Maryland Legal Alert for Financial Services
Maryland Legal Alert - March 2016
In This Issue:
Recent developments are likely to have a significant impact on demands by mortgage loan purchasers for repurchase or indemnification. These developments may help mortgage loan sellers defeat claims based on allegations that representations or warranties in loan sale agreements were breached. These developments also may clarify the evaluation process for breach of contract claims when the investor is Fannie Mae or Freddie Mac (GSEs).
On the other hand, these developments may cause non-GSE investors to file lawsuits for breach of contract more quickly, increasing the risk for loan sellers that disputes over repurchase demands will escalate.
The developments regarding claims for breach of contract result primarily from a January 27, 2016 decision by the Tenth Circuit Court of Appeals, which held that claims for breach of warranty under certain loan purchase agreements accrued when the loans were sold, not when the loan seller refused to repurchase the loans. In this appeal, which consolidated six cases decided by the U.S. District Court for the District of Colorado, the Court of Appeals affirmed the lower court's decisions that breach of contract claims were filed too late, after expiration of the applicable statute of limitations (SOL).
The Court of Appeals concluded that the claims accrued when the loans were sold, not when an injury was allegedly suffered by the investor (purchaser).
Of interest, the Court of Appeals concluded that the governing SOL was Delaware's three-year SOL, rather than New York's six-year SOL, even though the loan purchase agreements elected New York as governing law.
Why? Because the contractual governing law provision did not narrow its application to the substantive law of New York and did not restrict application of New York's conflicts of law analysis. Rather, the loan purchase agreements simply stated that New York law would govern the transaction, and New York law includes a "borrowing statute" upon which the Court of Appeals relied to conclude that Delaware's shorter SOL controlled. This is a contract drafting lesson that should not be forgotten.
In addition to this decision by the Tenth Circuit Court of Appeals, the Federal Housing Finance Agency in February 2016 instituted for both GSEs an independent dispute resolution (IDR) process. Under this IDR, if the GSEs and other parties cannot resolve loan repurchase or indemnification demand disputes, those disputes will move to the selection of and hearing by a neutral arbitrator. This IDR process is intended to streamline and bring more consistency to the loan repurchase and indemnification recoveries pursued by the GSEs. The new IDR process is available for loans delivered to the GSEs on or after January 1, 2016.
Please contact Christopher Rahl with questions concerning this topic.
The CFPB and Department of Justice (DOJ) recently announced a $21.9 million disparate impact settlement involving a large indirect auto lender. The complaint (available here) and the related consent order (available here) were both filed on February 2, 2016 and involve alleged violations of the Equal Credit Opportunity Act.
The complaint involves dealer mark-ups and alleged that minority borrowers paid more than white borrowers with similar credit characteristics. As in previous CFPB disparate impact actions in the indirect auto finance context, the CFPB and DOJ assigned race probabilities to the lender's auto loan portfolio, using software that predicts race based on zip code and/or borrower last name. Based on the assigned race determinations, the CFPB and DOJ concluded that minority borrowers paid as much as $200 more over the term of a loan than white borrowers with similar credit profiles.
The consent order requires the lender to:
- Initially pay $19.9 million in restitution (with up to an additional $2 million, based on post-consent order analysis by the DOJ); and
- Provide periodic reporting for three years.
In addition, the consent order requires the lender to either:
- Change its discretionary rate structure so that dealer mark-ups do not exceed 125 basis points above the lender's "buy-rate" for loan terms of 60 months or less or 100 basis points above the lender's "buy-rate" for loan terms greater than 60 months; or
- Eliminate dealer mark-up discretion entirely.
Notably, the lender was not required to pay any separate civil penalties because of its cooperation and "proactive" efforts concerning fair lending.
This settlement serves as a reminder to financial institutions in the indirect auto business to:
- Implement a strong compliance management system that includes, among other things, a fair lending policy statement, regular fair lending employee training, ongoing monitoring for fair lending compliance, and (depending on lender size/complexity) regular statistical analysis of loan data for potential disparities; and
- Impose limits on dealer discretionary pricing adjustments or eliminate discretionary dealer pricing and use a compensation method that does not result in disparate treatment (e.g., use a flat fee).
Please contact Christopher Rahl if you have questions about this topic.
On February 24, 2016, the Maryland Court of Appeals held that the wages of a Texas resident could be garnished in Maryland even though the Texas resident earned the wages in Texas. The Court of Appeals ruled that, because the Texas resident's employer had continuous and systematic contact with Maryland, the garnishment was proper.
In the case (available here), the underlying judgment that precipitated the garnishment arose from an unpaid personal line of credit and a credit card account that were established by the judgment debtor in Maryland. The judgment creditor obtained two default judgments against the judgment debtor in the District Court for Montgomery County. By the time of each judgment, the judgment debtor had moved to Texas. The judgment creditor secured two writs of garnishment and served the writs on the judgment debtor's employer by service on the employer's Maryland resident agent. The employer answered the garnishments and the judgment debtor moved to quash the writs, arguing that his wages were earned solely with respect to work performed in Texas and were not subject to garnishment in Maryland.
Because the Maryland definition of "wages" for purposes of attachment includes "all monetary remunerations paid to an employee for his employment," and because the Maryland definition of "employee" includes an employee "whether he is a resident or nonresident of the State," the Court of Appeals concluded that once properly served in the original action, the district court had continuing jurisdiction to issue the resulting Writs. Therefore, if a Maryland court has personal jurisdiction over a defendant (based on their contact with Maryland) when a judgment is entered in Maryland and an employer has continuous and systematic contact with Maryland, wages earned outside of Maryland may be garnished in Maryland.
Please contact Christopher Rahl with questions concerning this topic.
On March 3, 2016, the Maryland Bankers Association sponsored a webinar describing law and insurance products that help to protect Maryland-chartered bank and credit union directors and officers from personal liability. Andy Bulgin and Margie Corwin of our offices, along with Terry Cawley of ABA Insurance Services Inc., were the presenters. The slides from that webinar can be found here.
Maryland law, which can apply to federally chartered banks located in Maryland, requires corporations to provide certain indemnification for directors and officers.
In addition, Maryland law permits a corporation, through its charter, bylaws or separate agreements, to provide even greater indemnification protections.
Maryland law also allows a corporation to exculpate directors and officers from certain claims by the corporation, or derivatively by its stockholders, but only if the corporation's charter or articles of incorporation so provide.
There is a specific narrowing of this permitted exculpation for bank and credit union directors and officers when claims are asserted by certain parties, including by receivers or conservators. Careful consideration and drafting is important to achieve director and officer protections that are consistent with the corporation's culture and desired outcomes.
Please contact Andy Bulgin if you would like to discuss how your institution can best protect directors and officers from liability for simply doing their jobs.
Our Real Estate Practice Group recently released its Relating to Real Estate publication (available here). The publication identifies all foreclosure-related Maryland appellate court decisions during 2015 and summarizes several noteworthy 2015 Maryland Court of Appeals foreclosure-related decisions. Please contact Edward J. Levin for more information.