Legal/Legislative Update – October 14, 2014

Published on: October 14, 2014

SECURITY LAPSES. It seems that the Consumer Financial Protection Bureau (CFPB), which enforces data security and consumer privacy requirements for financial institutions, has some lapses of its own in those areas. The Government Accounting Office (GAO) has identified 11 steps the CFPB should take to strengthen its privacy and data security practices and policies. Among other problems, a GAO audit found, the CFPB lacks “written procedures and comprehensive documentation” for several procedures, including those related to the collection of data and the performance of information security risk assessments. The GAO report also noted the agency’s failure to fully implement several key privacy control and information security practices, “which could hamper [its] ability to identify and monitory privacy risks and protect consumer financial data.”

DEMOGRAPHIC CHANGES. The increasing number of minorities will change the structure of the housing finance system, according to David Stevens, president and CEO of the Mortgage Bankers Association. Whites currently occupy 70 percent of the nation’s housing stock, he noted in a recent interview in National Mortgage Professional Magazine. “[But] if you look over the next decade, in terms of new housing stock being created and new household formation, only about a third of that is going to be white non-Hispanic, and the remainder is going to be minority. We’re moving to a country that is going to be majority minority. And in terms of home sales, it is going to be vastly majority minority by about two-thirds.”

A WORRY LIST. You can stop worrying that inventory levels are too low – and start worrying that they may be getting too high. Zillow reports that inventories of existing homes available for sale, which have been increasing steadily for most of this year, were 20.6 percent above the year-ago level in August. Inventories rose in 549 of the 644 metropolitan areas Zillow tracks, reaching their highest level so far this year. And if you want another worry to add to your list, Black Knight has one for you. Analysts there see a crisis-in-the-making as $2.5 million in home equity lines of credit reset at higher interest rates over the next three years. HELOCs resetting. The reset picture beyond 2019 could be even more problematic, Kostya Gradushy, Black Knight’s manager of Research and Analytics, warns in a recent report.

REGULATORY DILEMMA. To ease or not ―that is the question confronting financial regulators as they balance memories of the lax underwriting standards that contributed to the financial meltdown against current concerns that overly strict credit guidelines are impeding the housing recovery. The dilemma: How to encourage lenders to ease up without creating another housing bubble. Recent surveys indicate that many lenders are planning to relax their standards, but it’s not clear how quickly they will move in that direction, or how far. “Historically, as lenders face a more competitive market for loan volume, it’s not uncommon to see some loosening in the lending standards; however, this time, the easing will likely be around the edges noted recently in a press statement.

MOVING OUT ─ FINALLY! The exodus has begun. The young adults who have re-populated the nets of parents who expected to be empty nesters are finding jobs and finally beginning to establish households of their own. The Demand Institute, a non-profit think tank operated jointly by The Conference Board and Nielsen reported those happy findings recently, predicting that millenials will create more than 8 million new households over the next five years. But before you envision a surge in home purchases – the institute also noted that most of these new households will be renting, not buying, their homes. The homeownership market’s loss is the apartment market’s gain. Freddie Mac reports that multifamily construction is running at the fastest pace in 25 years.

ISLA RELIEF. Condominium developers won the relief they had been seeking recently, when President Obama signed into law a measure exempting them from the disclosures required by the Interstate Land Sales Full Disclosure Act (ISLA). Designed to curb abuses in installment sales contracts, ISLA requires developers to describe lots precisely in sales contracts, and allows owners to rescind sales when those descriptions are omitted or inadequate. The problem for condominium developers is: They can’t precisely describe units until the building has been completed, and many pre-sale agreements stumbled over ISLA as a result. The problem surfaced in a big way during the economic downturn, when many condominium buyers used ISLA to extricate themselves from pre-sale purchase agreements they had signed before the real estate market crashed and condominium prices plummeted. When the new law takes effect (in March of next year), condominium developers will no longer be required to describe units in pre-sale contracts. They will also be exempt from the requirement to register condominium developments with the Consumer Finance Protection Bureau. However, ISLA’s anti-fraud provisions, dealing with descriptions of improvements and amenities, will still apply.

LEGAL BRIEFS

POOR JUDGMENT. Community association boards generally recognize the need to respond quickly and proactively to owners’ complaints about damaging or potentially damaging water leaks that the association may (or may not) have an obligation to address. But sometimes they need a reminder of why a quick response is necessary. This Illinois appeals court decision (Schuh v. Plaza Des Plaines Condominium Association) provides a good one, and it comes with an equally helpful reminder that the “business judgment rule” protects boards from honest mistakes, but not from outright negligence.

A trial court ordered the community association to pay nearly $28,000 to cover actual and punitive damages claimed by an owner (Mary Ann Schuh), who had complained for nearly two years about water damage in her unit. Schuh notified the board immediately when she noticed water streaming from an electrical outlet in her unit after a heavy rain. Association officials assured her they were “working on” the problem, but hardly working is more accurate. Eight months later, an inspector hired by the association identified evidence of water infiltration and reported the findings to the association, recommending extensive remediation work to repair the damage and prevent future leaks.

When the association failed to follow-up and failed to respond to her concerns about possible mold damage, Schuh hired an inspector of her own, who found evidence of toxic mold in her unit. She hired a remediation company to deal with the mold and then hired a contractor to repair the damage resulting from that work and other water-related damage in her unit, sending the $7,000 bill for those efforts to the association. When the association refused to pay, she sued the board for breaching its fiduciary duty to her. The trial court sided with her, adding $22,000 in punitive damages, including $12,000 in attorneys’ fees, to her claim.

The association appealed the punitive damages, arguing that they were excessive and not justified by the board’s actions, which were protected by the business judgment rule. The appeals court was unsympathetic, to say the least. The board’s actions, the court found, reflected “a pattern of neglect and reckless indifference” with no evidence of the due diligence that would have indicated a good faith effort to respond to Schuh’s concerns.

The business judgment rule, the court noted, protects directors “who have been careful and diligent in their duties, but who make ‘honest mistakes of judgment.’” In this case, the court said, the association “was neither diligent nor careful in performing its duties….The Association did not carefully and diligently go about its duties, inadvertently making an honest mistake of business judgment; the Association simply failed to do its job, something not protected by the business judgment rule,” the court concluded.

WORTH QUOTING:

“I think it’s entirely possible [that lenders] may have gone a little bit too far on mortgage credit conditions.” — Former Federal Reserve Chairman Ben Bernanke, revealing in a recent speech that he was unable to refinance his home mortgage.