Lender Challenges CFPB’s Constitutionality

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On July 30, this blog discussed State Bank of Big Spring v. Lew, a case in which the U.S. Court of Appeals for the District of Columbia ruled on that day that a small Texas bank had standing to challenge the constitutionality of the Consumer Financial Protection Bureau (CFPB).

The same court was asked on August 5 by mortgage lender PHH Corporation to stay a final decision of the CFPB on constitutionality grounds.

The latter case follows the CFPB’s final decision in an enforcement action against PHH requiring the lender to pay $109 million in disgorgement. The lender was accused of illegally increasing consumers’ closing costs by requiring them to pay reinsurance premiums to PHH’s in-house reinsurance company. The CFPB classified the reinsurance payments as kickbacks.

The court granted the stay, holding PHH “satisfied the stringent requirements for a stay pending appeal.”

PHH argues the CFPB is unconstitutional because Director Richard Cordray has the sole authority to issue final decisions, rendering the CFPB’s structure to be in violation of the separation of powers doctrine. The petition states, “Never before has so much authority been consolidated in the hands of one individual, shielded from President’s control and Congress’s power of the purse.” The petition argues that the Director is only removable for cause, distancing him from the power of the President, and is able to fund the agency from the Federal Reserve System’s operating expenses, distancing him from Congress’s power to refuse funding.

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The court issued a one paragraph stay order, and it is not clear whether the motion was successful based on the constitutionality argument because PHH had also argued that Director Cordray misinterpreted settled law on mortgage reinsurance and on how disgorgements are calculated.

The stay is in place pending the appeal. It will now be interesting to see whether the Court of Appeals will reach the constitutionality issue or decide the case on the legal interpretation issues. And, of course, it will be interesting to see whether future constitutionality challenges continue with regard to this powerful agency that is changing the rules for residential closings.

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Another TRID Lender Announcement

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This one has an interesting twist.

US-Bank-Home-MortgageU.S. Bank Home Mortgage (USBHM) recently announced that it, like other large lenders, will prepare and deliver the Closing Disclosure and any necessary revisions to the consumer once the TRID rules become effective on October 3. Settlement agents (closing attorneys in South Carolina) will be responsible for the seller’s Closing Disclosure.

Here’s the twist: USBHM stated that it will only require TRID documents for loans subject to TRID, which would include most closed-end consumer credit transactions secured by real estate, for applications taken on or after October 3. Then it stated, “One exception to this is that USBHM will require TRID disclosures for properties that are title vested in an LLC.”

On its face, this statement would mean that commercial loans involving properties vested in LLCs would be subject to the new Loan Estimate and Closing Disclosure forms. Since the name of this lender is U.S. Bank Home Mortgage, we can only assume this announcement means USBHM will consider any loan secured by residential property vested in a limited liability company to be a consumer loan. As an example, loan on a rental house (an investment property) titled in an LLC, would be subject to TRID rules, according to this lender. The announcement did not make a distinction between single- and multi-member LLCs.

The announcement indicated that USBHM will use various methods of delivery for the Loan Estimate and Closing Disclosure, including regular mail, electronic delivery and tracking through eLynx. (A quick look at eLynx’ website indicates this company provides a network for paperless document collaboration and distribution throughout the financial industry.)

USBHM indicated it will work with settlement agents to prepare the Closing Disclosure for delivery to the consumer, and that collaboration on the numbers will begin seven to ten days before the scheduled consummation date. The bank will continue to place the burden on settlement agents for the accuracy of the closing figures: “The settlement agent will continue to be responsible for ensuring that the Closing Disclosure provided at consummation is accurate to the terms agreed upon with USBHM.”

After the settlement agent and USBHM have agreed on the closing figures, USBHM will deliver the closing disclosure to the consumer and the settlement agent simultaneously through eLynx. The plan is to deliver the closing documents, including the final Closing Disclosure, to the settlement agent one day prior to closing.

surprised woman with bookLocally, we have been speculating that loan documents for various lenders will arrive ten minutes prior to closing despite the three-day rule for the Closing Disclosure. This announcement gives that speculation some credence. There is no requirement of early delivery of the closing documents to the closing attorney.

Locally, we have also been speculating that making changes to the closing figures will be difficult, particularly if the closing takes place outside of normal banking hours. This announcement provides some help by indicating that USBHM will have staff available for after-hours closings provided it has notice that a borrower will be signing outside normal business hours.

To read the entire announcement, follow this link.

Dirt Lawyers Will Like This Mortgage Satisfaction Case

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S.C. Supreme Court holds equity lines are subject to the timely satisfaction statute.

In an opinion written by Justice Beatty, our Supreme Court held on August 5 that open-ended mortgages are satisfied in the same manner as conventional mortgages and under the same statutory requirement for timely satisfaction by lenders.

Regions Bank v. Strawn involved a mortgage foreclosure against Robert and Nancy Borchers. The Borchers counterclaimed seeking to recover from Regions Bank under §§29-3-310 and 29-3-320 of the South Carolina Code based on the bank’s failure to satisfy the mortgage within the three-month time period required.

mortgage jengaThe home had been purchased from Cammie Strawn, who had taken title from her then-husband, Richard Strawn. Mr. Strawn had previously obtained the home equity line of credit. At the time of the Borchers’ closing, the balance of the mortgage was $32,240.42. Immediately after the closing, the Borchers’ attorney, James Belk, had an employee deliver a payoff check and a mortgage satisfaction transmittal letter to Regions Bank. The check had the words “Payoff of first mortgage” typed on it.

Instead of satisfying the mortgage, the bank applied the check to the balance, bringing it to zero, and provided Richard Strawn with new checks even though he had not owned the home for more than two years. Mr. Strawn spent more than $72,000 on the equity line.

When Regions Bank attempted to collect on Mr. Strawn’s debt by foreclosing on the Borchers’ home, the Borchers answered, counterclaimed and moved for summary judgment. The bank argued that a revolving line of credit should be handled differently than conventional mortgages, and this particular mortgage could not be satisfied without instructions from Mr. Strawn.

The trial court and Court of Appeals ruled in favor of the Borchers. On appeal to the Supreme Court, Regions Bank made two basic arguments: (1) open ended mortgages are an exception to the statutory satisfaction requirement because only the original borrower is authorized to request a satisfaction; and (2) the Borchers could not assert a violation of the mortgage satisfaction statutes because their attorney had the authority to satisfy the mortgage pursuant to the attorney satisfaction statute (§29-3-330).

The Court affirmed and held that the first argument failed because the mortgage itself contemplated that the property may be sold and specifically stated that it would be binding on the mortgagor’s successors and assigns. Also, the court stated that anyone with an interest in mortgaged property is allowed to request a satisfaction upon payment, and there is no exception for equity lines of credit.

Sale of a house. Object over whiteAs to the argument that the Borchers’ attorney could have satisfied the mortgage, the Court stated simply that this argument is without merit because the statutory framework does not exempt a mortgage holder of an equity line from the penalty provisions for failing to satisfy a mortgage within the required time frame.

This is a good opinion for South Carolina closing lawyers!

Malpractice Case Questions Delegation of Responsibility for Title Work

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SC Supreme Court decides client’s informed consent is required.

The South Carolina Supreme Court has ruled that a closing attorney cannot delegate the ultimate responsibility for delivering clear title to a purchaser without the purchaser’s informed consent. Johnson v. Alexander is an attorney malpractice case decided on July 29. This case involved Amber Johnson’s 2006 closing of a home in North Charleston.  Ms. Johnson alleged that her closing attorney, Stanley Alexander, breached his duty of care by failing to discover the house had been sold at a tax sale in 2005.

shutterstock_113463292The title examination had been performed by another attorney, Charles Feeley at the request of Ms. Johnson’s previous attorney, Mario Inglese.  Mr. Alexander purchased the title work from Mr. Inglese and relied on the title examination, which concluded that no back taxes were owed on the property. Ms. Johnson stopped making mortgage payments when she learned she didn’t have title to the property, and the property went to foreclosure.

At trial, Ms. Johnson moved for partial summary judgment as to Mr. Alexander’s liability. At the summary judgment hearing, an affidavit of the Delinquent Tax Collector for Charleston County was proffered to prove the availability of the delinquent tax records during the time when the title would have been examined.  Mr. Feeley’s affidavit indicated he could  not remember the specific title work, but that he always searched titles the same way, and he always checked delinquent taxes for a ten-year period. His notes showed that he found no outstanding taxes. Further, Mr. Feeley attested that the tax sale would not have appeared in the chain of title because the tax sale deed was actually recorded after the closing.

As a side note to abstractors: recent tax sales often do not appear in chains of title because the deeds are not yet recorded. Title examiners should check for payment of taxes for a ten-year period to uncover ad valorem tax delinquencies.

The trial court granted Ms. Johnson’s motion on Mr. Alexander’s liability.  On appeal, the Court of Appeals reversed and remanded, holding the lower court incorrectly focused its inquiry on whether an attorney conducting a title examination should have discovered delinquent taxes from 2003 and 2004 and the tax sale from 2005. Instead, the appellate court held the proper question was whether Mr. Alexander acted reasonably in relying on the title work and reversed and remanded the case for trial.

The Supreme Court reversed and remanded for a determination of damages. Ms. Johnson argued that the Court of Appeals erred in holding the correct inquiry is whether an attorney reasonably relied on another attorney’s work where that work is outsourced. She contended that an attorney should be liable for negligence arising from tasks he delegates unless he has expressly limited the scope of the representation. The Supreme Court agreed.

The Supreme Court said the Court of Appeals erroneously equated delegation of a task with delegation of liability. The opinion, written by Justice Hearn, stated that while Feeley’s negligence was the issue, that does not displace Alexander’s ultimate liability.

The opinion states, “while an attorney may delegate certain tasks to other attorneys or staff, it does not follow that the attorney’s professional decision to do so can change his liability to his client absent that client’s clear, counseled consent.”

The Court cited Rule 1.8(h) of the Rules of Professional Responsibility which indicates a lawyer shall not make an agreement prospectively limiting the lawyer’s liability to a client for malpractice unless the client is independently represented in making the agreement.

Notice that the Court makes no distinction between delegating a task to staff and delegating it to another attorney. Mr. Alexander had argued that because Ms. Johnson knew he did not personally examine the title, its accuracy was not within the scope of his representation to her. The Court clearly held that the scope of representation can only be limited through the clear, counseled consent of the client.

Many residential closings are handled in South Carolina by attorneys who have nothing to do with the title examination. This case clearly states that those attorneys should limit the scope of their representation and obtain their clients’ clear, counseled consent. Otherwise, the title work is the ultimate responsibility of the closing attorney regardless of who performs it.

shutterstock_233295964And on a related topic, it is my opinion that any title examination that covers less than a full-search period or is based on a prior title insurance policy should be used only after consultation with the client and obtaining the client’s informed consent.  Many residential and commercial closing attorneys rely heavily on prior title policies for back title, and they may want to tweak their practices after they read this opinion.

Closing attorneys’ files should be papered with those informed consents confirmed in writing!