The Dodd-frank Act and the Changing Landscape of Alabama Mortgage and Foreclosure Litigation
| Publication year | 2014 |
| Pages | 0166 |
| Citation | Vol. 75 No. 3 Pg. 0166 |
In January 2014, a number of new federal regulations governing residential mortgage loan origination and mortgage loan servicing become effective. Those rules instituted major changes from the current law in Alabama governing the obligations that lenders and mortgage servicers owe to residential borrowers. They also created several new causes of action that borrowers may assert for breach of those obligations. In total, the new federal regulations changes are likely to have far-reaching ramifications for lenders, home-buyers and others involved in this area of the economy.
This article provides a brief overview of the current state of Alabama law in this area as well as some of the recent changes in this area of law.
Current Protections for Mortgage Borrowers in Alabama
Litigation arising out of the recent mortgage crisis demonstrated that borrowers in default have limited defenses to a creditor's foreclosure on their mortgaged property under Alabama law. Among other things, the Alabama courts have rejected the argument that a mortgage servicer owes the mortgagor any duty of care in the servicing of his mortgage in the absence of personal injury or property damage.1 They have confirmed that wrongful foreclosure is a narrow cause of action under Alabama law, which applies only where the borrower can show that the foreclosing party commenced the action for some purpose other than to secure the debt that is owed.3 Finally, the courts have held that alleged violation of federal consumer statutes and regulations (e.g., Real Estate Settlement Procedures Act ["RESPA"], 12 U.S.C. §2601 et seq. and the Fair Housing Act) do not constitute a defense in an ejectment action following a nonjudicial foreclosure.2
In addition, the Alabama courts have long held that a bank's duty to its borrower is purely contractual absent special circumstances, and have rejected the argument that a lender owes a duty to its borrower to determine if the borrower truly has the ability to repay a loan.4 In Flying J Fish Farm v. Peoples Bank of Greensboro, for example, the Alabama Supreme Court held as a matter of law that a bank could not be liable to a business borrower on the theory that it had negligently loaned the borrower more money than the borrower could repay. In doing so, the court noted that a bank's loan-approval policies are generally intended solely for the bank's benefit.5
The new federal regulations will have an impact on all of these holdings.
The Dodd-Frank Amendments to TILA and RESPA
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank" or the "Act") was signed into law. Dodd-Frank amended a number of federal consumer protection statutes affecting mortgage borrowers, including RESPA and the Truth in Lending Act (TILA), 15 U.S.C. §1631, et seq. It also created a new federal agency, the Consumer Financial Protection Bureau ("CFPB"), to promulgate regulations interpreting and enforcing both the requirements of Dodd-Frank and preexisting federal consumer financial protection statutes.
Under Dodd-Frank, most of the statutory amendments to the TILA related to residential mortgages were to automatically go into effect January 21, 2013 unless the CFPB promulgated regulations related to those amendments by that date. On January 10, 2013 the CFPB responded, announcing a series of new implementing regulations. The majority of those new regulations, including the TILA and RESPA rules that are the subject of this article, became effective in January 2014.
Mortgage Loan Origination and The New Ability to Repay Cause of Action
Most significantly, sections 1411, 1412 and 1414 of the Dodd-Frank Act add new Section 1639c to the Truth in Lending Act ("TILA"), 15 U.S.C. §1631 et seq. This provision prohibits lenders from making a "residential mortgage loan" unless the lender "makes a reasonable and good faith determination, based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance and assessments."6 In doing so, Dodd-Frank represents a substantial departure from the current Alabama rule that a lender does not owe its borrower a duty to ensure that he or she has the ability to repay a loan, at least as that rule is applied to consumer mortgage borrowers.
The act gives borrowers a private right of action under the TILA if a creditor fails to evaluate the borrower's ability to repay as provided by the statute (i.e., the "Ability to Repay Rules"). The borrower's potential remedies for such a violation include actual damages (e.g., loss of down payment), recovery of all finance charges and fees paid by the consumer, costs of any action and reasonable attorney's fees.7 The statute of limitations for such claims is three years from the date of the violation.8
In addition, the statute expressly provides that a borrower may assert the lender's violation of this provision as a defense in any action following a nonjudicial foreclosure. This rule appears to limit those recent Alabama cases holding that violations of federal statutes are not a defense to an ejectment action following a non-judicial foreclosure.9 The defense is not absolute; the statute provides that the defense is by way of recoupment or setoff to the creditor's claim. Thus, the creditor may still proceed with the ejectment if its claim exceeds the recovery resulting from any successful counterclaim by the borrower for violation of the Ability to Repay Rules (including the borrower's damages, costs of action and a reasonable attorney's fee). There is no statute of limitations for such claims when asserted as a counterclaim in a foreclosure action.10
Dodd-Frank, along with the CFPB's implementing regulations (Regulation Z, 12 C.F.R. part 1026), provides guidelines on what a creditor must consider in making a reasonable and good-faith calculation of the borrower's ability to repay. At a minimum, the lender must consider the following eight criteria: (1) the consumer's current or reasonably expected income or assets, (2) past employment history and current, ongoing employment status, (3) monthly mortgage payment for loan, (4) monthly payment on any simultaneous loans secured by the same property, (5) monthly payments for property taxes and insurance that the lender requires the consumer to buy, as well as any homeowner's association dues, (6) debts, alimony and child-support obligations, (7) monthly debt-to-income ratio or residual income; and (8) credit history.11 The creditor may consider additional criteria if it chooses.
In evaluating these criteria, the creditor is not entitled to simply rely on information provided by the borrower. The statute provides that a creditor must verify the amounts of income or assets that it relies on to determine repayment ability by reviewing "reasonably reliable" third-party information, such as tax returns, payroll receipts and/or bank records. This requirement is designed to safeguard against borrower fraud.12
The Fraud Conviction Defense
Dodd-Frank provides that a creditor will have a defense to a claim under the Ability to Repay Rules if the borrower "has been convicted of obtaining by actual fraud such residential mortgage."13 The full scope of this defense is likely to be hammered out in future litigation. Attorneys for borrowers will almost certainly contend that Congress's express reference to a "criminal conviction" in this provision precludes creditors from asserting borrower misrepresentation or unclean hands as a defense to an action under the Ability to Repay Rules absent such a finding. Creditors will most likely argue that the rule does not preclude other equitable defenses to a claim where the borrower has engaged in misconduct.14
The Qualified Mortgage Exception
Dodd-Frank establishes an important exception to the Ability to Repay Rule for "Qualified Mortgages." The statute, however, leaves some ambiguity concerning the scope of this exception. The CFPB's Ability to Repay regulations seek to resolve this ambiguity by creating several categories of qualified mortgages and outlining specific criteria that a mortgage must meet to fall within the exception. For example, Regulation...
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