Legal/Legislative Update –September 17, 2014

Published on: September 17, 2014

BETTER OR WORSE.  It’s either getting easier or more difficult to obtain a mortgage, depending on which of any number of competing studies you want to choose. The Federal Reserve’s most recent survey of senior loan officers found that nearly 24 percent of banks have eased their credit standards in the past three months – at least as they apply to borrowers “with solid credit and incomes,” according to the Wall Street Journal. But Ellie Mae reported that the mortgage approval rate declined to 50.3 percent in June, down from 63.6 percent a year ago and the lowest approval rate in more than three years. As for those “easing” credit standards – nearly 60 percent of the borrowers obtaining loans in July had credit scores above 740.

BOTH WAYS.  The Federal Housing Administration (FHA) wants to have its cake and eat it too – perfect (or near-perfect) underwriting with fewer loan defects and more loans to borrowers with lower incomes and less than perfect credit scores. The response from lenders, forced to buy back failed loans: “Good luck with that!”

DISPARATE IMPACT.  The Supreme Court is likely to get another shot at a disparate impact case – deciding whether to uphold or reject the theory that actions and policies may be discriminatory if they have a disproportionately negative impact on minorities, even if the discrimination isn’t intentional. Civil rights activists, who fear that a conservative court will reject the theory, orchestrated last-minute settlements that ended two previous cases the court had agreed to hear. But a third – challenging a finding that Texas Department of Housing and Community Affairs policies were discriminatory – is on its way and there are two others in a queue behind that one.

DEBT DEBATE.  Economists who were concerned that consumers were spending too little are now becoming concerned that they may be spending too much. Credit card debt skyrocketed in the second quarter as consumers used plastic to purchase $28.2 billion worth of goods. That represented the largest increase in consumer debt in the past six years, replacing more than 85 percent of the debt consumers had paid off during the first quarter. A related study by the National Foundation for Credit Counseling (NFCC) found that credit cards were essential for 20 percent of consumers, who could not have paid essential expenses without them. Almost as many respondents to the NFCC survey (22 percent) said they would have had to adjust their lifestyle if forced to finance expenditures with cash. On the same topic, although economic conditions have improved and credit card debt levels are as low as they have been in nearly a decade, nearly one-third of all Americans have unpaid debts that have been referred to collection agencies, a study by the Urban Institute has found. Analysts blame stagnant income gains for the problem, which is more severe in some areas of the country (the south and west primarily) than in others.

A BIG DIVIDE.  Location, Location, Location has always defined the key factor in real estate values. Increasingly, it also describes vast differences in housing market conditions nationwide. In a recent “Beige Book” report on economic conditions, the Fed reported “stable or growing” housing markets in “barely half” of its 12 districts. Boston, New York Chicago and St. Louis all reported some softening in residential sales, while Philadelphia, Cleveland, and Richmond reported “slight to modest increases.”

HORROR STORY?  Looking for something to keep you awake at night? Loan modification resets might do the trick. Nearly 2 million modified loans are facing (upward) interest rate adjustments this year and 40 percent of them are underwater, with outstanding loan balances exceeding the market value of the homes, according to Black Knight Financial Services. Rising home prices will reduce foreclosure risks, which are particularly acute for the 10 percent of borrowers with equity of 10 percent or less. Of course, the reverse is also true hence the potential for some sleepless nights ahead.


IF A TREE FALLS. If a contractor’s error is unintended and (in the contractor’s view) accidental, might it still be foreseeable and excluded from coverage under a general liability policy? The answer, provided by a Massachusetts Appeals Court, is yes. And for those who enjoy contemplating the old “if a tree falls in the forest and no one hears,” puzzle, the explanation is interesting.

The dispute in Pacific Indemnity Company v. Lampro stemmed from a claim property owners (Steven and Sue Levkoff) filed against a landscaper (SMD) they had hired to clear some land on which they intended to build a vacation home. The site, abutting an environmentally sensitive area around a lake, required special permits, which the local conservation commission issued, requiring compliance with environmental regulations. The subcontractor SMD hired to do the work ignored the restrictions and clear-cut the land, resulting in more than$140,000 in remedial work. The Levkoff’s homeowners’ insurer (Pacific) paid most of those costs, and then sued SMD’s insurer (Preferred) to recover “the full amount of damages.”

The parties resolved most of the claims, but two of Pacific’s claim against Preferred wound up before the Appeals Court. Specifically, Pacific argued that Preferred had: Violated the Consumer Protection Act by failing to settle the property owner’s claim in a timely fashion; and had concluded incorrectly that the policy language excluded coverage for the damages claim.

On the coverage question, the Appeals Court noted, the policy provided insurance for property damage resulting from an “occurrence,” defined as “an unexpected happening without intention or design.” The subcontractor’s failure to comply with the permit was hard to understand, the court agreed, but it was not accidental, and so could not be deemed “a fortuitous or unexpected consequence” of the work. Quoting from the trial court’s opinion, the Appeals Court noted, in the landscaping business, “the possibility that unintended trees may be cut is clearly a normal, foreseeable, and expected incident of doing business,” not an “occurrence” for which coverage would be required.
The Appeals Court also agreed with the lower court’s conclusion that two specific exclusions in SMD’s insurance policy applied. One precluded coverage for damage to property on which the company was working, if the damage “arise[s] out of those operations.” The second precluded coverage to repair property damaged because contracted work “was incorrectly performed on it.”

Pacific said the exclusions didn’t apply because SMD’s subcontractor exceeded the scope of the permitted work, but the court didn’t buy that. The contract authorized SMD to perform work “throughout” the property, so the exclusion applied to damage anywhere on the site, the court said. Moreover, the court pointed out, the purpose of a general liability policy “is to protect the insured from the claims of injury or damage to others, but not to insure against economic loss [the insured incurs from] repairing or replacing its own defective work products.”

In its decision, the Appeals Court acknowledged that it has ruled in other cases that the coverage exclusion did not apply to damage to property owned by a third party, “[but] we distinguish between improper work performed by the insured that damages the property of a party to the contract and damage done to a third party. ” The owners’ claim for damage resulting from work performed improperly on their property “fits squarely within the exclusions,” the court said.

The court also rejected the argument that Preferred had violated the Massachusetts Consumer Protection Act by improperly delaying settlement of the claim, despite clear evidence of SMD’s liability for the damage. While SMD’s liability was clear, the court agreed, Preferred’s duty to indemnify the company was not. Quoting from a previous decision, the court noted, while Preferred might have responded “more forthrightly” and spent less time investigating the claim, “our decisions interpreting [Chapter 93-A] in no way penalize insurers who delay in good faith when liability is not clear and requires further investigation.” Because Preferred had no obligation to settle the claim, the court explained, “there can be no liability [under the statutory provision requiring] prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.”


WORTH QUOTING:    “We’ve locked down mortgage lending to the point where it’s like we’re trying to avoid all defaults. We’re back to using rules that were written for Ozzie and Harriet. And we’ve got to find a way to help normal people start buying homes again.” — William Dallas, chairman of Skyline Home Loans.