3rd Circuit Extends TILA Rescission Limitations Deadline

In its Sherzer v. Homestar Mortgage Services, 2013 WL 425835 (3d Cir. 2013) opinion, the Third Circuit Court of Appeals reversed its prior position and held that mailing a rescission demand letter - - and not filing a lawsuit - - satisfies the Truth in Lending Act, 15 U.S.C. §§1601 et seq.'s ("TILA") three (3) year limitations period.  

Specifically, TILA, which allows consumers to rescind residential mortgage loans following lender's failure to make required disclosures, sets forth that the "right of rescission" expires three (3) years after the loan is closed.  15 U.S.C. §1635(f). 

In Sherzer v. Homestar Mortgage Services, the Third Circuit reversed the district court’s dismissal of the action and rejected the lender’s argument that the lawsuit was not timely because it was not filed within three (3) years of the loan's closing holding that by mailing a rescission notice within the three (3) year period the borrowers had timely rescinded the loan. 

The Third Circuit found that the borrowers’ position was not foreclosed by the U.S. Supreme Court’s TILA interpretation in Beach v. Ocwen Federal Bank, 523 U.S. 410, 411–13, 118 S.Ct. 1408 (1998) which the Sherzer opinion interpreted as not addressing how a borrower must exercise his rescission right within such period to prevent its extinguishment. 

The Sherzer opinion also contradicts the Third Circuit’s 2011 unpublished Williams v. Wells Fargo Home Mortgage, Inc., 410 Fed. Appx. 495 (3d Cir. 2011) decision in which it deemed a borrower’s rescission claim "untimely" because, despite having sent a rescission notice within three (3) years of the closing, the borrower did not file her lawsuit within such period. 

Further, the Third Circuit rejected concerns that allowing borrowers to rescind soley by written notice could indefinitely cloud a lender’s title because uncertainty about the right to rescind could continue until either the borrower filed a rescission lawsuit or the lender brought a foreclosure or declaratory judgment action.  

Instead, despite acknowledging that its holding “could potentially impose additional costs on banks, as it costs little for an obligor to send a letter to the lender while, on the other hand, the lender would incur some cost to sue to determine title", the Third Circuit found  that “[o]nce alerted to the cloud on its title, a lender could sue to confirm that the obligor’s rescission was invalid or do nothing and assume the risk that a court might later rule that the rescission was valid.”  2013 WL 425835 at pg. 7-9. 

The Third Circuit joins the Eleventh and Fourth Circuits in holding that notice alone within the three (3) year period is sufficient to validly exercise a right to rescind whereas the Ninth, Tenth and First Circuits adopt the contrary view.  See Gilbert v. Residential Funding LLC, 678 F.3d 271, 277–78 (4th Cir. 2012); Williams v. Homestake Mortgage Co., 968 F.2d 1137, 1139–40 (11th Cir. 1992);  Rosenfield v. HSBC Bank, USA, 681 F.3d 1172, 1188 (10th Cir. 2012); Yamamoto v. Bank of N.Y., 329 F.3d 1167, 1172 (9th Cir. 2003); Large v. Conseco Fin. Servicing Corp., 292 F.3d 49, 54–55 (1st Cir. 2002). 

In light of this "circuit split" if a petition for certiorari is filed it is likely that the U.S. Supreme Court will agree to hear the case.

Third Party Communication Under Fair Debt Collection Practices Act

Two (2) recent opinions provide guidance on acceptable "third party communication" under the Fair Debt Collection Practices Act, 15 U.S.C. §§1592, et seq.  ("Act") barring collection letters addressed to a debtor's employer but easing restrictions on "dunning voicemails".

"Fair Debt Collection Practices Act" 3rd Party Communications Bar   

The Act regulates "debt collection activity" on "family, personal or household purposes" transactions.  15 U.S.C. §1692(a).

The Act defines a “communication” as the “conveying of information regarding a debt directly or indirectly to any person through any medium.”  Id.

The Act prohibits a debt collector, without debtor's consent, from communicating about collecting a debt with one other than a debtor and his attorney, consumer reporting agencies, a creditor and its attorney, or a debt collector's attorney.  15 U.S.C. §1692c(b).

Prohibition on Addressing Collection Letters to Debtor's Employers 

In Evon v. Law Offices of Sidney Mickell, 688 F.3d 1015 (9th Cir. 2012), the U.S. Court of Appeals for the Ninth Circuit ruled that sending a collection letter to debtor's employer's address addressed to debtor "in care of" employer without debtor's consent forms a per se violation of the Act's third-party communications bar.

The Evon plaintiff's employer had opened the letter addressed to her, the envelope for which listed defendant "law office" as the return address.

The Ninth Circuit ruled that the debt collector "knew or could reasonably anticipate" that a letter sent to a debtor's employer "might be opened and read by someone other than the debtor", because of the return address, someone handling plaintiff's mail would know that she "was receiving legal mail, a fact many people would prefer be kept private", and "disclosing a consumer's personal affairs to his or her employer is a form of collection abuse."  688 F.3d at 1019.

Non Specific Dunning Voice-Mail Permitted

In Zortman v. J.C. Christensen & Associates, Inc., No. 10-3086 (D. Minn. May 2, 2012), the Minnesota District Court held that a voicemail containing caller’s name and identifying him as a debt collector with “an important message” was not a prohibited “communication” under the Act.

The message, left on plaintiff’s cellular phone, included the debt collector’s phone number but did not identify a consumer or a debt and was heard by plaintiff's children to whom she had lent her phone.

Because the voicemail message was not directed to the plaintiff by name and did not identify a debt, the Zortman Court message ruled that it would not convey that the plaintiff was being called in connection with a debt and was unwilling to find “indirect communications” based on “inferences or assumptions by an unintended listener” that the plaintiff was the intended recipient or that the call, because it was from a debt collector, was necessarily to collect a debt.

The District Court also found that the “important message” language did not “convert [the debt collector’s] simple self-identification and telephone number into an indirect conveyance of information about a debt” and use of “important” conveyed no substantive information about the call’s purpose.

According to the Zortman Court, the Act as imposes no "third party communication" liability based on a voicemail message revealing no more than a hang-up call, a cellular phone’s “missed call” log, caller ID, or an Internet search for caller’s phone number.

Impact of Evon and Zortman Opinions

Beyond barring collection letters addressed to a debtor's employer and easing non specific "dunning voicemail" restrictions, the Evon and Zortman opinions provide guidance on acceptable "third party communications" under the Act.

First, the Evon Court based its ruling on the Federal Trade Commission's Act Staff Commentary providing that a debt collector cannot "send a written message that is easily accessible to third parties" or use an "in care of" letter unless the consumer "lives at, or accepts mail at, the other party's address." 

Thus, the lesson of Evon is that communications' easy access by a third party is a heavily weighed factor in deeming it a wrongful third party communication.

Second, the Zortman opinion eases the "collection voicemail restrictions" imposed by the Foti v. NCO Financial Systems, Inc., 424 F.Supp.2d 643 (2006) of requiring a debt collector to either hang up or leave an awkward, elaborately scripted message. 

Pursuant to Zortman, voice-mails that are not directed to the plaintiff by name nor identify a debt do not form a wrongful communications under the Act.

Supreme Court’s Freeman v. Quicken Loans Decision

In last month’s landmark Freeman v. Quicken Loans, Inc., No. 10-1042, 566 U.S. --- (2012) opinion, a unanimous United States Supreme Court ruled that establishing a “wrongful settlement service charge under” Real Estate Settlement Procedures Act, 12 U.S.C. §2607 (“RESPA”) required demonstrating that a charge was divided between two or more persons.

Beyond holding that RESPA excludes a single provider’s alleged “unearned fee retention”, the Freeman v. Quicken Loans, Inc. opinion is being heralded as a powerful tool for limiting regulatory discretion and overreach.

Background on RESPA

Enacted in 1974, RESPA regulates “any service provided in connection with a real estate settlement” such as “title searches, . . . title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, . . . services rendered by a real estate agent or broker, the origination of a federally related mortgage loan . . . , and the handling of the processing, and closing or settlement.” 12 U.S.C. §2602(3).

Among RESPA’s consumer-protection provisions is §2607, which furthers Congress’s stated goal of “eliminat[ing] . . . kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services.” §2601(b)(2).

Specifically, §2607(a) of RESPA provides:
“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 a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”

Further, §2607(b) adds:
“No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”

Any person who violates §2607 is liable to consumers for attorneys fees and damages including three (3) times the prohibited settlement service charges. §2607(d)(2).

Although initially authorizing the Department of Housing and Urban Development (“HUD”) to “prescribe rule and regulations” and “make such interpretations necessary to achieve RESPA’s purpose, on July 21, 2011, Congress transferred these functions to the newly formed Bureau of Consumer Financial Protection (“CFP”).

Freeman v. Quicken Loans, Inc. Background

After obtaining mortgage loans from Quicken Loans, Inc. (“Quicken”), the Freeman v. Quicken Loans, Inc. plaintiffs claimed that despite being charged respective loan “discount”, “processing” and “origination” fees, Quicken’s failed to provide a lower interest rate violating §2607(b)’s prohibition on fees for which no services were provided.

The United States Court of Appeals for the Fifth Circuit affirmed the trial court’s RESPA claim dismissal on summary judgment holding that because the allegedly unearned fees were not split with another party, no §2607 violation occurred.

Freeman v. Quicken Loans, Inc. Opinion

In a unanimous decision, the Supreme Court affirmed the Fifth Circuit’s ruling that §2607(b) encompasses only a settlement-service provider’s splitting of a fee with other persons and excludes a single provider’s “unearned fee retention”.

Interestingly, and in direct contravention of the CFB’s “friend of the court brief”, the United States Supreme Court held that although RESPA’s general purpose is protecting consumers from “certain abusive practices,” RESPA provides no basis for expanding §2607(b)’s prohibition beyond that to which it is unambiguously limited.

Freeman v. Quicken Loans, Inc. Opinion’s Impact

Writing for the Court, Justice Antonin Scalia declared that HUD’s RESPA interpretation was “manifestly inconsistent with the statute HUD purported to construe” and the statute’s express language “clearly describes two distinct exchanges” not an exchange of fees of a company to itself.

Stated another way, all nine (9) justice came together to limit regulators from poaching legislator’s authority and gave the newly CFB its first judicial “time out”.

In many circles, the Freeman v. Quicken Loans, Inc. opinion is being heralded as a powerful tool for limiting regulatory discretion and overreach.

For example, to accuse financial institutions of discrimination under the 1968 Fair Housing Act and 1974 Equal Credit Opportunity Act, the Department of Justice has been using a “disparate impact analysis”, i.e., a statistical analysis which ignores the purported wrongdoer’s intent.

However, because neither statute’s express language supports “disparate impact analysis” use, the Freeman opinion suggests the entire Supreme Court is inclined to curb this type of overreaching.

Consumer Financial Protection Bureau’s 1st 6 Months

Six months have elapsed since the Consumer Financial Protection Bureau’s (“Bureau”) July 21, 2011 launch, during which “consumer financial protection” was consolidated from 7 federal agencies into the Bureau charged with protecting consumers and increasing financial transactions’ transparency.

Following a controversial director appointment, the Bureau implemented a federal “nonbank,” supervision program for mortgage companies, payday lenders, and private education lenders, released a “Supervision and Examination Manual” of banks, thrifts, and credit unions with assets exceeding $10 billion, and launched an interactive website and a Facebook page.

Bureau’s Creation and Powers
Created by Title X of the Consumer Financial Protection Act of 2010 (“Dodd-Frank Act”), the Bureau is an independent agency under the Federal Reserve System charged with protecting consumers and increasing financial transactions’ transparency.

The Dodd-Frank Act provides the Bureau with broad regulatory and rulemaking authority under numerous existing federal consumer protection laws along with the power to enact new regulations and take enforcement and supervisory actions regarding consumer financial products and the entities that deal in them, i.e., banks, financial institutions, mortgage companies, payday lenders, and private education lenders.

The Bureau embodies the consolidation of “consumer financial protection’s” from 7 federal agencies into 1 agency comprised of 6 divisions: Consumer Education and Engagement; Supervision, Enforcement, Fair Lending, and Equal Opportunity; Research, Markets, and Regulations; General Counsel; External Affairs; and Chief Operating Officer.

The Bureau regulates "consumer financial products and services" encompassing:
•extending credit and servicing loans, including mortgages;
•extending or brokering leases of personal or real property;
•providing real estate settlement services;
•engaging in deposit-taking activities;
•transmitting or exchanging funds;
•acting as a custodian of funds or any financial instrument for use by or on behalf of a customer;
•selling, providing, or issuing stored value or payment instruments;
•check cashing, check collection, or check guaranty services;
•providing payments or other financial data processing products or services;
•collecting, analyzing, maintaining, or providing consumer report information or other account information; and
•collecting debt, including foreclosing on property.

“Bureau Director” Appointed
Although it appeared that Harvard Professor Elizabeth Warren, the Bureau’s purported “architect”, would be appointed, “polarization” issues caused President Obama to nominate Richard Cordray as the Bureau’s initial director.

As Ohio’s former Attorney General, Cordray pursued claims against the consumer financial services industry including “unfair or deceptive acts or practices law” violation actions against mortgage servicers.

After 44 Republican senators indicated that they would not approve any nomination until the Dodd-Frank Act was modified to dilute the Bureau and its director’s powers, and the Senate voted down the nomination in December 2011, President Obama seated Cordray as the Bureau’s director using his executive authority.

Director Corday’s first official act was implementing a federal non-depository, or “nonbank” supervision program, defined as any company providing “consumer financial products or services but does not have a bank, thrift, or credit union charter”.

Under the new program, the Bureau will oversee nonbank business in particular markets including regulating mortgage companies, payday lenders, and private education lenders.

Additionally, the Bureau may supervise “larger participants” in the “consumer financial services industry” including debt collection, consumer reporting, prepaid cards, debt relief services, consumer credit, and money transmitting.

Bureau issues “Supervision and Examination Manual 1.0” and Launches Web Page

In October 2011, the Bureau released version 1.0 of its Supervision and Examination Manual (“Manual”), a guide to its supervision of banks, thrifts, and credit unions with assets exceeding $10 billion and tool for examining consumer products and services providers other than depository institutions.

The Manual incorporates Federal Financial Institutions Examination Council developed procedures (including its Uniform Interagency Consumer Compliance Rating System) and provides “mortgage servicing industry” “examination procedures”.

The Bureau also launched a colorful, interactive and user friendly website (www.consumerfinance.gov) and Facebook page, which has about 13,000 “likes.”

“Attorney Client Privilege” Waiver
Although federal law provides that a federally chartered institution furnishing attorney-client privileged materials to a “Federal banking agency” during an examination does not waive the privilege, the Bureau is not a statutorily defined “Federal banking agency”. 12 U.S.C. §1828(x)(1).

Rather than skip receiving privileged materials or adding itself to the “Federal banking agency’s” definition, the Bureau concluded that it is a “Federal banking agency” arguing that because it inherited supervisory authority from the other federal banking regulators, it also inherited access to privileged materials and the attorney client privilege protection.

Unfortunately because the Bureau only inherited partial supervisory authority from the federal banking agencies, the privilege may not apply to the banks’ production and rendering the produced information vulnerable to discovery in litigation or a Freedom of Information Act request.

PA Upholds Taxing Principal and Interest Discharged in Foreclosure

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

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”

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.