Source: http://updates.mwbllp.com/2014_02_23_archive.html
Timestamp: 2019-01-18 13:51:17
Document Index: 536359143

Matched Legal Cases: ['§ 4001', '§ 4012', '§ 4012', '§ 61', '§ 203', '§ 203', '§ 1692', '§ 1692', '§ 1692', '§ 1692']

Financial Services Law Developments: 2/23/14 - 3/2/14
FYI: 11th Cir Holds FHA Mortgage Allows Lender to Require More Flood Insurance Than Federal Minimum
The U.S. Eleventh Circuit Court of Appeals recently held that the Federal Housing Administration (“FHA”) Model Mortgage Form unambiguously makes the federally required flood-insurance amount the minimum, not the maximum, the borrower must have.
The case arises from a residential mortgage loan on property located in a FEMA designated special flood hazard area. The borrower signed a standard FHA Model Mortgage contract which included the FHA flood insurance covenant. As you may recall, the covenant provides:
See 54 Fed. Reg. 27,604 (June 29, 1989) (hereafter, “Covenant 4”).
As you may recall, the National Flood Insurance Act (“NFIA”), 42 U.S.C. §§ 4001, et seq., requires a minimum amount of flood insurance before a federal agency can provide “any financial assistance” for home purchases in areas that present “special flood hazards” as designated by FEMA. See 42 U.S.C. § 4012a(a). Specifically, the NFIA mandates that homes receiving assistance from a federal agency be covered “by flood insurance in an amount at least equal to the outstanding principal balance of the loan or the maximum limit of coverage made available under the [NFIA].” 42 U.S.C. § 4012a(b)(1)(A). The “maximum limit of coverage” under the NFIA is $250,000. 44 C.F.R. § 61.6.
HUD requires that all FHA guaranteed loans for homes in special flood hazard areas be covered by flood insurance in “in an amount at least equal to either the outstanding balance of the mortgage, less estimated land cost, or the maximum amount of the NFIP insurance available with respect to the property improvements, whichever is less.” 24 C.F.R. § 203.16a(c). This requirement is implemented by HUD through Covenant 4. See 54 Fed. Reg. 27,596, 27,601 (June 29, 1989).
As the Eleventh Circuit noted, “[s]ome courts have found the covenant ambiguous because it does not clearly indicate whether the federally required flood-insurance amount is a minimum or a maximum. Other courts have held that the covenant unambiguously makes the federally required amount a minimum and allows lenders to require borrowers to have more flood insurance than federal law demands.”
Following the origination of the loan, the borrower purchased and maintained flood insurance on the property in an amount equal to the original principal balance of the loan. The original lender did not make any demand of the borrower to increase the amount of flood insurance. Subsequently, the defendant acquired the mortgage loan, and notified the borrower that she needed to increase her flood insurance coverage to either $250,000 or the home’s replacement value, whichever was less. The defendant also notified the borrower the defendant would obtain lender placed flood insurance if the borrower failed to correct the deficient flood insurance amount.
The borrower did not increase her flood insurance coverage as requested by the lender, and as a result the lender purchased the additional insurance and passed the premium cost to the borrower.
The borrower filed this lawsuit against the lender alleging breach of contract, breach of an implied covenant of good faith and fair dealing, breach of fiduciary obligations, and unjust enrichment for demanding more flood insurance than required under the applicable HUD and FHA regulations. The lower court granted the lender’s motion to dismiss the borrower’s complaint.
The borrower argued on appeal that Covenant 4 can be reasonably interpreted as limiting the insurance amount that lenders can require to the minimum set by the Secretary of HUD. In particular, the borrower relied upon the third sentence of Covenant 4 which provides “Borrower shall also insure all improvements on the Property … against loss by floods to the extent required by the Secretary.
The Eleventh Circuit was not persuaded by the borrower’s interpretation.
In rejecting the borrower’s argument, the Court noted that the traditional contract interpretation principles were inadequate for interpreting uniform provisions mandated by federal regulation. Specifically, when a contract contains a uniform, standard-form provision required by the federal government, such as Covenant 4, two supplemental considerations must be taken into account: (1) the interpretation of the provision cannot vary from place to place or from contract to contract; and (2) the federal government drafted the language to implement federal directives. Thus, interpreting the federally mandated provisions requires that the Court also interpret the regulations themselves.
The Court looked first to the language of Covenant 4 itself to discern whether the meaning is clear in light of the context and purpose of the regulatory scheme. The Court determined that the language in Covenant 4 is not ambiguous, and that the only reasonable interpretation is that a mortgage lender may require the borrower to have more flood insurance than the HUD-determined minimum.
In reaching this ruling, the Eleventh Circuit held that the first two sentences of Covenant 4 explicitly allows the lender to set the required insurance amount for “hazards” which the Court noted, clearly includes floods. The third sentence, upon which the borrower based its arguments, provides a separate and independent requirement that the borrower maintain the federally required minimum amount of flood insurance in addition to – not in lieu of – what the lender requires. The Court concluded that the language of Covenant 4 sets two minimum requirements for the borrower, one set by the lender and one set by HUD, and both of which the borrower must satisfy.
The Court noted that its interpretation of Covenant 4 is supported by other provisions of the mortgage contract and by the nature of the lender’s interest in the mortgaged property. As an example, the Court pointed to Paragraph 7 of the standard-form mortgage contract which allows the lender to “do and pay whatever is necessary” to “protect the value of the Property and the Lender’s rights” including payment of hazard insurance. The Court found that the “value of the property” was not limited to the unpaid principal balance, but rather extended to the continued receipt of the interest payments over the lifetime of the loan. Similarly, the Court found that the lender’s exposure to the risk of loss extends to the replacement value of the home and not merely the loan’s principal balance.
Moreover, the Eleventh Circuit noted that the NFIA and FHA regulations supported its interpretation. The Court found that the inclusion of the term “at least” in the HUD requirements for flood insurance are consistent with interpreting Covenant 4 to allow the lender to require more insurance than the HUD minimums, and inconsistent with interpreting the covenant to prohibit more.
The Court also determined that the statutory and regulatory context supports a determination that the lender can require insurance in excess of the HUD minimums. The FHA mortgage-guarantee scheme places the risk of flood losses on the lender, which makes the lender’s need for more flood insurance particularly acute. For instance, if a flood damages the property, the lender cannot collect from the United States until it has repaired the damage or deducted the cost of repairing the damage from the insurance benefits. 24 C.F.R. § 203.379. Thus, if the insurance were merely limited to the unpaid balance, the lender would not be able to insure against the risk the regulatory scheme imposes because the cost of repairing the damage may exceed the unpaid balance of the loan.
The Court also pointed out that the borrower’s interpretation would cause absurd results. The Court noted that HUD does not require any flood insurance for homes outside the FEMA designated special flood hazards, which under the borrower’s interpretation would prevent the lender from requiring any flood insurance at all. Moreover, the borrower’s interpretation would prevent lenders from requiring insurance for mortgages above $250,000. Accordingly, the Court concluded that the regulatory scheme supports the interpretation of Covenant 4 to allow lenders to require insurance beyond the minimum set by HUD.
The Court also determined that the borrower’s extracontractual claims failed as a matter of law. First, the Court found that because it already determined that Covenant 4 allows the lender to require insurance above the federal minimums the borrower’s claims for breach of the duty of good faith and fair dealing were without merit.
As to the borrower’s breach of fiduciary duty claims against the lender, the Court first noted under the applicable Alabama law lenders do not owe a general fiduciary duty to the borrower. Then, the Court dismissed many of the borrower’s fraud allegations for the same reasons the breach of contract claim failed.
Additionally, in rejecting the borrower’s claims of kickbacks, the Court noted that the defining characteristic of a kickback is divided loyalties, but the lender was not acting on behalf of the borrower or representing her interests. The loan agreement makes it clear that the insurance requirement is for the lender’s protection.
Accordingly, the Court affirmed the lower court’s dismissal of the borrower’s complaint for failure to state a claim.
Posted by Ralph T. Wutscher at 12:17 AM
FYI: 6th Cir Holds Inclusion of "Costs" in Amounts Due Did Not Violate FDCPA, If Costs Recoverable Under Relevant State Law
The U.S. Court of Appeals for the Sixth Circuit recently held that the inclusion of a demand for costs, in a dunning letter and before they had been awarded by a court, does not violate the federal Fair Debt Collection Practices Act (“FDCPA), if such costs are permitted by the relevant state law to a prevailing party in a lawsuit.
The Court also concluded that an affidavit from a debt collection company’s representative purporting to have “personal knowledge” of the business records of a third party does not constitute a materially false or misleading statement for purposes of the FDCPA, when in fact the affiant relied on records originally created by the third party.
A copy of the Court’s opinion can be found at: http://www.ca6.uscourts.gov/opinions.pdf/14a0069n-06.pdf.
After the plaintiff defaulted on a credit card, the creditor sold the account and the right to claim the balance owed to a collection company. The collection company then hired a law firm to recover the debt. In response to the plaintiff’s request of proof that she owed the debt, the law firm sent the plaintiff a packet that included an affidavit from a representative of the collection company.
The affidavit contained three statements that were the subject of the litigation. First, the representative affirmed that he had “personal knowledge” of the facts contained in the affidavit. Second, the representative stated that the facts contained in the affidavit were based upon the “electronic business records in question, which are part of the [company’s] regular business records.” Third, the affidavit stated the actual amount of the balance due and owing followed by the term “and costs.”
The collection company initiated a collection action in state court in Kentucky, requesting the outstanding balance and costs. Attached to the complaint was the same packet previously sent to the plaintiff, which included the affidavit of the representative of the collection company.
In response, the plaintiff filed a class action lawsuit against the collection company in federal court in Ohio, alleging that the company violated the FDCPA by “intentionally filing of false affidavits for the purpose of obtaining judgments against debtors in collection lawsuits and coercing debtors.” The district court granted the collection company’s motion for summary judgment, holding that the term “costs” was unclear but was not material. Likewise, the district court also held that an affiant’s assertion that he had personal knowledge of the debt based on business records of a third party was not a material violation of the FDCPA.
As you may recall, the FDCPA bars “conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt.” 15 U.S.C. § 1692d. Section 1692e provides that “a debt collector may not use any false, deceptive, or misleading representation or means” in connection with the collection of a debt. Section 1692e(2)(A) prohibits a party from making a “false representation” of the “amount” of any debt. Section 1692e(10) prohibits a party from using “false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer.”
On appeal, the issues related to the use of the terms “costs” and “personal knowledge” in the representative’s affidavit and whether those terms violated the FDCPA. The plaintiff argued that including the term “and costs” after the exact amount owed in the affidavit constituted violations of 15 U.S.C. § 1692e.
The Sixth Circuit acknowledged that in assessing whether a debt collector’s actions violate the FDCPA, the Sixth Circuit and other courts “apply an objective test based on the understanding of the least sophisticated consumer.” The Court also acknowledged that the FDCPA protects the “gullible and the shrewd,” but “also prevents liability for bizarre or idiosyncratic interpretations of collection notices by preserving a quotient of reasonableness and presuming a basic level of understanding and willingness to read with care.”
The Sixth Circuit concluded that, because Kentucky law permits costs to be awarded “as of course to the prevailing party,” the affidavit accurately described the law when it referred to costs. The Court determined that the fact that costs had not yet been awarded was irrelevant, because neither had interest or the principal amount due, and no argument was raised that asserting those amounts were “due and owing” in the affidavit was unfair, false or deceptive. Therefore, according to the Court, “the simple request for costs in an unstated amount, where such costs are permitted by state law to the prevailing party, is not a false representation and does not violate” the provisions of the FDCPA.
The Court also analyzed the use of the term “costs” under 15 U.S.C. § 1692f, which prohibits the “use of unfair or unconscionable means to collect or attempt to collect any debt,” and proscribes “the collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.” Based on the Court determined that seeking costs was permitted under Kentucky law, the Court concluded there was no violation. The Court also concluded that the plaintiff’s cardmember agreement with the original creditor permitted seeking costs. Thus, the Sixth Circuit held there was no violation of 15 U.S.C. § 1692f.
The Sixth Circuit then examined the use of the term “personal knowledge” in the company representative’s affidavit. The relevant portion of the statement at issue read “the facts recited herein are based upon the electronic business records of the account in question, which are part of [the company’s] regular business records.” The plaintiff argued that the statements were false because the president did not have personal knowledge of the data – he acquired the data from the original creditor. The Court rejected the plaintiff’s argument. As the Sixth Circuit noted, “multiple courts, including this circuit, have determined that an affiant’s statement of ‘personal knowledge’ regarding a record originally generated by a third party that the attesting party has subsequently reviewed does not violate the FDCPA.” The Court also determined that even if the affidavit statement was misleading, it was not material.
Ruling that the use of the term “and costs” as part of the amount due in a dunning letter, if costs were recoverable under the relevant state law, did not violate the FDCPA, and that an affiant is qualified to have personal knowledge of information contained in the records in a company’s file that were created by a third party, and that the related “personal knowledge” statement was not materially misleading or deceptive, the Sixth Circuit affirmed the district court’s ruling granting the collection company’s motion for summary judgment.
Posted by Ralph T. Wutscher at 9:13 PM