When making a loan secured by a mortgage on residential real property, lenders typically order an appraisal and rely upon the value provided by that appraisal. How quickly must a lender sue an appraiser if the appraisal was negligently performed and the property was worth less than the appraised value? It seems logical that a lender would first have to wait for the borrower to default, foreclose on the property, and sell the property for a loss. However, Florida’s First District Court of Appeal recently ruled that the statute of limitations begins to run as soon as the loan is funded, even if a default doesn’t occur until years later.

In Llano Financing Group, LLC v. Petit, Fla. 1st DCA Case No. 1D16-3168 (Fla. 1st DCA Sep. 27, 2017), a lender made a $172,000 loan in reliance upon an appraisal that valued the collateral at $216,000. Seven years later, the borrower defaulted and the successor in interest to the lender filed a foreclosure action. Three years after that, the successor to the lender acquired a certificate of title and sold the property at a loss. A year later, eleven years after the loan closed, the successor to the lender sued the appraiser for negligently conducting the appraisal, claiming that the original lender would not have made the loan and the successor to the lender would not have acquired the loan if not for the bad appraisal. The trial court granted the appraiser’s motion to dismiss based upon the expiration of the statute of limitations and the successor to the lender appealed.

The appellate court first ruled that the four-year statute of limitations for an action founded on negligence applied, rather than the two-year professional malpractice statute of limitations, because the successor lender and the appraiser were not in privity. The court then addressed when the limitations period started to run. The court determined that the last element of the cause of action (damages) existed not at the time that the property was sold at a loss, but as soon as the original lender funded the loan that was secured by collateral that was worth less than the appraised value. The court dismissed concerns that the precise amount of damages may not be known at the time and suggested that it was the Legislature’s job to address whether the ruling might result in bad policy. The First DCA concluded:

The statute of limitations began to run when [the original lender] relied on the appraisal to fund the loan. That was 2004, so [the successor lender’s] 2015 suit was far too late. The trial court correctly dismissed it.

This case is a cautionary tale to lenders who rely upon appraisals when making loans. In Florida, any concerns about the validity of an appraisal must generally be addressed within four years of funding the loan, even if the borrower has not yet defaulted and the property has not yet been sold for a loss.

 

On August 30, 2017, the Consumer Financial Protection Bureau (CFPB) and Prime Marketing Holdings L.L.C. filed their proposed stipulated final judgment and order in United States District Court, the Central District of California to resolve a lawsuit the CFPB originally filed in September of 2016.

Credit Score GaugeIn the proposed final judgment, it is alleged that Prime Marketing Holdings L.L.C. illegally charged advance fees and misled consumers as to the cost of credit repair fees. It is alleged that in its approximately two and a half years of operation, the company charged over 50,000 consumers more than $20 Million for credit repair services.

The CFPB took particular exception to allegations around the company misleading customers in the benefits of the credit repair services and misrepresentation of the overall cost of the services provided.

The proposed final judgment stipulates that the company will permanently be banned from operating in the credit repair business and is to pay a fine of $150,000.

On July 10, 2017, the Consumer Financial Protection Bureau issued its arbitration agreements rule which implemented Section 1028(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The rule will become effective September 18, 2017 and will affect agreements entered into on or after March 19, 2018.

The arbitration agreements rule prohibits pre-dispute arbitration agreements in class actions related to certain “covered” products or services unless and until a court has ruled that a case may not proceed as a class action or the time for such review has lapsed.  The arbitration agreements rule does not affect post-dispute arbitration agreements.  Additionally, the providers of covered services and products must submit redacted records of arbitration or civil suit to the CFPB within 60 days of filing or receipt (as applicable).  The CFPB will publish this information on its website.

Aribitration Agreement

Covered parties are defined as banks and nonbank financial institutions that provide covered consumer financial products and services.  There are a number of exceptions to that definition.

There are 10 categories of covered products and services.

  1.  Extending, acquiring, purchasing, selling or servicing consumer credit, participating in consumer credit decisions, and referring consumer credit applicants to creditors;
  2.  Extending automobile leases;
  3.  Providing debt management/settlement, loss mitigation or credit repair services with regard to consumer credit;
  4. Providing consumers with consumer reports (except if the provision is only in connection to an adverse action notices);
  5. Providing accounts subject to the Truth in Savings Act;
  6. Providing accounts or remittance transfers subject to the Electronic Funds Transfer Act and Regulation E;
  7. Providing money transmission services;
  8. Accepting or providing tools to accept, financial or banking data directly from a consumer to facilitate payment via credit or charge card or other payment instrument;
  9. Providing check cashing, check collection or check guaranty services; and
  10. Collecting debt arising from any of the covered products and services.

The arbitration agreements rule will likely face a challenge under the Congressional Review Act, the Financial Choice Act, or by various government agencies.

On April 27, 2017, the CFPB issued a report on strategies for promoting diversity and inclusion in the mortgage industry. The report identifies what many people are already aware of, a company that promotes and encourages a culture of diversity and inclusion is not only a much better environment for its employees, it also makes an organization more profitable.

Diversity & Inclusion
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Reading between the lines, many of the recent enforcement actions brought by the CFPB have focused on the underlying culture of an organization to support the Bureau’s findings of systemic breakdowns or deficiencies, justifying significant monetary penalties.

The report is broken into the following 10 subcategories:

  1. Leadership Buy-in
  2. Defining Diversity and Inclusion Within the Organization
  3. Developing a Business Case for Diversity and Inclusion
  4. Accountability
  5. Recruiting and Hiring
  6. Broadening the Customer Base with New Business Products
  7. Inclusion, Retention, and Employee Engagement
  8. The Importance of Data
  9. Promotion/Advancement Opportunities
  10. Supplier Diversity

3 Takeaways

  1. Have a clear, documented and centralized vision of what diversity and inclusion means and looks like within your company. That vision should be supported by all employees, including the executive team.
  2. Have a clear and articulate understanding of the culture of your organization and the role that diversity and inclusion play into that culture.
  3. Understand demographic data in the areas your organization offers its services and utilize employees that best serve the need of that community. Document and track trends in hiring, retention and advancement

For more information, see the CFPB’s OMWI Report on Promoting Diversity and Inclusion in the Mortgage Industry.

U.S. Supreme Court
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In an Alert published on June 13, Joshua Horn examines the U.S. Supreme Court’s decision in Henson, et al. v. Santander Consumer USA, Inc.:

When the Fair Debt Collection Practices Act became law in 1977, it promised to regulate the conduct of anyone who “regularly collects or attempts to collect … debts owed or due … another.”

But the courts have divided over an important question about the scope of the law. The split among the federal circuit courts hinges on whether an entity that purchases debt and attempts to collect that debt for itself is a debt collector subject to the FDCPA.

Now the U.S. Supreme Court has resolved the conflict with its June 12, 2017, opinion in Henson, et al. v. Santander Consumer USA, Inc.

Affirming a decision of the Fourth Circuit Court of Appeals, the Court held that an entity that purchases debt for its own account is a creditor – not a debt collector – under the FDCPA. As a result, that entity is not required to comply with the conduct proscribed by the FDCPA because it did not regularly attempt to collect debts “owed … another.”

To read Joshua’s full discussion of the court’s ruling, please visit the Fox Rothschild website.

In the Midland Funding, LLC v. Johnson opinion, released by the United States Supreme Court (the “Court”) on May 15, 2017, the Court ruled that a creditor’s filing of an obviously time-barred proof of claim is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice under the Fair Debt Collect Practices Act, 15 U.S.C. §§1692 et seq. (the “Act”).  The Johnson decision settles a disagreement among the Courts of Appeals regarding the propriety of the practice under the Act.  A copy of the Johnson opinion can be found here.

U.S. Supreme Court
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In Johnson, the debtor, Aleida Johnson (“Ms. Johnson”), filed for personal bankruptcy under Chapter 13 of the United States Bankruptcy Code (the “Code”), 11 U.S.C. §§1301 et seq., in the United States District Court for the Southern District of Alabama.  Two months later, one of Ms. Johnson’s creditors, Midland Funding, LLC (“Midland”), filed a written statement (called a “proof of claim”), asserting that Ms. Johnson owed Midland $1,879.71 in credit card debt.  The proof of claim further stated that the last time any charge appeared on Johnson’s account was in May 2003—over ten years before Ms. Johnson filed for bankruptcy.  Because the statute of limitations under Alabama law is six years, Johnson’s attorney objected to Midland’s proof of claim.  Although the bankruptcy court ultimately disallowed the claim, Johnson sued Midland, arguing that its untimely filing of a proof of claim violated §1692(k) of the Act.

The Court sided with the majority of Courts of Appeals that have considered the matter and concluded that Midland’s filing of a proof of claim that, on its face, admits that the limitations period has run, does not constitute “false,” “deceptive,” “misleading,” “unfair,” or “unconscionable” conduct as defined under the Act.  Instead, Midland’s proof of claim falls within the Bankruptcy Code’s definition of “claim,” which is defined as a “right to payment.”  See 11 U.S.C. §101(5)(A).  Under Alabama law, a creditor has a right to the payment of a debt even after the limitations period expires; the expiration of the limitations period extinguishes a creditor’s remedy (the ability to enforce the claim), but not the right (the ability to assert it).  Thus, the Court concluded that Midland’s time-barred proof of claim—even if ultimately unenforceable due to the limitations issue—comported with the Act.

Although good news for creditors, two important caveats accompany the Johnson decision.  First, Johnson applies only to a creditor’s filing of a proof of claim in a Chapter 13 bankruptcy proceeding.  The decision does not extend to the filing of a proof of claim in a proceeding arising under another chapter of the Code.  Second, Midland’s conduct comported with the Act, in part, because Midland had a right to payment under Alabama law.  As the Court noted, state law governs whether a creditor has the right to the payment of a debt.  Thus, unless doing so under Alabama law, creditors should consult an attorney and/or familiarize themselves with the applicable state law before filing an obviously time-barred proof of claim in other jurisdictions.

While the CFPB is generally thought of as a consumer protection agency, the CFPB also has authority to protect small business owners as well. Specifically, Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amends the Equal Credit Opportunity Act (“ECOA”) to require financial institutions to compile, maintain, and report information concerning credit applications made by women-owned, minority owned and small businesses.

Small business and growth
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The Request for Information will be used to help the CFPB better understand the small business industry, and to craft the language of Section 1071 (which may ultimately provide the framework for future enforcement actions) related to the small business financing market in the future. The Bureau broke its questions into five categories:

  1. The definition of a small businessdo
  2. Data Points
  3. Financial Institutions Engaged in Business Lending
  4. Access to Credit and Financial Products Offered to Businesses
  5. Privacy

This request for information is the first major step into the CFPB expansion to review the practices in the small business lending community and there will undoubtedly be more developments to come. Comments and responses to the CFPB’s questions must be received sixty days after the notice is published in the federal register (Update when available).

The CFPB’s request for information can be found on its website..

The United States District Court for the Southern District of Florida recently addressed an issue that may arise when a lender or servicer must acknowledge receipt of a written request for information. In Shelisa Todd v. Ocwen Loan Servicing, LLC, U.S.D.C. S.D. Fla. Case No. 17-cv-60454-BLOOM/Valle, U.S District Court Judge Beth Bloom dismissed a borrower’s claim with prejudice, finding that an acknowledgement letter that was sent directly to the borrower will bar a claim that the lender or servicer failed to send an acknowledgment letter to borrower’s counsel.

Copyright: iqoncept / 123RF Stock Photo
Copyright: iqoncept / 123RF Stock Photo

In Todd, the borrower’s counsel sent a written request for information to the servicer pursuant to RESPA and Regulation X. The request instructed the servicer to send its response directly to borrower’s counsel. Two days later, before expiration of the deadline to acknowledge receipt of the request for information, the servicer sent its acknowledgment of receipt directly to the borrower, but not to borrower’s counsel.

The borrower then filed suit, claiming that the servicer violated RESPA § 2605(k) and Regulation X by failing to acknowledge receipt of the request for information within five days because borrower’s counsel did not receive such acknowledgment. The servicer sought dismissal of the claim based upon the fact that it had sent acknowledgment of the request for information directly to the borrower two days after receiving the request, a fact that the borrower did not concede or refute.

Copyright: iqoncept / 123RF Stock Photo
Copyright: iqoncept / 123RF Stock Photo

Judge Bloom initially addressed the procedural issue of whether the Court could consider the acknowledgment that the servicer had attached to its motion to dismiss. She determined that she could consider the acknowledgment, without needing to convert the motion to dismiss to a motion for summary judgment, because the acknowledgment was central to the borrower’s claim and there was no genuine dispute as to the acknowledgment.

Judge Bloom then addressed the merits of the borrower’s claim, finding that a lender or servicer is not required to send an acknowledgment letter to borrower’s counsel and may, instead, timely send an acknowledgment letter directly to the borrower. The Court concluded that the borrower had failed to state a cause of action for violation of RESPA and Regulation X based on the allegations that the servicer had not timely sent an acknowledgment to borrower’s counsel.

the Court finds that the Acknowledgment Letter, properly considered within the context of Defendant’s Motion to Dismiss, conclusively shows that Plaintiff’s RESPA claim must fail.

The Todd ruling provides useful guidance to lenders and servicers who receive a written request for information that includes instructions to communicate only with borrower’s counsel.