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October 13, 2003






“It is required that anyone being serviced in the state of Texas be serviced by an attorney and not by a software program.” Timothy Clyne — Attorney with the Texas Supreme Court Unauthorized Practice of Law Committee

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i n s i d e t h i s Is s u e

Supreme Court’s UPL committee scrutinizes process

The Texas Supreme Court doesn’t like the way Countrywide is shuffling its paperwork these days, and has sought a temporary restraining order and temporary and permanent injunction against the corporation to try to get them to change their ways. Filed in late July by the Unauthorized Practice of Law Committee for the Supreme Court of Texas, the petition claims that Countrywide Home Loans Inc. is engaging in the unauthorized practice of law by promoting the sale of legal documents or advice and by holding itself out to the public as having the legal knowledge required to advise and assist clients with their contracts, deeds, deeds of trust and real estate closings in the state of Texas. At issue is the method by which Countrywide produces, selects and completes various types of forms for use in real estate transactions. “When a person comes in for a home loan, Countrywide would then use their software to select the forms,” alleges Timothy Clyne, attorney for the UPL Committee. “They fill out that form according to information they gained from the client and then forward that to the attorney. The attorney, according to our record, would have 15 to 20 seconds to actually look at the document. That doesn’t even meet the basic review standard.” In addition to producing legal documents in violation of Texas state law, the petition accuses Countrywide and the Houston-based firm of Gregg & Valby of

Feature Report — Page 4 Industry is divided over split closings FOCUS — Page 5 HUD investigation into CBAs focuses on bona fides

Continued on page 2

Case Law — Page 7-10 AMPTA preemption trumps Illinois Interest Act Negligence claims stand in suit against First American

Feature Report — Page 11 California law doesn’t preempt Oakland predatory lending ordinance

TILA does not protect borrower from contractual obligations

State Bill Track — Page 12 California escrow licensing draws in directors

Class certification denied in Pennsylvania RICO case

O c t o be r 27 a n d be y o n d

EXCLUSIVE: Texas rejects Countrywide’s document preparation system; calls for restraining order...Part 1

From the Pennsylvania Tech Expo: Cybercrime and Electronic RE Recordings LIVE! The Legal Description reports from the MBA convention in San Diego Did the class action lawsuit against Countrywide succeed? … Part 2 Large commercial title deals often include complex and unusual demands

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THE LEGAL DESCRIPTION October 13, 2003 (Continued from page 1)

improper fee splitting. The Legal Descrip tion is a production of the October Research Corporation, specializing in market intelligence for the real estate industry.The Legal Description is the premier legal and legislative analysis resource for today’s real estate, mortgage & settlement services professional.

“The defendant, Gregg & Valby, did aid and abet Countrywide Home Loans, Inc. in the unauthorized practice of law by allowing them to use their names and allowing them to prepare documents for the public, charging fees for this service under the name of the attorneys fees or document fees. These fees are paid to Gregg & Valby and in part returned to Countrywide Home Loans for actually producing and getting the necessary information required to produce legal documents,” the petition alleged. Clyne said that Countrywide and Gregg & Valby have ceased the alleged fee-splitting, putting them in compliance with federal rules, but the issue of document preparation has not yet been resolved.

Copyright 2002/2003. All rights reserved.

“Because it is required that anyone being serviced in the state of Texas, be serviced by an attorney and not by software program and not by Countrywide, they are still in violation of the rules,” Clyne noted.

The L eg al De scrip ti on P.O. Bo x 370 Ri chfield, O H 4 4286

Gregory L. Gregg and Scott Valby of Gregg & Valby were contacted about the story but declined to comment on the ongoing case. Countrywide was contacted but did not respond to requests for interviews.

The Legal Description is published 24 times a year by October Research Corporation.

Funneling paper In its complaint, the committee focused on the business model set up between Countrywide and Gregg & Valby. “Gregg & Valby serves only one purpose: to funnel paper given to them by one mortgage company, Countrywide,” Clyne explained. “They are what we call a ‘captive firm’ because they receive income from only one source. If that source would go away there would be no law firm.”

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The court petition claims that the public interest is not served when nonlawyers are preparing legal documents. “Public interest demands that persons receiving legal services will receive the same directly from qualified persons who are at all times subject to the ethical considerations and disciplinary rules of the State Bar of Texas and of the courts,” the petition said. Douglas W. Salvesen, litigation counsel for MCA The Real Estate Bar Association for Massachusetts said that often at issue in these cases is the expectation of the buyer and the lender that legal judgment has been brought to bear on the process. “The closing attorney is given the responsibility to insure that the documentation that he or she has been provided is sufficient to do what the bank wants or needs it to do,” Salvesen said. “The attorney must make a legal judgment that the information the bank has filled in will result in the loan going forward as the parties intend.” While there is an ongoing debate from state to state about the difference between filling in the blanks on a document and actual legal document preparation, Salvesen said that how the documents are filled in is less significant than to what extent they are reviewed. “I can’t say that mortgage documents are always filled out by an attorney in Massachusetts,” he explained. “Ordinarily there is a package of documents that is sent to a closing attorney, and some of the information may be filled out. In Massachusetts, the Supreme Judicial Court has taken the position that conveyancing is the practice of law and conveyancing includes a number of different activities.” Not familiar with the current case in Texas, Salvesen could not comment specifically on 2

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the facts in the Countrywide case, but he did note that the ultimate concern of UPL committees is to prevent a situation where it appears as if an attorney has undertaken a review of documents when in fact legal judgment has not been exercised.

to point out that it’s not about protecting an attorney’s right to make money. “Gregg &Valby are making plenty of money at this,” Clyne remarked. “It is really to protect the document system. Bad things happen when you have clerks, who are not legal clerks, working for a corporation that is not even residing in the state doing paperwork that needs to be filed with the County Clerk.”

Document preparation debate This case also points to an ongoing debate about when document preparation is a matter of filling in the blanks and when it involves legal judgment. A recent Michigan case reported by The Legal Description highlights some of the current legal issues surrounding document preparation. (See “Michigan case sets dangerous precedent for commercial real estate document preparation,” TLD Aug. 18, 2003)

(Next Edition: The legal Description will report on a class action lawsuit filed against Countrywide related to this action. )

Utah title industr y divided on benefits of split closings

The case, Dressel v. Ameribank, involved borrowers who sued a lender for fees it charged in association with completing standard mortgage documents. The trial court granted summary judgment in favor of the lender, but the court of appeals determined that charging a separate fee for the documents constituted the unauthorized practice of law. The Supreme Court of Michigan reversed the appeals court holding that “a person engages in the practice of law when he counsels or assists another in matters that require the use of legal discretion and profound legal knowledge,” but that in this case, the lender only filled in standard forms.

Utah’s Insurance Department held hearings recently on a proposed regulation that would have designated a single title company to be responsible for handling closings, inciting a heated discussion about the benefits and drawbacks of a system of split closings unique to the Utah title industry. While the proposed rule sparked renewed debate about the practice, the Insurance Department insists that the regulation has been erroneously reported as a “splitclosing” rule. “It’s a fiduciary rule,” said Geri Jones, title insurance market conduct examiner for the Utah Department of Insurance, “not a split-closing rule.” Jones said the Department of Insurance is re-evaluating comments from recent public hearings. A decision concerning the next step for the proposed regulation is expected on or before Nov. 15, 2003.

In spite of the Michigan decision, the debate over standard documents versus legal document preparation is rife across the country as sophisticated software programs seek to provide solutions to simplify the voluminous mortgage process. Although several mortgage technology providers were contacted by The Legal Description, none were willing to go on record about the issue.

No matter what the new regulation attempts to address, the title agents in Utah seem suspicious of any regulation that purports to put an end to the unusual practice of split closings.

In Texas, according to Clyne, mortgage documentation that is required to be produced by an attorney cannot be produced by a company. Although a corporation cannot practice law, Clyne said that Countrywide’s defense has been that they are the client and are allowed to manage the documents such as the deed from the seller to the buyer at their discretion.

A closing for two In split closings, two title companies, one for the buyer and one for the seller, handle paperwork in real estate closings. Al Newman of Metro National Title in Salt Lake City said he knows of no other state that has this setup.

The UPL committee doesn’t take issue with a corporation providing document forms to attorneys, according to Clyne, and corporations often assist attorneys in that way to reduce the work load. “But the attorney does have to take the information down and put it into the form themselves,” he said. “Most firms in Texas have the system down to where they turn out an entire file for a loan in 15-20 minutes.” Clyne was quick

Prior to RESPA, sellers in Utah customarily decided what title company did the title work and provided the buyer with owner’s title insurance at the cost of the seller. Then, citing concerns raised by RESPA, some argued that buyers should have the option to choose who handled the title (Continued on page 4)


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THE LEGAL DESCRIPTION October 13, 2003 (Continued from page 3)

work. However, the result wasn’t a switch to letting the buyer control the entire process. Instead, the practice of split closings evolved. A title company selected by the seller customarily prepares a seller’s closing statement and deed, as well as provides title insurance for the new owner at seller’s expense, paying for an owner’s policy at a rate somewhat lower than charged in other states. The title company selected by the buyer performs title work for the lender, which acquires a lender’s policy at 60 percent of the rate charged for the owner’s policy. Newman said that if underwriters in Utah raised the owner’s rate to what would be comparable to surrounding states rather than, in effect, splitting the cost of title insurance between seller and lender by under-pricing the owner’s insurance, there would be less incentive for split closings, and a lender’s policy would be issued for a nominal fee. Another problem with split closings is duplication. “Often, the Realtor may want a preliminary title report,” said Jones. Then, when a buyer is found, the buyer may choose someone else to handle the transaction. The result is duplication of effort. “The greatest cost to title companies is the search and examination required to know if the title is insurable. In a split closing, this cost is incurred by two companies. Costs to the consumer might decrease if split closings were eliminated,” said Newman. Newman said split closings sometimes result in two title companies trying to charge a closing fee. Jones and Newman both say that split closings can cause confusion. “Each side prepares its own HUD,” said Jones. Sometimes the two closing statements are so different “you can’t tell it’s the same transaction.” Another problem created by split closings is the way with which it conflicts with the good funds rule, said Newman. In Utah, funds in escrow must be clear of any possibility of stop payment before they can be disbursed. With split closings, two title companies are handling funds, which means necessarily at least one company must, at some point, violate the “good funds” rule in order to complete the transaction.

Fiduciary obligations Jones said the state Attorney General, in response to inquiries by the Department of Insurance, opined that

only one settlement agent can perform the fiduciary obligations involved in settlement escrow. In other words, only one settlement agent can be ultimately responsible for the funds and the documents. The proposed regulation required settlement agents providing escrow services “be solely designated as the settlement agent for the specific escrow by a written agreement, executed by the parties.” The regulation does not prohibit the hiring of two title companies, but limits escrow activities to one company. “Everybody ends up finger-pointing if there’s not one person responsible,” said Jones, “and it leaves the door wide open to fraud, which is not good for the consumers.” Fraud involving title companies has been a problem in Utah in recent years. Newman said there have been three or four instances of serious fund defalcations in Utah over the past few years. Some specific claims involved split closings. Only months ago, Utah homebuyers and sellers filed suit, alleging $22 million in fraud by an agent of Attorneys Title Guaranty Fund and other persons affiliated with it. The relationship between fraud and split closings is one that divides the industry. Some proponents of the present system say split closings actually reduce the likelihood of fraud because there are “two sets of eyes” taking a look at everything, according to Scott Sabey, a real estate attorney in Utah. Controversy over split closings hasn’t just suddenly appeared. “This is actually the second go-around for this rule,” said Jones. Yet even opponents of split closings have a problem with the proposed regulation, which Newman said was “poorly drafted.” There were “a lot of questions [the regulation] didn’t answer,” he said. One problem some people had with the regulation, said Newman, is the provision that requires escrow agents to “have a contract … which acknowledges that Insurer’s liability imposed by Sections 31A-23a-407 and 31A-23a410” for misapplied funds. “This is the statutory law,” said Newman, “but underwriters didn’t want that in every agency contract,” evidently thinking the regulation might increase the underwriter’s legal exposure. In addition, some realtors simply oppose the end of split closings. Split closings allow realtors to steer customers to title companies with which the Realtor has a relationship, if not a financial interest. On the other hand, said Newman, some Realtors, frustrated with problems caused by split closings, have begun writing in sale contracts that a single title company will handle the closing. 4

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Bona fides required to avoid RESPA kickback charges could have received referrals of business directly. In such arrangements, the entity actually performing the settlement services reduces its profit margin and shares its profits with the referring participant in the arrangement.”

Over the past few years, the U.S. Department of Housing and Urban Development (HUD) has increased RESPA enforcement efforts, hiring new staff for that purpose. The Legal Description recently reported on action taken against TitleVentures.com in Kingsport Tenn. In that case, HUD determined that dozens of sham title insurance companies had been created to pay kickbacks to real estate brokers and mortgage brokers.

That describes exactly what HUD said was happening in the TitleVentures.com, though the owner, Jerry D. Holmes Jr., denies any wrongdoing. “We don’t think we did anything wrong,” Holmes told the Kingsport TimesNews. “But we made a business decision we can’t fight the federal government.”

“The Realtors and brokers would then refer customers who needed to purchase title insurance to the sham agency in which they held an interest,” said Brian Sullivan of HUD’s Office of Public Affairs. Since HUD is eyeing affiliated business arrangements closely, what features should a business model have (or not have) to avoid being accused of violating RESPA? An important question to ask, according to Phil Schulman, of the Washington D.C. office of Kirkpatrick & Lockhart, LLP, is whether the affiliated business is “bona fide.”

Schulman said that when investigating such businesses, one of the key things HUD is going to ask is, “Are there full-time employees who perform core functions?”


A problem HUD said it had with TitleVentures.com was that the affiliated companies had few or no employees and performed little or no work.

The agencies affiliated with TitleVentures.com said Sullivan, “did not perform any core title work. They merely contracted out the core title work to TitleVentures.com, which received a fee for its work, and also got 20-25 percent of the title insurance premium.” I It should be noted that TitleVentures.com’s Web site presently states, “Your employees will handle all core title agent services (including issuing title commitments and policies, clearing objections with the underwriter(s), etcetera.)”

To understand why bona fides are important, a little history is helpful. In 1983, Congress amended RESPA to permit controlled business arrangements (CBA) in which persons in a position to refer business to a settlement service could have an affiliate or ownership interest in the service. Referrals were okay if (1) the relationship and an estimate of the charges were disclosed to the consumer; (2) the consumer wasn’t required to use the referred settlement service; and (3) the referrer received only payment for services rendered or a return on ownership interest.

Another red flag noted in the HUD policy statement is extensive involvement by the settlement company in setting up and/or operating the affiliated agency:

Regulations spelled out how to make the disclosure, what was not a proper return on investment (i.e., returns that varied by the amount of business referred) and identified limited exceptions to the three conditions.

“In some situations…companies that could have received referrals of settlement service business directly…have assisted the referring parties in creating wholly owned subsidiaries at little or no cost to the referring party. These subsidiaries in turn refer or contract out most of the essential functions of its settlement service business back to a creator that helped set them up or use the creator to run the business.”

However, HUD began to receive complaints about sham title agencies created to funnel kickbacks. HUD statement of policy 1996-2 put it this way: “In many of the arrangements that have come to HUD’s attention, the substantial functions of the settlement service business that the new arrangement purports to provide are actually provided by a pre-existing entity that otherwise

TitleVentures.com’s Web site offers to help “real estate and lending professionals create their own title (Continued on page 6)


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for corporate debts where a corporation has not been adequately capitalized. HUD also is interested in whether the owners invested their own money as contrasted with a “loan” from the company to which the referrals will be made.

(Continued from page 5)

agencies…TitleVentures.com trains licensed agents that become employees of your title agency.” The Web site also said that Holmes, as principal owner of TitleVentures.com, “will oversee all operations of your title agency.”

Settlement services contemplating CBAs should look at HUD statement of policy 1996-2 and obtain advice of counsel in order to avoid inviting the wrath of RESPA enforcement. What seems real to them might be a sham to HUD.

HUD believes Congress did not intend to roll back antikickback provisions when amending RESPA to permit CBAs. So even if a CBA complies with the “three conditions,” RESPA is violated if the CBA is a sham to funnel referral fees.

Znet Financial, RE/MAX settle with HUD on alleged RESPA violations

Factors HUD will use to distinguish shams from bonafide businesses include whether core functions (i.e., the title search or determining insurability) are contracted out, and if so, whether to independent third parties or to a parent provider and whether the subcontractor charges reasonable value for the contracted services.

The Department of Housing and Urban Development (HUD) announced a settlement agreement with Atlantabased lender, Znet Financial, involving alleged violations of the Real Estate Settlement Procedures Act (RESPA). In addition, real estate broker RE/MAX of Atlanta, some of their officers and affiliated companies, and 14 RE/MAX real estate agents agreed to the settlement after HUD determined all violated the anti-kickback and unearned fee provisions of RESPA.

The agencies associated with TitleVentures.com “retained 75-80 percent of the title insurance premium,” Sullivan said. “The Realtors and brokers benefited because they had an ownership interest in the sham agency to which they referred business,” which violated Section 8(a) of RESPA prohibiting referral fees. In other words, HUD said most of the title insurance premium went to persons who referred business but performed no significant work.

A HUD investigation found Znet paid RE/MAX of Atlanta real estate agents as “employees” even though the agents performed little or no work for the lender.

Other factors include whether the CBA has its own office space, has its own employees (as contrasted with employees “loaned” by the settlement service receiving the referrals) and manages itself.

“RESPA is very clear that creating the illusion of employment to mask otherwise illegal referral fees is not permitted,” said John C. Weicher, HUD Assistant Secretary for Housing - Federal Housing Commissioner. “Real estate agents, brokers and lenders should know that they will be held accountable for kickbacks and unearned fees.”

Another factor HUD will look at is whether the affiliated business actively competes in the marketplace or merely receives business only from one of its parent providers and whether the affiliated business refers exclusively to its parent provider or to multiple businesses. In TitleVentures.com’s settlement with HUD, affiliated agencies in the future would have to receive at least 40 percent of revenue from unaffiliated parties.

HUD’s investigation found that Znet represented the RE/MAX of Atlanta agents as “employees,” paying them $400 for each consumer referred to Znet. The real estate agents are actually “sham employees” after investigators found the agents performed little or no origination work other than filling out loan application forms.

“Is there sufficient capitalization?” asks Schulman. Legitimate businesses, intended to be functioning entities in their own right, should have sufficient capital and net worth typical of similar businesses. HUD includes this factor among the criteria it uses to distinguish shams from bona fide businesses.

Under the terms of the settlement, the companies, their officers and the real estate agents agreed to stop this bogus employee compensation program. Further, the RE/MAX agents will refund $400 to each consumer referred to Znet for a total of $9,200. In addition, Znet will make a settlement payment to the U.S. Treasury of $15,000.

An analogy can be drawn to situations where courts have “pierced the corporate veil” to hold shareholders liable


October 13, 2003

Case Law Memorandum Preemption

Illinois federal court grants mortgage company summary judgment on AMTPA preemption challenge Thomas W. McCarthy v. Option One Mortgage Corporation, et al. (U.S. District Court for the Northern District of Illinois, No. 01 C 3935)

“A mortgage lender has no way to discover and correct a failure to provide an ARM Consumer Handbook when its records, indicate that the borrower received the handbook.”

A federal district court granted summary judgment to a mortgage lender and a loan servicer who claimed that a borrower could not sue under the Illinois Interest Act since it was preempted by the Alternative Mortgage Transaction Parity Act (AMTPA). The facts: Thomas W. McCarthy sued Option One Mortgage Corp. and BNC Mortgage Inc., alleging that it violated the Illinois Interest Act by charging him a pre-payment penalty. McCarthy claimed non-compliance, alleging that he never received a copy of the Consumer Handbook on Adjustable Rate Mortgages as required by the regulation. The defendants argued that McCarthy’s claim is preempted by AMTPA and that the Illinois Interest Act does not apply to servicers like Option One. What the court ruled: The U.S. District Court for the Northern District of Illinois determined that the lender was only required to show substantial compliance and that proof of receipt of the handbook was unnecessary. “A mortgage lender has no way to discover and correct a failure to provide an ARM Consumer Handbook when its records, indicate that the borrower received the handbook.,” the court said. While McCarthy claimed he did not receive the handbook at closing, he and his wife both signed documents that indicated they had received it, and the court ruled that no reasonable jury could disregard McCarthy’s written acknowledgement. The court also agreed that the Illinois Interest Act did not apply to servicers.


Court dismisses emotional distress claims against First American but retains negligence claims in sexual harassment suit Radesky v. First American Title Insurance Co. (U.S. District Court for the District of Connecticut, No. 3:02cv1304) A federal court granted an employer and managers’ motion to dismiss on a claim of (Continued on page 8)


October 13, 2003

Case Law Memorandum (Continued from page 7)

intentional and negligent infliction of emotional distress and intrusion upon seclusion but denied a motion to dismiss a negligence claim against the company as well as all claims against a supervisor. The facts: Laura Radesky alleges sexual harassment against James Kavanagh, her supervisor at First American Title Co., who she says “aggressively attempted to initiate a personal relationship” with her from 1999 until May 2001, including attempting several private visits to her home. Radesky alleges that she repeatedly informed management of the problem until Kavanagh was dismissed in May 2001. Later that summer, Radesky was also dismissed from her position with the company. After exhausting her administrative remedies, Radesky commenced her suit against First American and her supervisors alleging sexual harassment, retaliation, intentional and negligent infliction of emotional distress, intrusion upon seclusion, and negligent hiring, supervision and retention. First American and the managers moved to dismiss the common law claims and the supervisor moved to dismiss the retaliation claim. What the court ruled: The U.S. District Court for the District of Connecticut ruled that Radesky’s allegations did not rise to the level of extreme and outrageous conduct on the part of the employer and the managers and so dismissed the claim of intentional infliction of emotional distress. The court also said that the employer could not be held vicariously liable for the supervisor’s alleged invasion of privacy. However, the court determined that Radesky had adequately alleged that the employer was negligent in its hiring, supervision and retention of the supervisor and the managers, and also refused to dismiss the retaliation claim against the supervisor.


Montana court hands Mortgage Source a win in contract dispute The Mortgage Source Inc. v. Herbert Strong (Supreme Court of Montana, No. 03062) The Supreme Court of Montana affirmed a trial court’s order enforcing a brokerage contract and promissory note between a customer and a broker, saying that the Truth in Lending Act (TILA) does not protect a customer from contractual obligations. The facts: Herbert Strong sought a mortgage on his home through The Mortgage Source Inc. and signed a contract stating he was to pay for the services of the broker regardless of whether he actually consummated a transaction with a lender. Both the promissory note and the brokerage contract provided for the payment of attorney’s fees and costs in the event of litigation. The broker obtained an offer from the lender that the customer rescinded. The broker sent Strong a bill for its brokerage fee and out-of-pocket expenses. Strong refused to pay.


A Practical “How-To” Guide to Navigating the Post-RESPA Bundled Services Landscape

Washington, DC November 11-12, 2003 Distinguished Panels will explore: • A View of the Economic Landscape • A Look Ahead: Bundled Services in the Mortgage Finance Industry • RESPA Reform: Latest Developments • RESPA Reform: Industry Leaders Speak Out • Editors Roundtable • Technology for Bundlers • Bringing It All Together: The Ultimate Bundled Services “How- To” • Becoming a Bundler • Bundling Services • Partnering • Final Thoughts

For more information, please go to www.tavma.com for program details and a conference registration form. Or, you can simply fill out the registration form on back and fax or mail it to us. Sponsored by the Title/Appraisal Vendor Management Association (TAVMA) and media sponsor October Research Corp.

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October 13, 2003

Case Law Memorandum The Eleventh Judicial District in Flathead, Montana issued an order enforcing the brokerage contract and promissory note and awarding $5,000 in attorney fees. Strong appealed arguing that federal law protects a consumer from being liable for any fees associated with a credit transaction that is rescinded within three days, including a mortgage broker’s fees. What the court ruled: The court affirmed the trial court decision, saying that Strong’s contention that TILA and Regulation Z protect him from liability for fees and costs of a mortgage broker in the event of rescission, is unreasonable. “Strong’s literal interpretation penalizes mortgage brokers for servicing loans,” the court said. “Under Strong’s argument, a mortgage broker would never be able to collect its fees and costs when, through no fault of its own, the loan transaction is not consummated.”

Class certification denied in Pennsylvania RICO case against home builders and Chase Manhattan Mortgage Corp. Eddie Lester, et al. v. Gene P. Percudani, et al. (U.S. Court for the Middle District of Pennsylvania, No. 3:01-CV-1182) A federal court determined that the individual and complex issues of a RICO case brought against a builder and a mortgage banker militated against a class action being the superior method of adjudication. The facts: Eddie Lester sought to represent all persons who purchased a new-construction house through Gene Percudani of Chapel Creek Homes, Inc. and Raintree Homes Inc.; Dominick P. Stranieri of Chapel Creek Mortgage Banker, Inc.; William Spaner; and Chase Manhattan Mortgage Corp. The class alleges that the defendants lured customers into a program that promised rent coverage and low monthly mortgage payments. Once locked into the deal, monthly payments came in considerably higher, forcing a large percentage of the homeowners into foreclosure. What the court ruled: The U.S. District Court for the Middle District of Pennsylvania ruled that, although the fraudulent acts themselves may have been in common to the proposed class, the issues of causation and proof of damages mandated the conclusion that individual issues would predominate in a class action of this type, presenting the court with the prospect of holding hundreds or thousands of individual hearings. “Lastly, the court notes that a class action appears unnecessary because persons with a viable claim should have sufficient incentive to bring their claims individually. Because claimants have allegedly suffered substantial loss and may recoup costs of counsel through fee-shifting provisions, and because individual issues clearly predominate, the class action is not a superior method to adjudicate claims,” the court said. 9

RICO Class Action

October 13, 2003

Case Law Memorandum Court Shorts

Yield Spread Premium

SCME Mortgage Bankers granted summary judgment in YSP challenge Douglas S. Byars v. SCME Mortgage Bankers, Inc. (California Court of Appeals 4th Appellate District, No. C040390) Douglas S. Byars claimed that the fees paid to SCME Mortgage Bankers, Inc. for an FHA loan were limited to the loan origination fees and were not permitted to exceed one percent of the loan amount, and thus the yield spread premium (YSP) paid to the broker was illegal. The appellate court affirmed the trial court’s determination that the YSP did not violate the regulation and that a lump sum payment was permissible. The court determined that substantial services were provided to Byars, and there was no evidence that the compensation paid the broker was unreasonable.


Court denies extended rescission period to borrowers who allege TILA violation in a case of first impression Harry and Louise Carmichael v. The Payment Center, Inc. (U.S. Court of Appeals for the Seventh Circuit, No. 02-3958) In a case of first impression, a federal appellate court ruled that in stating that the 13th payment’s amount encompasses “the balance of unpaid principal and interest to be paid in full” without naming a dollar figure is sufficient to satisfy Regulation Z’s disclosure requirement. Harry and Louise Carmichael sued The Payment Center Inc. alleging that PCI violated the Truth in Lending Act (TILA) by failing to make adequate disclosures regarding its loan, and by failing to allow them the extended rescission period of three years required when a creditor fails to make a material disclosure. The district court granted summary judgment, holding that PCI’s disclosures were adequate and that the extended rescission period was therefore unavailable to the Carmichaels. The appellate court affirmed the trial court’s ruling, noting though there were errors in the TILA document PCI did deliver the required information, so the right to rescind could not be extended.

Breach of Contract

Escrow company’s failure to record insurance company in first lien position constituted breach of contract Old West Annuity & Life Insurance Co. v. Progressive Closing & Escrows, Inc. U.S. Court of appeals for the Tenth Circuit, No. 02-7082) Old West Annuity & Life Insurance Co. contracted with Progressive Closing & Escrows, Inc. to close a loan and to place the life insurance company in a first-lien position on the property. When the loan closed on Oct. 29, 1999, the company was placed in a third-lien position behind two other mortgage loans that had been recorded on Aug. 11, 1999. The life insurance company eventually foreclosed on the property but received none of the foreclosure proceeds because of its third lien position. The district court granted summary judgment in favor of the life insurance company in a breach of contract suit and the appellate court affirmed, stating that the contract was not ambiguous and that the determination of damages was proper. 10

TLD Feature Reports

www.TheLegalDescription.com October 13, 2003

Preemption at issue in both California and Ohio local predator y lending ordinances

legislation if they had so wished. Ohio: Local ordinances forbidden In Ohio, where a law was adopted in 2002 prohibiting cities from passing lending laws, Jones ruled in late September that the Cleveland predatory lending ordinance was unconstitutional in light of the recent law.

A California court of appeals upheld a trial court ruling that a City of Oakland ordinance regulating subprime consumer loans was not preempted by state law, but the court did overturn a lower court’s determination that the ruling was subject to severance of the exemption for federal lenders.

The Cleveland ordinance had reportedly sent almost 200 lenders packing when it went into effect, but some lenders have indicated they will return with the ordinance now off the books. Jones did leave one part of the Cleveland ordinance intact, allowing the city the right to stop doing business with any lenders it believes are violating the caps the law put on rates and fees.

In Ohio, a local predatory lending ordinance did not fare as well. Cuyahoga County Common Pleas Judge Peggy Foley Jones tossed out a Cleveland predatory lending ordinance that took effect in July 2002, declaring it unconstitutional.

While AFSA was pleased with its victory in the Cleveland case, its general counsel, Robert McKew, said he was disappointed that Jones is still allowing Cleveland to decide which banks it will do business with, and plans to appeal that part of the decision. McKew said some lenders who work with the city may continue to restrict their loans because of that provision.

Both cases hinged on the question of preemption and legislative intent.

California: No preemption clause In both California and Ohio, the lawsuits were brought against the city ordinances by American Financial Services Association (AFSA). In California, AFSA sued Oakland, alleging that its lending ordinance was preempted by California state law — Assembly Bill 489 — passed in 2001 to regulate subprime lending. On cross motions for summary judgment, the trial court upheld the ordinance but declared it was subject to severance of the exemption for federal lenders. AFSA and Oakland filed cross appeals in the case.

Oakland: Imposes liability on assignees Jon Jaffe, an attorney with Kirkpatrick & Lockhart, noted in a recent release that the Oakland ordinance has not been enforced due to a stipulation early in the litigation proceedings that the ordinance would not be enforced pending appeals. “While an appeal by AFSA is likely, less certain is how much longer the stipulation against enforcement will remain in effect,” Jaffe said. “It is possible that the appellate process may be completed in as short a time as 60 days. If you lend in Oakland, you should start preparations to comply with the ordinance.”

The California Court of Appeals for the First Appellate District noted that the issue in the case was not whether Oakland is constitutionally authorized to regulate predatory lending practices but whether the Legislature has acted to remove that power from Oakland. The court noted that, in order for preemption to take place, a conflict must exist between a local ordinance and a state law. “Because we find no conflict between AB 489 and the Oakland ordinance, we do not reach the issue of whether the ordinance impacts a municipal or statewide concern,” the court stated.

Jaffe said there are special provisions in the Oakland ordinance of which lenders should take note. “Unlike California’s anti-predatory lending statute, the Oakland ordinance imposes liability on assignees for all claims, actions and defenses related to the loan that the borrowers, the City Attorney, or others could assert against the original lender,” Jaffe noted. “Those liabilities can be extreme, ranging from exemplary damages equal to the points and fees plus 10 percent of the total loan amount, rescission, injunction against enforcement, punitive damages, civil penalties up to $50,000 per loan, and other remedies otherwise available under California Law.”

In its brief, AFSA also claimed that the ordinance contradicted state law. But the court said there was no contradiction between the local ordinance and the state law. The court also denied AFSA’s contention that there was implied preemption, noting that it would have been easy for the Legislature to place a preemptive clause in the 11

TLD State Bill Track


California escrow licensing law expanded to include directors establishing the coverage the corporation is required to provide its members; and revises the annual assessment the corporation bills and collects from its members.

Changes to the California escrow law will soon require more than just escrow agents to become licensed. AB 479 passed this summer and signed by Governor Gray Davis on Sept. 16, will require an applicant for an escrow agent license to apply for a certificate from the corporation for each proposed shareholder, officer, director, trustee, manager or employee who is to be compensated by the licensee.

Connecticut Senate Bill 984 was signed into law on June 3 and went into effect on Oct. 1. The bill updates the bonding requirements of the Money Transmission Act and exempts State-chartered banks and credit unions from licensure under the Act, regardless of whether they are federally insured. This bill also relates to the notice of right to cancel certain insurance products required by the high-cost home loan.

Current California escrow law provides for licensing and regulation by the Commissioner of Corporations of persons engaged in business as escrow agents, unless specifically exempted. Existing law requires persons licensed as escrow agents to be members of the Escrow Agents’ Fidelity Corporation, which is established as a nonprofit corporation to indemnify its members against loss, subject in certain cases to a deductible, and which is funded by fees and assessments on its members. Existing law requires employees of escrow agents and various other persons to obtain a certificate from the corporation as a condition of employment or compensation.

California AB 313 provides that a borrower, under certain circumstances, would not be required to pay interest for more than 1 day prior to the date the loan proceeds are disbursed out of escrow or disbursed to the borrower or to another party on behalf of the borrower. Deletes the repeal date of the California Residential Mortgage Lending Act, which regulates residential mortgage lenders, thereby extending the act indefinitely. Nevada NAC 489.360, 489.370, 489.380 was passed by the Nevada Department of Business and Industry/Manufactured Housing Division on Sept. 26 and was effective Sept. 24. The regulation amends Nevada Administrative Code to increase fees for mobile homes, manufactured homes and other similar vehicles.

AB 479 also authorizes the Commissioner to refuse to issue a license to an applicant who has failed to comply with the corporation’s membership requirements; revises the application requirements for membership in, and certification by, the corporation; revises the schedule

State Bill Track Nevada NAC 489

California AB 479 AB 313

Connecticut SB 984


TLD Federal News

www.TheLegalDescription.com October 13, 2003

Lawsuit against Fountainhead Title alleges kickbacks; seeks class action status

Investors Title has sued Recorder of Deeds Janice Hammonds and Revenue Director Norris Acker in an attempt to get the funds returned to the company.

A lawsuit that alleges a title company set up a sham company that funneled kickbacks to a mortgage company was filed in a U.S. District Court in Baltimore, Md. on Sept. 15.

The former owner of a Miami title agency was charged with stealing more than $5.5 million from property escrow accounts, using the money to buy yachts, a Venetian Way home and seven luxury automobiles while eight families lost their homes, according to investigators.

Florida agent indicted in $5.5 million escrow theft

Beverly E. Phipps and Brenna and John L. Wolfe filed the lawsuit against Fountainhead Title Group, Premier Financial Co. and PFC Title, alleging that the entities set up a sham company that funneled kickbacks to Premier in exchange for Premier’s business.

According to an article in the Miami Herald Tribune, James Georges Mourra of Miami Beach has been charged with theft from escrow, a first-degree felony punishable by up to 30 years in prison. He was being held in the Miami-Dade County Jail on a $1 million bond.

The lawsuit was filed by Richard S. Gordon and Kieron F. Quinn of Quinn, Gordon & Wolf LLP and Denis J. Murphy of Civil Justice Inc. on behalf of the plaintiffs and seeks class action status.

Investigators said Mourra diverted the money from escrow accounts held by his company, Equitable Title Insurance Services, Inc., from April 2002 to May 2003. The title company has since folded.

According to a report in the Baltimore Business Journal, the attorneys filed a similar class action suit against other title companies and won a settlement this year.

Indiana men sentenced in mortgage fraud scheme William L. Yerman, president of Fountainhead’s Maryland division, told the Baltimore Business Journal that it would defend against the suit. “We absolutely spend our day priding ourselves on being a professional company and doing the right thing,” he said. “We’re going to make sure that the truth comes out.”

U.S. District Court Judge Sarah Evans Barker sentenced Scott Fetting of Indianapolis to one year and three months in prison and his accomplice, Chris Wine of Marion, Ind., to two years for their part in a mortgage fraud scheme.

The lawsuit alleges that the partnership between Fountainhead and Premier, called PFC Title LLC, was actually a sham company. The complaint alleges that PFC charged borrowers a fee of $400 to $1,000 for each loan settlement, but performed “little or no work.”

According to Assistant U.S. Attorney Donna R. Eide, who prosecuted the case, from March 2001 to April 2002, Fetting, who operated a mortgage brokerage company located in Indianapolis, conspired with Wine, a real estate investor who owned residential properties in Marion, and other unnamed persons to commit mortgage fraud and money laundering.

L e ga l D es c r i p t i o n B l o t t e r

The charging document alleged that Fetting and Wine found buyers for Wine’s properties, obtained inflated appraisals for the properties, provided the borrowers with the down payment funds, and submitted false loan applications to the lenders to obtain loans on the properties in excess of their true value. The excess loan funds were used to reimburse Wine and Fetting for the down payment they provided to the borrower to obtain the loan.

St. Louis county recorder suit will go to trial St. Louis County Judge David Lee Vincent III will let four of nine counts stand in a lawsuit brought by Investors Title against a county recorder who pleaded guilty in March of stealing money from the recorders office and covering it up by over-billing Investors Title. Margaret King was accused of stealing $865,445 from a cash drawer from 1995-2001. She pleaded guilty in March of 12 counts of felony theft and was sentenced in June to 12 years in prison.

Both men pleaded guilty to felony charges of mail fraud and conspiracy to commit fraud. Barker ordered both men to pay $184,320 restitution. 13



Former California Department of Insurance attorney takes on new challenge at Mercury Companies A: Although I was prepared to move to Florida, I was approached by the Mercury Companies to remain in California. I was attracted by the opportunity and challenges offered by Mercury.

Hon Chan Senior Vice President and Assistant General Counsel Mercury Companies, Inc.

Also, most of my family lives in California. I grew up in the San Francisco Bay area. So there is certainly a strong preference to remain in California.

Hon Chan has put his experience as senior staff counsel with the California Department of Insurance to good use in the title industry in California. After three years with Fidelity National Financial Inc. as senior vice president and assistant general counsel, Chan moved into a similar position with Denver-based Mercury Companies Inc. in late August.

Q: What is the primary difference between Mercury and Fidelity? A: Mercury is involved in several lines of business across many states. It is a closely held group of companies — approximately 40 companies in all. It has about 4,000 employees. It's involved in title and escrow business, home building, mortgage lending and vendor management company activity and support-type companies such as document preparation software.

Chan was with the California Department of Insurance for more than 15 years in the Corporate Affairs Bureau and the Conservation and Liquidation Bureau in both San Francisco and Sacramento. He was lead attorney for the department in the area of title insurance; in all matters regarding applications by all licensed insurers and related entities for securities permits; statutory consents to mergers, consolidation, and reinsurance; assumption transactions; and non-United States domiciled insurers.

The subsidiary title agencies of the Mercury Companies constitute the largest agency for First American Title, which does all of the underwriting. In addition to that, the Mercury Companies’ agency group is the largest agency group in the country, and we are significantly larger than our next competitor.

At Fidelity, he spearheaded the title industry's national efforts in the Radian/mortgage impairment matter. At Mercury, he will be handling corporate licensing and acquisition approval applications to the insurance department and will be addressing regulatory compliance issues such as title agency marketing and business generation activity.

Along the vein of differences, while Fidelity is the largest title insurance underwriter, Mercury is the largest title agency group in the country. Q: What are the most important challenges Mercury faces?

A graduate of the University of California at Berkeley, Chan earned his Juris Doctor in May 1984 University of California, Hastings College of the Law.

A: The issues facing Mercury are no different from the issues facing Fidelity. One is the mortgage impairment issue with Radian — that is, the issue of non-title companies issuing title insurance products. I think it is a broader issue, and I appreciated the foresight of people at Fidelity, such as Ernest Smith, Patrick Stone, Joe Drum and Frank Willey for seeing the impact of the broader mortgage impairment issue exemplified by Radian. I think the issues that we educated the insurance departments across the country about were the effects of solvency, monoline classes of insurance,

He spoke recently with The Legal Description about his work in the title industry and his transition to his new position at the Mercury Companies. Q: Was Fidelity’s corporate headquarters move to Jacksonville, Fla. the impetus for your decision to take a position with Mercury Title?

(Continued on page 15)


TLD Federal News

www.TheLegalDescription.com October 13, 2003

Speaking at the National Association of Realtors’ (NAR) Housing Opportunities Summit 2003 in Washington, D.C., Martinez said RESPA reform is high on the administration’s agenda as part of a wider commitment to improve affordable housing all over the country and promised the rule would be available soon.

the monoline distinction, consumer protection, the sanctity of the public record, the importance of having secondary market protection of mortgages and the premium tax base on title that would be lost. The second regulatory issue that could have a big impact on the title industry is the anticipated regulation involving bundling of services (RESPA) that HUD is expecting to introduce. It could be a very big issue for the title industry. But it depends on what the regulation looks like.

Martinez praised NAR President Cathy Whatley, the leadership of the organization and representatives of the organizations attending the summit for providing HUD with input on the proposed reform.

Q: California has the reputation of being a tough regulatory environment. Is that good for the industry?

“As I am sure you know, we are engaged in a little bit of process at HUD on RESPA reform, and we are looking forward to revising this regulation,” Martinez said. “Your comments have been helpful and insightful and you have provided us with a great deal to think through. Our proposed rule has evolved as our thinking has evolved as a result of your very thoughtful comments. We are committed to issuing a new rule while being very mindful of the impact it would have on small businesses.”

A: I believe the California Insurance Department is probably one of the most active regulatory agencies in the country and probably has one of the most stringent requirements of any insurance department in the country. It stems from the fact that California is usually the leading premium volume state of all lines of insurance, and there is so much business — mainly because there are so many people — so there is a need to regulate that insurance activity.

Martinez also joked that while he could not promise when the rule would be released he noted, “I can tell you it will not be at the Mortgage Bankers Convention.” In an article about the upcoming Mortgage Bankers Association of America (MBA) annual meeting in San Diego in October, speculations were voiced that Martinez would use the national forum as an opportunity to release the new rule.

Q: Is it too strict, and does it discourage businesses from operating in California? A: I believe there needs to be a balance between a stringent regulatory environment to protect consumers and companies doing business and the need for the insurance department to be practical and allow companies to do business in California.

Martinez said he is still convinced that the homebuying process will be improved as a result of the new rule and will help achieve the ultimate aim of lowering barriers to homeownership.

I believe, in spite of the stringent regulatory environment in California, there is a strong desire and preference to do business in California because of the customer base.

“We will lower the cost at the closing table for young families who are trying to buy their first home,” Martinez said. “My goal from day one has been to establish a better, timelier disclosure for consumers so they have the opportunity to shop for the best loan, and to simplify the mortgage origination process, eliminate the confusion and ultimately lower the set costs for the homebuyer.”

Martinez tells NAR Summit RESPA reform is ‘evolving’ The reform of the Real Estate Settlement Procedures Act (RESPA) has “evolved” over the last few months, according to Housing and Urban Development (HUD) Secretary Mel Martinez, opening up the possibility that the final rule may incorporate requests for multiple packaging, substantially altering Martinez’ initial proposed.

Martinez also spoke at length about initiatives to improve minority homeownership and the importance of partnerships between government and private business to achieve those goals over the next five years.


















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Mortgage Bankers Association of America Annual Convention San Diego, California www.mbaa.org October 22-25 American Land Title Association Annual Convention Phoenix, Arizona www.alta.org October 29-30 Real Estate Services Providers Council Fall Meeting San Francisco, California www.respro.org

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