Legal/Legislative Update – April 14, 2014

Published on: April 14, 2014

DEVELOPER RELIEF. Condominium developers may win relief from the Interstate Land Sales Full Disclosure Act (ILSA). The law requires developers to provide specific pre-contractual and pre-closing disclosures to borrowers and to register development projects with the Consumer Financial Protection Bureau (CFPB). Although the law was not aimed at condominium developments, federal and state courts have ruled that a condominium unit represents a “lot” which is subject to the disclosure and registration rules. Many condominium buyers have used technical violations of the law as an escape hatch to withdraw from deals they no longer wanted to close. This occurred frequently during the real estate downturn, when the value of condominiums consumers had agreed to purchase pre-construction plunged before the developments were complete.

The House of Representatives approved legislation last year that would exempt condominiums from the ILSA requirements; the Senate just approved an identical bill, that has been referred to the Banking Committee. The CFPB’s aggressive enforcement of consumer protection laws, and its imposition of hefty penalties (up to $ 1 million per day for knowing, continuing violations) makes approval of the measure a matter of some urgency for condominium developers, as one industry blogger noted recently: “The CFPB intends to make use of consumer complaints to identify targets for investigation and enforcement actions under ILSA. Multiple complaints against the same developer or project could lead to a Civil Investigative Demand which can require the production of documents, answers to interrogatories and/or appearance for testimony.”

GOOD TIMING. After months of industry-wide hand-wringing over the shortage of homes for sale, inventory levels have started to increase – just in time for the start of the spring home buying season. The National Association of Realtors reports that inventory levels increased by 10 percent year-over-year in February, the best showing in months. But even with that gain, inventories remain low by historical standards, the NAR noted. Despite that encouraging report, bubble talk is bubbling up again in press reports about buyers being priced out of the market and/or outbid in ‘hot’ markets where a combination of rising prices, higher interest rates and limited inventories are making it impossible for many willing buyers to connect with available homes. …

BUYER LIARS. As lenders scrutinize homebuyers’ income more closely, buyers are becoming more likely to lie about it. And this is surprising to whom?

POSITIVE TREND. The number of homeowners with negative equity continues to fall, but not fast enough to return the housing market to “normal” any time soon, according to Zillow. At just under 20 percent of all homes with mortgages, negative equity is still “roughly four times what it is in a healthier market.,” Zillow’s chief economist, Stan Humphries, said, “another sign of how distorted the market continues to be, and how far we still have to go on the road back to normal.”

NO APPLAUSE. “My message to you is a tough one. I don’t expect a standing ovation when I leave.” That’s what Deputy CFPB Director Steven Antonakes told members of the Mortgage Bankers Association after criticizing the lack of progress in improving mortgage servicing problems. His prediction was correct. Applause was tepid – and barely that. Industry executive complained later that his remarks were “inflammatory and without benefit to the audience.”

BAD RAP. Self-absorbed? Entitled? Lazy? Those stereotypical views of millenials (aged 21-36) don’t fit the reality, according to a UBS survey, which concludes that this generation’s frugality and preoccupation with saving make it “the most fiscally conservative generation since the Great Depression.”



MORE THAN ENOUGH. A lender who required a borrower to increase the flood insurance on her home did not violate the federal regulations governing FHA-insured loans, a federal appeals court has ruled. The borrower in this case (Fairei Feaz v. Wells Fargo Bank) initially purchased flood insurance that exceeded the amount of her loan but was less than the replacement value of her property. Four years after purchasing her loan, Wells Fargo instructed Feaz to boost her flood coverage. When she failed to act, the bank force placed the additional coverage and charged her for it. Feaz sued, citing a covenant in her FHA mortgage that, she argued, capped the coverage the lender could require. That covenant specified:

“Borrower shall insure all improvements on the Property, whether now in existence or subsequently erected, against any hazards, casualties, and contingencies, including fire, for which Lender requires insurance. This insurance shall be maintained in the amounts and for the periods that Lender requires. Borrower shall also insure all improvements on the Property, whether now in existence or subsequently erected, against loss by floods to the extent required by the Secretary.”

Wells Fargo argued that the covenant set the minimum, not the maximum amount of flood coverage the lender could require. A federal District Court agreed with that interpretation and the Eleventh Circuit Court of Appeals affirmed that decision. The language clearly allows the lender to establish the coverage required for “any hazards,” which would include flood, the court noted. The language on which the borrower relied, requiring flood insurance “to the extent required by the Secretary,” imposed “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…. In other words, the federally required amount is necessary. But if the lender requires more, the federally required amount is not sufficient. Both the lender and HUD set minimum amounts of required flood insurance. Neither sets a ceiling,” the court said.

That reading is consistent not only with the lender’s right, specified in the mortgage note, to do anything required to protect the value of the property, the court said. It is also consistent with the statutory structure of the federal flood insurance program and with HUD regulations for the program. Those regulations require borrowers in flood hazard areas to obtain flood insurance “at least equal to” the outstanding mortgage balance or the maximum amount of insurance available….” suggesting, the court said, that a lender can require more insurance than HUD’s rules call for.

To view the HUD formula as a ceiling would also undermine the regulatory scheme for the FHA insurance program, which, the court noted, requires lenders to finance any repairs on a foreclosed property before collecting the insurance on an FHA loan. If HUD regulations capped the flood insurance lenders could require, they might end up paying more for repairs on a flood-damaged property than they could collect in insurance, the court said, which would either discourage lenders from financing properties in flood-prone areas or lead them to increase loan rates to cover their increased risks. “Either approach is inconsistent with the FHA’s purpose of encouraging affordable home ownership and the [federal flood insurance program’s] purpose of encouraging adequate flood insurance,” the court concluded.



“There’s no excuse for not having a simpler code by tax time a year from now, except self-serving politics and a lack of political will.” – USA Today editorial.