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Firm Offer of Credit—Class Certification

"Firm offer of credit" is the hottest topic in mortgage banking litigation, and lots of credit card issuers are concerned too.  As well they might be.  Judge Easterbrook’s decision in Murrayv.GMAC Mortgage, 434 F.3d 948 (7th Cir. 2006) paves the way for class certification and suggests that it will not be easy to settle these class actions cheaply.  In Murray, the Seventh Circuit faced "some fundamental questions about the management of consumer class actions," noting that more than 40 of these cases are pending in the Northern District of Illinois alone.

In Murray, plaintiff alleged that shortly after receiving her bankruptcy discharge she received numerous credit solicitations from defendant, which the creditors had learned by asking credit bureaus to forward information about certain borrowers who meet specified criteria.  Deluged by such offers, she showed them to her lawyer, who decided these offers violate the Fair Credit Reporting Act in two ways.  First, GMAC Mortgage allegedly made only a conditional, and not a "firm" offer that is essential when a creditor seeks access to a person’s credit history without that person’s consent.  Second, GMAC Mortgage’s offer letter allegedly failed to include a "clear and conspicuous" notice of the recipient’s right to close her credit information to all those who lacked her prior consent. 

The Seventh Circuit issued a number of rulings:  (1) The fact that consumer’s counsel did not try to cut a deal for consumer personally was insufficient reason to preclude class treatment; (2) The fact that consumer sought statutory but not compensatory damages did not warrant denial of class certification; (3) potential catastrophic damages award for "technical" violations was not a proper basis for denying class certification;

(4) consumer’s status as a "professional plaintiff" involved in more than 40 lawsuits seeking did not justify denial of class treatment; and (5) the Seventh Circuit’s decision in Colev. U.S. Capital, Inc., 389 F.3d 719 (7th Cir.2004) did not require an offer’s value to be assessed recipient-by-recipient, thus resulting in class-defeating individual determinations.

For more information, please contact Michael Agoglia at magoglia@mofo.com.

Firm Offer Litigation—Private Right of Action

Most district courts have held that there is no private right of action for the sort of "firm offer" violation discussed in the previous article, in light of the FACT Act amendments.  (See Murray v. Cross Country Bank, 399 F.Supp.2d 843, 844 (N.D. Ill. 2005); Killingworthv.Household Bank(SB), N.A., 2006 WL 250704 (N.D. Ill., Jan. 30, 2006); Hernandez v. Citifinancial Serv., Inc., No.05 C 2263, 2005 WL 3430858 (N.D. Ill., Dec. 9, 2005); McCane v. America's Credit Jewelers, Inc., No. 05 C 5089, 2005 WL 3299371 (N.D. Ill., Dec. 1, 2005); Pietras v. Curfin Oldsmobile, Inc., No. 05 C 4624, 2005 WL 2897386 (N.D. Ill., Nov. 1, 2005); Perryv.First Nat'l Bank, No. 05 C 1470, 2005 U.S. Dist. Lexis 23100, (N.D. Ill., Sept. 13, 2005); Murrayv.American Int'l Group, No. 05 C 3881 (N.D. Ill., Dec. 23, 2005) (minute order); Wanev.C.M.A. Mortgage, Inc., No. 05 C 4775 (N.D. Ill., Dec. 12, 2005) (minute order); see also, Phillipsv.New Century Fin. Corp., No. SA CV 05-0692 (C.D. Cal., Nov. 14, 2005) (minute order).

For more information, please contact Michael Agoglia at magoglia@mofo.com.

Breaking With Tradition

In what could be a harbinger of lawsuits to come, the alphabet soup of regulatory agencies (including the OCC, FRB, FDIC, OTS, and NCUA) recently published their proposed "Interagency Guidance on Nontraditional Mortgage Products" in the Federal Register.  Comments are due by March 29, 2006.  The agencies are concerned with the recent rise in "nontraditional" mortgage products, such as interest-only loans and adjustable-rate mortgages with payment plans that allow for negative amortization, and the related perception that these loans "are being offered to a wider spectrum of borrowers who may not otherwise qualify for more traditional mortgage loans and may not fully understand the associated risks." 

Although the agencies recognize that these loan programs provide flexibility to borrowers, they are concerned about the frequency of nontraditional mortgage products being made with lax underwriting criteria and "risk-layering" through simultaneous second-lien loans, which exposes financial institutions to heightened risk.  The proposed guidance underscores the agencies’ concern that financial institutions carefully manage the increased risk associated with nontraditional loan products.

Accordingly, the agencies have proposed a number of guidelines concerning advertising, underwriting, portfolio, and risk management practices.  Although the guidance does not mandate specific new disclosures, the agencies recommend that consumers be given detailed information concerning repayment schedules and attendant risks, even during the pre-application advertising and promotional stage.  The agencies encourage lenders to ensure that "prudent lending practices" are followed when evaluating a borrower’s ability to repay and when underwriting the loan, and that they maintain capital levels and loan loss reserves commensurate with the increased risk associated with a portfolio of nontraditional loans.  

Practice Tip:  The final standards, when published, will likely become the benchmark by which nontraditional mortgage practices are measured throughout the financial services industry.  Even if your financial institution is not directly regulated by the agencies promulgating these guidelines, expect a bleed-over effect (and we all know how sharks like blood in the water).  This may be a good time to review your compliance, underwriting, and risk management practices to determine if any corrective action is warranted. 

For more information, please contact Michael Agoglia at magoglia@mofo.com.

2005 HMDA Misinformation

Mortgage loans are priced on short-term (3-7 year) interest rates, which rose in 2005 (compared to 2004), but are reported for HMDA purposes based on long-term interest rates, which moved down in 2005 (compared to 2004).  This will create a distortion, and make it seem as if borrowers of "higher cost" loans were treated differently from one year to the next, when that isn’t really the case.  So, get ready for another donnybrook once the 2005 HMDA data get sent to the regulatory agencies on March 1, 2006 and are made public in April.  

Mortgage Elimination Schemes Under Fire In The "O.C."

Don’t believe everything you read on the Internet.  That nice-sounding Nigerian official isn’t going to deposit millions of dollars in your bank account, and despite what a disturbing number of self-styled "consumer advocates" on the Internet may say, you aren’t going to be able to eliminate your mortgage with a home-drafted "bonded bill of exchange" purporting to be drawn on the U.S. Treasury.  So says the California Court of Appeal in McElroy v. Chase Manhattan Corp., 134 Cal. App. 4th 388 (2005), in which the Court of Appeal sitting in Orange County, California, minced no words in criticizing the borrowers’ attempt to tender such a "worthless piece of paper" to their mortgage lender.  It turns out that actual money still is required to repay a debt after all.  Even in California. 

For more information, please contact Eric Olson at eolson@mofo.com.

Tattle-Tale

Speaking of the Internet, HUD recently notified the public that it intends to establish a website where consumers will be able to post complaints about possible RESPA violations, such as illegal kickbacks to brokers or other settlement service providers.  What HUD will do with complaints lodged on the new website remains to be seen.  The website is intended to allow consumers and service providers to "assist in the enforcement of RESPA."  But one can only wonder about how effective the site will be, and whether the website will be inundated with mistaken or false accusations cloaked in the veil of Internet anonymity. 

For more information, please contact Eric Olson at eolson@mofo.com.