The impact of a secular doctrine on the mortgage market

Rules promulgated by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) in 2020 codified a doctrine known as “Valid once done” rule. The new OCC and FDIC rules are under attack in federal courts, with lawsuits seeking to overturn the rules. The potential effects of a successful challenge to these rules could have implications for lenders, service providers, investors and law firms in the foreclosure arena. They could also question the application of interest rates and other conditions on previously issued mortgages.

Legal League 100 Special Initiatives Working Group (SIWG) adopted the “Valid-When-Made” rule and wrote a white paper, “Implications for Mortgage Lenders, Service Agents and Investors if the ‘Valid-When-Done’ Rule Is Canceled” examining the history of the Rule, the impact of Second Circuit Ruling in Madden v. Midland Funding LLC (786 F.3d 246 [2d Cir. 2015]), the rules set forth by the OCC and the FDIC, as well as the implications if this long-standing doctrine is eliminated.

In addition to White paper, on Wednesday September 29 from noon to 1:00 p.m. CDT, the LL100 SIWG will present the webinar “Implications for Mortgage Lenders, Service Agents and Investors if the “Valid-When-Done” Rule Is Canceled. “A panel of 100 Legal League members will discuss the implications of the Rule, in a timely and informative webinar, as challenges to this doctrine could impact lending, the secondary market and future foreclosures.

DS News had the chance to chat with President of Legal League 100 Stephen Hladik, partner of Hladik, Onorato & Federman LLP, before the webinar regarding the ramifications of a repeal of the “Valid-when-done” rule.

Hladik brings extensive experience to his foreclosure, bankruptcy and practice at Hladik Onorato & Federman LLP. He graduated from Widener University with honors in law, where he was in-house editor of the Law Review. He has acquired considerable expertise in the application of the Loan Law, Dealing with Unfair or Deceptive Acts or Practices (UDAP), Fair Debt Collection Practices Law (FDCPA), Debt Collection Procedures Law. Real Estate Regulation (RESPA) and the Truth in Loans Act (TILA) in his role as Deputy Attorney General in charge of the Harrisburg office of the Office of Consumer Protection.

Vice-President of Legal League 100 Stephen Hladik, Partner at Legal Group Hladik, Onorato & Federman LLP

DS News: What precipitated the drafting of the “Valid-When-Made Rule” white paper?
Hladik: The “Valid-When-Made” rule is a doctrine that dates back over 100 years in this country.

Within the lending community, as we look to the future as moratoriums expire and the potential for increased foreclosures exists, this doctrine will receive more scrutiny. Judges have interpreted and referred to it since at least the 1800s.

Much of the current understanding of the rule stems from federal deregulation and laws passed by Congress. The Deposit-Taking Institutions Deregulation Act, among other things, provided that a lender can export to other states or other places the maximum interest rate allowed where that lender is based. In other words, if the state of Indiana allowed someone to lend at 21%, an Indiana-based lender could safely export that rate to another state. If that other state had an interest rate cap of 6%, the Indiana-based lender would be able to lend at the state of Indiana rate to that out-of-state borrower. This is where the “Valid-When-Made” doctrine comes from.

This loan was 21% good when made in Indiana by an FDIC insured institution. When the originator sells this loan, this interest rate would remain applicable according to the terms of the contract signed between the originator of the loan and the borrower. In other words, if it was deemed “valid” when made, it somehow does not turn into an “invalid” loan when the loan is transferred to another holder.

We have seen an increase in the number of investors and institutions purchasing loans that are not necessarily a national bank or an FDIC insured institution. In order to support the aftermarket at the national level, the “Valid-When-Made” rule was and is very important.

If you disrupt, change or modify this doctrine, you will affect the aftermarket. Suddenly, if this 21% interest rate, and I take the example, is no longer enforceable, that creates a multitude of legal problems. A buyer of a loan at an institution currently recognizes the protection of the Valid-When-Made rule, and is able to enforce the terms of that loan as originally written when he buys the loan. And if the secondary market or the investor no longer has the assurance that they can execute a loan as written, this will cause problems in the secondary market.

DS News: Can you describe the Madden decision and its impact on the industry?
Hladik: The Second Circuit decision in Madden v. Midland Funding LLC is related to credit card debt, but concerns the interest rates charged on a credit card. The Madden decision did not expressly say a word about “Valid-When-Made” and ignored the “Valid-When-Made” doctrine, but turned the basket of apples upside down. The person who stood in the place of the original credit card issuer suddenly couldn’t enforce the terms as they were originally written.

In response to this, in 2020 you saw the OCC, as well as the FDIC, come up with regulations, which were codified in the Code of Federal Regulations, that the “Valid-When-Made” rule is a doctrine of loan established. that, if you search hard enough, you will find cases from the 1790s or 1800s recognizing it. The courts use a sentence that “if it is valid when it was made or when the loan was made, the loan cannot turn into an invalid or unenforceable loan when it is transferred to someone else. ‘other “.

This is the basis of the Rule, and now this Rule is under attack. Federal lawsuits are underway in the state of California, which several states have joined, and those states are seeking to make these rules unenforceable.

If certain rules are rejected, you start to have mixed decisions as to whether the Madden ruling controls certain areas of the country. The Madden decision had an impact on the aftermarket and sales within that channel. It’s just the rule adopted in a circuit, but if you throw away those state and federal rules, then it will be a circuit-by-circuit battle.

Legal League 100’s Strategic Initiatives Working Group has paid close attention to all of this, and it certainly has an impact on our services, clients, investors, and we want to make sure everyone is up to date on what happens.

I have already seen some challenges in cases where the impact of an interest rate can be applied as it is written, when it is transferred to a non-bank organization. This will be a problem as the moratoriums are lifted. We are currently at an unprecedented number of seizures in this country, which is a good thing in light of COVID. We obviously don’t want to take people off their properties, but we are at an artificial low well below normal hours. If you look at a straight line of loan foreclosure percentages, from 1933 to 2008, it is a relatively straight line in the number of loans and foreclosures. We’re well below that point now, so you’ll see an increase in foreclosures, even getting back to a normal level of foreclosures. When these new foreclosures are contested, the maximum interest rate could be one of the defenses that present themselves.

DS News: What are the implications if the “rule of validity at creation” is canceled?
Hladik: I think you will see the borrower’s defenses; you will see potential claims against law firms and service providers for potential equitable debts, claiming that the interest rates were not applicable in that particular state. You will see an impact on prices and the secondary market.

Obviously, there is always a risk involved in buying a loan, but you are increasing that risk now for an investor. This adds risk to the secondary market equation, which will inevitably impact prices.

You can see the challenges of the transfer and the potential challenges of the enforceable interest rate. If that interest rate is not enforceable, you open up the lender, manager or investor to claims and not only foreclosure defenses, but you also review potential claims related to fair collection practices. receivables.

Bottom line … there is a whole host of legal issues that can arise if this rule is overturned.

DS News: Any closing comments?
Hladik: Legal League 100’s Special Initiatives Working Group (SIWG) did a great job in the white paper analyzing not only the history of the doctrine, but also its impact and potential in bankruptcy courts.

The webinar, September 29 from noon to 1:00 p.m. CDT, will go deeper into what the Madden decision found, and we’ll discuss some of the rulings that just came out of Colorado that were very supportive of the service community, and other cases from across the country.