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New South Carolina Code Impacts Foreclosures for Border Counties of North Carolina

Posted By USFN, Tuesday, November 29, 2016
Updated: Monday, October 31, 2016

November 29, 2016

by Gregory D. Spink
The Hunoval Law Firm – USFN Member (North Carolina)

As many are aware, the Carolinas have been in a border war for 20 years. The issues relate to surveys created during the Colonial era using landmarks that no longer exist: rocks, trees, and even fence posts. Both legislatures have worked out a compromise regarding the boundary dispute, but now both states must look to the legal implications of new property lines.

South Carolina took the first step — enacting S.C. Code § 30-5-270, regarding real property recordings and filings for counties bordering North Carolina, with an effective date of January 1, 2017. The specific counties impacted by this code are Cherokee, Chesterfield, Dillon, Greenville, Horry, Lancaster, Marlboro, Oconee, Pickens, Spartanburg, and York. The register of deeds is required to index and record a “Notice of State Boundary Clarification” to provide notice to anyone checking title to real property for the affected lands. This notice will identify the land, the parties who are the owners, and corresponding recorded instruments. [S.C. Code § 30-5-270(C)(2)].

How Does this New Law Impact Foreclosures?
In addition to the above-cited code, the legislature enacted S.C. Code § 29-3-800 dealing with the foreclosure of real estate liens for counties bordering North Carolina. When a foreclosure is initiated in an affected county, the mortgagee (through its attorney of record) shall file a copy of the recorded Notice of Boundary Clarification and attorney certification regarding title to the real property contained in the affected county. The attorney must also serve the certifications with the summons and complaint.

This new law focuses on property that was believed to have been in North Carolina but is now determined to be wholly (or in part) in South Carolina due to the boundary clarification. [S.C. Code § 30-5-270]. The attorney of record is required to serve the Notice of Boundary Clarification and filed pleadings “upon any party identified on the Notice of Boundary Clarification or known to have an interest in the subject affected lands, not already a party to the action ...” [S.C. Code § 29-3-800(B)(2)].

The practical impact could involve additional judgment lienholders, amending complaints, re-serving pleadings, and the obvious costs of ordering updated title for all property within the affected counties. The new boundary lines will not impact title or casualty insurance issued prior to January 1, 2017, regardless of whether the insured property is determined to be in another state. [Click here to see map from North Carolina Public Records, as cited by the Washington Times.]

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New York’s Vacant and Abandoned Property Law and Regulations (Effective 12/20/2016)

Posted By USFN, Tuesday, November 29, 2016
Updated: Monday, October 31, 2016

November 29, 2016

by Robert H. King
Rosicki, Rosicki, & Associates, P.C. – USFN Member (New York)

New York’s vacant and abandoned property law goes into effect on December 20, 2016. The law affects various aspects of New York’s foreclosure law. Servicers should be aware of each of the provisions of the new law; the provisions include:

Vacant and Abandoned Properties
• Real Property Actions and Proceedings Law (RPAPL) § 1308 requires servicers to maintain vacant and abandoned properties at the 90th day delinquency.

• RPAPL § 1309 creates an expedited process for obtaining judgments for uncontested actions involving vacant and abandoned properties.

• RPAPL § 1310 requires servicers to register vacant and abandoned properties with the New York Department of Financial Services.

The New York State Department of Financial Services (DFS) released their proposed rules for comment, seeking to compel servicers to report such information as the date of inspections, when notices were posted, and the actions taken to maintain the property. The DFS will require quarterly reporting of vacant and abandoned properties.

RPAPL § 1304 – New York’s Pre-Foreclosure 90-Day Notice
In order to continue to comply with the 90-day pre-foreclosure notices and to prevent delays in commencement of New York foreclosure actions, it is important for servicers to review the amendments to the 90-day pre-foreclosure notice required by RPAPL § 1304. The language of the 90-day pre-foreclosure notice was amended to include:

• A disclaimer to borrowers that they have the right to remain in the property until a court orders the borrowers to leave the premises; the 90-day notice also informs of the borrower’s ongoing ownership of the property and of responsibilities as owner.

• The New York State Attorney General Homeowner Protection Program toll-free consumer hotline.

The statute makes clear that the 90-day notice is required to be sent for all residential loans regardless of whether the borrower occupies the property or files for bankruptcy.

The new statute clarifies that a new 90-day notice must be sent if the borrower cures the delinquency but then re-defaults.

90-Day Notice and Limited English Proficiency
In order to comply with the new amended provisions in RPAPL § 1304, servicers should consider this question: Does the person preparing the 90-day notice have access to communication logs to determine if the borrower is non-native English proficient?

If the servicer knows that the borrower has limited English proficiency, then the RPAPL §1304 notice must be drafted in the native non-English language, provided that the language is one of the six most common non-English languages spoken by individuals with limited English proficiency in the state of New York. The New York State Department of Financial Services will provide a list of these six most common non-English languages based on the United States Census data. Further, the DFS will post the 90-day notice in the six most common non-English languages on its website (www.dfs.ny.gov).

Housing Counseling Agencies
The list of housing counseling agencies attached to the 90-day notice must include at least five current housing counseling agencies serving the county where the property is located.

RPAPL § 1303 – Help for Homeowners in Foreclose Notice
The content of the notice was amended to include a “rights and obligations” provision to borrowers that they have the right to remain in the property until a court orders the borrowers to leave the property. This notice is delivered to all parties in the foreclosure action at service of the summons and complaint.

CPLR 3408 – Settlement Conferences and Mediations
The amendments define good faith in negotiations, require detailed loan modification denial letters, and require the court to provide borrowers with a Consumer Bill of Rights. (DFS has been tasked with publishing a Consumer Bill of Rights.) The amendments also allow borrowers to interpose an answer/contested pleading 30 days after the first settlement conference date.

Conclusion
Servicers should be aware of the changes made to New York foreclosure law, and ensure that they have processes in place to comply.

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D.C. Circuit Rejects Structure of CFPB and Retroactive Enforcement Action against PHH

Posted By USFN, Tuesday, November 29, 2016
Updated: Tuesday, November 1, 2016

November 29, 2016

by Joshua Schaer
RCO Legal, P.S. – USFN Member (Oregon, Washington)

On October 11, 2016 the D.C. Circuit Court of Appeals issued its ruling on an appeal by PHH Mortgage (PHH), which challenged the Consumer Financial Protection Bureau’s (CFPB) enforcement action under Section 8 of the Real Estate Settlement Procedures Act (RESPA). The CFPB had imposed a $109 million penalty on PHH for its captive reinsurance arrangements; however, the court vacated the penalty and remanded the case back to the CFPB for further agency consideration.

Constitutional Problem with the CFPB’s Structure
PHH first contended that the CFPB violates Article II of the U.S. Constitution because it is an independent agency headed by a single director.

The court observed that the heads of both executive and independent agencies have historically been subject to a check on their authority — either through the president, fellow commissioners, or other board members. The CFPB was originally proposed to operate in that manner, but Congress vested all of the agency’s power in a single director instead. The court found that this outcome fails to prevent arbitrary decision making and protect individual liberty; therefore, the CFPB’s structure is unconstitutional.

As a remedy, the court severed the unconstitutional portion of the Dodd-Frank Act; this result allows the president to supervise, direct, or remove the CFPB director. Consequently, the CFPB can still perform its duties, but as an executive agency.

PHH’s Captive Reinsurance Arrangements
PHH next asserted that the CFPB erred in determining that Section 8 of RESPA completely prohibits captive reinsurance arrangements. These arrangements involve referring borrowers to an insurer who purchases reinsurance from an entity affiliated with, or owned by, the lender.

Prior to the CFPB’s creation, the Department of Housing and Urban Development (HUD) interpreted Section 8 of RESPA to permit captive reinsurance arrangements if the amount paid for reinsurance does not exceed its reasonable market value. However, if the amount paid was in excess of market value, a presumption would arise that the payment was for the referral and, therefore, prohibited under Section 8. PHH and other lenders relied on this interpretation.

Nonetheless, in 2015 the CFPB expressed its own contrary interpretation and penalized PHH for captive reinsurance arrangements that had occurred as far back as 2008 — before the CFPB was even founded. The court agreed with HUD’s guidance that engaging in these arrangements is not per se improper, and also found that the CFPB violated due process when it retroactively applied the opposite interpretation to PHH’s conduct.

The court then analyzed the appropriate statute of limitations for enforcement actions under Section 8 of RESPA. The CFPB argued that there is no limitation period for administrative proceedings under the Dodd-Frank Act. The court disagreed, holding that RESPA’s three-year statute of limitations covers both administrative and court actions to enforce Section 8.

On remand, the court’s ruling allows for the CFPB to allege if any insurers paid more than reasonable market value to PHH’s subsidiary, but only within the proper three-year statute of limitations.

Conclusion
The court’s decision is a significant victory for lenders because it reins in the CFPB’s power to take unilateral enforcement actions based on new interpretations of law. The CFPB, like traditional government agencies, is subject to checks on its authority. Thus, other actions taken based solely on the director’s judgment may now also be challenged as unconstitutional. Additionally, the CFPB is constrained to imposing penalties only within a defined limitations period based on the relevant statute.

The 101-page majority opinion in PHH Corporation v. Consumer Financial Protection Bureau (along with concurring and partial dissenting opinions) can be found at: https://www.cadc.uscourts.gov/internet/opinions.nsf/AAC6BFFC4C42614C852580490053C38B/$file/15-1177-1640101.pdf.

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Michigan: When a Surplus is Not a Surplus

Posted By USFN, Tuesday, November 29, 2016
Updated: Tuesday, November 8, 2016

November 29, 2016

by Matthew D. Levine
Trott Law – USFN Member (Michigan)

The Michigan Court of Appeals recently issued an unpublished opinion that could, potentially, resolve what has been a non-uniform statewide policy concerning surplus proceeds following foreclosure. At issue was the difference between funds used to purchase a foreclosed property and the amount bid by a mortgagee. Some counties view funds in excess of a mortgagee’s bid as surplus proceeds. Others, like Macomb County, do not see a surplus unless the successful bid exceeds the mortgage debt. Distribution of surplus proceeds is controlled by MCL § 600.3252, which states, in part:

If after any sale of real estate, made as herein prescribed, there shall remain in the hands of the officer or other person making the sale, any surplus money after satisfying the mortgage on which the real estate was sold, and payment of the costs and expenses of the foreclosure and sale, the surplus shall be paid over by the officer or other person on demand, to the mortgagor, his legal representatives or assigns, unless at the time of the sale, or before the surplus shall be so paid over, some claimant or claimants, shall file with the person so making the sale, a claim or claims, in writing … [emphasis added].

The question presented in In re Surplus Proceeds from Sheriff Sale: Trademark Properties of Michigan, LLC v. County of Macomb and Civil Staffing Resources, LLC (No. 327426, Oct. 11, 2016) was: What constitutes satisfaction of the mortgage?

Typical Scenario
Often when a mortgage is foreclosed under the Michigan Foreclosure by Advertisement Statute, MCL §§ 600.3201, et seq., a mortgagee will bid the total debt owed on the mortgage, and there are no other bidders. In this situation, the mortgagee generally need only submit a credit bid, and there is no issue. In other situations, a mortgagee will submit a credit bid in the entire amount of the mortgage debt, and a third party will submit a successful bid in an amount above the mortgage debt. The difference between the mortgage debt and the successful bid would then become a surplus. MCL § 600.3252 dictates that any surplus belongs to the mortgagor, and shall be submitted to the mortgagor unless another claimant submits a claim. In the event of a claim, or claims, the proceeds will then be subject to a court action.

Trademark Case: Untypical Scenario
The Trademark facts presented a different scenario. In Trademark, the mortgagee CitiMortgage (respondent) made a credit bid of $20,572.80, though the total debt on the mortgage was $55,030.58, resulting in a difference of $34,347.78. CitiMortgage did not, however, present the successful bid. A third party successfully bid $31,572.80 ($11,000 more than the mortgagee bid but less than the total debt).

The Macomb County forwarded the entire amount to the attorneys for CitiMortgage, the former mortgagee. Trademark (petitioner and assignee of the former mortgagor) filed a Petition for Return and/or Payment of Overbid Funds, claiming that the $11,000 above CitiMortgage’s bid constituted a surplus. Macomb, on the other hand, maintained that a surplus only arises when the purchase amount is over the amount owed on the mortgage loan. Thus, a dispute was formed. The Macomb County Circuit Court found in favor of Macomb; Trademark appealed to the Michigan Court of Appeals.

Trademark primarily asserted that the difference between the successful bid and the mortgagee bid resulted in a surplus. In support of its position, Trademark relied upon the statutory language “satisfying the mortgage.” Trademark offered the definition of “surplus” as ‘“[a]n amount or quantity in excess of what is needed,’” citing American Heritage Dictionary of the English Language, 5th Ed. 2011. Notably, argued Trademark, the statute does not state “satisfying the mortgage debt.” Trademark additionally relied on the fact that, upon foreclosure sale, the mortgage is extinguished (Trademark cited Dunitz v. Woodford Apartments Co., 236 Mich. 45 (1926); Wood v. Button, 205 Mich. 692 (1919); New Freedom Mtg. Corp. v. Globe Mtg. Corp., 281 Mich. App. 63 (2008); New York Life Ins. Co v. Erb, 276 Mich. 610, 268 NW 754, “[a] mortgage is not extinguished by foreclosure until the sale”). In other words, regardless of the amount bid at the sale, once a foreclosure takes place the mortgage is extinguished.

Trademark contended that while a mortgage secures the debt owed on a note, the debt is not owed on the mortgage. Should a foreclosure result in an amount less than the amount owed on the note, the security may cease to exist; however, a note holder may still collect upon the note. MCL § 600.3252 does not mention the words “note” or “debt;” thus, according to Trademark, the note and the debt are not relevant in determining satisfaction of the mortgage.

Under Trademark’s theory, it appears that the mortgagee, in submitting a bid, decided and conveyed the amount necessary to “satisfy” the mortgage. Had there been no other bidder, the mortgage would have been satisfied with the specified bid; therefore, so Trademark’s theory suggests, the mortgagee could not claim that the mortgage was not satisfied.

Appellate Court’s Analysis
The Michigan Court of Appeals, however, found in favor of Macomb County. Acknowledging that the statute lacks a definition for “surplus,” the court referred to Merriam-Webster’s Collegiate Dictionary (11th ed.) and found that the term is defined as “the amount that remains when use or need is satisfied.” The definition is very similar to that used by Trademark. The court additionally noted that the term “satisfy” is also not defined by statute. Using the same source, the court observed that “satisfy” means ‘“to carry out the terms of (as a contract): DISCHARGE,’ and to meet a financial obligation to.’” The Court of Appeals used the definitions to read the statute to necessarily refer to the debt secured by the mortgage; i.e., the amount owed on the note.

Moreover, the appellate court mentioned that MCL § 600.3252 does not reference the difference between a mortgagee’s initial credit bid and the final purchase amount. The court noted that “[a]lthough petitioner [Trademark] contends that this Court should consider CitiMortgage’s initial bid in determining the surplus amount, MCL § 600.3252 does not refer to the difference between the mortgagee’s initial credit bid and the final bid …. Further, petitioner does not support its contention that the initial credit bid was the amount CitiMortgage needed to satisfy the mortgage ….”

In addressing Trademark’s assertion concerning the difference between the mortgage and the note, the court stated: “[a]lthough the statute refers to the amount of the ‘mortgage’ rather than the underlying note, the statute does not differentiate between the mortgage and the note. Instead, the statute refers to ‘satisfying the mortgage,’ which indicates the payment must first go toward carrying out the terms of the mortgage and meeting the financial obligation underlying the mortgage,” Opinion, p. 4. The court referenced Powers v. Golden Lumber Co., 43 Mich. 468, 471 (1880), which was also cited by Trademark.

Trademark mentioned Powers for the proposition that the foreclosure extinguishes the mortgage, but only extinguishes the note “to the extent of the proceeds of the mortgage sale.” The court, on the other hand, found that Powers actually supports its own opinion: “While the Powers Court acknowledged a distinction between a mortgage and the underlying note, the Powers decision supports respondent’s position because the Court acknowledged that the foreclosure sale only satisfied the debt to the extent of the sale proceeds. Thus, in this case, the foreclosure sale only satisfied the debt to the extent of the sale proceeds, which were less than the amount due on the mortgage note. Accordingly, Powers supports respondent’s contention that there was a deficiency, rather than a surplus.” Opinion, p. 4.

Finally, the Court of Appeals adopted the respondent’s position that Trademark’s argument would render an “absurd” result. Barrow v. Detroit Election Comm., 301 Mich. App. 404 (2013), as cited by the Court of Appeals, provides ‘“[u]nder the absurd-results rule, ‘a statute should be construed to avoid absurd results that are manifestly inconsistent with legislative intent ….’” Opinion, p. 4. The appellate court inferred that it would be absurd to allow a surplus resulting from a foreclosure sale when money was still owed on the mortgage that was the subject of the foreclosure.

Conclusion
The court’s opinion in Trademark stands for the position that purchase funds in a foreclosure sale must be used first to satisfy the foreclosed mortgage, regardless of the mortgagee’s bid. While Macomb County did not view funds above the mortgagee’s credit bit to be surplus, other counties do. At present, counties have differing procedures for addressing funds above the mortgagee bid. While the opinion is not binding, it is indicative of how the Michigan Court of Appeals would address future matters and will influence the decisions of bidders as well as post-foreclosure county policies.

Editor’s Note: While the appellate court’s decision discussed in this article was pending, an article was published on this topic in the May 2016 USFN e-Update. Click here to access the previous article.

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Illinois: City of Chicago Passes Amendment to its Vacant Building Ordinance

Posted By USFN, Tuesday, November 29, 2016
Updated: Tuesday, November 15, 2016

November 29, 2016

by Michael Anselmo
Anselmo Lindberg Oliver LLC – USFN Member (Illinois)

In July the City of Chicago passed a few minor — but noteworthy — changes to its vacant building ordinance (13-12-126). The changes, which were published on September 13, 2016, are effective 90 days later (December 12, 2016). They concern the types of vacant buildings that a mortgagee must register as vacant with the City, the deadlines for filing, and the registration fee.

The ordinance previously required that a mortgagee file a registration statement with the department of buildings for all residential buildings within the later of: 30 days after the building is vacant or 60 days after a borrower default.

The ordinance is no longer limited to residential buildings. The City Council has now expanded the requirements to all vacant buildings. Further, the timeline has been changed to 30 days after the building is vacant or 10 days after a borrower defaults.

Formerly, the mortgagee was required to pay a $500 registration fee. Now that fee is conditioned upon which timeline the registration is filed within. If the mortgagee filed within the 30-day timeline outlined above, the fee is $700. If the mortgagee files within the 10 days of default deadline, the fee is cut to $400. Further, the validity of the registration has been extended from six to twelve months from the date of registration. Unfortunately, whereas renewal was previously at no charge to the mortgagee, the ordinance now requires that a renewal fee of $700 be paid upon expiration.

Outside of those few, yet significant, changes, the ordinance remains intact. The mortgagee is still required to implement routine maintenance on these properties (such as boarding and securing entrances, cutting grass, shoveling snow, winterizing the building, posting signs, and responding to complaints relating to the building). The fine for failing to do so remains between $500 and $1,000 for each offense.

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Filing Fee of a Motion for Relief from Stay Increases on December 1, 2016

Posted By USFN, Tuesday, November 29, 2016
Updated: Wednesday, November 16, 2016

November 29, 2016

by Edward J. Boll III
Lerner, Sampson & Rothfuss, LPA – USFN Member (Kentucky, Ohio)

The Judicial Conference approved inflationary adjustments to certain fees on the appellate, district, and bankruptcy court miscellaneous fee schedules, which are effective in December 2016.

The filing fee increases from $176 to $181 (effective 12/1/16) for these bankruptcy motions:

• To terminate, annul, modify or condition the automatic stay;
• To compel abandonment of property of the estate pursuant to Rule 6007(b) of the Federal Rules of Bankruptcy Procedure;
• To withdraw the reference of a case or proceeding under 28 U.S.C. § 157(d); or
• To sell property of the estate free and clear of liens under 11 U.S.C. § 363(f).

In most jurisdictions, this fee is not required in the following situations:

• For a motion for relief from the co-debtor stay; or
• For a stipulation for court approval of an agreement for relief from a stay.

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Foreclosure Trustees are Not Debt Collectors despite the CFPB’s Legal Opinion

Posted By USFN, Tuesday, November 29, 2016
Updated: Thursday, November 17, 2016

November 29, 2016

by Wendy Walter
McCarthy Holthus, LLP – USFN Member (Washington)

On October 19, 2016 the Ninth Circuit Court of Appeals published its opinion in Ho v. ReconTrust Company, N.A. The decision affirmed the dismissal of a Fair Debt Collection Practices Act (FDCPA) claim brought against ReconTrust, a nonjudicial foreclosure trustee. In doing so, the opinion clarified that a trustee of a California deed of trust is not a “debt collector.” The holding affirmed Hulse v. Ocwen Federal Bank, a 2002 case decided by the District Court of Oregon (195 F. Supp. 2d 1188). In other circuits (including the Third, Fourth, Fifth, and Sixth) a nonjudicial foreclosure trustee is a debt collector.

In coming to its conclusion, the majority in Ho analyzed the notices in the nonjudicial process and found that the act of issuing such notices doesn’t constitute debt collection as defined by the FDCPA. The opinion analogizes the nonjudicial trustee to the tow truck driver in that the repossession of the car isn’t the act of collecting on the unpaid parking ticket debt, even though the threat of such action can motivate a debtor to pay on a debt.

The majority makes some valuable points related to the interplay of state foreclosure law and federal debt collection law, discussing the “friction” that exists in requiring trustees to comply with both. The FDCPA contains broadly interpreted concepts like “unfair,” “misleading,” as well as “deceptive,” and — to the average person — state foreclosure notice requirements might appear to be unfair, misleading, or deceptive. State legislatures aren’t often doing consumer testing before enacting or modifying statutory foreclosure notices, making it quite possible that the trustee, while trying to comply with state law, might run afoul of the FDCPA in this context. The majority opinion states that the FDCPA wasn’t intended to displace state law, and the U.S. Supreme Court’s recent opinion in Sheriff v. Gillie, 578 U.S. __ (2016), is cited as authority on this point.

In Gillie, the plaintiffs claimed that contracted debt collectors using state letterhead was confusing and deceiving. The Supreme Court unanimously disagreed — finding that a debtor’s impression that a letter from the contractor might be confusing, and cause a consumer to think that the action was being taken by the attorney general, is unconvincing. By reading Justice Ginsburg’s short and pithy opinion, one could conclude that the Supreme Court is weary of FDCPA litigation.

CFPB
With all of the efforts of the Consumer Finance Protection Bureau (CFPB or Bureau) on regulation of mortgage servicing and the FDCPA, foreclosure law is being stepped on a bit. For example, the CFPB in its servicing rules wants to dictate when a foreclosure must stop or proceed based on certain loss mitigation activity under RESPA. In many cases, state courts are refusing to allow these federal protections to affect the state judicial foreclosure cases. The Ninth Circuit’s take on the presumption against preemption when it comes to state foreclosure laws is very timely and sets the stage for continued friction in the upcoming months as we learn more about the CFPB’s FDCPA rulemaking.

The CFPB filed an amicus brief in support of the plaintiffs in Ho v. ReconTrust and claimed that the FDCPA’s consumer protection purposes would be significantly undermined if trustees were exempt. The Bureau concludes that consumers would be subject to much of the conduct that Congress sought to prohibit under the FDCPA if trustees were exempt. By making this assertion, the CFPB ignores the many states that have consumer protection laws that were designed to cover the state foreclosure process. Ho sends a signal to the industry that the courts might not always agree with how the CFPB views debt collection.

Case Status
The case is ongoing, and the appellant is seeking a petition for panel rehearing before the Ninth Circuit. It wouldn’t be surprising to see this issue before the U.S. Supreme Court in the future.

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Florida Supreme Court Rules on Statute of Limitations: Bartram v. U.S. Bank

Posted By USFN, Tuesday, November 29, 2016
Updated: Friday, November 18, 2016

November 29, 2016

by Jane Bond and Robyn Katz
McCalla Raymer Pierce, LLC – USFN Member (Florida, Georgia, Illinois)

The Florida Supreme Court issued its much anticipated opinion in Bartram v. U.S. Bank, N.A on November 3, 2016, providing long awaited guidance as to the statute of limitations on successive mortgage foreclosure actions, post-dismissal. The Court answered a very narrow certified question, which limited the scope of their opinion.

Essentially affirming the decision of the Fifth District Court of Appeal, the Florida Supreme Court held that a lender is not barred from filing a subsequent foreclosure action based on a default after a first foreclosure action is involuntarily dismissed, provided the subsequent default occurred within five years of the new foreclosure action. This was a victory for the mortgage servicing industry and will result in the movement of foreclosure cases having otherwise been stalled while awaiting the Court’s ruling.

What can be determined from the Florida Supreme Court’s opinion?

(1) A dismissed foreclosure case does not prevent suit on a separate and subsequent default.
The Bartram panel affirms the consistent findings of the Florida District Courts of Appeals that dismissal of a foreclosure case does not bar the refiling of a foreclosure on the same mortgage based upon a different date of default. The Florida Supreme Court found that when foreclosure actions are dismissed, lenders and borrowers are returned to their pre-foreclosure complaint status with the same continuing obligations. One exception: if the default is within five years and the prior dismissal was without prejudice, a suit may be brought on the same default date.

(2) The type of prior dismissal, with or without prejudice, is immaterial for re-filing.
Bartram follows the prevailing opinion that whether a previous foreclosure was dismissed with or without prejudice, it does not affect the lender’s rights to a new foreclosure. This is because, as Bartram points out, the new foreclosure is a new cause of action, completely independent of the previous suit, as long as it is based on a subsequent default date. However, the Court limited its holding to cases that were involuntarily dismissed and where the subject mortgage contains language granting the borrower the right to reinstate post-acceleration. The Court does make the distinction between involuntary dismissals, with and without prejudice.

(3) Deceleration of the debt is not necessary.
In a handful of previous Florida District Court opinions, there was discussion that the bank should be required to perform an overt act of deceleration in order to allow acceleration of a new default after dismissal. The Bartram panel held that, “the dismissal itself — for any reason — ‘decelerates’ the mortgage and restores the parties to their positions prior to the acceleration.” Therefore, it is not necessary to provide a notice of deceleration.

(4) Where there is a new default (post-dismissal), the default date must be within five years of the new foreclosure.
The opinion states that, “the mortgagee, also referred to as the lender, was not precluded by the statute of limitations from filing a subsequent foreclosure action based on payment defaults occurring subsequent to the dismissal of the first foreclosure action, as long as the alleged subsequent default occurred within five years of the subsequent foreclosure action [emphasis added].”

(5) What questions still remain about the statute of limitations as to mortgage foreclosures in Florida following this opinion?
The opinion only answers the question raised and leaves many questions unanswered. Foreclosures that are voluntarily dismissed by the mortgagee may not be covered by this holding. However, the Florida Supreme Court recently accepted jurisdiction of a Second District case wherein the prior foreclosure was voluntarily dismissed, Bollettieri Resort Villas Condominium Association, Inc. v. Bank of New York Mellon. This case will hopefully provide some guidance on this remaining issue. Undoubtedly, there will be several new arguments and continued litigation regarding the proper application of the Florida Supreme Court’s decision in Bartram.

(6) How should mortgage servicers proceed in cases where there is a potential statute of limitations issue?
Servicers should solicit opinion from their legal counsel as to the applicability of the Bartram ruling to the facts at issue. Counsel will review: whether the prior foreclosure was involuntarily or voluntarily dismissed, with or without prejudice, the previous default date that was used, and the filing date of the prior action. Additionally, the mortgage will be reviewed to determine whether there is a right to reinstate.


Default dates should generally be advanced so that the default date is within five years of the new foreclosure action. As always, each case will need to be carefully and specifically reviewed before re-filing.

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Oregon: Borrower Cannot Bring a Post-Sale Challenge that the Trustee’s Notice of Sale Did Not Correctly Identify the Beneficiary

Posted By USFN, Tuesday, November 29, 2016
Updated: Friday, November 18, 2016

November 29, 2016

by John Thomas
RCO Legal, P.S. – USFN Member (Oregon, Washington)

The Oregon Court of Appeals recently held that a borrower cannot challenge a completed nonjudicial foreclosure based on an allegation that the trustee’s foreclosure notice did not correctly identify the beneficiary. DiGregorio v. Bayview Loan Servicing, LLC, 281 Or. App. 484 (Oct. 12, 2016).

Background
The borrower defaulted on her mortgage (trust deed) in 2010. There were two assignments of the mortgage recorded. First, from MERS to the original lender First Horizon; and, second, from First Horizon to Bayview Loan Servicing LLC (the holder and servicer of the promissory note). Bayview appointed a successor trustee, Quality Loan Service Corporation (QLS), who conducted a nonjudicial foreclosure at Bayview’s direction. The borrower received QLS’s notice of sale, which identified the beneficiary as it was described in the mortgage; i.e., MERS as nominee for First Horizon.

The property reverted to Bayview at the trustee’s sale in 2012. Following the sale, in 2013, Bayview filed an eviction action against the borrower. The borrower separately filed an action for declaratory relief against Bayview claiming that the foreclosure notice was invalid because it did not reflect the current beneficiary. Both actions were consolidated.

ORS 86.771 (1) requires that a trustee’s notice of sale list the beneficiary “in the trust deed.” The trial court did not reach the issue of whether the trustee’s notice of sale identified the correct beneficiary but, instead, granted summary judgment in Bayview’s favor on the basis that the borrower received the foreclosure notice and did not bring suit until after the sale. ORS 86.797 (1) specifies that a borrower’s interest is terminated by a trustee’s sale provided that the borrower had notice, among other requirements.

Appellate Review
The Oregon Court of Appeals affirmed the trial court’s decision, opining that a borrower cannot undermine a completed trustee’s sale based on a single asserted defect in the content of the trustee’s notice of sale under ORS 86.771, which the borrower received (and did not challenge) prior to the sale. The court of appeals harmonized its ruling with its prior holding in Wolf v. GMAC Mortgage, LLC, 276 Or. App. 541, 546, 370 P.3d 1254 (Feb. 18, 2016) (declining to resolve whether ORS 86.797 “requires strict compliance with every provision of the OTDA before a person’s property interests will be terminated by a trustee’s sale”).


As of this writing, the borrower could still petition the Oregon Supreme Court for review, so the recent outcome on appeal may change.

Conclusion
DiGregorio further defines the contours of emerging foreclosure law in Oregon following the Wolf decision, which had permitted a post-sale challenge based on the borrower’s assertion that the foreclosure trustee was not validly appointed and did not meet the statutory definition of a trustee. DiGregorio is positive for the industry and should promote greater certainty and finality of nonjudicial foreclosures.

Editor’s Note: The author’s firm represented the respondent Bayview Loan Servicing, LLC in the summarized case.

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TN: Appellate Review Relating to Purchase at Foreclosure Sale while Short Sale Discussions are Ongoing

Posted By USFN, Tuesday, November 29, 2016
Updated: Monday, November 21, 2016

November 29, 2016

by Kate Lachowsky
Wilson & Associates, P.L.L.C. – USFN Member (Arkansas, Mississippi, Tennessee)

A recent opinion of the Tennessee Court of Appeals holds that once a mortgagor defaults, absent an agreement between the mortgagor and mortgagee to delay foreclosure to permit a short sale, the mortgagee has the right to proceed with foreclosure. Further, knowledge of ongoing short sale discussions between the mortgagor and mortgagee does not prevent a third-party purchaser from bidding and purchasing real property at a foreclosure sale.

Background
In 2013 Jorge and Madelyn Alfonso (plaintiffs) owned real property in Sevier County, Tennessee. They experienced difficulty in making their mortgage payments owed to CitiMortgage, Inc. (Citi), resulting in default. In hopes of avoiding foreclosure on their property, the plaintiffs worked with Citi to pursue a short sale. According to their complaint, the plaintiffs had buyers for the short sale ready to close on the sale of their property and Citi “slow-dragged talks on a prospective short sale.” Alfonso v. Bailey, 2016 Tenn. App. LEXIS 569 (Tenn. Ct. App. Aug. 9, 2016). The plaintiffs alleged that Citi made excuses as to why the short sale could not be completed, including the need for an “internal document” that was allegedly never generated or acknowledged by Citi.

During these short sale discussions, the foreclosure action progressed and one of the defendants was informed by the plaintiffs’ agent that a short sale was pending and that it was expected that the foreclosure sale would be postponed. On October 1, 2013, the plaintiffs’ property was sold to three investors (defendants) who attended the foreclosure sale and were the highest bidders.

In February 2014 the plaintiffs sued Citi and the investor-defendants in the Chancery Court for Sevier County (trial court) seeking declaratory relief and damages arising from the following ten claims: (1) violation of the Tennessee Consumer Protection Act; (2) fraudulent misrepresentation; (3) fraud; (4) unjust enrichment; (5) civil conspiracy; (6) inducement of breach of contract; (7) breach of contract; (8) tortious interference with contract rights; (9) intentional interference with contract rights; and (10) fraudulent concealment.

Citi filed a motion to dismiss in April 2014, which the trial court granted. In its June 2014 order, the trial court found that the plaintiffs failed to state any of their ten claims and dismissed all of them with prejudice. Further, the trial court found that the plaintiffs did not identify any wrongful activity on the part of Citi and that even though the plaintiffs were engaged in short sale discussions with Citi, the bank had the right to pursue foreclosure under the terms of the security instrument executed by the plaintiffs. Ultimately, the trial court held that “Citi had no legal duty to complete a short sale, or to even discuss the same.”

The plaintiffs filed a motion to alter or amend judgment as to the trial court’s June 2014 order, which was denied by an order entered on September 18, 2014. The plaintiffs did not appeal this final order and Citi was not a party on appeal; rather, the plaintiffs pursued the case against the third-party purchasers. The defendants filed a motion to dismiss and the trial court granted their motion, holding that the plaintiffs’ complaint “failed to state a claim against the Defendants upon which relief could be granted.” The plaintiffs timely appealed this order to the Court of Appeals of Tennessee at Knoxville and raised the following issue on appeal: whether the trial court erred in granting the defendants’ motion to dismiss.

Appellate Review
The Court of Appeals reviewed the trial court’s legal conclusions regarding the adequacy of the complaint de novo without a presumption of correctness (citing Lind v. Beaman Dodge, Inc., 356 S.W.3d 889, 895 (Tenn. 2011); Highwoods Props., Inc. v. City of Memphis, 297 S.W.3d 695, 700 (Tenn. 2009)).

On appeal, the plaintiffs asserted that their complaint alleged facts sufficient to withstand a motion to dismiss for failure to state a claim upon which relief may be granted. In the Court of Appeals’ opinion, the court explained that in the plaintiffs’ brief on appeal, “Plaintiffs summarize their argument as follows: ‘Plaintiffs, facing foreclosure, had entered into a contract for a short sale … [Defendants] … were made aware that Plaintiffs believed the foreclosure was postponed, and proceeded to purchase the property at foreclosure, inducing the contract for short sale to be breached resulting in a higher deficiency, damages, incurred by Plaintiffs.’” As the appellate court noted, “Merely reciting claims or the elements of claims does not suffice in order to withstand a motion to dismiss. A party must allege facts in support of the claims that if taken as true would sustain those claims. Conclusory recitations of the elements of claims are inadequate.” In response, the defendants correctly contended that they had no duty to refrain from purchasing the property at the foreclosure auction.

The appellate court pointed to a June 2014 order in which the trial court explicitly held: “‘Absent such an agreement or contractual obligation, Citi had no legal duty to complete a short sale, or to even discuss the same.’ That order was made final pursuant to Rule 54.02 of the Tennessee Rules of Civil Procedure and has not been appealed. It therefore represents the law of the case ….” Because the plaintiffs did not have a written contract with Citi concerning a short sale, Citi had the right to proceed with foreclosure under the terms of the security instrument and the defendants were free to bid and purchase the subject property. Accordingly, the Court of Appeals affirmed the judgment of the trial court.

Conclusion
From a practical standpoint, requiring mortgagees to provide time for short sales may be overly burdensome, costly, and can result in lengthy delays to foreclose. Often times, mortgagees are amenable in working with mortgagors when it comes to short sales; however, mortgagees frequently require proof of funds and a copy of a signed contract before agreeing to the postponement of a foreclosure sale.

The Alfonso case is not unusual because most standard security instruments are silent as to short sales, which renders the plaintiffs’ claims of breach of contract, fraud, and intentional interference with contract rights to be far-reaching. Similarly, knowledge of short sale discussions or other types of loss mitigation negotiations between the mortgagor and mortgagee should not bar interested parties from bidding and purchasing real property. The Court of Appeals pointed out that the plaintiffs cited no law suggesting otherwise.

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Illinois: “Keep Chicago Renting Ordinance” Ruled Invalid by Cook County Circuit Judge

Posted By USFN, Tuesday, November 29, 2016
Updated: Tuesday, November 22, 2016

November 29, 2016

by Douglas A. Oliver
Anselmo Lindberg Oliver, LLC – USFN Member (Illinois)

A Cook County Circuit Court recently ruled the “Keep Chicago Renting Ordinance” (frequently referred to as KCRO) to be invalid. The court found the ordinance to violate Illinois’ state-wide legislative ban on local rent control laws.

In 2013 the Chicago City Council enacted the KCRO to enhance the rights of tenants living in foreclosed rental properties. The ordinance requires those acquiring title to residential rental property through deed-in-lieu of foreclosure, consent foreclosure, or foreclosure sale to: pay a one-time relocation assistance fee of $10,600 to a qualified tenant unless the owner offers such tenant the option to renew or extend the tenant’s current rental agreement. [Chicago Municipal Code § 5-15-050(a)(1).]

Critically, the ordinance further requires that if the owner chooses to renew or extend an existing lease rather than pay the $10,600 relocation fee, the annual rental payment under the resulting lease may not exceed 102 percent of the existing rental payment, nor exceed 102 percent of the previous year’s rent in any subsequent annual renewal. Thus, the ordinance limits rental payment increases to 2 percent per year, regardless of market rents. This rental increase limitation continues in perpetuity or until the property is sold to a third party, post-foreclosure. [Chicago Municipal Code § 5-15-050(a)(1).]

When an owner fails to meet its obligations under the ordinance to timely offer either a relocation fee payment of $10,600 or a renewal or extension of the lease for no more than 102 percent of the previous rent, the owner is subject to a fine and is also liable to the tenant for $21,200 (double the $10,600 fee) plus attorney fees and court costs.

On November 8, 2016, Cook County Circuit Judge Mitchell held in a written ruling that the KCRO violates a state-wide legislative ban on rent control laws and is therefore invalid. In its opinion, the court noted that the KCRO limits the amount of rent that can be charged to a tenant covered by its terms, regardless of market rental rates. This, he observed, ran afoul of the Illinois Rent Control Preemption Act of 1997.

In 1997 the Illinois Legislature enacted the Illinois Rent Control Preemption Act as a state-wide ban on rent control laws. The statute withdrew from home-rule local governments (such as the City of Chicago) any authority to regulate or control rents. Its language specifically prohibits any “ordinance or resolution that would have the effect of controlling the amount of rent charged for leasing private residential or commercial property.” [50 ILCS 825/5.]


The court opined that the Illinois Rent Control Preemption Act prohibited any rent control, and the limitation of rental increases to 102 percent under the KCRO was clearly a control on rental rates. Further, the circuit court held that the rent control provision found within the KCRO was not severable from the rest of the ordinance since the ordinance, absent the rental limitation, could not serve its intended purpose of forcing a choice between offering cheap rent or paying the $10,600 relocation fee.

Currently, Judge Mitchell’s ruling holding the KCRO to be invalid is part of a circuit court order; it has no precedential authority. At this time, it would be inadvisable to ignore the KCRO or adopt a lax approach to compliance as the ruling will most likely be appealed. However, this ruling will provide leverage in resolving questionable claims that are brought in an effort to exploit the KCRO to extract unwarranted concessions.

Ultimately, there is reason to anticipate a successful outcome on appeal, as Judge Mitchell’s ruling is based upon a strongly-worded, clear statutory mandate.

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NACTT Annual Conference 2016

Posted By USFN, Monday, November 7, 2016
Updated: Thursday, October 20, 2016

November 7, 2016

by Joel W. Giddens
Wilson & Associates, P.L.L.C.
USFN Member (Arkansas, Mississippi, Tennessee)

The National Association of Chapter Thirteen Trustees (NACTT) held its annual conference in Philadelphia this past July. Mortgage issues continued to be a hot topic at the conference, with several educational panels addressing them. There was also much useful dialogue among mortgage industry representatives, mortgage servicing attorneys, and Chapter 13 trustees. Highlighted here are a few events of interest to the mortgage servicing industry.

NACTT Presentations and Educational Panels
Director of the Administrative Office of the U.S. Trustee program, Clifford J. White III, provided opening remarks for the conference. The Office of the U.S. Trustee (UST) falls under the Department of Justice and is responsible for overseeing the administration of bankruptcy cases and private trustees. In a departure from previous years, Director White’s remarks seemed somewhat softened toward the mortgage servicing industry. He was gratified by servicer responses to UST initiatives toward improved servicing in bankruptcy over the prior year, with self-reporting a welcome outgrowth of prior enforcement actions.

Instead of centering on mortgage servicers, his remarks addressed other issues that the UST is focusing on — starting with security for trustees’ meetings of creditors (perhaps due to recent terrorist violence). Security for the meetings is a challenging task because of the numerous sites (more than 400) in which the meetings are held. The UST’s budget has earmarked an additional $2.2 million to enhance security, including providing a list of “secure sites” in federal locations, authorizing the use of U.S. Marshalls for security in “emergency situations” (instead of the usual private security), and establishing a “call threat center” phone number to allow for identification of any threat to security.

In addition to the security concern, another current focus of the UST is underperforming consumer bankruptcy practitioners, in particular (but not limited to) large consumer debtor law firms operating across judicial district lines. Director White said that the UST would be targeting attorneys for substandard performance, unauthorized practice of law, fee sharing in violation of state professional conduct rules, and any other unethical attorney practices. He asked the trustees to help the UST in policing such conduct by informing his office of any questionable attorney practices observed in their day-to-day practice. Finally, the UST will be increasing scrutiny on the practices of unsecured creditors, including the robo-signing of proofs of claim (POCs) by debt buyers and the practice of filing POCs for unsecured debt that is unenforceable under state law due to the statute of limitations (“stale” claims).

Educational sessions included: the annual Chapter 13 case update; the aftermath of the National Mortgage Servicing Settlement, plus the winding down of the Home Affordable Mortgage Program; the treatment of long-term mortgage claims and discharge issues; as well as an overview of the Consumer Financial Protection Bureau and how it interfaces with bankruptcy.

Chapter 13 Case Update — The panel highlighted reported and unreported decisions in Chapter 13 cases handed down since the prior year’s conference. Included were cases of interest to the mortgage servicing industry. Among them, the continuing debate over whether a debtor may surrender a property in her bankruptcy plan and, at the same time, vest the property in the mortgagee upon confirmation of the plan. While it appears that the majority of courts have decided that this is impermissible, some courts have allowed this plan treatment. The court in HSBC Bank, N.A. v. Zair, 2016 WL 1448647 (E.D.N.Y. Apr. 12, 2016), sided with the majority view and held that such treatment was not permitted, while the court in In re Brown, 14-12357, slip op. (Bankr. D. Mass. Mar. 4, 2016), held that a plan can satisfy the requirements for confirmation in surrendering the property coupled with vesting the property in the mortgagee. This continued debate warrants monitoring and proactive responses if mortgage servicers wish to avoid unwanted consequences of creative Chapter 13 plans.

A reminder to servicers on the importance of observing bankruptcy deadlines came from In re Wells, 536 B.R. 264 (Bankr. E.D. Ark. Aug. 2015). In Wells, the mortgagee had completed a foreclosure sale on the property prior to the filing of the debtor’s Chapter 13 petition. Notwithstanding the completion of the sale, the debtor scheduled payments to the mortgagee under the plan, which was confirmed without the mortgagee’s objection. The court held that the debtor’s possession of the property at the time he filed his petition, coupled with the confirmed plan that paid rent, gave rise to a tenancy at sufferance that was property of the estate and, as a result, the mortgagee was bound to accept payments for the duration of the plan.

Another notable case was HSBC Bank USA, NA v. Blendheim (In re Blendheim), 803 F.3d 477 (9th Cir. Oct. 1, 2015), in which the Ninth Circuit Court of Appeals held that a Chapter 13 petition filed after discharge but before the closing of the prior Chapter 7 case was not per se prohibited by the Bankruptcy Code. The Blendheim court also held that a mortgage servicer who actually files a claim, and has that claim disallowed, may have its lien avoided under 11 U.S.C. § 506(d). The servicer in Blendheim filed a timely proof of claim in the Chapter 13 case reflecting its first-lien position on the debtors’ residence. The debtors objected to the claim on the basis that the servicer had not produced a copy of the promissory note and that a prior copy of the note appeared to bear a forged signature. The servicer did not respond and an order disallowing the claim was entered. In a subsequent adversary proceeding, the bankruptcy court held that the lien was void and cancelled upon completion of the Chapter 13 plan.

The Ninth Circuit, on appeal, held that under a “plain reading” of § 506(d), the bankruptcy court properly voided the lien because the secured claim was disallowed. Under general principles of bankruptcy, a secured creditor may choose to not participate in a bankruptcy case and its lien will ride through the bankruptcy unaffected. Blendheim illustrates that mortgage servicers should carefully consider whether filing a POC in a Chapter 13 case may be the wrong strategy in the cases in which there may be issues with proving the claim. These were but a few of the noteworthy cases covered by the distinguished panel.

“Life after the National Mortgage Servicing Settlement” — Discussed by the panel was the state of mortgage servicing in bankruptcy since the sunset of the National Mortgage Servicing Settlement (NMSS) and during this period of the wind-down of the Home Affordable Mortgage Program (HAMP) and Home Affordable Refinance Program (HARP).

Regarding servicing standards post-NMSS, the panel pointed out that while the five servicers subject to the NMSS are no longer bound by the consent judgments, other servicers have entered consent judgments with the Department of Justice and the states’ attorneys general that are still in effect. The NMSS had a substantial spillover impact on non-covered servicers who voluntarily followed the NMSS standards and continue to do so.

The substantial investment in compliance by servicers and the improvement of the quality of servicing loans in default have led most servicers to leave most, if not all, levels of review in place. To a large degree, multiple levels of quality control review (regarding proofs of claim and motions for relief from stay) continue because of the benefits to servicers in making sure that they get their claims right. While time will tell how stringently the NMSS standards will carry on, it appears that those standards will continue for the foreseeable future.

As for HAMP and HARP, regulators will continue to urge servicers, investors, and housing finance agencies to maintain affordable and sustainable loss mitigating programs, including loan modification programs. On August 25, 2016 the Federal Housing Finance Agency directed Fannie Mae and Freddie Mac to extend HARP through September 30, 2017 (in light of a new refinance offering that will not be available to borrowers until October 2017). On the same day, the Federal Housing Authority announced new procedures to streamline the process that servicers use to evaluate borrowers for FHA-HAMP.

Meeting of Trustees, Servicers, and Attorneys
In a continuation of the “Gateways to Communication” Chapter 13 Roundtable (started in Little Rock, Arkansas in 2004), trustees, mortgage servicer representatives, and mortgage servicer attorneys met to share ideas to improve mortgage servicing in Chapter 13 cases. During this meeting the trustees were asked to convey their top issues related to current mortgage servicing practices in bankruptcy. While the trustees generally said that those practices have improved, their biggest concern relates to being able to effectively communicate with servicers about loan-level issues. In particular, incorrect servicer contact information on mortgage POCs hampers trustee staff in trying to address mortgage issues with servicers. An effort is being made by this group to maintain a list of servicer contact information through the National Data Center (NDC), an adjunct to the NACTT, so that trustees know who to contact. Servicers who want to be added to the list may contact the NDC (www.ndc.org) or this author (jgiddens@wilson-assoc.com).

In addition to communication matters, trustees said that their main concerns were: transfers of loan servicing without providing new servicer information; untimely or incomplete POCs, or the failure to file one; as well as the withdrawal, or improper amendment, of POCs after loan modification agreements. The trustees added that the next area of bankruptcy litigation may be over incorrect notices of payment change (NOPC). Specifically, the trustees are targeting those first post-petition NOPCs that include an escrow shortage as a component of the payment because these are viewed as a practice of “double-dipping.” Servicers should be mindful that trustees and the UST are scrutinizing NOPCs closely, and they need to make sure that the NOPCs are being completed accurately and with sufficient oversight.

Conclusion
Once again, the conference proved to be a valuable experience for bankruptcy practitioners and mortgage servicers — a place to come together to discuss the issues impacting our world.

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Amendment to FRBP Rule 3002.1: Notice Relating to Claims Secured by Security Interest in the Debtor’s Principal Residence

Posted By USFN, Monday, November 7, 2016
Updated: Wednesday, October 26, 2016

November 7, 2016

by David McAllister
Aldridge Pite, LLP
USFN Member (California, Georgia)

On December 1, 2016, amended Federal Rules of Bankruptcy Procedure (FRBP) Rule 3002.1 will become effective. Presently, FRBP Rule 3002.1 applies in Chapter 13 bankruptcy cases to claims that are secured by a debtor’s principal residence and which are provided for under the debtor’s plan in a manner where the pre-petition arrears are being cured and the post-petition payments are maintained on a loan that matures after plan completion. Creditors whose claims fall within the scope of FRBP Rule 3002.1 are required to continue to timely file and serve payment change notices (PCNs) and notices of post-petition mortgage fees, expenses and charges (PPFNs), and to also timely respond to Notices of Final Cure (NOFCs) unless the court specifically waives these requirements. As discussed more fully below, the amendment to FRBP Rule 3002.1 will both broaden the scope of the rule regarding secured claims in a Chapter 13 plan and also limit the applicability of the rule following entry of an order terminating or annulling the automatic stay.

First: The requirement that the debtor’s plan specifies a cure of arrears has been eliminated. Instead, FRBP Rule 3002.1 simply requires that the Chapter 13 plan provide for either the trustee or the debtor to make the contractual installment payments. As a result, creditors will be required to comply with FRBP Rule 3002.1 even if there are no pre-petition arrears being cured under the plan, and regardless of whether the post-petition payments on their claims are being made by the Chapter 13 trustee or the debtor.

Second: Amended FRBP Rule 3002.1 provides that “[u]nless the court orders otherwise, the notice requirements of this rule cease to apply when an order terminating or annulling the automatic stay becomes effective with respect to the residence that secures the claim.” Therefore, once a creditor obtains an entered order for relief from and/or annulment of the automatic stay that is effective, the creditor will no longer be required to file and serve any PCNs and/or PPFNs, and the Chapter 13 trustee and/or debtor should not be filing and serving any NOFCs that would require the creditor’s response.

However, the effective date of the entered order for relief from and/or annulment of the automatic stay may be stayed and creditors must comply with the supplemental notice requirements of FRBP Rule 3002.1: (1) unless and until the 14-day stay of FRBP Rule 4001(a)(3) is either waived or terminates; (2) if the order specifically provides that its effectiveness is stayed until a future date; and/or (3) if an interested party obtains a stay on the effectiveness of the order (e.g., a stay pending an appeal of the order). Finally, a bankruptcy court may still expressly require creditors to comply with the notice requirements of FRBP Rule 3002.1 when it terminates or annuls the automatic stay.

In conclusion, creditors should carefully review the particular provisions of a debtor’s Chapter 13 plan and any orders terminating or annulling the automatic stay regarding their claims secured by a debtor’s principal residence in a Chapter 13 bankruptcy proceeding — and the bankruptcy court docket — to determine whether the supplemental notice requirements of FRBP Rule 3002.1 are no longer applicable prior to making any adjustments to their account records regarding the same.

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CFPB’S New Final Rules: Periodic Statements during Bankruptcy

Posted By USFN, Monday, November 7, 2016
Updated: Wednesday, October 26, 2016

November 7, 2016

by Alan S. Wolf
The Wolf Firm
USFN Member (California)

On December 15, 2014, the Consumer Financial Protection Bureau (CFPB or Bureau) published its proposed rules amending and clarifying the 2013 Mortgage Servicing Rules and allowed the industry until March 16, 2015 to comment (2014 Proposed Rules). The CFPB received an onslaught of comments from the mortgage industry that were highly critical of the proposed rules. Then, on April 26, 2016, the CFPB released the results of its consumer testing of periodic statement forms which, it claimed, could safely be used during a pending bankruptcy. The Bureau reopened the comment period until May 26, 2016 to seek comment specifically on the report summarizing that consumer testing; the industry provided numerous comments as to why the sample forms were problematic.

On August 4, 2016, well after the expected release date of early summer, the final CFPB mortgage servicing rules were released (2016 Mortgage Servicing Rules or 2016 Rules). While the mortgage servicing industry dodged some bullets contained in the 2014 Proposed Rules and the April 2016 proposals, the 901 pages of 2016 Mortgage Servicing Rules are still dire.

This article covers the most onerous of the new rules: when and what types of periodic statements must be sent during and after bankruptcy.

Most of the 2016 Rules will be effective 12 months after publication of the rules in the Federal Register. However, because they are so complex and require systemic changes within the servicing industry, the rules pertaining to successors in interest and periodic statements in bankruptcy will not be effective until 18 months after that same publication date. At this writing, the Federal Register publication is to occur on October 19. Accordingly, the rules pertaining to successors in interest and periodic statements would be effective April 19, 2018. There is much that the mortgage servicing industry must do to prepare.

Background
The history of the Bureau’s treatment of periodic statements in bankruptcy is an important factor in understanding the requirements of the 2016 Mortgage Servicing Rules. It all starts with the Dodd-Frank Act, which in 2010 established Truth in Lending Act (TILA) section 128(f) requiring periodic statements for mortgage loans. Until Dodd-Frank there was no real federal requirement to provide periodic mortgage statements. Then, on January 17, 2013, the CFPB issued the 2013 TILA Servicing Final Rule implementing the periodic statement requirements and exemptions in § 1026.41.

In the preamble to the 2013 TILA Servicing Final Rule, the CFPB acknowledged that the Bankruptcy Code might prevent attempts to collect a debt from a consumer in bankruptcy but, nevertheless, stated that it did not believe the Bankruptcy Code would prevent a servicer from sending a consumer a statement on the status of the mortgage loan, and that servicers could make changes to the periodic statement to ensure compliance. Since most servicers do not send periodic statements during bankruptcy precisely because it is nearly impossible to send statements that comply with the Bankruptcy Code, this proposed rule caused great concern in the mortgage industry and a scramble to develop periodic statement formatting that would be acceptable to the constraints of individual bankruptcy judges.

After an outcry from the mortgage industry (including USFN and other industry leaders, as well as support of the mortgage industry’s position from the National Association of Chapter Thirteen Trustees) the CFPB changed course. In its interim final rule published October 23, 2013, the Bureau added new § 1026.41(e)(5) exempting a servicer from the periodic statement requirements in § 1026.41 for a mortgage loan while the consumer is a debtor in bankruptcy. Hence, under the currently effective CFPB Rules, a periodic statement does not need to be sent to a borrower when the borrower is in bankruptcy (Comment 41(e)(5)-1 to § 1026.41(e)(5)). Moreover, if there are multiple obligors on the mortgage loan, the exemption applies if any of the obligors is in bankruptcy (Comment 41(e)(5)-3).

Finally, there is no obligation to resume providing periodic statements with respect to any portion of the mortgage debt that is discharged in bankruptcy (Comment 41(e)(5)-2.ii). That was the good news and the industry rejoiced, passing over the CFPB’s comments that it was still studying the bankruptcy issues and would likely issue new rules regarding periodic statements during bankruptcy. True to its word, the CFPB issued proposed new rules on December 15, 2014 directly addressing — and limiting the exemption applicable to — periodic statements and bankruptcy. Those proposed rules were, to say the least, not good news. [See the accompanying text box below for the CFPB’s explanation of that portion of the 2014 Proposed Rules.]

 

Exactly what did the 2014 Proposed Rules pertaining to periodic statements in bankruptcy mean? No one quite knew. What was clear is that they were convoluted; the mortgage industry had no ability to make the nuanced decisions demanded by the rules nor the technology to implement the various requirements of the rules; and, even if the rules could somehow be followed, there was no protection from automatic stay or discharge injunction violations. As expected, the mortgage industry was very vocal in pointing out the numerous problems with the 2014 Proposed Rules and shared its comments with the Bureau.

 

 Excerpted from CFPB’s 2014 Proposed Rules
“Specifically, proposed § 1026.41(e)(5)(i) limits the exemption to when two conditions are satisfied. First, the consumer must be a debtor in a bankruptcy case, must have discharged personal liability for the mortgage loan through bankruptcy, or must be a primary obligor on a mortgage loan for which another primary obligor is a debtor in a Chapter 12 or Chapter 13 bankruptcy case. Second, one of the following circumstances must apply: (1) The consumer requests in writing that the servicer cease providing periodic statements or coupon books; (2) the consumer’s confirmed plan of reorganization provides that the consumer will surrender the property securing the mortgage loan, provides for the avoidance of the lien securing the mortgage loan, or otherwise does not provide for, as applicable, the payment of pre-bankruptcy arrearages or the maintenance of payments due under the mortgage loan; (3) a court enters an order in the consumer’s bankruptcy case providing for the avoidance of the lien securing the mortgage loan, lifting the automatic stay pursuant to 11 U.S.C. 362 with respect to the property securing the mortgage loan, or requiring the servicer to cease providing periodic statements or coupon books; or (4) the consumer files with the bankruptcy court a Statement of Intention pursuant to 11 U.S.C. 521(a) identifying an intent to surrender the property securing the mortgage loan. The proposal also provides that the exemption terminates and a servicer must resume providing periodic statements or coupon books in two general circumstances. First, notwithstanding meeting the above conditions for an exemption, the proposal requires servicers to provide periodic statements or coupon books if the consumer requests them in writing (unless a court has entered an order requiring otherwise). Second, with respect to any portion of the mortgage debt that is not discharged through bankruptcy, a servicer must resume providing periodic statements or coupon books within a reasonably prompt time after the next payment due date that follows the earliest of the following outcomes in either the consumer’s or the joint obligor’s bankruptcy case, as applicable: the case is dismissed, the case is closed, the consumer reaffirms the mortgage loan under 11 U.S.C. 524, or the consumer receives a discharge under 11 U.S.C. 727, 1141, 1228, or 1328.”

 

CFPB: August 2016
Based upon its review of the comments received, and its study of the intersection of the periodic statement requirements and bankruptcy law, the Bureau once more changed the rules. [See the accompanying text box below for the relevant excerpt of the CFPB’s August 4, 2016 Final Rules release (New Rule).]

 

The New Rule removes some, but not all, of the troubling provisions of the 2014 Proposed Rules. For example, the 2014 version required a borrower-level, as well as a bankruptcy chapter-level, analysis. If one borrower was involved in a bankruptcy proceeding and a second was not, each was independently analyzed as to whether or not a periodic statement should be sent. Further, depending on the chapter, it could be required that each of the borrowers receives a periodic statement, with each statement needing a unique format.

How would a servicer do that? Fortunately, the New Rule employs loan-level and all-bankruptcy-chapters analyses — making it much easier to implement. The 2014 Proposed Rules also mandated certain provisions in a confirmed bankruptcy plan to prove that the borrower did not intend to keep the property before exempting the requirement of sending a periodic statement. The New Rule only insists that a proposed plan contain those provisions.

However, the New Rule also makes things more difficult by limiting the exemption in ways not restrained by the 2014 Proposed Rules. For example, despite the filing of a Statement of Intention to surrender the property (which alone was sufficient to invoke the exemption under the 2014 Proposed Rules) if the borrower makes any payments, the exemption no longer applies and periodic statements must be sent under the New Rule.

 Excerpted from CFPB’s 2016 Final Rules (New Rule)
“Except as provided in paragraph (e)(5)(ii) of this section [the consumer’s reaffirmation of the loan or a consumer’s written request to get periodic statements during bankruptcy], a servicer is exempt from the requirements of this section [sending periodic statements to borrowers involved in a bankruptcy] with regard to a mortgage loan if:
(A) Any consumer on the mortgage loan is a debtor in bankruptcy under title 11 of the United States Code or has discharged personal liability for the mortgage loan pursuant to 11 U.S.C. 727, 1141, 1228, or 1328; and
(B) With regard to any consumer on the mortgage loan: (1) The consumer requests in writing that the servicer cease providing a periodic statement or coupon book; (2) The consumer’s bankruptcy plan provides that the consumer will surrender the dwelling securing the mortgage loan, provides for the avoidance of the lien securing the mortgage loan, or otherwise does not provide for, as applicable, the payment of pre-bankruptcy arrearage or the maintenance of payments due under the mortgage loan; (3) A court enters an order in the bankruptcy case providing for the avoidance of the lien securing the mortgage loan, lifting the automatic stay pursuant to 11 U.S.C. 362 with regard to the dwelling securing the mortgage loan, or requiring the servicer to cease providing a periodic statement or coupon book; or (4) The consumer files with the court overseeing the bankruptcy case a statement of intention pursuant to 11 U.S.C. 521(a) identifying an intent to surrender the dwelling securing the mortgage loan and a consumer has not made any partial or periodic payment on the mortgage loan after the commencement of the consumer’s bankruptcy case.
* * *
(ii) Reaffirmation or consumer request to receive statement or coupon book. A servicer ceases to qualify for an exemption pursuant to paragraph (e)(5)(i) of this section with respect to a mortgage loan if the consumer reaffirms personal liability for the loan or any consumer on the loan requests in writing that the servicer provide a periodic statement or coupon book, unless a court enters an order in the bankruptcy case requiring the servicer to cease providing a periodic statement or coupon book.”


The best way to make sense of this is by understanding that the CFPB believes that there is no stay violation, and no violation of the discharge injunction, if statements are sent during a bankruptcy, or after a discharge, where either the bankruptcy court or the debtor evidences an intent that the property and loan be kept. The CFPB reasons that since the debtor wants to keep the property and loan, sending properly fashioned informational statements simply aids the debtor and does not violate the stay or discharge injunction. In other words, the Bureau believes that the benefit of sending a properly drafted statement to the debtor outweighs the risk of violating the stay. Of course, it’s not the CFPB at risk here — it’s the loan servicer.

Conversely, if the bankruptcy court or the debtor evidences that the property or loan will not be kept, the CFPB reasons that there is no point in providing information to the debtor and risking a stay or discharge violation. Accordingly, in these limited cases a servicer is exempt from sending a periodic statement during a bankruptcy.

How to determine that the property or loan will not be kept? A bankruptcy court typically evidences its intent that the property or loan will not be kept by the debtor through an order lifting the stay or an order avoiding the lien.

Turning to the debtor, a borrower in bankruptcy normally evidences that he does not intend to keep the property or the loan by any of the following: (1) requesting in writing that the servicer cease providing periodic statements or coupon books; (2) filing a bankruptcy plan (or filing a Chapter 7 Statement of Intention) that provides for the surrender of the property; (3) providing for the avoidance of the lien in the plan; or (4) not providing for the loan in the plan.

Furthermore, any indicia that the borrower does not intend to keep the property or the loan can be overturned by later actions. For example, if the borrower files a notice of intent to surrender the property, but then makes payments, the payments indicate that the debtor intends to keep the property. Consequently, the exemption no longer applies and statements must be sent. Similarly, if the debtor reaffirms a debt subject to discharge, this evidences the debtor’s intent to keep the property; the exemption is not applicable and statements must be sent. And, of course, if the debtor simply requests that statements be sent, this evidences that the debtor intends to keep the property and statements must be sent.

Final Words
It is important to remember that any debtor action can be preempted by the bankruptcy court. In other words, a court order trumps the intent of the debtor. For example, even if a debtor states clearly that he wants periodic statements, a court order that provides that no periodic statements be sent is superior and must be followed.

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Chapter 13 Trustee Pay-All/Conduit Jurisdictions: Some Issues, Challenges, and Pointers

Posted By USFN, Monday, November 7, 2016
Updated: Wednesday, October 26, 2016

November 7, 2016

by Craig Rule
and Heather McGivern
Orlans Associates, P.C.
USFN Member (Michigan)

Chapter 13 trustees who permit or require post-petition mortgage payments to be disbursed through their offices constitute a small — but growing — majority and present a number of unique challenges to mortgage servicers. Based on the authors’ analysis of the most recent disbursement numbers set forth on the webpage of the Executive Office for the U.S. Trustee, it is estimated that ninety-three Chapter 13 trustees are conduit trustees, while eighty-four are not. See https://www.justice.gov/ust/file/ch13ar15-aarpt.xlsx/download.

These “conduit” jurisdictions and trustees impact the way a mortgage servicer should handle many of the fundamental actions that secured creditors take to protect their interests during a Chapter 13 case. This article discusses how conduit claims affect decisions to file a proof of claim or a motion for relief from the automatic stay, change how to approach loan modifications, and amplify the adverse consequences of failing to file a transfer of claim.

Readers should note that not all secured claims in conduit jurisdictions must be wholly paid through the Chapter 13 trustee under all circumstances. For example, Local Rule 3070-1 (Bankr. E.D. Mich. 2016) creates a presumption of trustee payment that must be rebutted if a claim is to be paid directly. In practice, this means that a debtor must be contractually current on the petition date to continue to make post-petition payments directly to a mortgage creditor.

No Proof of Claim = No Payment?
Although the Bankruptcy Code and Federal Rules of Bankruptcy Procedure (FRBP) do not presently require secured creditors to file a proof of claim (POC), there are several possible adverse results of failing to do so on conduit claims. See 11 U.S.C. § 501(a) and FRBP Rule 3002(a). Even if there is little or no pre-petition arrearage, the lack of a filed proof of claim can prevent a mortgage servicer from receiving any payments during the course of a Chapter 13 plan. Though the absence of a filed POC on an unmodified mortgage claim may not result in a full (or even partial) discharge of the obligation, the loss of a potential stream of payments for up to five years makes filing a proof of claim highly advisable. See Matteson v. Bank of America, 535 B.R. 156 (6th Cir. B.A.P. 2015).

While a trustee or debtor is permitted to file a POC on behalf of a creditor, it is by no means certain that either party will do so — or, if filed, that the claim will be accurate in terms of the arrears and ongoing post-petition payments. See 11 U.S.C. § 501(c) and FRBP Rule 3004. Furthermore, if the incorrect servicer is identified or the wrong payment address is noted in the debtor- or trustee-filed POC, it could create an administrative quagmire that causes the trustee to object to, or stop payment on, the proof of claim. If an objection is granted, there is a risk that some or all of the expected payments during the pendency of the bankruptcy case could be subject to discharge at plan completion.

No Post-Petition Payments? MFR Considerations
For mortgage servicers, perhaps the most significant difference between conduit and non-conduit claims is the determination of whether a referral should be made to local bankruptcy counsel to bring a motion for relief from the automatic stay (MFR). This divergence begins when the bankruptcy case is filed. If the proposed Chapter 13 plan intends to have the trustee disburse the post-petition payments, the trustee will generally not begin to make those payments until the plan is confirmed unless directed otherwise by a local rule or court order. As a result, mortgage servicers and their attorneys should carefully examine the proposed plan treatment before filing what could be an impractical MFR. Even if a debtor initially intends to pay a mortgage claim directly, a MFR at the pre-confirmation stage can be a costly alternative to filing an objection to plan confirmation since, in many instances, the debtor may amend the plan to convert the claim to a trustee-paid one.

The discrepancies between conduit and non-conduit claims continue at the post-confirmation stage. Due to other claims that may have priority in distribution under the confirmed plan (such as debtor attorneys’ fees and equal monthly payment secured claims), it is often the case that a debtor is fully performing under a plan even though the post-petition mortgage payments are not current. To avoid filing unfeasible MFRs on conduit claims, servicers and their attorneys should always examine the trustee’s payment histories, which are available online and without cost to creditors. There are several different platforms that Chapter 13 trustees around the country use to provide access to their records. The most frequently-used platform is the 13 Network, which can be accessed at www.13network.com.

Loan Modification Pitfalls
While effective and timely communication among a servicer’s bankruptcy department, loss mitigation department, and local counsel is always of the utmost importance, the failure to do so has even more negative implications for all parties to a Chapter 13 case if post-petition payments are made through the trustee’s office. The troubles often begin at the trial loan modification stage because the disbursements from the trustee must be modified to match the monthly trial payments.

Prompt action by a servicer once the trial modification is offered is necessary to ensure that the Chapter 13 trustee will make the correct payments in the right time frame. In some jurisdictions this simply means that the servicer must notify the trustee (either through direct contact or a filed payment change notice) to adjust the post-petition payment amount for a fixed period. In other courts, which put the entire loan modification burden on the debtor, the debtor’s attorney should be promptly notified so that he or she can take the required action to cause the trustee to effectuate the correct trial payments. In still additional jurisdictions, however, servicers may be held to account if they do not ensure that a trial loan modification receives court approval. In this instance, it is crucial that local counsel be alerted of the trial modification in enough time to obtain bankruptcy court approval either through a motion or through a stipulated order.

Once a debtor is approved for a permanent loan modification, there are a number of pitfalls to avoid. The consequences to all parties in a Chapter 13 case for failing to have permanent loan modifications quickly and accurately effectuated are even more heightened for conduit loans. In conduit jurisdictions, if a permanent loan modification is not approved by the court or brought to the trustee’s attention, not only will the trustee continue to pay any pre-petition arrearage but he or she will also pay the post-petition monthly payments at the pre-modification amount. In many instances, this could result in a significant overpayment to the mortgage creditor, to the detriment of other creditors; the mortgage servicer could face sanctions or a U.S. Trustee investigation. Regardless of whether the post-petition payments are made through the trustee or directly by the debtor, servicers should contact their local bankruptcy counsel to determine whether the bankruptcy court must approve the permanent loan modification before it is tendered to a debtor for signature.

File Transfers of Claim
The consequences of the failure to file a timely transfer of claim are even more pronounced if the post-petition mortgage payments are being disbursed through the Chapter 13 trustee. FRBP Rule 3001(e)(2) requires a transferee to file a transfer of claim when the transfer takes place after the proof of claim is filed. On a non-conduit claim, a delay in filing a transfer of claim will only affect disbursements on the pre-petition arrearage; however, the impact on conduit claims is amplified since the post-petition payments from the trustee will also not make it to the new servicer. In some instances, after the return of checks from the previous servicer, the trustee may seek to disallow the claim in its entirety if a transfer of claim is not filed. Not surprisingly, based on the authors’ experience, the failure of creditors to file transfers of claim and payment address changes constitute one of the biggest frustrations for Chapter 13 trustees and their staff. In order to prevent a potentially significant delay and/or financial loss, mortgage servicers should promptly file a transfer of claim after acquiring servicing rights.

Conclusion
Although not exhaustive, the issues peculiar to conduit jurisdictions discussed in this article represent some of the most common and costly obstacles facing mortgage servicers. As always, mortgage servicers should reach out to their local counsel to discuss other potential pitfalls that may be unique to each jurisdiction.

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RESPA Servicing Rules and the CFPB Partial Removal of BK Exemptions for Early Intervention: It Could Have Been Worse!

Posted By USFN, Monday, November 7, 2016
Updated: Wednesday, October 26, 2016

November 7, 2016

by Wendy Walter
McCarthy & Holthus, LLP
USFN Member (Washington)

In a clarifying amendment to the mortgage servicing rules, contained within the Real Estate Settlement Procedures Act (RESPA), the Consumer Financial Protection Bureau (CFPB or Bureau) recently peeled back certain exemptions that shielded servicers from having to comply with early intervention requirements if the borrower was in an active bankruptcy. After a long deliberative process (18 months), the Bureau announced on August 4, 2016 that the early intervention requirements would partially apply to borrowers in bankruptcy.

Taking a step back, it is important to note that the original mortgage servicing rules published in February 2013 to be effective January 10, 2014 didn’t exempt bankruptcy loans from their provisions. In October 2013, after many comments and concerns were made to the newly announced rules, the Bureau issued an interim final rule providing bankruptcy exemptions to the early intervention requirements and announcing that the rules would be revised to address the concerns in contacting a borrower (who is in bankruptcy) with any communication that could be determined to potentially be in violation of the automatic stay.

This article will address the recent bankruptcy-related revisions to the live contact and written notice requirements contained within RESPA regulation 12 CFR 1024.39.

Live Contact — Bankruptcy Exemption Remains
RESPA requires that within the 36th day of delinquency the servicer will make good faith efforts to contact the borrower in order to discuss the availability of loss mitigation options. The definition of delinquency has been added to the rules in 12 CFR 1024.31 and states: “Delinquency means a period of time during which a borrower and a borrower’s mortgage loan obligation are delinquent. A borrower and a borrower’s mortgage loan obligation are delinquent beginning on the date a periodic payment sufficient to cover principal, interest, and if applicable, escrow, becomes due and unpaid, until such time as no periodic payment is due and unpaid.”

Examples of live contact are speaking on the telephone or conducting an in-person meeting and may include contact established on the borrower’s initiative. In the updated rules, the Bureau has colored in the picture of what it thinks might constitute a good faith effort to make live contact and mentioned items in its official interpretation, such as making telephone calls on multiple occasions and sending written and electronic messages.

In the amendments to the live contact requirements, the Bureau cleaned up its original proposal to create a different rule depending on the applicable bankruptcy chapter and whether the consumer in bankruptcy was a borrower or co-borrower. After soliciting feedback and recognizing the limitations in loan servicing systems, it came back with a much cleaner rule and establishes a permanent exemption from the live contact requirements for borrowers in bankruptcy. In the new section 12 CFR 1024.39(c), the Bureau will provide an exemption to the live contact requirements if the borrower is in any chapter of bankruptcy. The duty to resume compliance will come into effect after the next payment due date that is the earliest of dismissal, closure, or reaffirmation. There is no duty to resume live contact requirements if the borrower obtains a discharge.

The Bureau has taken this approach because the live contact might be more intrusive and add less value when a borrower is in bankruptcy. Bankruptcy is used as a method to protect borrowers from overwhelming creditor calls and communications; requiring live contact would disturb the purpose of many consumer bankruptcies.

Written Notice — Partial Exemption for Borrowers in Bankruptcy
Under 12 CFR 1024.36(c), the servicer must send a borrower a written notice no later than the 45th day after the borrower’s delinquency. The written notice must include: a statement encouraging the borrower to contact the servicer, the telephone number and mailing address for the loss mitigation/continuity of contact team, a brief statement of available loss mitigation options, application instructions or a statement advising on how the borrower can find out more about loss mitigation, and a list of HUD counselors or the website with the list of counselors. The rule also contains some model clauses and states that the requirement shouldn’t force the servicer to violate another law when communicating with the borrower in this manner.

The original regulation and interim final rule from October 2013 contained an exemption for borrowers in bankruptcy. The recent amendment to the rule adjusts and now describes it as a “partial exemption.” The exemption for borrowers in bankruptcy doesn’t apply if there are no loss mitigation options available or if the borrower has requested that the servicer cease communication under the FDCPA section 805(c). If those exemptions do not apply, the servicer must send a written notice no later than the 45th day after the borrower files bankruptcy if the borrower was delinquent when the case was filed. If the borrow becomes delinquent after the filing, the normal 45-day rule applies and the notice must be sent within the 45th day of delinquency. For the notice sent while the borrower is in bankruptcy, it “may not contain a request for payment.” The 180-day rule doesn’t apply in that the notice doesn’t have to be sent more than once in a bankruptcy setting. The official interpretation also allows the servicer to comply with this section by sending the notice to the borrower’s attorney as a representative. This rule also applies if the borrower revives a bankruptcy case; however, if the servicer already sent a notice once during that case, it will be deemed to have complied for the life of that case.

Effective Date
The rule changes related to early intervention are effective 12 months after the date that the final rules are published in the Federal Register. As of the date of this article, the final rule is to be published in the register on October 19. The amendments would then be effective October 19, 2017.

Servicers should be relieved that the Bureau opted to simplify the rule, to not differentiate between bankruptcy chapters or borrowers, to not distinguish those cases where a borrower was intending to surrender or avoid the lien, and to only require notices where the borrower was proposing to repay through a Chapter 13 plan. While it might be a challenge determining whether loss mitigation is available, and tailoring the notice to outline options for the specific bankruptcy scenario might not be possible (rendering the exemption for borrowers in bankruptcy, if no loss mitigation, unusable in many cases), when comparing the final rule to the proposed rules of late 2014, one thing is clear: it could have been worse.

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Bankruptcy Anti-Modification Provision and Mortgages Secured by Principal Residences

Posted By USFN, Monday, November 7, 2016
Updated: Wednesday, October 26, 2016

November 7, 2016

by Graham Kidner
Hutchens Law Firm
USFN Member (North Carolina, South Carolina)

The Fourth Circuit Court of Appeals recently reasserted the integrity of the anti-modification provision of the Bankruptcy Code with respect to mortgages secured by a borrower’s principal residence. [Anderson v. Hancock, 2016 WL 1660178 (4th Cir. Apr. 27, 2016)].

In Anderson, the seller (Hancock) of a residential property took back a note and deed of trust from the purchaser (Anderson). Following default, the seller invoked a clause in the note increasing the interest rate from five percent to seven percent, and commenced foreclosure. The purchaser-borrower filed for Chapter 13 bankruptcy protection, followed by a plan proposing to pay arrears over 60 months and post-petition payments at a five percent interest rate.

Bankruptcy Court: Sustained Seller’s Plan Objections
The bankruptcy court found that the proposed five percent interest rate violated the Bankruptcy Code’s anti-modification provision applicable to principal residences. [11 U.S.C § 1322(b)(2)]. Further, the bankruptcy court rejected the purchaser-borrower’s contention that the increased rate was a consequence of default that bankruptcy could “cure,” consistent with § 1322(b)(3) and (b)(5). The bankruptcy court also determined that arrears on the loan should be calculated using a seven percent rate of interest for a specified period, and then it entered an order confirming the plan as modified. The purchaser-borrower appealed to the district court.

District Court: Affirmed Except in One Respect
The district court disagreed with the bankruptcy court’s interpretation of the note. Specifically, the district court: “[H]eld that acceleration and foreclosure was a ‘disjunctive alternative remedy’ to the default rate of interest, and that once the Hancocks accelerated the loan, the rate of interest reverted back to five percent. J.A. 71. It held that this period of acceleration (and thus only five percent interest) lasted from September 16, 2013 [the petition filing date] until December 2013 (the effective date of the plan), after which the seven percent rate of interest reactivated due to the bankruptcy plan’s deceleration of the loan. In the district court’s view, the rate of interest thus see-sawed depending on whether the loan was in accelerated or decelerated status.” Anderson, at *2.

Court of Appeals: Affirmed in Part; Reversed in Part; and Remanded
The Fourth Circuit “agree[d] with the courts below on the basic question, namely that the cure lies in decelerating the loan and allowing the debtors to avoid foreclosure by continuing to make payments under the contractually stipulated rate of interest.” The Court of Appeals held that the proposed change to the interest rate was an impermissible modification rather than a permissible cure because otherwise the rate reduction would modify the bargained-for rights, enforceable under state law, expressed in the security agreement, citing Nobelman v. American Savings Bank, 508 U.S. 324, 329, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993). “Courts have accordingly ‘interpreted the no-modification provision of § 1322(b)(2) to prohibit any fundamental alteration in a debtor’s obligations, e.g., lowering monthly payments, converting a variable interest rate to a fixed interest rate, or extending the repayment term of a note.’ In re Litton, 330 F.3d 636, 643 (4th Cir. 2003).” The court found that “[t]he meaning of ‘cure’ thus focuses on the ability of a debtor to decelerate and continue paying a loan, thereby avoiding foreclosure.” Anderson, at *3.

Rejecting the purchaser’s contention that this result was unfair and denied a “fresh start,” the Fourth Circuit observed that the fresh start was the opportunity to escape foreclosure and resume the opportunity to make payments. The ability to impose a default interest rate in this case was a “risk premium” contracted for between the parties and to provide a measure of protection to the lender when the debtor demonstrates behavior that reveals an increased likelihood of loss.

Rejecting the district court’s disjunctive alternative remedy theory, the Court of Appeals observed that “[n]othing in the contract indicates that the parties intended for [the] invocation [of the remedy of acceleration and foreclosure] to unravel the earlier, less-severe remedy.”

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PHH Corporation v. CFPB

Posted By USFN, Monday, November 7, 2016
Updated: Wednesday, October 26, 2016

November 7, 2016

by Joshua Schaer
RCO Legal, P.S.
USFN Member (Oregon, Washington)

On October 11, 2016, the D.C. Circuit Court of Appeals issued an opinion in PHH Corporation v. Consumer Financial Protection Bureau that is a significant victory for lenders.

Background — HUD had long interpreted Section 8(c) of the Real Estate Settlement Procedures Act (RESPA) to read that only an insurer who pays above market value for reinsurance can be presumed to have engaged in a disguised payment for the referral, which is disallowed under Section 8(a). But, in 2014, the Consumer Financial Protection Bureau (CFPB) suddenly declared that all captive reinsurance arrangements are barred under RESPA and ordered PHH to pay $109 million, plus stop reinsurance referrals to their subsidiary.

The Decision — On appeal, the D.C. Circuit found that:
• The CFPB’s single-director structure is unconstitutional because its director enjoys unchecked unilateral power unlike any other federal agency. Rather than preventing the CFPB’s continued operation, however, the court severed the provision of Dodd-Frank which allowed for a single director and held that the agency can continue to function in the executive branch, unless Congress enacts legislation changing its structure.
• On the merits of the CFPB’s action, Section 8 of RESPA allows captive reinsurance arrangements if the amount paid by the insurer is not above market value of the reinsurance.
• The CFPB acted improperly to retroactively apply its own interpretation of Section 8 to punish PHH.
• Any enforcement action concerning whether insurers paid more than market value for reinsurance must be subject to a three-year statute of limitations.

The 101-page majority opinion (along with concurring and partial dissenting opinions) can be found at: https://www.cadc.uscourts.gov/internet/opinions.nsf/AAC6BFFC4C42614C852580490053C38B/$file/15-1177-1640101.pdf.

Editor’s Note: As this USFN Report was going to press, the decision in PHH Corporation v. CFPB (D.C. Cir. Oct. 11, 2016) discussed above was released. Look for more on this case in future USFN publications.

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Overview of the CFPB’s Supervisory Highlights Mortgage Servicing Special Edition (June 2016)

Posted By USFN, Tuesday, October 11, 2016
Updated: Monday, October 3, 2016

October 11, 2016

by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

In June the Consumer Finance Protection Bureau (CFPB or Bureau) published its Supervisory Highlights Mortgage Servicing Special Edition summarizing its recent supervisory examination observations that focus on compliance with the Mortgage Servicing Rules (MSRs) and on unfair, deceptive or abusive acts or practices by loan servicers. As noted in the Highlights, the Bureau recently updated its Supervision and Examination Manual and enhanced the section related to consumer complaints, in particular, to review whether servicers have adequate processes in place to expedite the evaluation of complaints or notices of error where borrowers face foreclosure. Additionally, the CFPB is increasing its focus on compliance with the Equal Credit Opportunity Act (ECOA). For the latter half of 2016, the Bureau will be conducting a more targeted review of ECOA compliance.

The issues most extensively addressed in the Supervisory Highlights based on recent supervisory observations are in the following areas: loss mitigation acknowledgment; loss mitigation offers and related communications; loan modification denial notices; policies and procedures; and servicing transfers. The Highlights provide numerous anecdotal examples of specific violations, the alleged harm to borrowers as a result, and the remedies required by the Bureau, without identifying the at-fault servicers.

Loss Mitigation Acknowledgment Notices
Bureau examiners found numerous violations relating to the requirement that a servicer must acknowledge in writing within 5 days the receipt of a loss mitigation application received 45 days or more before foreclosure sale. If the application is incomplete, the acknowledgment must inform the borrower of the additional documents and information needed, and a date by which they must be provided. In addition to process defects, the CFPB reported that it had found some statements contained in acknowledgment notices to be deceptive, such as when servicers informed borrowers that their homes would not be foreclosed on before the deadline to submit additional loss mitigation materials, but the foreclosure sales proceeded anyway.

The Bureau found other errors, including the failure to timely send the acknowledgment notices, failing to inform the borrowers about additional material needed, requesting documents not relevant to loss mitigation review, and denying loss mitigation before the deadline had passed for the borrower to submit additional materials.

Loss Mitigation Offers
The CFPB found fault with the way in which some servicers handled proprietary loan modifications, including misleading or deceiving borrowers about whether and when outstanding charges would be deferred or assessed. Some servicers were found to have made the language in their offers impossible for many borrowers to comprehend, exposing borrowers to risks that they did not understand. Other servicers sent loss mitigation option letters that did not match the terms approved by their underwriting software, thus misrepresenting the actual terms being offered.

Additionally, the Bureau observed numerous situations where servicers had sought to require borrowers to waive their legal rights to bring claims in court in return for the receipt of a loss mitigation option, in violation of Regulation Z. Servicers should already be aware of the well-publicized administrative proceeding from July 2015, In re Residential Credit Solutions, in which the servicer paid a hefty penalty for engaging in similar behavior.

Loan Modification Denial Notices
Further, the Bureau found that some servicers failed to provide a reason for the denial of a loss mitigation application, or provided an incorrect reason. The MSRs require that such an explanation be provided in a denial notice so that the borrower knows whether to appeal. If the servicer receives a complete loss mitigation application 90 days or more before foreclosure sale or during the pre-foreclosure review period, the borrower has a right to appeal the denial but is deprived of that right if the servicer fails to inform the borrower of the right to appeal, the amount of time available to appeal, or the reasons for denial.

Servicing Policies, Procedures, and Requirements
The CFPB reports a miscellany of errors as the result of servicers failing to have necessary policies and procedures in place to deal with a wide range of borrower inquiries or requests. These range from the failure to provide borrowers with loss mitigation application forms to identifying which loss mitigation options were available for the particular borrowers who sought relief. Some of these failings were the result of inadequate communications among servicer personnel, or the failure of servicer employees to understand the loss mitigation options allowed by their loan investors.

Servicing Transfers
While improvements have been observed by the Bureau, there continue to be problems in honoring already-agreed-upon loss mitigation resolutions following servicing transfers, as well as the loss of documents and information provided to the transferor servicers by the borrowers.

Conclusion
The Highlights were positive in many respects, with the CFPB noting considerable improvements made by many servicers to properly staff effective compliance management programs, improve employee training, better utilize technology systems, and actively review borrower complaints for allegations of legal violations. Nonetheless, servicers would be wise to study the Highlights and continually strive to improve their loss mitigation policies, procedures, and processes so as to better serve their customers and avoid adverse action by the Bureau.

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Filing Proof of Claim on Unextinguished Time-Barred Debt Not a Violation of FDCPA

Posted By USFN, Tuesday, October 11, 2016
Updated: Monday, October 3, 2016

October 11, 2016

by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

In a published opinion, the U.S. Court of Appeals for the Fourth Circuit has held that filing a proof of claim in a Chapter 13 bankruptcy based on a debt that is time-barred does not violate the Fair Debt Collection Practices Act (FDCPA) when the statute of limitations does not extinguish the debt. [Dubois v. Atlas Acquisitions LLC (In re Eric Dubois), No. 15-1945 (4th Cir. Aug. 25, 2016)].

Background
Atlas purchased the defaulted debts of two debtors and filed proofs of claim in both Chapter 13 bankruptcy cases. Each debtor filed an adversary action against Atlas, alleging that because all of the debts were beyond Maryland’s statute of limitations when Atlas purchased them and filed its proofs of claim, Atlas violated 15 U.S.C. §§ 1692e (using “any false, deceptive, or misleading representation or means in connection with the collection of any debt”) and 1692f (using “unfair or unconscionable means to collect or attempt to collect any debt”). The debtors had not listed the Atlas debts in their bankruptcy schedules and did not give notice to Atlas of their bankruptcy filings. The bankruptcy court consolidated the cases and dismissed both complaints for failure to state a claim for which relief may be granted pursuant to Fed. R. Civ. P. 12(b)(6). The debtors appealed, and the Fourth Circuit permitted the appeal directly to the appellate court.

Appellate Review
The court first provided a brief overview of the purpose of bankruptcy and the reasons behind enactment of the FDCPA, setting up the justification for its holding. It then observed that “[f]ederal courts have consistently held that a debt collector violates the FDCPA by filing a lawsuit or threatening to file a lawsuit to collect a time-barred debt,” citing Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1259-60 (11th Cir. 2014) (collecting cases), cert. denied, 135 S. Ct. 1844 (2015). Dubois at 8. Surprisingly, however, the court did not reference the holding in Crawford, which opined that the filing of a proof of claim to collect stale debt in a Chapter 13 bankruptcy case violates 15 U.S.C. §§ 1692e and 1692f.

Addressing the competing arguments of Atlas and the debtors, the court first held that filing a proof of claim is debt collection activity. The “animating purpose” behind filing a proof of claim is to seek a share of the distribution of a debtor’s estate. Dubois at 10, citing Grden v. Leikin Ingber & Winters PC, 643 F.3d 169, 173 (6th Cir. 2011). “This fits squarely within the Supreme Court’s understanding of debt collection for purposes of the FDCPA.” Dubois at 10.

The court then considered whether a “claim” could include a time-barred debt. The court noted that “[t]he Bankruptcy Code defines the term ‘claim’ broadly to mean a ‘right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.’ 11 U.S.C. § 101(5)(A).” Id. at 14. The Code is designed to deal with all of the debtor’s legal obligations regardless how remote, providing the debtor with the “broadest possible remedy”. Id., citing H.R. Rep. No. 95–595, p. 309 (1977); S. Rep. No. 95–989, p. 22 (1978). Maryland’s statute of limitations does not extinguish the debt, rather it bars the remedy of a civil action to collect it — a remedy that may be revived if the debtor sufficiently acknowledges the debt’s existence. Id. at 15, citing Potterton v. Ryland Group, Inc., 424 A.2d 761, 764 (Md. 1981). Hence, because a time-barred debt still constitutes a right to payment under Maryland law, it is a “claim” for bankruptcy purposes. Dubois at 15.

In the court’s opinion “when a time-barred debt is not scheduled the optimal scenario is for a claim to be filed and for the Bankruptcy Code to operate as written.” The Code’s claim objection and disallowal procedures will stop a creditor from engaging in further collection activity, which is preferable to allowing the debt to continue to exist (if unscheduled and no proof of claim is filed), because “[t]his is detrimental to the debtor and undermines the bankruptcy system’s interest in ‘the collective treatment of all of a debtor’s creditors at one time.’ 1 Norton Bankr. L. & Prac. 3d § 3:9.” Id., at 19.

The court offered several other considerations in support of its decision, including that the Bankruptcy Rules require claims such as these to state the last transaction and charge-off dates, allowing for easy identification of time-barred debt. Therefore, “the reasons why it is ‘unfair’ and ‘misleading’ to sue on a time-barred debt are considerably diminished in the bankruptcy context, where the debtor has additional protections and potentially benefits from having the debt treated in the bankruptcy process.” Id. at 22.

Split of Authority among the Circuits
Servicer and attorney debt collectors should be aware that whether the filing of a proof of claim on time-barred debt violates the FDCPA is an area of developing law. A few other federal courts have held such action does not violate the FDCPA; e.g., Simmons v. Roundup Funding, LLP, 622 F.3d 93 (2d Cir. 2010) — while some have arrived at the opposite conclusion; e.g., Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014). Debt collectors must familiarize themselves with the law applicable to the jurisdiction in which they intend to file proofs of claim.

Editor’s Note: Recent USFN Reports have also addressed this subject. See the articles “FDCPA Trumps Bankruptcy Rules?” (Summer 2016 Ed.) and “Don’t Drink Expired milk and be Wary of Stale Claims” (Winter 2016 Ed.). Articles are archived in the Article Library at www.usfn.org.

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Minnesota: Supreme Court Says “No” regarding Borrowers Claiming Equitable Estoppel in Oral Credit Agreements

Posted By USFN, Tuesday, October 11, 2016
Updated: Monday, October 3, 2016

October 11, 2016

by Paul A. Weingarden and Kevin Dobie
Usset, Weingarden & Liebo, PLLP – USFN Member (Minnesota)

In the law, there is an old saying regarding oral contracts that goes something like this: “An oral agreement isn’t worth the paper it’s not printed upon.” That adage was driven home recently by a Minnesota Supreme Court decision, ending a nagging defense in state and federal courts on a single limited, but vexatious, issue.

The Minnesota Statute of Frauds codified as Minn. Stat. § 513.33 sub. 2 states, in pertinent part: “A debtor may not maintain an action on a credit agreement unless the agreement is in writing, expresses consideration, sets forth the relevant terms and conditions, and is signed by the creditor and the debtor.”

Promissory Estoppel
Both state and federal courts in Minnesota have routinely rejected the formation of oral agreements in credit contracts under what is referred to as a promissory estoppel argument that an oral agreement to refinance was breached. State appellate court decisions such as Greuling v. Wells Fargo Home Mortgage, Inc., 690 N.W.2d 757 (Minn. Ct. App. 2005); Bank Cherokee v. Insignia Development, LLC, 779 N.W.2d 896 (Minn. Ct. App. 2010); and Rural American Bank of Greenwald v. Herickhoff, 473 N.W.2d 361 (Minn. Ct. App. 1991) have all considered and rejected the doctrine.

Similarly, promissory estoppel to prevent oral formation of mortgage modifications has been consistently denied by federal courts as well. See Brisbin v. Aurora Loan Services, LLC, 679 F.3d 748 (8th Cir. 2012); LaBrant v. Mortgage Electronic Registration Systems, Inc., 870 F. Supp. 2d 671 (2012); Bracewell v. U.S. Bank, N.A., 748 F.3d 793 (8th Cir. 2014); and St. Jude Medical S.C., Inc. v. Tormey, 779 F.3d 894 (8th Cir. 2015).

Equitable Estoppel
Disturbingly, however, the concept of “equitable estoppel” has remained viable in both the state and federal courts. The doctrine (based on the concept of detrimental reliance) has been recognized in state appellate court decisions such as Norwest Bank Minnesota, N.A. v. Midwestern Machinery Co., 481 N.W.2d 875 (Minn. Ct. App. 1992); Highland Bank v. Dayab, unpublished, (Minn. Ct. App. 2011); and Bank Cherokee v. Insignia Development, LLC, 779 N.W.2d 896 (Minn. Ct. App. 2010). Federal cases recognizing the doctrine have been equally challenging for mortgagees, including Bracewell v. U.S. Bank, N.A., 748 F.3d 793 (8th Cir. 2014) and Stumm v. BAC Home Loan Servicing, LP, 914 F. Supp. 2d 1009 (D. Minn. 2012). United States District Court judges accepting the concept of equitable estoppel include Judge Magnussen in Racutt v. U.S. Bank, N.A., No. 11-2948, 2012 WL 12423210, at *3 (D. Minn. 2012), and Judge Ann Montgomery in Laurent v. Mortgage Electronic Registration Systems, Inc., No. 11-2585, 2011 WL 6888800, at *4 (D. Minn. 2011).

In cases raising the equitable estoppel argument, the debtor alleges that the creditor acted in bad faith or that the debtor refrained from finding alternate credit, believing the creditor was bound by an oral promise, which was ultimately rejected, resulting in detrimental reliance.

Thankfully the Minnesota Supreme Court has now provided what is hoped to be the definitive answer. [Figgins v. Wilcox, A14-1358 (Minn. June 1, 2016)]. In Figgins, the debtor alleged that the creditor orally told him not to make the balloon payment and that the creditor would refinance the loan. When the debtor checked on terms with a different bank, the creditor gave a poor credit response, resulting in a rejection and an ultimately higher interest rate on refinancing, all to the debtor’s detriment.

In raising the argument to enforce an alleged oral credit agreement, the Supreme Court noted:
“To support his position, appellant cites Norwest Bank Minnesota, N.A. v. Midwestern Machinery Co., 481 N.W.2d 875 (Minn. App. 1992) … which exempted a claim of promissory estoppel from section 513.33 because ‘[a]n agreement may be taken outside the statute of frauds by equitable or promissory estoppel.’ Id. at 880. Norwest Bank, a court of appeals decision, has never been explicitly overruled, but other court of appeal decisions have declined to follow its holding and have refused to exempt claims of promissory estoppel from section 513.33.”

In denying relief, the Supreme Court expressly ruled in Figgins that “the text of section 513.33 is plain, clear, and unambiguous — no action on a credit agreement may be maintained unless the writing requirement is satisfied.” Presumably, as BOTH equitable and promissory estoppel concepts were noted in the opinion, it is anticipated that because the Minnesota Supreme Court is the ultimate arbiter in state law matters, both state and federal courts will refuse to consider equitable estoppel claims pertaining to alleged oral credit agreements in the future.

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North Carolina: Appellate Review of Trustee as Fiduciary & Affidavit of Indebtedness Admissibility

Posted By USFN, Tuesday, October 11, 2016
Updated: Monday, October 3, 2016

October 11, 2016

by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

Opinions issued by the North Carolina Court of Appeals have raised concerns among foreclosure trustees and their attorneys about the extent to which North Carolina’s Rules of Civil Procedure apply to power-of-sale foreclosure proceedings. For example, in Lifestore Bank v. Mingo Tribal Pres. Trust, 235 N.C. App. 573, 577, 763 S.E.2d 6, 9 (2014), review denied, __ N.C. __, 771 S.E.2d 306 (2015), in upholding the application of N.C. R. Civ. P. Rule 41(a) (the voluntary dismissal rule) the court held that “[a] foreclosure under power of sale is a type of special proceeding, to which our Rules of Civil Procedure apply.”

Recent Decision: In re the Foreclosure by Goddard & Peterson, PLLC
Practitioners see mixed blessings in the recent decision of In Re: the Foreclosure by Goddard & Peterson, PLLC, 2016 WL3585841 (N.C. App. July 5, 2016).

Background — In Goddard & Peterson, the note holder-petitioner (Beal Bank) in the foreclosure proceeding substituted in Rogers, Townsend & Thomas (RTT) (a law firm) as trustee to the deed of trust executed by Lillian Cain. RTT later sent a foreclosure notice to Cain, followed by a letter informing her that it had been retained to foreclose the property and including the debt validation notice required by 15 U.S.C. § 1692g. Following an unexplained, lengthy delay in the foreclosure proceedings, Cain served RTT with a request to petitioner Beal Bank for admissions pursuant to N.C. R. Civ. P. Rule 36. The Request for Admissions to Beal Bank (seeking an admission that it was not the note holder) went unanswered beyond the time period to respond contained in N.C. R. Civ. P. Rule 36. Shortly thereafter, Beal Bank substituted the law firm Goddard & Peterson for RTT as trustee, and RTT commenced representation of Beal Bank in the contested foreclosure proceedings before the superior court.

At the hearing before the superior court following the appeal de novo of the clerk’s order authorizing RTT to proceed with foreclosure sale, Cain served an unfiled motion to dismiss the petition supported by the petitioner’s purported failure to answer the Request for Admissions. The judge orally denied the motion; a written order was not entered. The judge also overruled Cain’s objection to the petitioner’s introduction of an affidavit of indebtedness executed by a bank employee.

Appellate Court Procedurally Dispenses with Borrower’s Failed Motion to Dismiss — On appeal, the Court of Appeals could have taken the opportunity to narrow the holding in Mingo by ruling that discovery is not permissible in a power-of-sale foreclosure special proceeding, or at least to find that service of discovery on attorneys employed by the trustee does not constitute service on the petitioner. It did neither. Instead, it held that because the superior court had not entered a written order denying the motion to dismiss, then no appeal could be taken from it. An order is enforceable only when written, signed by the court, and entered by the clerk. West .v. Marko, 130 N.C. App. 751, 756, 504 S.E.2d 571, 574 (1998), N.C. Gen. Stat. §1A-1, Rule 58. While undoubtedly correct from a procedural standpoint, the court could have stricken the Request for Admissions on the grounds that it was served only on two RTT attorneys at a time when RTT was acting solely as substitute trustee. Surely service of legal documents on RTT (a neutral and a fiduciary, see discussion below) of materials intended for the petitioner, and with potentially dispositive effect, cannot be permissible.

Appellate Court Reviews Trustee as Fiduciary — On the positive side, the court upheld the superior court’s decision overruling Cain’s objection to RTT appearing as counsel for petitioner in the de novo hearing. Cain contended that RTT owed her a fiduciary duty when the case was in front of the superior court, and violated that duty by advocating for Beal Bank. The court acknowledged the fiduciary nature of a trustee’s role in the context of the enforcement of a deed of trust:

‘“In deed of trust relationships, the trustee is a disinterested third party acting as the agent of both [parties].’ In re Proposed Foreclosure of McDuffie, 114 N.C. App. 86, 88, 440 S.E.2d 865, 866 (1994). As such, in a typical foreclosure proceeding, trustees have a long-recognized fiduciary duty to both the debtor and the creditor. In re Foreclosure of Vogler Realty, Inc., 365 N.C. 389, 397, 722 S.E.2d 459, 465 (2012). ‘Upon default [a trustee’s] duties are rendered responsible, critical and active and he is required to act discreetly, as well as judiciously, in making the best use of the security for the protection of the beneficiaries.’ Id. (quoting Mills v. Mut. Bldg. Loan Ass’n, 216 N.C. 664, 669, 6 S.E.2d 549, 552 (1940)). More specifically, ‘the trustee is required to discharge his duties with the strictest impartiality as well as fidelity, and according to his best ability.’ Hinton v. Pritchard, 120 N.C. 1, 3, 26 S.E. 627, 627 (1897).” In re Goddard & Peterson, at *5.

The court disagreed with Cain’s contention, however, finding that RTT was removed as substitute trustee well before the superior court hearing, and noted that Cain had not explained how RTT’s representation of petitioner at the hearing either violated a legal obligation or was done in bad faith. Moreover, Cain had not alleged any injury proximately caused by RTT’s actions, observing that “‘[t]his Court has held that breach of fiduciary duty is a species of negligence or professional malpractice. Consequently, [such] claims require[ ] proof of an injury proximately caused by the breach of duty.’ Farndale Co., LLC v. Gibellini, 176 N.C. App. 60, 68, 628 S.E.2d 15, 20 (2006) (citations and internal quotation marks omitted).” In re Goddard & Peterson, at *4.

Invoking the authority of the North Carolina State Bar’s ethics opinions, the court remarked that this matter had been addressed in N.C. CPR 220 (1979), when the State Bar opined “that if a lawyer who is acting as a trustee for a deed of trust resigns his position as trustee, the lawyer may represent the petitioner bringing the foreclosure claim ‘as long as no prior conflict of interest existed because of some prior obligation to the opposing party.’” In re Goddard & Peterson, at *5.

In 1990, the Bar found that “former service as a trustee does not disqualify a lawyer from assuming a partisan role in regard to foreclosure under a deed of trust.” Id. quoting N.C. RPC 82 (1990). “N.C. RPC 90 (1990) ties it all together, and provides that: ‘[i]t has long been recognized that former service as a trustee does not disqualify a lawyer from assuming a partisan role in regard to foreclosure under a deed of trust. CPR 220, RPC 82. This is true whether the attorney resigns as trustee prior to the initiation of foreclosure proceedings or after the initiation of such proceedings when it becomes apparent that the foreclosure will be contested.’” Id. at *6.

The court went on to cite the most recent ethical opinion “which more specifically defined RPC 90, by stating: ‘[A] lawyer/trustee must explain his role in a foreclosure proceeding to any unrepresented party that is an unsophisticated consumer of legal services; if he fails to do so and that party discloses material confidential information, the lawyer may not represent the other party in a subsequent, related adversarial proceeding unless there is informed consent. N.C. Formal Opinion 5 (2013).’” Id. at 6.

Given that Cain was represented by counsel in proceedings lasting more than three years, and that she had failed to assert that she had disclosed any material confidential information to RTT when it was acting as trustee, the court found nothing in the record indicating that the superior court had erred in overruling Cain’s objection to RTT acting as counsel for petitioner.

Appellate Court Reviews Affidavit of Indebtedness Admissibility — The opinion provides further support for the use of affidavits to satisfy the superior court in a de novo hearing with respect to the enumerated findings that the court must make under N.C.G.S. § 45-21.16(d) in order to authorize the trustee to sell the secured property. Records that meet the definition of the business records exception to the hearsay rule [N.C. R. Evid. Rule 801(c)] may be introduced by a witness when the proper foundation has been laid to qualify that witness.

Petitioner Beal Bank produced an affidavit from a bank employee in support of the introduction of loan account records. In the affidavit the employee “specifically stated that her averments were ‘based upon [her] review of [petitioner’s] records relating to [respondent’s] loan and from [her] own personal knowledge of how they are kept and maintained.’ As a result, [the employee] was a qualified witness under Rule 803(6) and petitioner’s records regarding respondent’s default on her loan account were properly introduced through [the employee’s] affidavit.” Id. at 8.

The court also rejected Cain’s argument that the affiant’s statement that Beal Bank “is the holder of the loan” was inadmissible hearsay. Firstly, the foreclosure statute explicitly requires the clerk to consider the evidence of the parties and may consider affidavits and certified copies of documents. N.C. Gen. Stat. § 45–21.16(d). Id, at *8. The court had extended that requirement to de novo hearings in In re Foreclosure of Brown, 156 N.C. App. 477, 486-87, 577 S.E.2d 398, 404 (2003). On the basis that because “[a] power of sale provision in a deed of trust is a means of avoiding lengthy and costly foreclosures by action[,] this Court held that the ‘necessity for expeditious procedure’ substantially outweigh[ed] any concerns about the efficacy of allowing [the secretary] to testify by affidavit, and the trial court properly admitted her affidavit into evidence. Id. at 486, 577 S.E.2d at 404-05 (citation omitted).” In re Goddard & Peterson, at *8. The court acknowledged that whether Beal Bank was the holder was ultimately a question of law for the superior court to decide, and the fact that the affiant purported to make such a legal conclusion did not result in the affidavit being admitted in error. Id. at *9.

Lessons Learned — Trustees, their counsel, and loan servicers should be aware of the Rules of Civil Procedure and should not disregard papers served on them by borrowers and others connected to the foreclosure proceeding. Strenuous objection should be made to attempts to conduct discovery and to force other procedural and substantive activity contradictory or ill-suited to the power-of-sale foreclosure process.

Legal counsel acting as substitute trustees, or representing substitute trustees, who wish to advocate for the petitioner or note holder should refrain from soliciting or receiving confidential information or materials from the borrower, and should relieve themselves of the trustee’s duties as soon as possible.

Servicers should be mindful of the rules of evidence concerning the use of business records and the qualification of witnesses in court hearings. The vast majority of foreclosure proceedings in North Carolina involve the use of servicer employee affidavits and of business records entered into the servicer’s computerized filing systems by someone other than the person signing the foreclosure debt affidavit. Accordingly, selecting the right person to execute the affidavit and working closely with counsel to ensure that the affidavit will pass court muster are essential.

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Connecticut: Appellate Court Doesn’t Resolve Jurisdictional Split as to Whether EMAP Notice is a Condition Precedent to Suit

Posted By USFN, Tuesday, October 11, 2016
Updated: Tuesday, October 4, 2016

October 11, 2016

by James Pocklington
Hunt Leibert – USFN Member (Connecticut)

For the last eighteen months, trial courts in Connecticut have been divided over the notice requirements of Conn. Gen. Stat. §§ 8-265dd(b) and 8-265ee(a) and whether it creates a statutory condition precedent to initiating suit. Beginning with the unprecedented People’s United Bank v. Wright, 2015 Conn. Super. LEXIS 694 (Conn. Super. Ct. Mar. 30, 2015) decision, courts have been divided on the issue, with the majority adopting the reasoning of Wright in the southwest of the state. See “A Failure to Establish Compliance Leads to More than a Dismissal,” published in the USFN e-Update (Sept. 2015 Ed.).

In its recently released opinion in Washington Mutual Bank v. Coughlin, AC 37645 (Sept. 13, 2016), the Appellate Court had the opportunity to settle this interpretative dispute and resolve whether compliance with the Emergency Mortgage Assistance Program (EMAP) statute was or was not jurisdictional. Ultimately (and apparently knowingly), the court elected to avoid the question, stating: “Having thoroughly reviewed the record, we agree with the plaintiff that the defendants were not entitled to notice pursuant to § 8-265ee, and, thus, we do not decide whether, in a case in which § 8-265ee is applicable, failure to comply with its notice requirement implicates the court’s subject matter jurisdiction.”

In Coughlin, the plaintiff-bank was faced with a jurisdictional motion to dismiss for failure to comply with the notice provisions filed on the eve of trial. The plaintiff-bank elected to attempt to proceed to trial and requested a summary hearing on the jurisdictional allegations. At the hearing it asserted both that, in an abundance of caution, it had complied with the statute and (even were the court to determine otherwise) that it did not need to — mooting the non-compliance issue.

By its wording, the EMAP statute only applies to a “principal residence.” Through deposition testimony and the defendants’ allegations in their motion to dismiss, the plaintiff-bank was able to demonstrate that the subject property was not the defendants’ principal residence — removing the applicability of the statute and a need to comply with it. Rather than base its decision on the factual eligibility argument, the trial court denied the motion with a finding that “[C]ompliance with [EMAP] is not a jurisdictional matter.”

On appeal, relying on Rafalko v. University of New Haven, 129 Conn. App 44, 51 n.3 (2011) (“[w]e may affirm a proper result of the trial court for a different reason”), the Appellate Court avoided the legal issue and found that based on the facts established at trial that the subject property was not a primary residence, and thus not eligible for EMAP, the denial of the motion to dismiss was proper, declaring: “[I]t is irrelevant for purposes of this appeal … whether failure to give such notice, if applicable, implicates the subject matter jurisdiction of the court.”

As part of its holding, the Appellate Court acknowledged that the term “principal residence” was undefined at law and corrected that issue, defining it as “the person’s chief or primary home, as distinguished from a secondary residence or a vacation home. We also take note of the fact that the statute refers to the principal residence, suggesting that a person can have only one principal residence at any given time for purposes of this statute.”

Unresolved Outcome
The issue of whether EMAP compliance is subject matter jurisdictional in general therefore remains unresolved, though it is inapplicable to properties that are not the principal residence at the time suit is initiated.

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California: Successor in Interest Legislation (SB1150) Effective 1/1/2017

Posted By USFN, Tuesday, October 11, 2016
Updated: Tuesday, October 4, 2016

October 11, 2016

by Caren Jacobs Castle
The Wolf Firm – USFN Member (California)

The California Legislature has passed a bill (signed by the governor on September 29, 2016), which creates additional requirements as well as potential liability for servicers when dealing with “successors in interest” to a deceased borrower. The purpose of SB1150 is to allow successors in interest to step into the shoes of the deceased borrower with respect to home retention and loss mitigation opportunities. The bill will be effective January 1, 2017. Highlights of the new legislation are discussed below.

Definitions
SB1150 applies to first lien mortgages or deeds of trust that are secured by owner-occupied residential property containing no more than four dwelling units. “Owner-occupied” is defined as the principal residence of the borrower at the time of the borrower’s death. The definition of successor in interest has been greatly limited through the legislative process. “Successor in interest” is defined in the bill as a natural person, who notifies the servicer of the death of the mortgagor, and can provide documentation that the person is the spouse, domestic partner, parent, grandparent, adult child, adult grandchild, adult sibling, or joint tenant of the deceased borrower. Additionally the successor in interest must have occupied the subject property as his/her principal residence at the time of the borrower’s death and continuously for the six months prior to the borrower’s death.

Successor in Interest Determination: Timing & Process
There are several time frames built into the SB1150 process. Upon notification to the servicer (from a person claiming to be a successor in interest) that the borrower has died, the servicer may not proceed with the recordation of a notice of default. The bill specifically requires that the foreclosure not commence and/or proceed in any fashion until the successor in interest process is completed. The cumulative review/delay time frame stated within the legislation is a minimum period of 120 days.

Upon notification of death, the servicer shall request in writing that the party provide evidence of the death of the borrower. The bill allows 30 days to provide this documentation. The evidence may be a death certificate or “other written evidence.” Once the evidence of death is validated, the servicer must request in writing that the party provide written proof that he/she is a successor in interest as defined above. SB1150 deems 90 days as a reasonable time frame for the party to provide “reasonable documentation.”

Once the documentation is received, the servicer must evaluate whether the party qualifies as a successor in interest; in other words, determine that the original borrower is deceased, the party has an ownership interest in the property, and that the party has occupied the home for six continuous months prior to the borrower’s death as his/her principal residence. While SB1150 recognizes that there may be multiple successors in interest, it only provides a statement that the servicer shall apply the provisions of the loan documents as well as federal and state law when there are multiple parties.

Successor in Interest Entitlements
Within 10 days of determining that there is a successor in interest, the servicer shall provide to the party, at a minimum, the following loan information: loan balance, interest rate and any reset dates/amounts, balloon payments, pre-payment penalties, default information, delinquency status, monthly payment amount, and payoff amount.

The servicer shall further allow the successor in interest to apply to assume the loan and may evaluate the creditworthiness of the successor subject to applicable investor guidelines. If the loan is assumable, and the successor requests a foreclosure prevention alternative simultaneously with the assumption process, the party shall be allowed to apply for an alternative that would have been available to the deceased borrower. If the successor qualifies for an alternative, the servicer shall also allow the party to assume the loan.

Successors in interest will have the same rights and remedies as the borrower under the California Homeowner’s Bill of Rights (HBOR), which allows a private right of action. This includes the right to seek an injunction preventing the foreclosure sale from going forward — as well as the right to seek economic damages, and potentially punitive damages for intentional or reckless violations equal to the greater of $50,000 or treble damages, if a sale occurred in violation of SB1150. The successor in interest is also entitled to attorney’s fees if it is the prevailing party. Unfortunately, there is no attorney fee provision should the servicer be the prevailing party. The servicer will not be liable under SB1150 if violations are remediated prior to the recordation of the trustee’s deed upon sale.

SB1150 provides that compliance with the Consumer Financial Protection Bureau (CFPB) regulations regarding successors in interest will be deemed compliance with California law, albeit we now know that the new CFPB rules regarding successors in interest will not take effect for over 18 months. The California bill will sunset January 1, 2020, unless extended.

Issue Areas
There are several issues that remain problematic with SB1150:

1. Delays in foreclosure. Upon notification of a borrower’s death by a potential successor in interest, there is built into the process a minimum of a 120-day delay (30 days for evidence of death, and 90 days for reasonable documentation to prove successor in interest).

2. Determination of a successor in interest. The bill puts the servicer in the position of having to make a legal conclusion that a party is in fact a successor in interest. This may include having to review last wills and testaments, trusts, deeds, etc. It also may require that the servicer file a court action to determine if the party is in fact a successor in interest.

3. Conflicting successors in interest. Although the bill acknowledges that there may be more than one successor in interest, it does not deal with the issue of adverse successors. Again, this may require that the servicer file a court action to resolve any and all conflicts. Note, however, that the requirements under SB1150 will not apply if the potential successor is involved in a legal dispute over the rights to the subject property.

4. Privacy/Fair Debt Collection Practices Act (FDCPA) issues. SB1150 requires that the servicer, upon determination that a party is a successor in interest, provide specified loan information without written authorization of the borrower or court order, which may violate federal privacy laws and FDCPA. The California legislature has thus far been unwilling to address these conflict of statutes/preemption issues.

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Key Foreclosure Provisions of the CFPB-Promulgated Changes to Servicing Rules

Posted By USFN, Tuesday, September 13, 2016
Updated: Tuesday, August 23, 2016

September 13, 2016

by Wendy Walter
McCarthy Holthus, LLP – USFN Member (Washington)

The Consumer Financial Protection Bureau (CFPB or Bureau) announced its long-awaited changes to the mortgage servicing rules on August 4, 2016. The Bureau fulfilled its commitment to revisiting the exemptions given for borrowers in bankruptcies, it promulgated protections for successors in interest, and it amended loss mitigation rules to further address borrowers facing foreclosure. Adding icing to this regulatory cake, the Bureau also issued an interpretive rule under the FDCPA and provided an anticipated safe harbor for servicer communication that is required to comply with the mortgage servicing rules. This article focuses on the foreclosure-related provisions of these amendments, summarizing the general servicing policies and the loss mitigation application changes. To view CFPB’s Executive Summary, please visit: http://www.consumerfinance.gov/documents/805/08042016_cfpb_Mortgage_Servicing_Executive_Summary.pdf.

Default servicers and law firms should take note that these rules will not be the sea change of the 2014 rules but, in reviewing feedback, the Bureau took care to further clarify the intersection of loss mitigation and foreclosure. The relevant foreclosure-related rules are effective 12 months from the date they are published on the Federal Register; rules relating to successors in interest and periodic statements for borrowers in bankruptcy are effective 18 months from the date of publication in the Federal Register.

General Servicing Procedures affecting Foreclosure Counsel Communication
The Bureau amended the official interpretation to section 12 CFR 1024.38 to require that servicer policies and procedures “promptly inform servicer provider personnel handling foreclosure proceedings that the servicer has received a complete loss mitigation application and promptly instruct foreclosure counsel to take any step required by 12 CFR 1024.41(g).” The purpose of this amendment is to make it clear that counsel might need time to assist the servicer to comply with the rule prohibiting moving for judgment or order of sale or conducting a foreclosure sale when a complete loss mitigation application has been received. The Bureau’s modification on this piece is far less draconian than the original proposal, and it is here that the work of the USFN’s task force handling comments to the proposed rule should be commended. Earlier versions would have required dismissal of a case as a consequence of failing to properly stop entry of a judgment or order of sale.

Notice of Complete Loss Mitigation Application
To provide clarity and more certainty as to when a servicer determines a loss mitigation application to be complete, the amended rules require that the servicer provide a written notice to the borrower no later than five days after receiving a complete loss mitigation application. The notice must contain the receipt date of the completed application, the list of foreclosure protections to which the borrower is entitled, and whether there might be additional protections under state law. As counsel, it is worth consideration to request a copy of this letter in order to show the court that a case needs to be continued pending the completion of the loss mitigation review and compliance with the federal loss mitigation rules. The CFPB stopped short of requiring that the servicers provide this to counsel but, clearly, it might be good information to have. Notably, the Bureau did not require in the final rule that this notice contain the foreclosure sale date. The original proposal had this data point on the proposed notice, and the USFN task force worked with the CFPB to explain how difficult it would be to get this right and to not create unnecessary confusion to the borrower.

More than One Bite at the Loss Mitigation Apple
Servicers are now required to consider more than one loss mitigation application for the life of the loan. In other words, a borrower’s foreclosure must be stopped for every single complete loss mitigation submission, if prior to the 37 days preceding a foreclosure sale. There is no more exception to the loss mitigation rule for a borrower on his or her second or third loss mitigation application. The ability to obtain a second set of loss mitigation rights only applies, however, to those borrowers who become current on payments anytime between their prior complete loss mitigation application and a subsequent loss mitigation application.

In the winter 2017 edition of the USFN Report, I will further elaborate on the foreclosure- and loss mitigation-related provisions of these rule amendments. Stay tuned to the USFN publications for more details.

©Copyright 2016 USFN. All rights reserved.
September e-Update

Note for consideration of the USFN Award of Excellence: This article is not a "Feature."

 

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