Millions of homeowners have signed up for a forbearance under the CARES Act, which gives homeowners with a federally-backed mortgage loan the right to obtain a temporary reduction or suspension of mortgage payments by way of a forbearance. During the forbearance period, the financial institution cannot charge fees, penalties, or interest beyond the amounts included as part of the homeowners’ regular monthly mortgage payments. A new putative class action asserts that one bank, however, is doing just that.
An Opportune Time For Financial Institutions to Review Their Fair Lending Procedures
At the beginning of his term, President Biden declared that his administration would make it a policy to eliminate “racial bias and other forms of discrimination in all states of home-buying and renting.” Recently, this policy statement has manifested itself in regulatory proposals and enforcement actions against a national banking association in what is the largest fair lending enforcement action in the past few years.
In late August, the Office of the Comptroller (“OCC”) entered into a consent order [1] with a national banking association, Cadence Bank, over what it alleged were violations of the Fair Housing Act during the 2014-2016 time period. The OCC alleged that the bank failed to provide equal access to residents seeking first-lien mortgage loans in majority-minority (predominantly black) census tracts and Hispanic neighborhoods in the Houston area. Without admitting or denying liability, the bank agreed to pay $3 million in civil penalties.
Mortgage Brokers File Class Action Against Leading Wholesale Mortgage Lender
United Wholesale Mortgage (UWM), the nation’s largest wholesale mortgage lender, announced on March 4, 2021, that it would no longer do business with mortgage brokers who also worked with Rocket Mortgage (the online loan shopping and application tool offered by Quicken Loans) or with Fairway Independent Mortgage Company, claiming that those two rival companies “are hurting the wholesale channel.” UWM’s “us or them” ultimatum sparked a furor and no shortage of angst among the voluminous group of brokers who had been dealing profitably with both UWM and at least one of those rivals to that point. Now, the ultimatum has led to a class action lawsuit against UWM.
A lawsuit filed on April 23 on behalf of a large group of independent mortgage brokers alleges that UWM’s edict is “unlawful” and “anticompetitive.” A statement released at the time of the suit’s filing asserts that “UWM’s leveraged ultimatum is clearly unlawful, unfair and is designed to use UWM’s dominant market share … to limit the consumers’ choice and steer business for their own gain.” The statement went on to note that “[t]his position also runs counter to the actual value provided by mortgage brokers — the ability to shop all lenders and select the company and loan program that provides their clients the best possible rate, experience, and process.”
The suit claims three separate violations of the federal Sherman Antitrust Act. One is for unreasonable restraint of trade. The second claim is that UWM’s action constitutes impermissible “steering” — an act intended to dissuade consumers or business partners from using a third party’s product or services— to an extent that harms competition and violates antitrust law. The third alleged violation is that UWM’s policy is an attempt to unlawfully monopolize the wholesale mortgage market.
In addition, the class action lawsuit asserts causes of action under Florida’s state antitrust laws and the Florida Deceptive and Unfair Trade Practices Act, as well as a state law claim for tortious interference. The suit requests that the court rule that UWM’s policy is unenforceable and seeks compensation for named plaintiffs and other class members for damages that they sustained as a result of the policy.
Rocket Mortgage announced in March that “22 of our 25 largest partners have rejected UWM’s ultimatum and have elected to continue working with our company.” A company spokesman said recently that over 9,000 brokers had rejected UWM in favor of continuing to work with Rocket. Both the Mortgage Bankers Association and the National Association of Mortgage Brokers have been critical of UWM’s action. Whether the widespread concern and disenchantment that the ultimatum produced will translate into a successful class action remains to be seen.
NFTs: Unique Assets Spur Legal Questions of First Impression
Non-fungible tokens (NFTs) have gotten a lot of media attention of late, with breathless reports of multi-million dollar purchases of items one might never have expected to command such staggering sums. The objects sold have included digital artworks (such as drawings, music, and short videos) and even an autographed tweet by Twitter’s founder. Talk of an NFT “gold rush” abounds and does not seem overstated at the moment. But perhaps just as intriguing and unsettled as this new marketplace are the many legal issues that it raises.
The SPAC Era Is Upon Us, and Related Litigation Is on The Rise
Special Purpose Acquisition Companies (SPACs) have been in such widespread use over the last year or two that an uptick in SPAC-related litigation appears inevitable. Indeed, the increase is already beginning. After a brief overview of SPACs, this article will identify some of the key litigation risk areas for these entities and the individuals who govern them.
SPACs have no commercial operations when they are formed. They are shell companies that exist to raise capital through an IPO to merge with a private operating company and take it public. Taking the private company public is often referred to as a “de-SPAC transaction.” The IPO funds are held in a trust account until that de-SPAC transaction occurs. After the target has been selected, the proposed merger is put to a shareholder vote. Prior to a merger, shareholders can opt to redeem their shares if they do not approve of the target or the terms of the deal.
Lehman Brothers Holdings Inc. Files New Adversary Proceedings Against Mortgage Brokers
If you thought Lehman Brothers Holdings Inc. (“LBHI”) was done suing lenders as a result of its settlements with RMBS trustees years ago, think again. LBHI recently filed a new wave of lawsuits against approximately 60 defendants, mostly mortgage brokers, in the bankruptcy proceedings currently pending in the U.S. Bankruptcy Court for the Southern District of New York, and more may still be to come. As it did with the nearly 190 mortgage originators that it sued in 2018 in the same bankruptcy proceedings (the “2018 Adversary Proceedings”), LBHI seeks the remedy of contractual indemnification, alleging breaches of representations and warranties at the time certain loans were sold or brokered.
The Fed Raises Concerns about Corporate Debt
We have previously written about the possible economic and litigation implications of mushrooming corporate debt. Now, the Federal Reserve has flagged some of those same concerns.
In its semi-annual monetary policy report to Congress last Friday, the Fed expressed anxiety regarding the amount of debt taken on by American companies. Even “before the outbreak of the pandemic,” business debt was “already elevated.” Now, amidst the pandemic, “business leverage now stands near historical highs.”
The Fed took a sanguine view of “near-term risks,” stating that low interest rates and other factors provide cause for optimism in the short term. But the Fed appears more worried about longer-term risks, citing “considerable” insolvency concerns at small, medium, and even some large firms. If bankruptcies do result, then the economic pain can be expected to spread to securitized corporate debt—also known as collateralized loan obligations, or CLOs—and trigger litigation over the quality of the underlying bonds.
ViacomCBS Seeks to Recover COVID-19-Related Losses from Insurer
Business interruption insurance claims keep coming, cutting across a broad array of industries. The entertainment and media sectors are certainly not immune from pandemic-related losses. Last month, ViacomCBS became the latest entertainment entity to file such a claim, suing its insurer, Great Divide Insurance Co., for breach of contract and breach of the implied covenant of good faith and fair dealing. In the suit, filed in the U.S. District Court for the Central District of California, ViacomCBS seeks damages and declaratory relief for what it alleges is the insurance company’s failure to cover losses on ViacomCBS’ Television Production Portfolio policy, which provides more than $55 million in production-related coverage of various types. The lawsuit cites losses related to canceled and delayed productions and live events, such as the Kids’ Choice Awards, which was delayed and ultimately aired virtually, as were many other productions during the early months of the pandemic. ViacomCBS accuses its insurer of interpreting the governing policy in “an overly narrow and wrongful manner” and refusing to acknowledge coverage for various losses while improperly limiting the coverage available for other losses. ViacomCBS also alleges that Great Divide has acted in a manner inconsistent with policy language and industry custom and practice by refusing to acknowledge that ViacomCBS is “entitled to a third annual period of coverage without modification of the policy wording or cancellation or reduction of any of the policy’s coverages, except rate revision, as necessary.” It asserts that the insurer has instead offered only to continue the policy if the parties agree to an addition of an exclusion applicable to losses relating to COVID-19.
Corporate Debt: Still Growing, and Still a Concern
As the pandemic began unfolding about a year ago, we wrote about the risk that the high volume of corporate debt might make it the next market bubble to burst. The issuance of corporate debt only accelerated in 2020 compared to 2019, growing by 17% and setting a new record in volume. S&P Global Ratings has predicted that corporate debt issuance in 2021 will remain robust, decreasing by only 3% compared to a frenetic 2020 (which would still be up 14% over 2019 levels).
The ratio of corporate debt to GDP might be at an all-time high, registering at over 46% in the second half of 2020. Factoring in the debt of smaller companies not listed on stock exchanges drives that ratio even higher, at nearly 75% before the pandemic arrived. For those watching the relationship of credit cycles and recessions—in which the ratio of debt-to-GDP plummets immediately after a recession and then rises until the next recession—the current ratio might be ominous. The cycle peaked at about 43% on the eve of the savings and loan crisis in the early 1990s, at about 45% before the dot.com recession in the early 2000s, and again at about 45% before the financial crisis.
Student Loan Defaults May Spark SLABS Litigation
U.S. student loan borrowers owe approximately $1.7 trillion on their student loans. About 92% of that amount consists of federal student loans (debt owed to the U.S. government), with the remainder owed to a growing market of private lenders. Despite the fact that default rates have increased consistently since 2003, a substantial marketplace developed for student loan asset-backed securities (SLABS). That marketplace, and the world of student loans more generally, are now being buffeted by a confluence of factors creating great uncertainty about what the future holds. These factors include the prospect of forthcoming student loan legislation, continuing concerns about the effects of COVID-19 on the larger economy, and structural changes affecting securitizations and the underwriting of student loans.
