6 legal issues that will affect lenders in 2025

December 18, 2024 5:00 AM

During 2024, the mortgage and real estate industries had its fair share of legal proceedings outside of the matters that involved the National Association of Realtors. Changes due to NAR's landmark settlement earlier in year are likely to have the most far-reaching impact on the business going into the next year

But a number of other matters also will have an impact in 2025. This is a look back at National Mortgage News' coverage of some of the most impactful cases outside of those involving NAR and real estate brokerages in the past year.

Wells Fargo redlining case progresses

A case filed against Wells Fargo by consumers alleging the bank engaged in "digital redlining" is moving towards trial, most likely next year, following several rulings during 2024.

The most recent from Federal Judge James Donato, on Nov. 29, rejected Wells Fargo's attempt to disqualify one of its former underwriters, Dante Jackson, from testifying against the bank.

This follows an attempt by Wells Fargo to have the case dismissed in July, arguing it "follows government sponsored enterprise guidelines in our decision making for conforming loans and our underwriting practices are consistently applied regardless of race or ethnicity of the applicant."

In April, the plaintiffs asked for class certification in the case, originally filed in 2022. That is one of the motions the judge still needs to rule on.

With a potential class of 119,100 individuals, a loss could be costly for Wells Fargo.

Zombie seconds biting servicers

Resurrected zombie second mortgages have been a hot button topic for several years, including from an April 2023 advisory opinion from the Consumer Financial Protection Bureau saying servicers seeking payment on them would be a violation of the Fair Debt Collections Protection Act.

A Massachusetts Attorney General settlement in October wiped out over $10 million of such debt in that state held by Franklin Credit Management Corp. It also was penalized $300,000.

Now Specialized Loan Services, recently acquired by Rithm Capital's Newrez subsidiary, was accused of inflating the balances on long-dormant second mortgages, in a case brought by a Georgia borrower that is also seeking class certification.

A zombie second started as a loan that was originated in conjunction with a first mortgage during the go-go days of the mid-2000s, primarily used to fund a down payment so the borrower could avoid private mortgage insurance. But when the borrower experienced financial difficulties, those seconds became delinquent.

Pay-to-play cases affecting Onity, Mr. Cooper

Onity, the company once known as Ocwen, has had its share of legal problems over the years. It is now awaiting a decision on an appeal regarding a FDCPA case.

The Eleventh Circuit Court of Appeals has heard arguments regarding allegations that Ocwen charged fees for using certain payment types, which runs counter to a FDCPA prohibition on collections "unless such amount is expressly authorized by the agreement creating the debt or permitted by law," the plaintiffs in the case argued.

Mr. Cooper is also facing a "pay-to-play" case, where the most recent development involves Freddie Mac's dismissal from the matter. However, the plaintiffs had 15 days from the time of the Judge Barbara Jacobs Rothstein's ruling on Dec. 5 to amend their complaint against the government-sponsored enterprise.

Townstone settled, but how will ECOA be defined?

The Townstone Financial redlining case, while it came to an end which was relatively favorable to the mortgage company, will still have an impact going forward.

Supporters of the lender said the settlement was a sign the case never should have gone forward in the first place and, between that and a likely philosophy change in enforcement, will give pause to such actions going forward.

On the other hand, it does preserve an appellate court ruling that the Equal Credit Opportunity Act not only applies to actual applicants but perspective customers as well. That is something originators will have to consider going forward.

Bank escrow interest cases returned to lower courts

Whether a bank has to pay interest on a mortgage escrow account remains an unsettled issue 11 months after the U.S. Supreme Court heard arguments in the case.

Cantero v. Bank of America involves New York law requiring the payment of 2% interest on an escrow account. B of A argued that was preempted by the National Bank Act. While the court heard this specific case, a similar suit in California involving Flagstar was on hold pending the ruling.

Appellate courts hearing both matters split, making it apparently ripe for the highest tribunal. The Second Circuit ruled in favor of B of A, while the Ninth Circuit found in favor the consumers against Flagstar.

But the U.S. Supreme Court essentially punted on the New York case, remanding it to the Second Circuit for further analysis.

The Ninth Circuit, in August, reaffirmed its decision against Flagstar. Days later, the plaintiffs in the B of A case made a filing before the Second Circuit stating the New York law is not an impediment on banking powers.

New laws bar deed theft, NTRAPs

Legal and legislative actions will help lenders from being direct or collateral damage from problems with property titles.

New York State Attorney General Letitia James has been particularly active around deed theft, including several successful prosecutions.

James was also behind the effort to criminalize deed theft in New York. The bill also helps deal with the issue of heirs' property, a nationwide problem where ownership is not clear because the original owner did not have a will and the surviving family members are not on the property's deed.

In July, Hawaii became the 29th state (out of 30) to enact a law barring the use of a real estate sales contract known as non-title recorded agreements for personal services, or NTRAPs for short.

While California also has a NTRAPs law, it was not in effect when the state sued MV Realty using other consumer statutes.

A state court issued an injunction against MV Realty in September; the company is appealing the ruling.