Banking and Finance Law Report : Banking & Finance Lawyer & Attorney : Porter Wright Morris & Arthur Law Firm : Bankruptcy, Commercial Lending

Receiverships have gained in popularity in foreclosure cases and in other types of litigation in recent years. Orders appointing receivers and setting forth the receiver’s duties frequently include a provision allowing the receiver to market and sell real estate. However, the question of whether a receiver legally has the ability to convey title to real estate, free and clear of liens and encumbrances, appears to have been answered in the negative, at least by one appellate district in Ohio.

In 2008, the Eighth District Court of Appeals handed down its decision in the matter of Ohio Director of Transp. v. Eastlake Land Dev. Co., 177 Ohio App.3d 379, 2008-Ohio-3013, 894 N.E.2d 1255. In what appears to be a classic example of bad facts making bad law, the appellate court reversed the lower court’s approval of a receiver’s sale of real property free and clear of liens. In Eastlake, which was not a foreclosure, the court-appointed receiver sought authority to sell a parcel of real estate for the sum of $250,000, an amount which he stated he “believed” was a commercially reasonable price for the property. In connection with the motion, the receiver presented no evidence of his marketing and sale efforts, nor did he present any evidence regarding the value of the property. Notably, the receiver’s motion did not state that he intended to sell the property free and clear of AFF’s liens. The senior lienholder, American First Federal, Inc. (“AFF”) intervened in the case and filed an objection to the receiver’s motion to sell the property for less than what was owed to AFF. 

On January 20, 2007, the court issued two, inconsistent orders related to the receiver’s motion. In the first, the court set the receiver’s motion for hearing on February 13, 2007. In the second, the court “inexplicably” granted the receiver’s motion to sell, without vacating the order setting the hearing.   In its approval of the motion, the trial court specifically authorized the receiver’s sale free and clear of AFF’s liens. On February 2, 2007, (presumably unaware of the court’s 1/20/07 granting of the sale motion) AFF filed its objection to the receiver’s motion and in that objection (1) submitted a credit bid of $251,000 and (2) offered evidence to the court that the property in question was worth at least $600,000.

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In Greenspan v. Third Fed. S. & L. Assn., Slip Opinion No. 2009-Ohio-3508, the Supreme Court of Ohio held that the private right of action for damages resulting from the unauthorized practice of law could only be invoked after the Supreme Court had already made such a finding. 

The plaintiff in Greenspan alleged that a $300 document preparation fee charged by Third Federal in connection with a 2002 mortgage loan constituted the unauthorized practice of law because  the bank's nonattorney personnel prepared and completed mortgage loan documents. 

The Supreme Court of Ohio rejected that claim, holding that the Court has exclusive jurisdiction over the practice of law in Ohio, including the unauthorized practice of law.  Therefore any determination that a defendant engaged in such unauthorized practice could only come from the Supreme Court, which established a Board on the Unauthorized Practice of Law for precisely this purpose.  The private right of action authorized by the legislature, therefore, could only permit recovery against persons already found to have engaged in the unauthorized practice of law by the Supreme Court, and the statute authorizing such recovery provided for exactly that.  Creative attempts to circumvent the Court's exclusive jurisdiction by framing the matter as common-law "unjust enrichment" failed. 

Although the Court rejected the argument that a plaintiff could bring a private action under these circumstances, it did not reach the issue of whether preparing the documents in question itself constituted the unauthorized practice of law.

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On November 12, 2008, the U.S. Department of Housing and Urban Development ("HUD") issued a long-anticipated Final Rule amending the regulatory framework of the Real Estate Settlement Procedures Act ("RESPA").  In conjunction with the Final Rule, HUD also issued a standardized Good Faith Estimate form and a revised HUD-1 Settlement Statement form.  Compliance with the Final Rule and use of these standardized forms will become mandatory on January 1, 2010.

Industry groups maintain that the Final Rule is deficient in many respects, arguing that because it may overlap with regulations issued by the Fed under the Truth in Lending Act, it creates the possibility of conflicting and ambiguous requirements for lenders and brokers.  Consumer advocates also maintain the Final Rule is deficient, arguing that it falls short of stopping certain incentives, such as yield-spread premiums, that contributed heavily to the current problems in the mortgage market, and fails in a broader sense in that it does not help consumers answer the basic question:  Can I afford this loan?

Key to these regulations is the requirement that lenders or brokers issue a Good Faith Estimate at the outset of the loan process.  Lenders must prepare the estimate with a minimum of information from the borrower, such as the borrower's name, Social Security number, gross monthly income, address and value of the property, and the amount of the proposed mortgage loan.  Lenders can request additional information, but cannot expect the borrower to go into the detail otherwise reserved for the formal loan application process. 

Once the lender has the necessary information, it must provide the borrower with a Good Faith Estimate (at no charge to the borrower) within three days.  The Good Faith Estimate will contain information needed to help consumers shop for the lowest-cost loan, such as the interest rate, timing and cost of the interest rate lock, estimated cost of all settlement charges (including title insurance and recording fees), and the general terms of the loan, such as the amount, term, origination fees, estimated monthly payment, and the fixed or variable nature of the interest rate. 

Because the purpose of this estimate is to help consumers make informed decisions, loan originators have an express obligation to provide accurate information up front.  As a result, the final cost and terms of the loan and closing process must reflect the original Good Faith Estimate, except under certain specific circumstances. 

This Final Rule represents a substantial changes in the regulatory environment surrounding residential mortgage loans and the settlement process.  In addition to the significant changes that lenders and brokers will need to make to their loan application process in order to ensure full compliance with the Good Faith Estimate requirements, there will be many practical business arrangements that will have to be made to ensure that disclosed costs (such as a title company's settlement costs) are accurate. 

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