A legal theory for finding fault that has long been used in employment law has found its way into housing litigation. A federal appellate court has bucked the trend of imposing a three-year statute of limitations in TILA cases, while a landowner — tasked with paying a prepayment penalty of close to $450,000 on a $1.6 million California property — is fighting in court.
Disparate Impact
An opportunity for the U.S. Supreme Court to weigh in on a legal theory new to the housing industry has been lost, according to a client newsletter from Ballard Spahr.
Disparate impact claims — long used in employment discrimination cases — was proposed in a rule announced by the Housing and Urban Development department in November. HUD concluded that the Fair Housing Act provides for liability based on discriminatory effects without the need for a finding of intentional discrimination, thus the go-ahead for disparate impact claims.
The Fair Housing Act prohibits discrimination in housing and mortgage lending based on race, color, religion, national origin, sex, disability and familial status.
While the federal courts of appeal and HUD had adopted disparate impact analysis under the federal law, it was widely believed that the Supreme Court would throw it out, the law firm wrote in the alert. That opportunity has been lost when both parties involved in a case — Magner v. Gallagher — agreed to the dismissal of the case just weeks before it was scheduled to be heard before the nation’s top court.
“The immediate implication of the dismissal of Magner is that the status quo will continue — the circuits’ adoption of disparate impact will remain the law for the time being, and HUD will presumably finalize the disparate impact rule it announced,” the law firm predicted.
And disparate impact is now an issue in employer use of arrest and conviction records in employment decisions. The Equal Employment Opportunity Commission issued an enforcement guidance on April 25 grounded on the premise that any employment practice that has a disparate impact upon a Title VII protected group is unlawful unless the practice is job-related and consistent with business necessity.
According to Ballard Spahr, to survive a potential disparate impact claim, an employer must show that its criminal record policy operates to effectively link specific criminal conduct and its dangers with the risks inherent in the duties of a particular position.
RESPA
The Seventh Circuit Court of Appeals recently affirmed a federal trial court decision that denied class certification under the Real Estate Settlement Procedures Act.
According to Ballard Spahr, the court in Howland v. First American Title Insurance Company rejected the plaintiffs’ claims that First American violated RESPA by using a program that compensated a consumer’s real estate attorney for conducting a title examination to determine whether the title associated with the consumer transaction is insurable.
The court said that it was not aware of any federal cases considering the suitability of class action treatment for alleged kickbacks to real estate attorney title agents based on compensation for nominal or duplicative services and that HUD had not made any pronouncement on the matter.
The court also said that RESPA Section 8 kickback cases are not a good fit for class action treatment.
Howland, Ballard Spahr said, further establishes “the clear trend against class actions in RESPA Section 8 cases.”
TILA
Three groups representing mortgage lenders urged the Third Circuit on June 1 to strictly enforce the three-year statute of limitations in Truth in Lending Act lawsuits, according to a story reported by Law360.
The friend of the court brief was filed by the American Bankers Association, the Consumer Bankers Association and the Consumer Mortgage Coalition.
TILA was enacted in 1968 to assure meaningful disclosure of loan terms so that consumers would be able to more readily compare various credit terms. TILA and its implementing regulation — Regulation Z — require creditors to clearly and conspicuously disclose specific information in credit transactions. TILA grants borrowers the right to rescind a home-secured loan in the event the lender has failed to make the required disclosures.
In a case recently decided in the United States Court of Appeals for the Ninth Circuit, the court, declaring the case to be one of first impression, sided with the trial court in throwing out the homeowner’s lawsuit alleging TILA violations because she waited too late to file suit.
Kathryn McOmie-Gray appealed dismissal of her lawsuit for failure to state a claim upon which relief may be granted. McOmie-Gray sought rescission of her loan because of alleged TILA violations. The district court dismissed the suit because it was filed after the three-year time limit established under federal law. On appeal, McOmie-Gray argued that she gave the bank timely notice, citing cases that applied a one-year statute of limitations from the date the lender fails to respond to the borrower’s notice of recession.
Congress created a claim for damages for lender violations of TILA, adopting a one-year statute of limitations.
The appellate court said that rescission suits must be brought within three years from the consummation of the loan. McOmie-Gray obtained her loan on April 14, 2006. She sent notice through her attorney on January 28, 2008 of her intent to rescind the loan, citing the banks’ alleged failure to advise her of the final date to cancel the transaction. Thus, the court said, McOmie-Gray’s right to rescission extinguished on April 14, 2009, three years after the consummation of the loan. McOmie-Gray filed her lawsuit on August 28, 2009. As a result, the trial court properly dismissed her case, the appeals court said.
A Kentucky state appellate court made a similar finding.
Rachel Berghaus, a subprime borrower, signed a note for a residential mortgage loan on Dec. 19, 2003, for $68,000. She obtained a 2/28 hybrid ARM with an initial interest rate of 7.49 percent. According to the court opinion, she was unable to make the payments in 2007 when the interest rate increased to 12.625 percent. The bank filed a foreclosure action.
Berghaus denied the default and counterclaimed that Decision One Mortgage (the loan originator) had violated TILA and engaged in predatory lending practices, including bait-and-switch.
Berghaus was required to file her claims within one year of the violation. Where an alleged TILA violation is based on insufficient disclosure, the limitation period begins as of the date of consummation of the transaction, the court said. Berghaus was required by TILA to file her claims within one year of the date of the occurrence of the violation. Berghaus’ loan agreement was made on Dec. 19, 2003. She filed her counterclaim on April 1, 2009. Her claim was time-barred, the court noted.
Also, the trial court granted the bank’s motion to dismiss on the basis that U.S. Bank, as the assignee of the loan and not the originator, was entitled to TILA’s safe harbor provisions. A lender’s assignee is entitled to safe harbor and may be subject to liability only under a very narrow set of circumstances.
Berghaus contended that neither the potential for an enormous rate increase nor the existence of a rate floor properly disclosed before the transaction was consummated.
“We disagree with this exertion,” the Court of Appeals of Kentucky said. U.S. Bank, as the assignee, is “wholly entitled to claim safe harbor,” the court said.
On the other hand, the appellate court for the Fourth Circuit has held that a lawsuit seeking rescission is timely where the consumer provided notice of rescission to the sub-servicer within three years of closing, but did not file suit until after the three-year deadline had passed.
Gilbert v. Residential Funding LLC is the first decision by a federal appellate court to hold that a borrower need only send notice of recession within the three-year period to validly exercise a right to rescind, according to a legal analysis by Ballard Spahr. The decision puts the Fourth circuit in the minority. The case was released May 3.
Prepayment Penalties
The San Diego-based law firm Morris and Associates filed a lawsuit on March 26, alleging that a San Diego man was defrauded based on a prepayment penalty clause in a real estate financing contract for a tract of land in Pacific Beach for $1.6 million.
“The fact that Chase Bank insisted on collecting an almost $450,000 pre-payment penalty in this case is offensive, unfair and an unfair business practice. This was a pure windfall for Chase, and one we surely will seek to correct,” said plaintiff’s attorney Steven Morris.
Chase has filed a motion to dismiss which will be heard the last week in June.
HUD Requirements
The Supreme Court of Virginia has adopted an “expansive reading of HUD’s requirement of face-to-face meetings prior to foreclosure.”
“Restricting the lenders’ argument that no face-to-face meeting was required because it did not have a “branch office” within 200 miles of the mortgagee, the justices held in Mathews v. PHH Mortgage Corporation that the term “branch office” includes not only servicing offices, but also “originating offices,” Ballard Spahr wrote.
The April 20 decision affects all lenders in Virginia.
State Action
West Virginia has revised its Residential Mortgage Lender, Broker and Servicer Act regulations to provide additional recordkeeping requirements, according to a compliance alert from Ballard Spahr. Effective May 1, in addition to existing recordkeeping requirements, the originating lender must also keep electronic, including e-mail, and written correspondence between the lender and the borrower. The originating lender must also keep an itemization of all fees and charges imposed on each loan and received by the lender and by any third-parties. The licensed broker must keep an itemization of all fees and charges imposed on each loan and retained by the broker.
In addition, the broker and the lender must document the tangible net benefit to the borrower before arranging or making any residential mortgage loan that closed within 24 months of the refinancing.
