judgments entered against applicant relating to home improvement transactions, bankruptcy filings, and any certificate or license revocation or suspension or disciplinary action from any another area in which applicant is registered.

Duty to Maintain $50,000 Property Damage and Personal Injury Insurance

HICPA also requires that all contractors obtain and provide proof of liability insurance covering personal injury and property damage of at least $50,000.

Home Improvement Contracts Terms Required/Barred By HICPA

HICPA requires that every home improvement contract:

contain work’s approximate starting and completion date.
describe work to be performed, materials to be used and specifications, which cannot be changed without a written change order signed by owner and contractor.
include all subcontractors’ names, addresses and telephone numbers.
verify that contractor agrees to maintain insurance and identifying amount of insurance maintained.
include total sales price due.

HICPA also provides a list of prohibited contractual provisions which, if included, empowers consumer to void the contract.

Civil & Criminal Violations

HICPA prohibits “home improvement fraud” defined as “misrepresenting true name of salesperson, contractor or business, damaging property with intent of inducing consumer into purchasing home improvement services, misrepresenting cost of materials, altering any agreement or mortgage and publishing false advertisement”.

Under HICPA “home improvement fraud” can be criminally prosecuted as a 1st degree misdemeanor or 3rd degree felony (depending if contract is for more than $2,000) and increases offenses’ grading if victim is 60 years old or older. HICPA’s criminal penalties include revocation or suspension of contractor’s certificate.

Civilly, any HICPA violation forms a per se Unfair Trade Practices and Consumer Protection Law, 15 Pa. Cons. Stat Ann. §§ 201-1, et seq. (“Consumer Protection Law”) violation which allows for recovery of treble damages and attorneys’ fees. HICPA expands the Consumer Protection Laws scope by:

requiring contractor to refund any amount paid within 10 days of “written refund request” receipt if 45 days have passed since work’s start time without performance of “substantial portion” of work.
prohibiting contractor from materially deviating from plans or specifications without written change order containing deviation’s price change.
barring contractor from accepting deposit exceeding of 1/3 of contract price (and cost of specially ordered materials) in contracts over $1,000.

Credit CARD Act of 2009

2009-06-30T13:58:00.000-07:00

On May 22, 2009, the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (“CARD Act”) was signed into law.

Many of the CARD Act's provisions track recently approved Federal Reserve System ("Federal Reserve") regulations and amending the Truth in Lending Act ("TILA") to include additional consumer protections, enhanced consumer disclosures, and special protections for consumers under 21, the Fair Credit Reporting Act regarding special protections for young consumers and deceptive credit report marketing, and the Electronic Fund Transfer Act targeting gift cards.

Like the Federal Reserve’s recent regulations, the CARD Act:
○limits when interest rates may be increased, thereby prohibiting "universal default" (i.e., where default in one obligation deemed to cause default in consumer’s universe of obligations);
○prohibits double-cycle billing;
○limits circumstances under which payments may be considered late;
○limits permissible methodologies for allocating payments exceeding “minimum amount due”;
○place restrictions on subprime credit cards; and
○mandate changes to certain disclosures.

Additionally, the CARD Act’s provisions:
○limit changes to other account terms;
○restrict use and amount of fees;
○require evaluating consumer's ability to repay when opening new account or increasing existing account’s credit limit;
○mandate posting of credit card agreements on the Internet;
○provide special protections for consumers under 21, including limiting marketing of credit cards to college students;
○imposes rules governing prepaid and gift cards;
○increases TILA penalties for issuers equaling twice finance charge amount with a $500 minimum and $5,000 maximum, or a higher amount if based on an established pattern or practice; and
○ curbs “free credit reports” advertisements.

Both the CARD Act and Federal Reserve’s new regulations are likely to affect credit cards’ availability and cost, consumer behaviors regarding credit cards purchases and payment patterns, and revenues of credit card issuers and processors, as well as retailers, colleges, and others involved in credit card programs.

Mortgage Reform and Anti-Predatory Lending Act of 2009

2009-05-21T14:23:00.000-07:00

Earlier this month the Houses of Representatives passed HR 1728, the "Mortgage Reform and Anti-Predatory Lending Act", a revival of HR 3915 which was passed by the last Congress but never taken up by the Senate.

Like HR 3915, HR 1728 contains “repayment ability” and “borrower benefit standards” provisions, “prepayment penalty” and “yield spread premium” restrictions, and imposes responsibilities on secondary market participants.

Also like HR 3915, HR 1728 establishes a "duty of care" for mortgage originators, prohibits "steering" borrowers to products that are not in borrower’s "interest", and requires mortgage originator’s licensing and registration. This duty of care includes standards regarding determination of a borrower's repayment ability and, for refinances, determination of a “net tangible benefit” and “qualified safe harbors” from which "qualified mortgages" meeting certain stringent requirements are exempted.

Unlike HR 3915, HR 1728 requires loan originators to retain a portion of the mortgages as a means of sharing credit risk with subsequent purchasers/”securitizers” (i.e., one transferring, conveying, or assigning residential mortgage loans including to any securitization vehicle).
HR 1728 also amends the Home Ownership and Equity Protection Act by significantly expanding both "high-cost mortgage’s" definition and afforded protections, creating safeguards for escrow accounts and lender/forced placed insurance, and amending the Real Estate Settlement Procedures Act to require faster consumer inquiry responses, increased penalties, and prompt payment crediting.

HR 1728 fortifies appraiser requirements by establishing stronger appraiser independence standards backed both by tough enforcement provisions and more stringent appraiser licensing and education standards.

If enacted in its current - - or an even a vaguely similar - - draft, HR 1728 could quell the credit markets at a time when liquidity is desperately needed.

Further, it is unclear whether originators would make - - and whether key current secondary market players like Fannie Mae and Freddie Mac would buy - - non "qualified safe harbor mortgages" and, if so, whether depository institutions and private mortgage companies will retain the requisite recourse when selling or securitizing the loans.

Lenders Now Liable For "Excessive" Hazard Insurance

2009-04-23T13:58:00.000-07:00

Pennsylvania now holds lenders liable for requiring hazard insurance which exceeds structures replacement value.

The attached recently enacted Mortgage Property Insurance Coverage Act, 7 P.S. § 6701, et seq. ("Act") provides that:
No lender may require a borrower, as a condition of obtaining or maintaining a secured loan, to obtain property insurance coverage which exceeds the replacement value of buildings and structures situate on the land used to secure the loan. A borrower on a loan secured by real property may not be required to insure the value of the land.

Thus, any loan closed after July 5, 2008 involving hazard insurance exceeding structures’ replacement value violates the Act and renders lenders liable.

Unfortunately, the Act fails to define "required" or "as a condition of obtaining or maintaining secured loan", explain whether a private action exists and, if so, what the penalties are, or rule out Unfair Trade Practices and Consumer Protection Law, 73 P.S. §§ 201-1, et seq.’s treble damages and attorneys’ fees penalties for Act violations.

Further, the Act provides no safe harbor for complying with Fannie Mae/Freddie Mac mortgage form "Section 5 Property Insurance" language that:
Borrower shall keep improvements now existing or hereafter erected on Property insured against loss . . . included within term "extended coverage" and any other hazards . . . for which Lender requires insurance. This insurance shall be maintained in amounts including deductible levels and for periods Lender requires.

Recent Caselaw Helping Lenders

2009-03-27T08:26:00.000-07:00

Finally, a break for the lenders.

In the recent Morilus v. Countrywide Home Loans, Inc., 2008 WL 5377627 (E.D. Pa. 2008) opinion, the U.S. District Court for the Eastern District of Pennsylvania dismissed loan origination claims against a lender arising exclusively from allegations of mortgage broker wrongdoing.

The Court examined whether the lender was liable for the broker’s action under an agency theory, the elements of which are manifestation by the principal that the agent shall act for him, the agent's acceptance of the undertaking, and the understanding of the parties that the principal is to be in control of the undertaking.

The lender argued that there was no evidence of a manifestation of intent for the broker to act on its behalf, nor was there ever any understanding between it and the broker.

Plaintiffs responded that the lender had exerted such a high level of control that the broker must be its agent and not an independent contractor.

The Court concluded that to be an agent, the control "must be of such a high degree that the purported agent is deemed to have had almost no independence" and that plainitffs could only demonstrate that if the broker worked for the lender, it was only was required to abide by certain of the lender’s guidelines.

Further, in rejecting the apparent agency claim, the Court ruled that the determination hinged on whether a principal "leads persons with whom his agent deals to believe he has granted certain authority which actually exceeds the scope of the agency" but that plainitffs failed to demonstrate any action by the lender indicating that the broker was its apparent agent. For example, the Court noted that the broker had the ability to submit the mortgage application to any lender in the industry and not just the lender that was ultimately selected.

Because many negligence, fraud, and Unfair Trade Practices and Consumer Protection Law, 73 P.S. §§ 201-1, et seq. violations claims against lenders stem from mortgage broker’s acts and omissions, Morilus will a tremendous help in getting claims dismissed.

Philadelphia Mortgage Foreclosure Court

2009-02-24T10:01:00.000-08:00

We’re a hit in Kentucky!

As the attached article sets forth, Philadelphia’s Mortgage Foreclosure Diversion Pilot Program - - of which I was a pioneer and in which I serve as Judge Pro Tem - - is being eyed by Kentucky, Maryland, New York, and New Jersey courts.

The Program provides for early court intervention in residential owner-occupied mortgage foreclosures to both facilitate loan work-outs and permit lenders to proceed freely to sheriff sales.

As always, if you have any question about litigation in Pennsylvania and New Jersey, please do not hesitate in calling.

Phila. Foreclosure Program Is Eyed by Kentucky Court
The Legal Intelligencer By Amaris Elliott-Engel January 16, 2009

Philadelphia's mortgage foreclosure diversion pilot program has garnered a lot of press coverage, but the true success of the mediation program might be measured in how many other jurisdictions want to copy the program to deal with their own foreclosure crises.

A group visiting from Louisville, Ky., last week was the fourth out-of-state contingent to visit City Hall in order to witness the program overseen by Philadelphia Common Pleas Judge Annette M. Rizzo.

Delegations from Maryland, New York and New Jersey already have visited, Rizzo said. A group from California is slated to come in the future, and officials from around Pennsylvania have visited, the judge said. Allegheny County has just started its mortgage foreclosure program, based partly on Philadelphia's program.

James Shake, the Kentucky chief judge in the Jefferson Circuit Court, Division 2, said during a working lunch over sandwiches that he and the other Kentucky visitors wanted to visit Philadelphia in order to be able to model their program after the parts of Philadelphia's program that are effective.

A similar program in Ohio was a "miserable failure," so the Kentuckians wanted to see what has made Philadelphia's program so successful, Shake said. Shake's determination is that "social work," or the direct outreach to homeowners, has made Philadelphia's program as successful as it has been.

Ian Phillips, legislative director for Pennsylvania ACORN, a community group with national reach, said during the lunch that conducting door-to-door outreach to borrowers whose homes are under foreclosure has increased the response of borrowers. On average, it takes 1.65 door knocks before outreach will connect with a homeowner or a relative, Phillips said.

ACORN, as well as 14 other organizations, including neighborhood advisory committees, has been conducting door-to-door outreach on behalf of the city. Carolyn Brown, of the city of Philadelphia's Office of Neighborhood and Business Services, distributes the list of homeowners whose residences are subject to foreclosure and that the community organizations contact.
Phillips said simply sending out mailings about the court program won't get a response from financially struggling homeowners deluged with mailings disguised as official matters.
Brown said it costs $25 to pay for three door-knockings in a dense neighborhood.

Dan Albers, a Jefferson Circuit Court Master Commissioner, said all foreclosure cases in his jurisdiction are first funneled through the commissioners. Because cases first come through the commissioners, Albers said the commissioners might conduct the foreclosure mediations. The commissioners review the cases and make recommendations to judges about the cases, Albers said.

There were 4,800 foreclosure filings last year in his jurisdiction, Albers said. Rizzo said Philadelphia's program handled 10,000 filings.

The Kentucky contingent included members of the lender bar, members of the public interest bar representing borrowers and community organizers.

Just as Philadelphia has a steering committee with municipal, judicial, lender and borrower stakeholders, the Louisville court project has similar buy-in, Shake said. Many of the members of the Philadelphia steering committee, chaired by Lesia Kuzma of the city's Law Department, came to the lunch with the Kentucky visitors.

Albers said he was amazed at the receptiveness of lenders and Louisville Mayor Jerry Abramson to the effort to build a mediation program for foreclosure cases.

"There was no one that refused," Albers said.

While Shake is the chief judge, he said that he is like an "elected queen" and has no authority over how his colleagues handle the foreclosure cases on their dockets. During an upcoming team meeting, Shake said he hopes that every judge will unanimously adopt a proposed order that will pause foreclosure cases to see if loan workouts are possible following mediations in those cases.
During the Kentucky visit last week, Philadelphia Common Pleas President Judge Pamela Pryor Dembe said that creating a program like Philadelphia's "gets a group of lawyers who chew on each other's ankles to work together."

The Kentucky group stayed for two days.

Paul Lewis, chief of staff to former Chief Judge of New York Judith Kaye, said in an interview last year that following a visit to Philadelphia, the New York contingent discovered that Philadelphia was getting a higher response rate from borrowers than New York was to the court's foreclosure conferences.

New York's program started in Queens County before rolling out to the rest of the state, Lewis said. Queens County had one of the highest foreclosure rates growing from 1,855 in 2004 to over 6,000 in 2008, Lewis said. The New York contingent visited last spring.
New York officials have been reaching out to plaintiffs' representatives to get contact information for the defendants in the cases, sending letters to the defendants informing them of their right to foreclosure conferences and then giving defendants' a telephone number to call the courthouse, as well as the phone numbers of local legal providers, Lewis said.
New Jersey made their foreclosure mediation program optional, so that is one way to make a foreclosure court program manageable in terms of the number of cases, Rizzo said. But she said that in Philadelphia she wants to reach every house that is subject to foreclosure.
Rachel K. Gallegos, Rizzo's law clerk, said that she has seen stakeholders have greater buy-in into the program because lenders' attorneys are meeting face-to-face with borrowers and their counsel, most of them pro bono volunteers.

The housing crisis, and the broader recession, has broken down the hierarchy stretching from the rich to the poor, Gallegos said.

"You either take part, or you watch everybody go down in flames," Gallegos said.