The impact of centuries of doctrine on the mortgage market

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Rules passed by the Office of the Comptroller (OCC) and the Federal Deposit Insurance Corporation (FDIC) in 2020 codified a doctrine known as Rule “Valid at manufacture”… The new OCC and FDIC rules are being criticized in federal courts as lawsuits are aimed at overturning those rules. The potential consequences of successfully challenging these rules could have implications for creditors, service companies, investors and foreclosure law firms. They can also question the compliance with interest rates and other conditions on previously issued mortgages.

Legal League 100 Special Initiatives Working Group (SIWG) adopted the “Valid at Creation” rule and wrote the White Paper, “Implications for mortgage lenders, servicers and investors if the” Valid for performance “rule is canceled”, exploring the history of the Rule, the influence Second Circuit judgment in Madden v. Midland Funding LLC (786 F.3d 246 [2d Cir. 2015]), the rules set by the OCC and the FDIC, and the consequences of repealing this long-standing doctrine.

In addition to White paper, on Wednesday 29 September from 12:00 to 13:00 CDT, SIWG LL100 will present a webinar “Implications for mortgage lenders, service providers and investors in the event of the cancellation of the “Valid at performance” rule… »A group of 100 members of the Legal League will discuss the implications of the Rule in a timely and informative webinar, as challenges to this doctrine could affect lending, the secondary market, and future foreclosures.

DS News had the opportunity to chat with Chairman of the Legal League 100 Stephen Hladick, partner of Hladik, Onorato & Federman LLP, ahead of a webinar on the implications of canceling the “Valid when done” rule.

Hladik has extensive experience in foreclosure, bankruptcy and practice at Hladik Onorato & Federman LLP. He graduated cum laude in law from Widener University, where he served as editor-in-chief of the Law Review magazine. He has gained significant experience in Law Enforcement Lending, Fraudulent or Fraudulent Acts or Practices (UDAP), Fair Debt Collection Practices Act (FDCPA), Real Estate Settlement Procedures Act (RESPA) and Provision of Truth Act (TILA) in business. his role as deputy attorney general in the Harrisburg office of the Bureau of Consumer Protection.

Vice Chairman of the Legal League 100 Stephen Hladik, Partner at Hladik, Onorato & Federman LLP

DS News: What was the impetus for the creation of the White Paper “The Rule is Really in Creation”?
Hladik: The “Really When Done” Rule is a doctrine that has existed in this country over 100 years ago.

In the lending community, as we look to the future as the moratorium expires and the potential for increased foreclosures exists, this doctrine will be subject to more scrutiny. Judges have interpreted it and referenced it since at least the 1800s.

Much of the current understanding of the Rules stems from federal deregulation and acts passed by Congress. V Depository Institutions Deregulation Law, inter alia, provided that the lender can export to other states or other locations at the maximum interest rate permitted where that lender is located. In other words, if Indiana allowed anyone to lend at 21%, the Indiana lender could safely export that rate to another state. If that other state had a maximum interest rate of 6%, then the Indiana lender could lend at the Indiana rate to that out-of-state borrower. This is where the “Really in manufacture” doctrine comes from.

This loan was valid at 21% when it was made in Indiana by an FDIC insured organization. When the lender sells this loan, this interest rate remains enforceable in accordance with the terms of the contract signed between the lender of the loan and the borrower. In other words, if it was found to be “valid” at the time of issue, it somehow does not turn into a “invalid” loan when the loan is transferred to another holder.

We are seeing an increase in the number of investors and institutions buying loans that do not necessarily belong to a national bank or an FDIC insured institution. In order to support the aftermarket at the national level, the “Valid in Manufacturing” rule has been and remains very important.

If you violate, change, or change this doctrine, you will affect the secondary market. Suddenly, if the interest rate is 21%, I’m using that as an example, is no longer enforceable, it creates a lot of legal problems. Currently, the purchaser of a loan at the institution recognizes that the “valid at issue” rule is in effect and that it can enforce the terms of the loan as originally written when purchasing the loan. And if the secondary market or investor no longer has confidence that they can force the loan to be repaid, as written, this will cause problems in the secondary market.

DS News: Can you describe Madden’s decision and its impact on the industry?
Hladik: The Second Circuit decision in Madden v. Midland Funding LLC is related to credit card debt but is related to the interest rates charged on the credit card. Madden’s decision does not explicitly say “Valid when done” and ignores the “Valid when done” doctrine, but essentially knocks over the apple cart. The man who stood in the shoes of the original credit card issuer suddenly failed to enforce the terms as originally written.

In response, in 2020, you saw the OCC as well as the FDIC come up with proposed rules, which were codified in the CFR, according to which the “Valid when done” rule is an established lending doctrine. that if you look closely enough, you will find cases dating back to the 1790s or 1800s to support this. The courts use the phrase that “if it is valid at the time the loan is issued or originated, the loan cannot turn into an invalid or unenforceable loan when it is transferred to someone else.”

This is the basis of the Rule, and now this Rule is under attack. The state of California has federal lawsuits that have been joined by several states, and these states are seeking to make these rules unenforceable.

If certain rules don’t apply, you start to make ambiguous decisions about whether Madden’s decision controls certain areas of the country. Madden’s decision affected the aftermarket and its internal sales. It’s just a rule of thumb to apply on one track, but if you drop these national and federal rules, then it’s a battle between the tracks.

The Legal League 100 Strategic Initiatives Working Group is paying close attention to all of this, and it certainly affects our service teams, customers, investors, and we want to make sure everyone is up to date with what’s going on.

I have already seen certain problems in cases where the effect of the interest rate can be realized in writing when it is transferred to a non-bank institution. This will be a problem since the moratorium has been lifted. The country is currently experiencing an unprecedentedly low foreclosure rate, which is good in light of COVID. We obviously do not want to deprive people of their property, but we are at an artificially low level, which is much lower than usual. If you look at a straight line of interest on loans issued for foreclosures from 1933 to 2008, it is a relatively straight line of loan counts and foreclosures. We are now well below that point, so you will see an increase in foreclosures even if it returns to normal foreclosures. When these new foreclosures become contested, the maximum interest rate could be one of the possible remedies.

DS News: What are the implications of canceling the Really When Done Rule?
Hladik: I think you will see the protection of the borrower; you will see potential claims against law firms and service providers for potential fair debt claims claiming interest rates were not enforceable in that particular state. You will see the impact on prices and the secondary market.

Obviously, there is always a risk when buying a loan, but now you are increasing that risk for the investor. This adds risk to the secondary market equation, which will inevitably affect pricing.

You can see the problems with the translation and you can see the potential problems with the mandatory interest rate. If this interest rate is not enforceable, you open up the opportunity for the lender, service provider, or investor to file a claim and not only object to foreclosure, but you also consider potential claims in accordance with fair debt collection practices.

Bottom line … there are a number of legal issues that could arise if this Rule were lifted.

DS News: Any closing comments?
Hladik: The Legal League 100 Special Initiatives Working Group (SIWG) did an excellent job on the White Paper, analyzing not only the history of the doctrine, but also its impact and potential in bankruptcy court.

Webinar, set for September 29 from 12:00 to 13:00 CDTWe will dive deeper into what was found in Madden’s decision and discuss some of the decisions that were just made in Colorado that were very favorable to the serving community, as well as other cases from across the country.



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