Real: Clearer mortgage disclosure forms proposed | ScrippsNews

The new consumer finance regulator has proposed simplified mortgage disclosure forms, aiming to ensure that borrowers receive clear and easy-to-understand information about home loans when they apply for credit.

The Consumer Financial Protection Bureau released two alternative mortgage disclosure forms, each taking only the front and back of a sheet of paper. The forms would combine and replace the current two-page Truth in Lending Act disclosure and the three-page good faith estimate required under the Real Estate Settlement Procedures Act, or RESPA. The bureau, created by last year’s Dodd-Frank financial reform law, will test the prototypes and incorporate feedback through September. It’s calling the effort the “Know Before You Owe” project.

“A home loan is the biggest financial commitment most Americans will make in a lifetime,” says Elizabeth Warren, who runs the bureau. “With a clear, simple form, consumers can better answer two basic questions: Can I afford this mortgage? And, can I get a better deal somewhere else? That’s good for American families and the markets they depend on.”

The prototypes emphasize the monthly loan payment, interest rate, potential cautions and other loan features.

Under Dodd-Frank, the bureau must propose new rules for simplified mortgage forms before July 2012. Staff started drafting the prototypes “quickly out of the gate” in consultation with federal regulators who have been working on streamlining the forms for years, Warren says.

The agency expects five rounds of evaluation and revision, with consumer testing in five cities and input from the industry, before the forms are finalized this fall. Then, the bureau will publish proposed regulations and a draft model form to solicit more comment and run quantitative tests before the rules are final.

Financial industry executives praise the move. “We think it’s a great step,” says Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable. “If everybody fully understands the product … both the consumer and the lender win.”

The Mortgage Bankers Association’s more guarded response notes that the industry spent significant money 18 months ago on RESPA changes — costs borne by consumers.

“Making mortgages easier to understand for prospective borrowers has been a long-term priority for the mortgage industry and we are pleased to see the initial prototypes take a step in that direction,” MBA President David H. Stevens said in a statement, noting the challenge of “trying to strike the right balance between simplification and providing as much information as possible to help borrowers make the most informed choices.”

Alex J. Pollock, a resident fellow at American Enterprise Institute who proposed a one-page form in 2007, notes the average mortgage closing form is 80 to 85 pages, which could be boiled down. He says the proposed forms don’t include the ratio of debt to income, a key factor in whether individuals can afford a loan.

“The real object of this is not to give someone a piece of paper that they passively consume but to get them to actively think about the borrowing commitment,” Pollock says.

Even as Warren prepares the new consumer bureau to assume regulatory power July 21, Wall Street lobbyists and their Republican allies in Congress seek to curb the bureau’s power. Pending House legislation would replace the director position with a five-member bipartisan commission and make it easer for other regulators to overturn CFPB rules. President Barack Obama is expected to appoint Warren as director during an upcoming congressional recess, given that 44 Republican senators have pledged to block any director nomination.

“This is all part of a unified campaign to weaken and delegitimize the agency,” says David Arkush, director of Public Citizen’s Congress Watch division, which supports the bureau and Warren as director. “If you had some basic consumer protections in the financial services arena, there’s a really good chance the housing bubble wouldn’t have gotten as large as it got and you wouldn’t have had so many predatory lending and mortgage abuses.”

x x x x

With interest rates on U.S. Treasuries continuing to fall and a new study showing continuing declines in home prices nationally, mortgage rates edged slightly lower this week.

The benchmark fixed-rate 30-year mortgage dipped by 2 basis points, averaging 4.75 percent in the latest Bankrate weekly survey. A basis point is one-hundredth of 1 percentage point.

Another popular home loan product, the 15-year fixed-rate mortgage, made an identical decline, falling 2 basis points to an average of 3.93 percent. With 30-year jumbo mortgages, or generally those for more than $417,000, the average rate was 5.21 percent, off by a single basis point.

With adjustable-rate mortgages, the 5/1 ARM was 3.45 percent, off 3 basis points.

(Distributed by Scripps Howard News Service. Reach Katherine Reynolds Lewis at editors(at)


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The MERS Morass, Part III

Our most recent blog entry in our series on MERS discussed the decision of the bankruptcy court for the Eastern District of New York in In re Agard.  A mere one day after Agard was decided, however, the bankruptcy court for the District of Kansas came to the opposite conclusion as to MERS’s status as agent.  In In re Martinez, the debtor filed an adversary proceeding seeking a determination of secured status as to MERS and the purported lender of her home mortgage loan.  In seeking such determination, the debtor sought to strip the mortgage from the property such that it would no longer encumber the property because, the debtor argued, she owed no debt to MERS.  The court found that the debtor’s objection to the secured proof of claim filed by the purported lender was also ripe for decision because the debtor argued that, as the lender did not hold the mortgage intended to secure the note, the lender’s obligation (and, thus, claim) was in fact unsecured.    

As in Agard, there had been a state court foreclosure judgment against the debtor, but here that judgment had been dismissed by an appellate court, which found that no evidence existed in the record before it that gave MERS standing to foreclose.  The appellate court held that because MERS did not hold the note, the debtor’s failure to pay it did not result in pecuniary injury to MERS.  Importantly, the appellate court had not made a finding as to the standing of the lender, which had been joined in the action as a third party defendant, and made no findings about whether the lender was the holder of the note.  Unlike in Agard, however, the bankruptcy court refused to apply res judicata to the state appellate court decision, holding that, because in that action the debtor had insisted MERS was the lender’s agent but in this action challenged its status as such, MERS could not be bound by an earlier decision in which it did not have a full and fair opportunity to litigate the claim.  

In Martinez, the debtor argued that the lender’s claim was unsecured because the note was split from the mortgage by the naming of MERS as the lender’s “nominee” on the mortgage.  The court stated that the central issue of the case, therefore, was what effect, if any, such granting of the mortgage to MERS had on the lender’s right to enforce the terms of the note. 

After addressing the res judicata issue by examining applicable Kansas case law, the court considered the merits of the case, noting that under the Restatement (Third) of Property (Mortgages), the transfer of an obligation secured by a mortgage also transfers the mortgage unless the parties to the transfer agree otherwise.  A mortgage may only be enforced by, or on behalf of, a person entitled to enforce the note, which the comments to the Restatement recognize may be an agent or trustee with responsibility to enforce the mortgage at the mortgagee’s direction.  Such relationship may arise from the terms of the assignment, a separate agreement, or other circumstances, and, the comments reflect, courts “should be vigorous in seeking to find such a relationship” to prevent a windfall to the mortgagor and frustration of the noteholder’s expectation of security. 

Thus, contrary to the debtor’s position that the mortgage and note were split ab initio, MERS and the lender argued that the mortgage and the note were never split because MERS was the lender’s agent and, even under the law set forth in the Restatement, the mortgage still effectively secured the note.  This argument had been made in, and accepted by, the bankruptcy court for the Western District of Missouri in In re Tucker, and the Martinez court adopted the analysis and holding from that case as being consistent with the Restatement.  In particular, the Martinez court found that the under the Restatement, assignment of the note to one entity and assignment of the mortgage to another entity renders the mortgage unenforceable and the note unsecured absent an agency relationship between the holder of the note and the holder of the mortgage. 

The Martinez court, like the Agard court, stated, therefore, that whether the lender and MERS were able to enforce the note and mortgage hinged on their relationship.  If an agency relationship existed, the lender, as principal, could direct MERS to assign the mortgage to it so that the mortgage would be united with the note and enable the lender to commence foreclosure proceedings, or the lender could assign the note to MERS, thus uniting it with the mortgage and enabling MERS to commence foreclosure proceedings on the lender’s behalf.  The court noted that although the Kansas Supreme Court had addressed the relationship between MERS and its members in another cases (likening MERS to a “straw man”), the Kansas Supreme Court had not specifically held that no agency relationship existed.

In direct contrast to the conclusion reached by the Agard court, the Martinez court held that, under Kansas law, an agency relationship did exist between MERS and the lender.  The court noted, and relied on the fact, that the Western District of Missouri bankruptcy court had found an agency relationship existed between MERS and the lender under Missouri law in Tucker.  Looking at language in the Martinez mortgage appointing MERS as nominee for the lender and its successors and assigns, which was identical to such language in the Agard mortgage, as well as at language of the MERS agreements, the Martinez court found that sufficient undisputed evidence existed to establish that MERS was acting as an agent for the lender.    

Further, the court found that the agreement between MERS and the lender was sufficient to create an express agency relationship, but even if not, their actions were sufficient to establish an implied agency.  The court found an agency relationship notwithstanding that the parties did not use the word “agent” and used the word “nominee” instead, which the court found to have a “nearly identical legal definition[]” as “agent” even though the Black’s definition of “nominee” states that it is one who is designated to act for another, “usu[ally] in a very limited way.”  Notably, the Agard court used the Black’s definition of “nominee,” among other sources (including the Kansas Supreme Court, whose decision the Martinez court distinguished for other reasons), to differentiate a “nominee” from an “agent.”  The Martinez court observed, however, that under Kansas law an agency relationship could be created even if the principal specifically denied that the agent was in fact such. 

The Martinez court did not address whether, under Kansas law, a separate standard existed for creation of an agency relationship when the principal sought to authorize the agent to convey an interest in real property.  The Agard court addressed this question, though, and found that, because MERS’s members purported to convey to MERS interests in real property, the agency relationship had to be committed to writing under New York law.  Unlike the Martinez court, the Agard court refused to “cobble together” the various documents at issue so as to draw an inference that an agency relationship existed.  Based on the Martinez court’s finding that the actions of MERS and the lender were sufficient to establish an implied agency, it is not clear from the decision whether, under Kansas law, such “cobbling” would even be necessary so as to establish an agency relationship committed to writing in the real property conveyance context.      

The court therefore denied summary judgment to the debtor on its motion to determine the secured status of the lender and overruled the debtor’s objection to the lender’s proof of claim, finding that because MERS held the mortgage as agent for the lender, the note and mortgage were never split and remained enforceable.  MERS was required to act on behalf of and at the direction of the lender, thus eliminating the concerns raised in the Restatement as to the enforceability of the note.  The court held that the lender’s interest was secured and that it had the right to enforce the mortgage through its agent, MERS, or on its own (by directing its agent to assign the mortgage to it).  The court accordingly entered summary judgment in favor of MERS and the lender.

The debtor subsequently filed a motion for reconsideration or to alter or amend judgment on the basis that the purported lender had sold its beneficial interest in the note to another MERS member prior to bankruptcy and that the purported lender was in fact merely the servicer which no longer had any beneficial interest in the note.  The servicer, which had also occupied that role throughout the bankruptcy case, retained possession of the note.  The debtor sought discovery to determine to whom the note was ultimately sold, including whether the other MERS member who purchased the note prepetition had packaged it into a securitization trust. 

In its ensuing decision, the court found, however, that the result of the case would not change.  MERS still held the mortgage as agent, and pursuant to the MERS agreements, it could take instructions from either the note holder or the servicer, and the servicer here (which had been the purported lender) was both.  The court revised its initial opinion accordingly as well as to reflect that MERS held the mortgage as an agent but not as agent for the servicer qua original purported lender.  The court did not state for whom MERS held the mortgage as agent in light of this clarification but merely that, pursuant to the MERS agreements, it could take instruction from the note holder or servicer.  Interestingly, though, in a footnote, the court noted that in seeking discovery, the debtor sought to raise a theory, detailed in the Tucker case, which questioned whether downstream purchasers of the note from the original lender, the purchaser, and all subsequent assignees of the note were MERS members such that there was no gap in the chain of title.  The court, however, ruled that it was too late for the debtor to raise this theory because she knew of it when she moved of summary judgment and elected not to raise it at that time.    

The contrary results in Agard and Martinez point out the weaknesses in each case and raise questions as to the future viability of MERS.  Why did the Agard court fail to consider the Restatement and be “vigorous in seeking to find [an agency] relationship” between MERS and its members?  Conversely, was the Martinez court too cursory in analyzing the mortgage language, MERS agreements, and Kansas law to conclude that an express or implied agency relationship existed? 

Following the posting of the first part of this series, we received an email from the Honorable Margaret Mann of the United States Bankruptcy Court for the Southern District of California, suggesting that the answer to whether MERS is the agent of the lender “may be somewhere in the middle.”  Judge Mann also pointed us to a recent decision she issued regarding MERS.  Before we ask some additional questions about MERS and its future, we will therefore discuss Judge Mann’s decision in In re Salazar in the next part of this series.

444 B.R. 231 (Bankr. E.D.N.Y. 2011)
444 B.R. 192 (Bankr. D. Kan. 2011)
441 B.R. 638 (Bankr. W.D. Mo. 2010)
2011 WL 1519877 (Bankr. D. Kan. 2011)
2011 WL 1398478 (Bankr. S.D. Cal. 2011)

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NY appellate court scrutinizes the MERS standing issue

From Housing Wire

A decision by New York’s 2nd Appellate Division may not have a direct impact on the issue of when Mortgage Electronic Registration Systems has standing in foreclosure cases, but it contains persuasive language that could be a shot across the bow when it comes to jurisdiction relating to MERS.

In Aurora Loan Services v. Steven Weisblum, the appellate court overturned a lower court’s decision to dismiss claims the Weisblum family made against Aurora. The appellate court concluded that Aurora’s motion for summary judgment should have been denied and said Aurora failed to comply with the Real Property Actions and Proceedings Law under the Home Equity Theft Prevention Act.

While the decision was not directly based on MERS, attorneys say language in the decision could impact later court rulings because it gives an appellate court’s view on how MERS operated in this particular transaction.

“We have not seen that from a New York appellate court up to now,” said Anthony Laura, an attorney with Patton Boggs. “I would caution, though, that it is commentary on MERS’ standing. It is not the holding of the case.”

On the MERS standing issue, which is not what the case was decided on, the Weisblums argued that Aurora did not have standing because it failed to provide evidence of MERS’ authority to assign the first mortgage note tied to the home.

The court said “Aurora failed to provide a copy of the first note but submitted a copy of the original first mortgage and a series of assignments culminating in the purported assignment of the first note and mortgage to Aurora. The first mortgage was originally held by MERS, as nominee for Credit Suisse; the mortgage document recites that the lender on the first note is Credit Suisse, but there is nothing in this document to establish the authority of MERS to assign the first note.”

The court goes on to say MERS later assigned the first mortgage with the underlying note and then made successive mortgage assignments.

“While, in some circumstances, the assignment of a note may effect the transfer of the mortgage as an inseparable incident of the debt, here the assignment instruments purport to do the opposite, without any evidence that MERS initially physically possessed the note or had the authority from the lender to assign it.”

The case also outlined what is needed for a foreclosing party to have an equitable interest in a mortgage — namely the plaintiff has to be both “the holder or assignee of the subject mortgage, holder or assignee of the underlying note — either by physical delivery or a written assignment prior to the commencement of the action that led to the plaintiffs filing a complaint.”

The court ruled Aurora failed to make this showing.

The case “is an effort to see problems with the MERS structure and how it has operated, so it has some level of importance,” Laura said. “A couple of things that everyone needs to take away from this case: It is a clear signal from this appellate court that it is scrutinizing the MERS structure.”

At the same time, the decision has no precedential value outside the New York appellate jurisdiction.

Write to Kerri Panchuk.

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