Mortgage loan brokers, correspondents and loan originators (“Originators”) who survived (or, in many cases, are still dealing with) the onslaught of “repurchase/indemnification” claims asserted by loan aggregators and government-sponsored entities (GSEs) (collectively, “Investors”) following the Great Recession are particularly well acquainted with Investors shifting the risk of a loss to the Originators of mortgage loans (“Mortgage Loans”) originated prior to that period. The Investors sought to attribute the fault for what was clearly a global mortgage market meltdown to the Originators.
A proposed class action filed in federal court in California on April 20 demands refunds for all fans who purchased tickets to Major League Baseball (MLB) games that have been postponed indefinitely due to the coronavirus pandemic. The suit, filed against MLB and online ticket sellers StubHub, Ticketmaster, Live Nation, and Last Minute Transactions, may be the first of its kind against a major sports league — but it is one of a rapidly growing number of suits seeking refunds for cancellations and postponements of events and pre-paid reservations.
In the mortgage industry, as in many others, uncertainty abounds as companies attempt to adjust to the “current normal.” One thing residential mortgage loan originators and servicers believe is clear, however, is that they are being unfairly squeezed from several directions during this time of especially fragile economic conditions. Recent government actions, new legislative mandates, and actions by contractual counter-parties have combined to create a real sense of alarm.
What can companies expect from their funding sources as COVID-19 does damage to the economy? In at least some instances, perhaps, opportunistic attempts by lenders to illegally take control of business assets. A real estate investment trust (REIT) in New York alleges in a new lawsuit that it has already fallen victim to that type of misconduct.
AG Mortgage Investment Trust Inc. (AG) filed suit against the Royal Bank of Canada (RBC) on March 25 for allegedly taking advantage of the pandemic to unlawfully seize the trust’s assets and sell them at below-market prices. AG says RBC is just one of many banks that are now trying to trigger margin calls on entities like AG. It alleges that RBC is doing so by applying “opportunistic and unfounded” markdowns on mortgage-based assets. A margin call then occurs, according to AG, with RBC contending that the value of a margin account — an investment account with assets bought with borrowed money — has fallen, requiring the borrower either to make up the difference with more collateral or have the asset seized. RBC, the suit further alleges, is being unreasonable in its valuations. Having seized assets based on what AG calls an “entirely subjective and self-serving calculation” of true market value, RBC then auctioned off $11 million worth of AG’s commercial mortgage-backed securities.
Earlier this week, we noted that COVID-19 might be the pin that bursts a corporate debt bubble. Unfortunately, corporate debt is not the only type of debt poised to explode, particularly under mounting pressure from COVID-19 and the economic downturn that is likely to follow in its wake. Though we have no desire to be prophets of doom, here are three other candidates for asset-based debt debacles in the near term, each of them likely to spur a lot of litigation activity:
As the world grapples with the health threat posed by the novel coronavirus (COVID-19), the secondary threats of the coronavirus—including economic and financial consequences—have come into clear view. Markets in the United States and the broader world tanked last week, including the worst day for the Dow Jones Industrial Average since “Black Monday,” October 19, 1987. The Dow ended last week on an upswing, but fell dramatically again yesterday (though it is rebounding somewhat as of this morning). Overall, the swift fall of both the Dow and the S&P 500 from all-time highs in February to bear territory this past week has raised concerns of a prolonged recession.
The emergency rate cut by the Federal Reserve in early March received a lot of attention, as did the resulting downward pressure on mortgage rates. Just over a week ago, the rate for a 30-year fixed mortgage had fallen all the way to 3.13%. Yet, at the end of last week, the rate jumped back up to 3.65%. Then at the beginning of this week, the Federal Reserve took even more drastic steps, cutting the benchmark interest rate all the way to zero and buying $700 billion of assets, including treasury bonds and agency residential-backed mortgage securities. The whip-saw effect of this health crisis—on the one hand, creating downward pressure on interest rates, and on the other hand, chilling the real estate market by, among other things, causing potential buyers to avoid open houses—will remain worthy of close scrutiny.
The years since the 2007–2008 financial crisis have been marked with milestone settlements of claims against the major mortgage “aggregators” (sometimes also known as “investors” in the mortgage purchasing context), who then became “securitizers” or “sponsors” with respect to the loans that they purchased. In the years immediately following the crisis, aggregators often first faced suits (or, at the very least, threats of high-stakes suits) from government agencies and departments—such as the United States Department of Justice—and by the major GSEs (Government-Sponsored Enterprises), Fannie Mae and Freddie Mac. Even as the aggregators were attempting to resolve those suits and threatened actions, they began getting hit with claims by trustees that managed the residential mortgage-backed securitization trusts established by the aggregators/sponsors and by the monoline insurers that “wrapped” some of the trusts. These claims by the trustees and monoline insurers comprise RMBS (Residential Mortgage-Backed Securities) litigation.
RMBS plaintiffs notched a number of significant, substantial recoveries against the major aggregators. Countrywide (after having been acquired by Bank of America) was among the first to yield, reaching a seminal settlement in 2011 concerning the RMBS trusts that it had sponsored. ResCap announced in 2013 that it had reached a settlement agreement allowing recovery on $8.7 billion in claims. JPMorgan Chase and its affiliates, including Bear Stearns, reached an agreement in principle to settle their RMBS exposure for approximately $4.5 billion in 2013. Citibank resolved similar claims in 2014. Lehman Brothers Holdings Inc. (LBHI) reached a final settlement of the RMBS-related claims against it in early 2018.
Lawyers or business people who feel they have been hearing about a lot more consumer protection class actions lately have good reason for that feeling. A recent report by Lex Machina, part of LexisNexis, highlights an extraordinary increase in federal consumer protection class actions over the last decade. The number of such class actions almost tripled, even though consumer protection suits generally (i.e., suits other than class actions) increased by less than 20% over the period studied, 2009 through 2018. The number of class action filings focused on consumer protection issues rose from 1,223 in 2009 to 3,382 in 2018. Though 2019 filings have not been compiled and verified as of this time, observers widely expect a number similar to, or larger than, 2018.
In its “Consumer Protection Litigation Report,” Lex Machina noted that cases involving data privacy issues and unwanted text messages were most responsible for the increase. Plaintiffs’ attorneys evidently perceive the potential for substantial company liability in data breach cases. At the same time, consumers and regulators alike are communicating higher expectations for companies’ data security systems and privacy measures. Regulators, in particular, are increasing the pressure on companies to bolster and protect their privacy and security practices and standards. This has created an opportunity for private plaintiffs and their counsel. In certain circumstances, they can contend that, among other things, a company’s alleged failure to conform to “accepted best practices” (as manifested, perhaps, in statutes like the much-discussed California Consumer Privacy Act) contributed to the injuries suffered by the putative class.
A recent decision by the United States Court of Appeals for the Eighth Circuit offers some vindication for mortgage companies still facing “repurchase” demands made by the banks to which they sold residential mortgages in the years leading up to the financial crisis that began in 2007 and accelerated in 2008. In CitiMortgage, Inc. v. Equity Bank, N.A., No. 18-1312 (8th Cir. 2019), the Eighth Circuit (which has appellate jurisdiction over the federal district courts of Arkansas, Iowa, Minnesota, Missouri, Nebraska, and the Dakotas) reached the common-sense conclusion that a plaintiff cannot require a defendant loan originator/seller to “repurchase” a loan extinguished by foreclosure. In such a circumstance, the court reasoned, there simply is nothing left to repurchase. In so holding, the Eighth Circuit affirmed the judgment of the United States District Court for the Eastern District of Missouri — a court that, despite being CitiMortgage’s consistently chosen forum for repurchase and contractual indemnification claims against loan sellers, had granted summary judgment to the defendant, Equity Bank, on this issue.
The relevant factual background is as follows. CitiMortgage filed suit against Equity, demanding that Equity repurchase 12 residential mortgage loans. CitiMortgage had notified Equity that it needed to take action under the cure-or-purchase provision in the parties’ Agreement. The Eighth Circuit affirmed the district court’s holding that Equity’s duty to repurchase was limited to the six loans that had not gone through foreclosure. For the loans that had not gone through foreclosure, the court affirmed the district court’s holding that Equity breached the Agreement. The court rejected Equity’s claims that CitiMortgage’s letters lacked the necessary detail to trigger its duty to perform, and that CitiMortgage waited too long to exercise its rights. But, as to the six loans that had gone through foreclosure, the court affirmed the district court’s holding that Equity owed nothing to CitiMortgage.
Late last month, the U.S. Court of Appeals for the Eleventh Circuit held in Regions Bank v. Legal Outsource PA, No. 17-11736, 2019 WL 4051703 (11th Cir. Aug 28, 2019), that a loan guarantor does not qualify as an “applicant” for purposes of asserting claims under the Equal Credit Opportunity Act, 15 USC § 1691.
The Equal Credit Opportunity Act (“ECOA”) makes it “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction” on the basis of “race, color, religion, national origin, sex or marital status or age[.]” In Regions Bank, a husband and wife claimed that Regions discriminated against them on the basis of their marital status, by forcing each member of the couple and the husband’s business to guarantee a loan made to the wife’s business. Regions Bank, 2019 WL 4051703, at *1.