Consumer Financial Services Alert - October 20, 2009 October 20, 2009
In This Issue

Massachusetts Land Court Holds Foreclosures Commenced Before Receipt of Executed Mortgage Assignment in Recordable Form Are Invalid

The Massachusetts Land Court has reaffirmed an opinion finding invalid foreclosures conducted before the assignment of the foreclosed mortgages to the foreclosing creditor were executed. Plaintiffs/foreclosing parties sought a declaratory judgment that they held title to the foreclosed-upon properties. The Court initially denied relief, finding that because the mortgage assignments only occurred after the foreclosure sale, plaintiffs had not been the “present holders” of the mortgages within the meaning of the Massachusetts foreclosure statute at the time of notice and sale. The Court concluded that retroactive assignments of the mortgages could not cure these statutory defects and that plaintiffs therefore had no power to foreclose. On plaintiffs’ motions to vacate, the Court reaffirmed its holding, rejecting plaintiffs’ argument that they were in fact the “present holders” of the mortgages at the time of notice and sale because they possessed the notes, assignments of the mortgages in blank, and agreements under which they were entitled to valid assignments of the mortgages. The Court concluded that because mortgages are conveyances of land under Massachusetts law, valid written assignments are required to transfer them, and neither assignments in blank nor agreements to assign mortgages effect a transfer. Further, the Court observed that the right to obtain an assignment and an actual assignment are not equivalent, and the foreclosure sale statute required an actual assignment.

We do not yet know if the Ibanez decision will be appealed by plaintiffs. Although not formally binding beyond the parties before it, the Ibanez decision will likely be given substantial weight by other state and federal trial-level courts in Massachusetts, as the Land Court is the Massachusetts trial-level court with special expertise in title issues. Based on Judge Long’s earlier March 2009 decision in Ibanez, we believe the relevant event before which a written assignment of the mortgage must occur is the notice of foreclosure sale. On the other hand, the opinion does not require the assignment to be recorded before it is effective – only executed and in possession of the foreclosing party.

We expect that this decision will result in a flurry of challenges to recent or pending foreclosures, and may present difficulties in obtaining title insurance for/and or selling REO properties acquired through foreclosure where a written assignment was not procured before a foreclosure notice. Under Ibanez, foreclosures conducted without valid written assignments before notice of sale are likely void. And as a practical matter, owners of REO properties likely cannot convey marketable title or obtain title insurance on these properties without re-foreclosing after a proper assignment. Please feel free to contact Jim McGarry (617.570.1332) or Rich Oetheimer (617.570.1259) for any guidance or assistance in dealing with these issues. Click here for U.S. Bank National Ass’n v. Ibanez, Misc. No. 08-384283/Wells Fargo Bank, N.A. v. Larace, Misc. No. 08-386755 (October 14, 2009). Click here for the March 2009 Ibanez decision.

Federal Appeals Court Affirms Dismissal of Unfair and Deceptive Practice Challenge to Fees for Expedited Delivery of Mortgage Loan Payoff Statements

The Ninth Circuit recently affirmed the dismissal of a class action which alleged that a fully-disclosed fee for “written expedited payoff service” was unfair and deceptive under the Washington Consumer Protection Act. Plaintiff argued that the fee was “unfair and deceptive” because it (1) was presented as an “amount due” to release the mortgage lien; (2) was not disclosed at the inception of the loan; and (3) was mislabeled as “expedited.” Plaintiffs also alleged that the mortgage’s pre-litigation demand requirement worked in tandem with occasional customer service fee-waiving accommodations to moot class actions. The Ninth Circuit held that the fee was not deceptive under the CPA “because the payoff demand statement twice unambiguously disclosed that payment of the payoff service fee was not required to release the mortgage lien.” The Court also found that the fee “was voluntary and extraneous to the mortgage,” so its nondisclosure in the mortgage contract at inception was not deceptive, and rejected plaintiff’s “mislabeling” argument because “the payoff statement was faxed and accompanied by automatic updates, and thus the label ‘expedited’ was, not misleading.” Finally, the Court found the notice requirement in the mortgage and the lender’s occasional fee waiving did not violate the CPA “because these business practices do not prevent plaintiffs who choose to bring suit from doing so, and it is not against public policy to resolve disputes before an action is brought.” Goodwin Procter partners Tom Hefferon and Brooks Brown represented Countrywide in both the District Court and Ninth Circuit. Click here for Beyer v. Countrywide Home Loans Servicing LP, No. 08-35725 (9th Cir. Oct. 8, 2009).

Overdraft Bill Introduced in Senate

Senate Banking Committee Chairman Chris Dodd introduced an overdraft bill in the Senate. The bill would, among other things:

  • Require customers opt-in before enrollment in overdraft coverage programs that charge fees for covering ATM withdrawals and debit card transactions.
  • Prohibit banks from charging more than one overdraft fee a month and more than six a year.
  • Require overdraft fee amounts be proportional to the cost of processing the overdraft.
  • Prohibit changing the order in which transactions are posted to increase overdraft fees.
  • Prohibit fees if an overdraft is due solely to a bank hold – such as the hold placed on funds when reserving a hotel room - if the hold is greater than the actual amount of the transaction.
  • Require customers be notified when they overdraw their account and give the customer the option of choosing to be notified by email, text or a letter.
  • Require that customers be warned if a transaction at an ATM or branch teller will overdraw their account, and be given the chance to cancel the transaction.
  • Require periodic statements clearly disclose the amount of overdraft coverage fees charged for the statement period and year-to-date.
  • Prohibit banks from including the amount available under an overdraft coverage program as part of the customer’s account balance.
  • Require banks to inform customers of the different overdraft services and products they provide, including how terms, fees and products differ.
  • Require customers be notified, by a medium of their choice, if an overdraft coverage program is terminated or suspended and why.
  • Prohibit unfair and deceptive marketing practices of overdraft coverage programs and require clear disclosure of overdraft fees in marketing materials.
  • Prohibit banks from negatively reporting to consumer credit report agencies if an overdraft amount and fee are paid under the terms of an overdraft coverage program.
Click here for the Committee press release on the bill.

HUD Further Revises FAQs on New RESPA Rule

On August 13th, HUD published FAQs on its 2008 amendment of Regulation X, the Real Estate Settlement Procedure Act’s implementing regulation. The FAQs cover many provisions of the amendment, including when a loan originator must provide a GFE, expiration of the GFE, providing a list of settlement service providers, the changed circumstances re-delivery rule, and completing the GFE and HUD-1/1A. HUD has issued a number of revised FAQs, the latest on October 7th. Click here for the FAQs as of October 7th.

FTC Publishes Revised Guidance on Endorsements and Testimonials

The FTC announced that it has approved final revisions to the guidance it gives to advertisers on how to keep their endorsement and testimonial ads in line with the Federal Trade Commission Act. The revisions incorporate several changes to the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising, which address endorsements by consumers, experts, organizations, and celebrities, as well as the disclosure of important connections between advertisers and endorsers. The Guides were last updated in 1980.

Under the revised Guides, advertisements that feature a consumer and convey the consumer's experience with a product or service as typical when that is not the case will be required to clearly disclose the results that consumers can generally expect. In contrast to the 1980 version of the Guides – which allowed advertisers to describe unusual results in a testimonial as long as they included a disclaimer such as “results not typical” – the revised Guides no longer contain this safe harbor.

The revised Guides also add new examples to illustrate the long standing principle that “material connections” (sometimes payments or free products) between advertisers and endorsers – connections that consumers would not expect – must be disclosed. These examples address what constitutes an endorsement when the message is conveyed by bloggers or other “word-of-mouth” marketers.

Celebrity endorsers also are addressed in the revised Guides. While the 1980 Guides did not explicitly state that endorsers as well as advertisers could be liable under the FTC Act for statements they make in an endorsement, the revised Guides reflect FTC case law and state that both advertisers and endorsers may be liable for false or unsubstantiated claims made in an endorsement – or for failure to disclose material connections between the advertiser and endorsers. The revised Guides also make it clear that celebrities have a duty to disclose their relationships with advertisers when making endorsements outside the context of traditional ads, such as on talk shows or in social media.

Click here for the Federal Register notice concerning the revised Guides.