In 2012, California courts dealt with three important issues from the fallout of the mortgage meltdown – California’s non-judicial foreclosure statutes were challenged on many fronts; U.S. Supreme Court definitively answered the issue of whether a “loan discount fee” was RESPA violation; and they affirmed a secured lender’s right to credit bid in a bankruptcy sale.
In this post Real Estate Attorney, Julia M. Wei will review the results of these legal actions and how they affect the real estate and lending practices in California in 2013 and beyond.
Supreme Court Decisions Affecting the Lending Industry in 2012
1) Is a “loan discount fee” a RESPA violation?
In Freeman v. Quicken Loans, Inc., lender Quicken charged the Freemans and Bennetts each a “loan discount fee” and
charged the Smiths a “loan origination fee” as well as a “loan processing fee “ Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. § 2607(b), prohibits lenders and others from charging “unearned, undivided” fees to borrowers at the closing of a mortgage transaction.
The borrowers sued Quicken for RESPA violations, alleging that a loan discount fee could only be charged if the borrowers were going to receive a lower loan rate. Since they did not receive a lower loan rate, then they argued the fees were “unearned” and a violation of RESPA Section 8(b) which states:
“No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”
Basically the borrowers were alleging that since they were charged a “loan discount” fee but did not actually receive a loan discount, the mortgage broker did not perform the service so the fee was unearned and therefore illegal. The borrowers lost at the trial court level and the case went all the way up to the U.S. Supreme Court.
The Supreme Court noted that RESPA prohibits kickbacks for referrals and prohibits certain unearned fees paid from a part of the charge with a customer. Consistent with the lower court and appellate court decisions in this case, the Supreme Court ruled that these mortgage loan fees were not split with anyone, and RESPA did not apply since these fees were not “split” or “shared” or divided in any way with a 3rd party. In other words, RESPA contemplates a three party fee sharing arrangement, and in the present case it was only the lender and the borrower involved. Thus RESPA did not apply.
2) Does a secured lender’s have the right to credit bid in a bankruptcy sale?
In Radlax Gateway Hotel, LLC v. Amalgamated Bank, the United States Supreme Court held that a secured lender must be allowed to credit bid on the sale of secured property when it is sold “free and clear” of liens. The debtor was a developer building a Radisson Hotel and filed bankruptcy. While in bankruptcy, the debtor proposed a sale to pay the secured creditors who were owed more than $120,000,000.
The “stalking horse” buyer was only offering $47,500,000 (a stalking horse buyer is the first party to make an offer to purchase a debtor’s asset), significantly less than what was owed! However, the proposed plan attempted to prevent those secured creditors from credit bidding at the sale.
In affirming the lower court and reversing the two other appellate courts, the Supreme Court of the United States noted the importance of the secured creditor’s right to credit bid. Not only does the right to credit bid give creditors what they bargained for when they made the loan, it also helps to prop up the value of the collateral, making for a more competitive bidding situation.
Ultimately, this ruling makes it clear that the creditors must be treated fairly in a sale context and they retain the right to credit bid the amount they are owed.
3) California’s Non-Judicial Foreclosure Statutes
Borrowers alleged a number of wrongful foreclosure claims against lenders, usually challenging the standing of the lender (beneficiary under the deed of trust) to foreclose non-judicially. Time and again, the California courts rejected borrower theories of why a foreclosure sale was invalid due to the lender not having possession of the original notes, or recorded assignments, or due to the involvement of MERS.
The Appellate courts concluded:
- Possession of the original Promissory Note is not required to initiate a non-judicial foreclosure (Debrunner v. Deutsche Bank National Trust Co.);
- The recorded Assignment of Deed of Trust is not required to initiate foreclosure (Haynes v. EMC Mortgage Corporation); and
- MERS as the nominee beneficiary has the power to assign its interest under a deed of trust. (Herrera v. Federal
National Mortgage Association “FNMA”).
But it was not all one sided. The Sixth District Court of Appeals took a different turn in the case of Lona v. Citibank. Citibank foreclosed on the Hollister mushroom farmer and Lona sued the bank to void the trustee’s sale on the theory that the lender made him an “unconscionable” loan he couldn’t possibly afford.
Lona alleged that he agreed to refinance the home, on which he owed $1.24 million at the time, in response to an ad. The monthly payments were more than four times his income, so unsurprisingly, he defaulted within five months and the home was sold at a trustee’s sale in August 2008.
Lona obtained two re-financed loans: the first being $1.125 million, a 30-year term and an interest rate that was fixed at 8.25% for five years and adjustable annually after that, with a cap of 13.255 and the second loan being $375,000, with a term of 15 years, a fixed rate of 12.25%, monthly payments of nearly $4,000, and a balloon payment of $327,000 at the end of the 15 year term.
Lona testified that English was not his first language, he was 50 years old at the time of the loan, and he did not understand the loan documents. Of course, he also did not read the loan documents. Citibank was successful at the trial court level but the appellate court overturned, rendering a 32 page opinion finding:
- The borrower did not have to tender repayment (which goes against almost a century of a legal precedent); and
- The borrower’s allegations of the loan being “unconscionable” were not wholly disproven by the lenders.
Similarly, in the case of Skov v. U.S. Bank N.A., the borrower’s case was allowed to proceed on her theory that the bank had violated California’s non-judicial foreclosure statute section 2923.5, which mandates lender contact with the borrower prior to recording the Notice of Default (“NOD”). The Skov case involved residential real property in Saratoga, California. The Lender had brought a motion for summary judgment on the grounds that the Trustee had recorded a notice of compliance with the NOD and that 2923.5 was pre-empted by the National Bank Act which is federal law.
The Appellate court overturned on primarily evidentiary grounds, finding that compliance with the statute was not a matter that could be judicially noticed. Further, the Appellate court reasoned that the National Bank Act itself acknowledged that real property transfers were not pre-empted and therefore traditional state laws for foreclosure were not pre-empted.
Also, courts continued to remain stern with lenders in the face of flagrant abuses.
In the case of Ragland v. US. Bank, NA. et al., Downey Savings jumped the gun and foreclosed on the borrower in violation of a statutory stay. Additionally, a few of the loan documents may have been forged, and the lender’s employees continually informed the borrower that her loan was “on hold” to investigate the forgery despite the fact that it continued to march towards foreclosure. Cases like these are precisely why the Homeowner’s Bill of Rights garnered such popular support—to bar “dual tracking” by lenders which misleads consumer borrowers.
Secondary Market, Junior Lenders and Deficiency Judgements.
In Bank of America v. Mitchell, the borrower prevailed against the purchaser of a junior note. BofA sued Mitchell on the deficiency after the first lien holder had foreclosed a year previously on a “sold out junior lienholder” theory. Since the first and second note had been originated by the same lender (Greenpoint), the appellate court concluded that Bank of America was the assignee and therefore subject to all the same defenses the borrower would have had against the original lender, Greenpoint. Mitchell, the borrower, prevailed and was awarded attorney’s fees.
Since Simon v. Superior Court came down in 1992, California law has prohibited a deficiency where the same bank originates two loans and controls what order to foreclose in. The other factor in Mitchell seemed to be the fact that the note was sold/assigned to BofA after the foreclosure had taken place. If the notes had been split up prior to foreclosure, a different result was likely due to the National Enterprises, Inc. v. Woods case, which also addresses the secondary market, and allowed a deficiency in that case
since the notes were re-sold prior to foreclosure sale.
In fact, that is exactly what happened in Cadlerock Joint Venture, L.P. v. Lobel. Unlike Mitchell, where the originating lender still controlled both notes during the foreclosure, in Cadlerock, the second loan was resold shortly after origination, and the senior lender later foreclosed. The sold-out junior lienholder re-sold the note to Cadlerock, who then sued the borrower for the deficiency. The borrower won at the trial court level but the appellate court overturned, finding that since at the time of the foreclosure sale the first and second note holders were not one-in-the-same, California’s anti-deficiency statutes did not bar the second (or assignee) from seeking a deficiency judgment.
The Homeowner’s Bill of Rights (“HBOR”) has revised many of the statutes governing non-judicial foreclosure sales. Lenders will have to “prove” their claim, much like any creditor in a bankruptcy context before being able to conduct a non-judicial foreclosure sale. 2013 will see trustees and lenders creating their own “best practices” to deal with new requirements of HBOR.
If you think you may need legal assistance regarding such matters, we invite you to contact the Law Offices of Peter N. Brewer at (650) 327-2900, or visit us on the web at www.BrewerFirm.com.
Have you, or someone you know, have legal issues as described above? How did you handle it? What was your outcome? I would love to hear your thoughts on this issues and more – Plus stop by next Wednesday night in my Free, Live Webinar “Foreclosure Investors: Make Fast Profits Now” and we will continue the discussion.