Tag Archives: misrepresentation

Unfair Loan Mod Negotiations

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The Ninth Circuit issued an Opinion in Compton v. Countrywide Financial Corp. et al., (11-cv-00198 Aug. 4, 2014).  The District Court had dismissed Compton’s unfair or deceptive act or practice [UDAP] claim because she had failed to allege that the lender had “exceeded its role as a lender and owed an independent duty of care to” the borrower. (14) The Court of Appeals concluded, however, that the homeowner/plaintiff had

sufficiently alleged that BAC engaged in an “unfair or deceptive act or practice” for the purpose of withstanding a motion to dismiss. As previously noted, Compton does not base her UDAP claim on allegations that BAC failed to determine whether she would be financially capable of repaying the loan. Rather, the gist of Compton’s complaint is that BAC misled her into believing that BAC would modify her loan and would not commence foreclosure proceedings while her loan modification request remained under review. As a result of these misrepresentations, Compton engaged in prolonged negotiations, incurred transaction costs in providing and notarizing documents, and endured lengthy delays. The complaint’s description of BAC’s misleading behave or sufficiently alleges a “representation, omission, or practice” that is likely to deceive a reasonable consumer.(15)

This seems to be an important clarification about what a reasonable consumer, or at least a reasonable consumer in Hawaii, should be able to expect from a lender with which she does business.

While the Court reviews a fair amount of precedent that stands for the proposition that a lender does not owe much of a duty to a borrower, Compton seems to stand for the proposition that lenders must act consistently, at least in broad outline, with how we generally expect parties to behave in consumer transactions: telling the truth, negotiating in good faith, minimizing unnecessary transaction costs; and minimizing unnecessary delays.

In reviewing many cases with allegations such as these, it seems to me that judges are genuinely shocked by lender behavior in loan modification negotiations. It remains to be seen whether such cases will change UDAP jurisprudence in any significant way once we have worked through all of the foreclosure crisis cases.

S&P Must Face The Orchestra on Rating Failure

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After many state Attorneys General brought suit against S&P over the objectivity of their ratings, S&P sought to consolidate the cases in federal court. Judge Furman (SDNY) has issued an Opinion and Order in In Re:  Standard & Poor’s Rating Agency Litigation, 1:13-md-02446 (June 3, 2014) that remanded the cases back to state courts because “they arise solely under state law, not federal law.” (3) Explaining the issue in a bit greater depth, the Court stated,

there is no dispute that the States’ Complaints exclusively assert state-law causes of action — for fraud, deceptive business practices, violations of state consumer-protection statutes, and the like.The crux of those claims is that S&P made false representations, in its Code of  Conduct and otherwise, and that those representations harmed the citizens of the relevant State. (20, citation omitted)

The Court notes that in “the final analysis, the States assert in these cases that S&P failed to adhere to its own promises, not that S&P violated” federal law. (28) The Court concludes that it does not reach this result “lightly:”

Putting aside the natural “tempt[ation] to find federal jurisdiction every time a multi-billion dollar case with national  implications arrives at the doorstep of a federal court,” the federal courts undoubtedly have advantages over their state counterparts when it comes to managing a set of substantial cases filed in jurisdictions throughout the country. Through the MDL process, federal cases can be consolidated for pretrial purposes or more, promoting efficiency and minimizing the risks of inconsistent rulings and unnecessary duplication of efforts. (51, citation omitted)

S&P knew that it would have to face the music regarding the allegations that its ratings were flawed. But it hoped that it could face a soloist, one federal judge. That way, it could keep its litigation costs down, engage in one set of settlement talks and get an up or down result on its liability. The remand means that S&P will face many, many judges, a veritable judicial orchestra. In addition to all of the other problems this entails, it is also almost certain that S&P will face inconsistent verdicts if these cases were to go to trial. This is a significant tactical setback for S&P. From a policy perspective though, the remand means that we should get a better understanding of the issuer-pays model of rating agencies.

Subprime Scriveners

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Milan Markovic has posted Subprime Scriveners to SSRN. The abstract reads,

Although mortgage-backed securities (“MBS”) and other financial products that nearly caused the collapse of the global financial system could not have been issued without attorneys, the legal profession’s role in the financial crisis has received relatively little scrutiny.

This Article focuses on lawyers’ preparation of MBS offering documents that misrepresented the lending practices of mortgage loan originators. While attorneys may not have known that many MBS would become toxic, they lacked incentives to inquire into the shoddy lending practices of prominent originators such as Washington Mutual Bank (“WaMu”) when they and their clients were reaping considerable profits from MBS offerings.

The subprime era illustrates that attorneys are unreliable gatekeepers of the financial markets because they will not necessarily acquire sufficient information to assess the legality of the transactions they are facilitating. The Article concludes by proposing that the Securities and Exchange Commission impose heightened investigative duties on attorneys who work on public offerings of securities.

The article addresses an important aspect of an important subject – which professionals could and should be held responsible for the rampant misrepresentation found throughout the MBS industry in the early 2000s. The prevailing wisdom is that no one can be held responsible, because no one did anything that made him or her personally culpable.  Markovic argues that lawyers can and should be held responsible for the misrepresentations found in MBS offering documents.  While I buy his argument that lawyers have been unreliable gatekeepers, I am not sure that I fully agree with diagnosis of the problem.

Markovic writes,

The large financial institutions that issued MBS presumably understood the implications of incorporating questionable representations from loan originators into MBS offering documents. They also would have been able to consult with their in-house counsel about the risks of securitizing poor quality mortgages. It is not self-evident that ethical rules should compel attorneys to investigate what sophisticated clients advised by in-house counsel do not believe needs investigating. (45)

In fact, sophisticated parties often use reps and warranties to allocate risk. For instance, a provision could require that an originating lender buy back mortgages that failed to comply with reps and warranties. This is not a situation where any of the parties would expect anyone to investigate the “representations from the loan originators.”  Rather, the parties assumed (rightly or wrongly) that the originator would stand behind the representation if and when it was proved to be false. And, indeed, solvent originators have had to do so.

As I do not fully agree with Markovic’s diagnosis of the problem, that leads me to have concerns with his proposed solution as well. But the article raises important questions that we have not yet answered even though the events leading to the financial crisis are nearly a decade behind us.

Tennessee Court Dismisses TILA, RICO, and RESPA Claims

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The Tennessee court in deciding Mhoon v. United States Bank Home Mortg., 2013 U.S. Dist. (W.D. Tenn., 2013) dismissed the complaint of the plaintiff pursuant to 28 U.S.C. § 1915(e)(2)(B)(ii).

Plaintiff [Mhoon] filed a complaint against defendant U.S. Bank. This case was an action to prohibit a non-judicial foreclosure of real property. The complaint alleged that U.S. Bank was engaged in efforts to illegally foreclosure on Mhoon’s home. The complaint also alleged that U.S. Bank acted with gross negligence and violated its duty of good faith.

In addition, the complaint alleged breach of contract because U.S. Bank failed to send any and all acceleration, default, and foreclosure notices to Mhoon in the manner required by the deed of trust.

The complaint further alleged U.S. Bank violated Truth in Lending Act (“TILA”); violated Real Estate Settlement Procedures Act (“RESPA”) by failing to provide a good faith estimate; violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”) statute and engaged in fraud; and lacked standing to initiate foreclosure proceedings on the Property.

The court ultimately held (1) plaintiff has not sufficiently plead a breach of contract claim; (2) plaintiff’s claims for gross negligence and violation of the duty of good faith fail as a matter of law; (3) plaintiff’s allegations based on violations of the TILA and the RESPA were barred by the applicable statute of limitations and failed to state a claim because U.S. Bank was not the originating lender; and (4) plaintiff’s claims for fraud violations of the RICO, and lack of standing all failed as a matter of law.

For those reasons, this court dismissed the plaintiff’s complaint pursuant to 28 U.S.C. § 1915(e)(2)(B)(ii).

California Court Denies Dismissal of Wrongful Foreclosure Claim

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The California court in Engler v. ReconTrust Co., 2013 U.S. Dist. 179950 (C.D. Cal. 2013) dismissed all but one of the plaintiff’s complaint.

Plaintiff originally filed suit against defendants BAC and MERS on June 6, 2012. On March 1, 2013, the lower court dismissed plaintiff’s complaint with leave to amend.

The plaintiff’s current complaint alleged thirteen causes of action: (1) Declaratory Relief; (2) Violation of RICO; (3) “Common Law Conspiracy;” (4) “Filing of Invalid Lien;” (5) “Fraudulent Conveyance Deceptive Practices Code of Federal Regulations 17 CFR Parts 204-249;” (6) Fraudulent Concealment; (7) Fraudulent Inducement; (8) Wrongful Foreclosure; (9) Violation of the Real Estate Settlement Procedures Act; (10) Violation of the Fair Credit Reporting Act; (11) Violation of the Federal Fair Debt Collection Practices; (12) Violation of the Truth in Lending Act; and (13) Constructive Fraud.

After considering the plaintiff’s contentions the court found that the plaintiff’s first, second, third, fourth, fifth, sixth, seventh, ninth, tenth, eleventh, twelfth, and thirteenth causes of action were rightfully dismissed with prejudice. However, defendants’ motion to dismiss plaintiff’s eighth cause of action was denied. Accordingly, the only cause of action remaining in Plaintiff’s claim was the Eighth Cause of Action.

Illinois Court of Appeals Upholds Lower Court Decision Finding that Wells Fargo had Standing to Foreclose

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The court in deciding Wells Fargo Bank, N.A. v. Abatangelo, 2013 IL App (1st) 130423-U (Ill. App. Ct. 1st Dist. 2013) that Wells Fargo had standing to foreclose the mortgage.

Defendant, Peter Abatangelo, appealed the order of the circuit court granting summary judgment in favor of plaintiff, Wells Fargo Bank, on plaintiff’s foreclosure complaint. On appeal, Mr. Abatangelo contended that the court erred in granting summary judgment because (1) the mortgage contract did not properly assign the right to foreclose to Wells Fargo; and (2) the trial court improperly considered new arguments raised by Wells Fargo for the first time in a reply brief in support of their motion to dismiss.

After considering the defendant’s contentions the court ultimately affirmed the lower court’s ruling.

Ohio Court Finds that Bank of America had Standing to Foreclose and MERS had Authority to Assign

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The court in deciding Bank of Am., N.A. v. Harris, 2013-Ohio-5749 (Ohio Ct. App., Cuyahoga County Dec. 26, 2013) found there was no merit to plaintiff’s appeal, and affirmed the lower court’s dismissal.

Defendant, Frederick Harris, appealed from the trial court’s decision granting summary judgment to plaintiff, Bank of America. Plaintiff argued that the trial court erred as a matter of law by granting summary judgment in favor of the plaintiff-appellee.

Plaintiff argued that Bank of America lacked standing to pursue the foreclosure because the bank was a party solely by virtue of a purported assignment from MERS. It argued that MERS had no authority to assign the mortgage to Bank of America, and thus, Bank of America had no standing to bring the suit.

The court rejected the plaintiff’s contentions, finding that the bank had standing to bring a foreclosure action because it was the real party in interest at the time that a foreclosure complaint was filed. The court also found that the bank had possession of the note, which was payable to bearer. Therefore, it was the current holder of the note and entitled to enforce it under R.C. 1303.31 and that after the merger, the bank stepped into the shoes of the absorbed company and had the ability to enforce. As such no further action was necessary to become a real party in interest.