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Connecticut: Tree on REO Falls on Adjoining Property; Bank not Liable

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

September 13, 2016

by Kristen E. Boyle
Hunt Leibert – USFN Member (Connecticut)

In a recent Connecticut Superior Court decision, the court found that a homeowner, even one with a name like HSBC Bank USA, is not negligent when a tree falls from one property to another and causes damage. [Corbin v. HSBC Bank USA, NA, No. WWM-CV-156009704S (Conn. Super. Ct. June 3, 2016)].

In Corbin, the court upheld the long-accepted standard that homeowners are not liable to one another for damages caused by natural conditions on the land. In the winter of 2015, the plaintiffs (homeowners whose property is located next to a foreclosed, bank-owned property) contacted the real estate agent tasked with selling the neighboring property, explaining that a tree on the bank’s property appeared to be damaged and decaying. The agent went to the property to inspect and take pictures of the tree — but a month to the day later, and before anything could be done, the tree fell onto the plaintiffs’ property. The falling tree destroyed a work shed filled with tools and personal belongings. The plaintiffs then brought suit for negligence and nuisance.

While the Connecticut Legislature has been discussing this very issue, no laws have been put into effect, and the court relied on the well-established use of the Restatement (Second) of Torts § 363 (1965). That section states that “neither a possessor of land, nor a vendor, lessor or other transferor, is liable for physical harm caused to others outside of the land by a natural condition of the land.” The court found that the plaintiffs failed to allege that the tree was anything other than a natural condition on the land; and, as a result, the defendant’s motion to strike both the negligence and nuisance counts was granted, as well as the defendant’s subsequent motion for judgment in its favor.

The plaintiffs had asserted that the damage to their shed and its contents caused by the tree present a basis for liability under 1 Am. Jur. 2d, § 21, given that the defendant had actual or constructive knowledge of the defective condition. The court was not persuaded by this argument and cited several Connecticut cases that continued to apply the common law rule under the Restatement in lieu of the plaintiffs’ theory. While the American Jurisprudence interpretation may be relied on in other states, Connecticut remains an exception for now.

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Tennessee: Foreclosure of Superior Deed of Trust Extinguishes Subsequent Easement

Posted By USFN, Tuesday, September 13, 2016
Updated: Wednesday, August 24, 2016

September 13, 2016

by Courtney McGahhey Miller
Wilson & Associates, P.L.L.C. – USFN Member (Arkansas, Mississippi, Tennessee)

The general rule in Tennessee regarding the foreclosure of a superior deed of trust is that the purchaser at a foreclosure sale takes title divested of all encumbrances made subsequent to the foreclosed deed of trust. The Court of Appeals of Tennessee recently confirmed that this rule applies when the subsequent encumbrance is an easement. Helmboldt v. Jugan, Tenn. App. LEXIS 523 (July 25, 2016).

Towering Oaks owned 13.4 acres of undeveloped land in Tennessee. Towering Oaks executed a deed of trust with TNBank to secure a mortgage taken on the 13.4 acres. The property was adjacent to property owned by the Jugans. Several years after executing the deed of trust, Towering Oaks began negotiating with TNBank to release 2.1 acres of the encumbered property. Simultaneously, Towering Oaks was negotiating with the Jugans to create a buffer easement across a portion of Towering Oaks’ property, adjacent to the Jugan’s property. TNBank ultimately agreed to a partial release of the 2.1 acres. Immediately thereafter, Towering Oaks sold the released 2.1 acres to the Jugans, and restrictions were executed and recorded between Towering Oaks and the Jugans. The restrictions created a buffer easement over a portion of the property still owned by Towering Oaks. The buffer easement forbade the construction of improvements, prohibited the clearance and trimming of brush and vegetation (with specific exceptions), and required a landscaping fence to be erected and maintained so as to substantially block the view between the properties. The easement’s terms and conditions were to be binding upon Towering Oaks and “its successor and assigns,” and it was to “run with the land for a period of fifty (50) years.”

A couple of years after the execution of the restrictions, Towering Oaks defaulted on its deed of trust with TNBank. TNBank foreclosed upon the 11.3 acres of property still encumbered, and acquired the property at foreclosure sale. TNBank did not learn about the restrictions until after the foreclosure sale. The foreclosed property was ultimately sold by TNBank to the Helmboldts, who promptly filed suit seeking a declaratory judgment to determine the validity of the restrictions.

In its review, the court recited the general rule that the purchaser at a regular foreclosure sale takes the mortgagor’s title divested of all encumbrances made since the creation of the power. The court clarified that the same rule applies when the post-mortgage encumbrance is an easement. The court’s discussion focused on the fact that TNBank never released the impacted area of property, never subordinated its interest, nor even knew about the existence of a buffer easement prior to the foreclosure. The court recited testimony from the record evidencing that TNBank was never informed that the Jugans were requesting a buffer area in exchange for their purchase of the 2.1 acres. The buffer easement did not exist at the time that the deed of trust was executed.

Subsequent to the execution and recording of the deed of trust, Towering Oaks lacked authority to encumber the interest of TNBank. The court determined that while the bank released 2.1 acres of property so that Towering Oaks could sell those acres to the Jugans, the record did not show that the bank was ever aware there would also be a buffer easement granted that would impact the bank’s remaining security interest.

In affirming the trial court’s grant of summary judgment in favor of the Helmboldts, the court stated that, “Easements like other encumbrances generally diminish the fair market value of a property rather than increase its value. To grant the buffer easement against the deed of trust would be to effectively foist an uncontemplated, unwanted easement onto a property where the holder of the security instrument executed it prior to any clouds on title.” Thus, the court found that the restrictions at issue were extinguished as an operation of law when TNBank foreclosed on its superior deed of trust.

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North Carolina: Collateral Estoppel Doctrine Bars Re-Litigation of Issues Already Decided

Posted By USFN, Tuesday, September 13, 2016
Updated: Wednesday, August 24, 2016

September 13, 2016

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

Earlier this year, the North Carolina Court of Appeals affirmed the dismissal of an action brought by a former borrower seeking to enjoin the sale of the foreclosed property. [Thompson v. Nationstar Mortgage, 785 S.E.2d 186, at *2 (Table) (N.C. Ct. App. Apr. 5, 2016)].

In Thompson, the plaintiff had sought to challenge whether Nationstar held a valid debt and had the right to foreclose under the deed of trust — two findings that the clerk must make in order to authorize the foreclosure sale pursuant to N.C.G.S. § 45-21.16(d). Because the plaintiff did not appeal the clerk’s order within the 10 days required by § 45-21.16(d1), the clerk’s findings were final. Moreover, the plaintiff’s opportunity to raise any equitable claims, or any legal claims outside the findings required by § 45-21.16(d), was lost because he failed to file a separate action and to obtain an injunction under § 45-21.34 before the rights of the parties became fixed.

While not breaking any new legal ground, the Thompson opinion is a reminder of the following legal principles:

1. Once the rights of the parties to the foreclosure proceeding are fixed, after the expiration of the upset-bid period following the foreclosure sale, the doctrine of collateral estoppel “bars all claims in the present appeal based on issues already decided by the clerk in the previous foreclosure proceeding, and ‘our analysis begins with the premise that [the] plaintiff [ ] [was] in default and the foreclosure [ ] [was] proper.’ Funderburk, __ N.C. App. at __, 775 S.E.2d at 5-6.” Thompson, at *3.

2. The Court of Appeals also overruled the plaintiff’s assignment of error that the trial court failed to make findings of fact when it dismissed the case pursuant to N.C. R. Civ. P. 12(b)(6). While an action “tried upon the facts” requires the court to “find the facts specially” (N.C. R. Civ. P. 52), “the requirements of Rule 52 are inapplicable to summary dispositions under Rules 12 and 56, as the resolution by the trial court of contested evidentiary matters is not contemplated under either Rule. G & S Bus. Servs., Inc. v. Fast Fare, Inc., 94 N.C. App. 483, 489-90, 380 S.E.2d 792, 796 (1989).” Thompson, at *3.

3. Finally, the court rejected the plaintiff’s contention that the alleged joint representation of the defendants (Nationstar Mortgage and the foreclosure trustee) by the same attorneys could form the basis for civil liability. Thompson, at *3, citing McGee v. Eubanks, 77 N.C. App. 369, 374, 335 S.E.2d 178, 181-82 (1985). And even if the alleged dual representation was prohibited by the State Bar’s ethics rules (which the court did not decide) (see Rev. R. Prof. Conduct N.C. St. B. 1.7(a)), “we hold that the trial court did not err in failing to conclude that such a dual representation prevented it from ruling in favor of Defendants on their motions to dismiss.” Thompson, at *4.

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North Carolina: Procedural Requirements must be followed to Challenge Foreclosure

Posted By USFN, Tuesday, September 13, 2016
Updated: Wednesday, August 24, 2016

September 13, 2016

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

A recent unpublished opinion issued by the North Carolina Court of Appeals confirms that a borrower who seeks to successfully challenge the clerk’s order authorizing foreclosure sale must comply with the procedural steps set out in the foreclosure statute. [In re Reeb, No. COA 15-927 (N.C. Ct. App. May 17, 2016)]. In Reeb, the appellate court held that by failing to post a bond when the borrower appealed the clerk’s order, or to file a separate action seeking injunctive relief to stop the foreclosure sale, the challenge to the sale was rendered moot.

In this case the clerk of superior court entered an order authorizing the foreclosure sale, which requires the clerk to make several findings, one of which is that the party seeking foreclosure is entitled to the relief it seeks. N.C.G.S. § 45-21.16(d). Reeb timely appealed to superior court pursuant to § 45-21.16(d1), which triggers a de novo review by the court, meaning that the court has to consider afresh whether the party seeking to foreclose the subject property is entitled to do so under the requirements set forth in § 45-21.16(d). However, upon taking an appeal the appellant “shall post a bond with sufficient surety as the clerk deems adequate to protect the opposing party from any probable loss by reason of appeal.” Reeb failed to do this.

Alternatively, after the sale but prior to “the rights of the parties to the sale or resale becoming fixed pursuant to G.S. 45-21.29A” — in other words, before the post-sale upset period expired — the borrower could have filed an action in superior court pursuant to § 45-21.34 and sought an injunction. She did not do this either. The sale went ahead and the trustee’s deed was recorded, concluding the foreclosure. Thereafter, the superior court dismissed the appeal due to mootness, meaning that when a case has already been resolved, the court lacks jurisdiction to consider further argument on the merits of the case. Reeb appealed the dismissal.

The Court of Appeals affirmed the order relying on well-established precedent: ‘“[W]hen the trustee’s deed has been recorded after a foreclosure sale, and the sale was not stayed, the parties’ rights to the real property become fixed, and any attempt to disturb the foreclosure sale is moot.’ In re Cornblum, 220 N.C. App. 100, 106, 727 S.E.2d 338, 342 (2012).” Reeb, at 3. Noting that mootness applies to the same extent in the appellate courts as it does in the trial courts, the court found that it therefore lacked jurisdiction to review the borrower’s arguments. Reeb, at 4, citing Simeon v. Hardin, 339 N.C. 358, 370, 451 S.E.2d 858, 866 (1994).

North Carolina is quite generous in providing the borrower or property owner with opportunities to challenge a foreclosure sale. The clerk’s order may be appealed to superior court, and then to the appellate courts. Further, “[a]ny owner of real estate, or other person, firm or corporation having a legal or equitable interest therein” may apply to enjoin the sale based upon any legal or equitable grounds, including that the bid price is inadequate and inequitable and will result in irreparable damage. § 45-21.34. However, as the appellate court makes clear in Reeb, failure to employ the proper procedures to invoke these opportunities will doom the challenge to failure.

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Connecticut Superior Court Reverses Vesting Due to Court’s Clerical Error

Posted By USFN, Tuesday, September 13, 2016
Updated: Wednesday, August 24, 2016

September 13, 2016

by James Pocklington
Hunt Leibert – USFN Member (Connecticut)

In a recent case, the Connecticut trial court was challenged by a vesting that occurred years prior when it implicated the Judicial Branch’s stated mission of “serv[ing] the interests of justice and the public by resolving matters brought before it in a fair, timely, efficient and open manner.” Ultimately, the court ruled to open the nearly two-year-old vesting, citing the facts of the case as a “rare case in which there is a significant failure in the judicial process.” [US Bank NA v. Tulloch, FBT-CV-09-5023011-S].

Precedent
Connecticut has long had a statutory bar on opening judgment by a mortgagor after the vesting of title. Codified currently in Conn. Gen. Stat. 49-15, this ban has served to provide foreclosing mortgagees with assurances regarding the finality of title and ensure proper reliance on the absolute title to a property taken through a foreclosure action. While often challenged unsuccessfully, the prohibition on opening judgments post-vesting was substantially weakened by Wells Fargo Bank v. Melahn, 148 Conn. App. 1 (2014). There, the appellate court determined that certain rare instances (in that case, blatant misrepresentations by the plaintiff’s foreclosure counsel) could warrant deviation from § 49-15.

There have been efforts, mostly in vain, to expand Melahn to other forms of alleged error. In Bank of New York Mellon v. Caruso, NNH-CV-12-6031454-S (Aug. 21, 2015), the trial court ruled that an error by a court-appointed attorney (in that matter, the trustee for the defendant’s disciplinarily-suspended attorney) was sufficient to revert a vesting. While part of a prior memorandum and not the motion, the Caruso court’s final holding was undoubtedly influenced by its determination that the trustee was an agent of the court and that “a dereliction of duty by that agent … must be subject to remediation by the court.”

Subject Case
In Tulloch, the factual errors were determined after an evidentiary hearing to have been committed by the court’s own clerks. Several days prior to the vesting, the defendant filed a motion to open along with a request to waive fees for same. At that time, the clerk was well aware of the time-sensitive nature of both motions and affirmatively promised to notify the defendant by phone. When no phone call was received prior to the law day, the defendant made a series of calls to the clerk’s office, culminating in a number of voicemails and a clerk finally advising the defendant to again wait for a phone call, which never came. The defendant relied on that advice to her apparent detriment and title vested. It came out in the subsequent evidentiary hearings that the motions had been lost by the clerk and found some thirteen days later.

Ultimately, Tulloch presents an extraordinarily slippery slope where vesting was rewound based on court error. By expanding the possibility of failure of process to clerical error, the trial court’s decision in Tulloch threatens the finality of title through a foreclosure action.

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Connecticut: Predatory Lending is Upheld as a Defense to Foreclosure

Posted By USFN, Tuesday, September 13, 2016
Updated: Wednesday, August 24, 2016

September 13, 2016

by Robert J. Wichowski
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

According to a recent decision of the Connecticut Appellate Court, predatory lending can be a special defense to a foreclosure. Moreover, for the first time in Connecticut appellate jurisprudence, the defense of predatory lending has been defined. [Bank of America, N.A. v. Aubut, 167 Conn. App 347 (Aug. 2, 2016)].

Trial Court
In May 2012, an action to foreclose a mortgage was instituted by the plaintiff. After court-annexed mediation and a stay of the case due to a bankruptcy filing, a new plaintiff was substituted into the action. Following the substitution, the defendants filed an answer and raised defenses claiming, inter alia, predatory lending. The defendants claimed that the loan originator knew or should have known that the loan was unaffordable, and that the defendants were insolvent at the time of origination. The defendants also alleged that the loan was destined to fail from its inception.

The plaintiff filed a motion for summary judgment to summarily resolve the defendants’ claims. In response, the defendants provided an affidavit and financial documents, evidencing that the monthly loan payment was in excess of 70 percent of their take-home income. The trial court granted summary judgment to the plaintiff, and the bank proceeded to final judgment shortly thereafter.

Appellate Court
On appeal, the defendants contended that predatory lending is a valid defense to a foreclosure action. In the alternative, the defendants asserted that a defense sounding in predatory lending should fall within the ambit of other recognized defenses to foreclosure actions (such as fraud, unclean hands, unconscionability, and equitable estoppel). In response, the plaintiff maintained that the defendants’ reliance on predatory lending was legally unsound and that the defendants’ allegations were legally insufficient to withstand summary judgment. The appellate court ruled in favor of the defendants on this issue and, in doing so, referenced the particularized detail that the defendants provided in their allegations and proof in opposition to summary judgment.

The appellate decision confirms the defense of predatory lending in mortgage foreclosures in Connecticut, noting that, although some trial courts have done so, there has been no legal authority defining that defense. As defined by this decision, predatory lending can be validly raised in defense to a foreclosure where a defendant’s allegations assert that the facts known to the plaintiff concerning the financial situation of the defendant at the time the subject loan was entered were such that the plaintiff knew, or should have known, that the loan would fail. Significantly, the court points out that in prosecuting the motion for summary judgment, the plaintiff did not counter the defendants’ evidence by affidavit or other documentary evidence. As such, the appellate court held that, at the time of summary judgment, there existed a genuine issue of material fact regarding the affordability of the loan and the defendants’ ability to repay.

Conclusion
This case is important to general foreclosure actions in Connecticut. Aubut supports by appellate authority — for the first time in this state — a defense of predatory lending to a foreclosure action. This would seem to indicate that allegations of predatory lending can be anticipated to be raised more often as a defense in future foreclosure actions.

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Connecticut: Lender Liable Relating to Loan Modification Processing?

Posted By USFN, Tuesday, September 13, 2016
Updated: Monday, August 29, 2016

September 13, 2016

by William R. Dziedzic
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

In a recent superior court case, a mortgagor filed a two-count complaint against his lender alleging a violation of the Connecticut Unfair Trade Practices Act (CUTPA) and a claim for common-law negligence. [Blanco v. Bank of America, 2016 WL 2729319, 62 Conn. L. Rptr. 190 (Conn. Super. Ct. Apr. 19, 2016)].

The basis for the CUTPA count of the complaint is alleged conduct arising out of the lender’s review and processing of the plaintiff’s application to modify his mortgage. In support of the negligence count of the complaint the plaintiff relied, in part, on provisions in the National Mortgage Settlement (NMS) and the 2011 Office of the Comptroller of Currency Consent Order with Bank of America (Consent Order) to assert that the Bank owed the borrower a duty of care.

Background: In an attempt to cure the delinquency on his loan, the plaintiff-borrower submitted a number of loan modification applications to the Bank. The application process began in April 2012 and concluded in May 2014, resulting in a permanent modification of the plaintiff-borrower’s loan. The plaintiff-borrower alleged that during this process the Bank was negligent and unscrupulous in reviewing the loan modification applications — citing examples of being told to resubmit documents as well as the misapplication of trial payments. The borrower’s lawsuit against the Bank followed. The Bank challenged the complaint as legally insufficient, and the court granted the Bank’s motion to strike both counts. [The Bank subsequently moved for judgment against the plaintiff-borrower for failing to file a substituted complaint pursuant to the Connecticut Rules of Practice. That motion, too, was granted; and the plaintiff-borrower took an appeal. The appeal is currently pending with the Connecticut Appellate Court.]

Superior Court’s Review of the CUTPA Count — This first count alleged that the Bank violated CUTPA by initiating a foreclosure action while the loan modification applications were under consideration by the Bank. In granting the Bank’s motion to strike, the trial court referred to a long history of decisions where Connecticut courts have held that refusing to negotiate a loan modification prior to proceeding to foreclosure does not rise to a violation of CUTPA.

Superior Court’s Review of the Common-Law Negligence Count — The second count related to the handling of the loan modification applications. The plaintiff-borrower cited to the NMS and the Consent Order, which detail certain actions and guidelines that a mortgage servicer must take when reviewing a loss mitigation request. The borrower contended that these guidelines imposed a duty on the Bank, and that the Bank breached its alleged duty by not reviewing the plaintiff-borrower’s loss mitigation request in accordance with them. The Bank countered that no duty of care exists between a lender and a borrower, specifically that lenders have no obligation to negotiate a loan modification with a borrower. Moreover, the Bank maintained that the borrower lacked standing to bring claims based on the NMS or the Consent Order. (The court did not address the standing argument. See Blanco, footnote 2.)

In striking the common-law negligence count, the court reasoned that to impose a duty on a lender or loan servicer in this context would ultimately frustrate the loan modification process and would likely lead to increased litigation. Entities in the defendant’s position would be less inclined to even entertain loan modification applications, which principally benefit mortgagors, if there is a chance that such entities would be exposed to civil liability.

As it stands, this Blanco decision is favorable to the loan servicing industry because the court refused to recognize a new cause of action for borrowers against their lender or mortgage servicer. However, as referenced above, the decision is currently under appellate review.

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South Carolina: Bankruptcy Court Moves to Conduit Mortgage Payments, Operating Orders Effective October 1, 2016.

Posted By USFN, Tuesday, September 13, 2016
Updated: Wednesday, September 7, 2016

September 13, 2016

by John B. Kelchner and John S. Kay
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

South Carolina has been one of the few states still requiring bankruptcy debtors to make post-petition mortgage payments directly to the mortgage lender or servicer. This will change on October 1, 2016 pursuant to operating orders issued by the three U.S. Bankruptcy Judges in South Carolina. The requirements for mortgage conduit payments for Judge Burris are contained in Operating Order 16-03, and the requirements for Judge Waites and Judge Duncan are contained in Operating Order 16-02.

Operating Order 16-03 (Judge Burris) — While the requirements are listed in two separate operating orders, the essential difference between the two orders is that under Judge Burris the conduit mortgage payments are not mandatory. [Footnote 3 of Operating Order 16-03 states, “This Operating Order is substantially consistent with Operating Order 16-02 Conduit Mortgage Payments in Cases Assigned to Judge Waites and Judge Duncan except paragraph I was altered to allow rather than require Conduit Mortgage Payments and paragraph II was omitted.”]

Operating Order 16-02 (Judge Waites and Judge Duncan) — This order requires the use of conduit mortgage payments under the following conditions: (a) When, as of the petition date, the debtor is delinquent six months or more in payments owed to a mortgage creditor, or (b) As part of a Section 362 Settlement Order involving a mortgage payment delinquency that proposes a cure of a post-petition default in mortgage payments that were delinquent for four months, or more, on the day the motion for stay relief was filed; or (c) If requested by the debtor and without objection from, or with the agreement of, the mortgage creditor and trustee; or (d) As otherwise ordered by the court.

Both Operating Orders — Pursuant to each operating order, there are several other important issues raised by the new procedure:

• If the mortgage creditor has not filed a “Compliant” proof of claim in the case, the Chapter 13 trustee may file a Request for a Mortgage Creditor Report and a request for a formal hearing on the matter. The information sought will be the amount of pre-petition arrearage, escrow status, and ongoing payment amount. If this is not provided (to the trustee’s satisfaction) by the creditor prior to the hearing, counsel for the creditor and a representative of the creditor must appear at the trustee’s hearing. [Footnote 9 of Operating Order 16-03 states, “‘Compliant POC’ is defined as a Proof of Claim filed in full compliance with the Official Forms and Bankruptcy Rules 3002 or 3004, and including: (a) all relevant Loan Documents; and (b) a detailed breakdown of any escrow, mortgage insurance, or other monthly obligation as provided for in the terms of the Loan Documents.”]

• If the trustee has commenced disbursements to the creditor prior to the filing of a proof of claim, the payment amount disbursed by the trustee will be deemed the correct amount.

• No Payment Change Notice filed by the creditor will be effective until the creditor has filed a proof of claim.

Conclusion — The new conduit payment procedure places even more emphasis on making absolutely sure that the creditor files an accurate proof of claim as quickly as possible to avoid payments by the trustee that are at an amount less than what is called for by the loan terms, or having to have a representative appear at a hearing on the matter.

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Michigan: Appellate Court Applies Saurman in Judicial Foreclosure Case

Posted By USFN, Tuesday, September 13, 2016
Updated: Wednesday, September 7, 2016

September 13, 2016

by Regina M. Slowey
Orlans Associates, P.C. – USFN Member (Michigan)

The decision in Residential Funding Co, LLV v. Saurman, 490 Mich. 909, 805 N.W.2d 183 (2011), verified that whether or not the mortgagee of record also owned the underlying note was immaterial to the right of that mortgagee to foreclose. Recently, the Michigan Court of Appeals expressly reaffirmed this right in a judicial foreclosure case.

In Select Commercial Assets, LLC v. Carrothers, the Court of Appeals (in an unpublished opinion) confirmed that the Saurman analysis applies to judicial foreclosures as well. [Select Commercial Assets, LLC v. Carrothers, No. 326968 (June 21, 2016)]. In particular, the appellate court ruled in a judicial foreclosure case that a mortgagee of record has the standing and capability to foreclose where there is undisputed evidence that the mortgage-secured debt is in default, regardless of the ownership of the note. The court ruled that the defendant-borrower’s arguments that the plaintiff must be the owner of the debt secured by the mortgage to bring a judicial action to foreclose were without merit.

This eases the burden for foreclosing entities that must use judicial action for a particular mortgage. The evidence must show that the underlying loan is in default, but similar to a foreclosure by advertisement, the foreclosing entity need only be the mortgagee of record, not the holder/owner of the note.

Editor’s Note: The author’s firm represented the plaintiff-appellee before the Michigan Court of Appeals in Select Commercial Assets, LLC v. Carrothers.

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Proposed Change to FRBP Rule 3015 and New FRBP Rule 3015.1: Public Commentary Period through 10/3/2016

Posted By USFN, Tuesday, August 2, 2016
Updated: Tuesday, July 19, 2016

August 2, 2016

by Michael McCormick
McCalla Raymer Pierce, LLC – USFN Member (Florida, Georgia, Illinois)

On July 1, 2016 the Judicial Conference Committee on Rules of Practice and Procedure approved publication of proposed amendments to Bankruptcy Rule 3015 and proposed new Rule 3015.1. Publication is open for a comment period from July 1, 2016 through October 3, 2016. You can read the text of the proposed amendments and supporting materials at the following webpage: http://www.uscourts.gov/rules-policies/proposed-amendments-published-public-comment.

Please note that this is a shortened public commentary period.

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Virginia Federal District Court Reviews SCRA and the Effect of Military Re-Entry by Borrower who Originated Loan during a Previous Active Duty Period

Posted By USFN, Tuesday, August 2, 2016
Updated: Tuesday, July 19, 2016

August 2, 2016

by E. Edward Farnsworth, Jr.
Samuel I. White, P.C. – USFN Member (Virginia)

In Sibert v. Wells Fargo Bank, N.A., No. 3:14CV737 (E.D. Va. May 4, 2016) the U.S. District Court for the Eastern District of Virginia grappled with the question as to what effect a borrower’s discharge from, and later re-entry into, military service might have regarding application of § 533 of the Servicemembers Civil Relief Act (SCRA). Specifically, § 533(a) grants protected status to an active duty servicemember with an obligation secured by a mortgage or deed of trust that “originated before the period of the servicemember’s military service and for which the servicemember is still obligated.” § 533(c) states that a foreclosure sale against a protected borrower without court approval is not valid. In considering cross-motions for summary judgment, the court framed its ruling as turning on “interpretation of the phrase ‘originated before the period of the servicemember’s military service.’” Id. at *8.

The borrower first served in the United States Navy from July 9, 2004 to July 8, 2008. It was during this first period of service that he originated the mortgage loan. Subsequent to being honorably discharged, the borrower re-entered the military by enlisting in the United States Army in April 2009. On May 13, 2009 during this second active duty period, his home was foreclosed.

The borrower contended that the foreclosure was void under the SCRA because he originated the mortgage loan in May 2008, prior to his current service period beginning in April 2009. Under his interpretation of the statute, the only relevant military service in relation to the loan’s origination was his current active duty period, upon which he based his claim for protection. Accordingly, the borrower asserted that he was protected because his loan originated prior to his most recent active duty period. The lender, by contrast, argued that the proper interpretation of the statute was that a borrower is not protected where the loan originated during “any” active duty period. Because the borrower originated the loan at a time that he was in the military, the lender reasoned, no protection from foreclosure was applicable under the statute.

The court held that the correct interpretation of the statute is that a subsequent active duty period is not germane where the loan was originated during a prior active duty period. The court, applying standard canons of statutory construction and considering the statute as a whole, opined that the statute is concerned with the “material affect” of entering the military for the first time after previously obtaining the mortgage loan:

“For a person entering military service for the first time, the resulting change in income and lifestyle relative to when they incurred the obligation could materially affect their ability to maintain payments . . . The same is not true for someone like Sibert, who incurred an obligation while already in the military, became a civilian, and then re-joined the military. Rather than being disadvantaged by re-entering the service, someone like Sibert has the same ability to comply with the obligation as when it was first negotiated and incurred.” Id. at *11.

The court also noted that this interpretation was consistent with other state and federal cases construing application of § 527 (mortgage interest rate limitation) and § 532 (protection for installment contracts for lease or purchase) of the SCRA, where the requirement for protection turns on whether the obligation originated while the borrower was in military service.

The foreclosed borrower has noted an appeal to the U.S. Fourth Circuit Court of Appeals, so there may be more forthcoming on this interpretation of the SCRA.


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Connecticut: U.S. District Court Reviews Ownership of Note & Standing

Posted By USFN, Tuesday, August 2, 2016
Updated: Tuesday, July 19, 2016

August 2, 2016

by Lindsey Goergen
Hunt Leibert – USFN Member (Connecticut)

Recently the U.S. District Court for the District of Connecticut denied a defendant-borrower’s motion for summary judgment and granted the plaintiff’s cross-motion for summary judgment. [Santander Bank v. Harrison, Civil No. 3:15cv1730 (D. Conn. July 1, 2016)].

The borrower asserted that the plaintiff lacked standing. The borrower’s motion for summary judgment had initially been filed as a motion to dismiss, which the court converted under Federal Rule 12(d) to a motion for summary judgment and permitted the plaintiff to file a cross-motion for summary judgment prior to any other responsive pleading or answer being filed.

The borrower claimed that Santander Bank lacked standing to bring the foreclosure action based upon her receipt of two letters from the plaintiff dated October 22, 2014 and February 9, 2015. The 2014 letter indicated that the plaintiff was unable to locate her loan in their computer system based upon the address and loan number that the borrower provided. The 2015 letter stated (erroneously) that the plaintiff had sold the loan on November 1, 2009. In fact, the plaintiff had owned the loan since 2007, as had been testified to by a vice president of Santander Bank in the course of a prior state court deposition.

In finding that the plaintiff owned the loan despite the letters, the court relied upon an affidavit from the plaintiff, which explained how the misstatements in the letters were made. The court noted that Santander Bank also presented undisputed evidence of its current ownership of the note. The court therefore found that the letters failed to create a sufficient issue of fact with respect to ownership.

In granting the plaintiff’s cross-motion for summary judgment, the court applied the standard as set forth in the case of GMAC Mortgage, LLC v. Ford, 144 Conn. App. 165, 176 (2013), that stated: “In order to establish a prima facie case in a mortgage foreclosure action, the plaintiff must prove by a preponderance of the evidence that it is the owner of the note and mortgage, that the defendant mortgagor has defaulted on the note and that any conditions precedent to foreclosure, as established by the note and mortgage, have been satisfied.”

Having found ownership of the note in denying the borrower-defendant’s motion, the court went on to find that the defendant had defaulted on the note and that the plaintiff had complied with all conditions precedent to foreclosure as set forth in the note and mortgage.

Editor’s Note: The author’s firm represented the plaintiff in the case summarized in this article.

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Connecticut: State Supreme Court Ruling regarding Foreclosures Filed by Condominium Associations

Posted By USFN, Tuesday, August 2, 2016
Updated: Tuesday, July 19, 2016

August 2, 2016

by Jennifer M. McGrath
Hunt Leibert – USFN Member (Connecticut)

Under the Common Interest Ownership Act (CIOA), C.G.S. §§ 47-200, et seq., condominium associations have a statutory lien on every unit for common charges and fines with a nine-month priority over recorded security interests. While an association is required to give mortgagees notice prior to commencing a foreclosure on a unit, it may rely on the land records to determine the identity of mortgagees and, in cases where assignments are not timely recorded, a secured party may not have notice and could miss its law day in the event that the foreclosure goes to judgment. Consequently, liens for common charges have long been a concern for mortgagees and loan servicers, but a recent decision by the Connecticut Supreme Court has provided new grounds to challenge an association’s foreclosure action that can result in dismissal of the case.

Under CIOA, a foreclosure of common charges cannot be commenced without certain conditions precedent, including a vote by the executive board to commence the foreclosure or (in accordance with an amendment to the statute effective July 1, 2010) the option to adopt a standard foreclosure policy. C.G.S. § 47-258(m). This prerequisite was at issue in The Neighborhood Association, Inc. v. Limberger, 321 Conn. 29 (Apr. 26, 2016).

In Limberger, the plaintiff commenced a foreclosure for unpaid common charges; the defendant moved to dismiss, contending that the court lacked subject matter jurisdiction because the plaintiff failed to either vote at executive session to commence the foreclosure, or to adopt a standard foreclosure policy in accordance with CIOA procedures. In opposition, the plaintiff asserted that its executive board had in fact adopted a “standard collection policy” pursuant to CIOA. The association categorized the policy as an “internal business operating procedure,” claiming that it is not subject to the stringent requirements of notice and opportunity to comment that attach to rules adopted by an association.

CIOA does not define an internal business operating procedure. This prompted the Court to examine statutory construction rules, extra textual sources, and the legislative intent to determine whether the foreclosure policy constituted a rule. The Court reasoned that “internal business operating procedures” connotes daily business activities and not policies that impact unit owners’ rights and obligations. Accordingly, the Court held that “[g]iven the real and substantial effect that such matters could have on the circumstances under which unit owners will incur financial obligations and potentially lose their residence, we cannot reasonably construe the policy as anything but a rule.” Id. at 42. The association was, therefore, required to provide notice of the proposed foreclosure policy to all unit owners and an opportunity to comment before the rule was adopted. Having failed to comply with CIOA procedure, the plaintiff could not prove a condition precedent to commencing its foreclosure, and the Supreme Court remanded the matter with instructions to dismiss the case.

Counsel for lenders and servicers should be mindful that liens for delinquent common charges are creatures of statute. Similar to a mechanic’s lien foreclosure, an association’s failure to comply with CIOA’s statutory requirements is a jurisdictional defect that gives defendants grounds to seek dismissal for lack of subject matter jurisdiction. The ruling in Limberger also poses the question of what the decision means for cases filed since the 2010 amendment to C.G.S. § 47-258(m) where plaintiffs have made the same error in adopting foreclosure policies.

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Ohio: House Bill 303 — D.O.L.L.A.R. Deed Program

Posted By USFN, Tuesday, August 2, 2016
Updated: Tuesday, July 19, 2016

August 2, 2016

by Peter L. Mehler
Reimer, Arnovitz, Chernek & Jeffrey Co., L.P.A – USFN Member (Ohio)

Ohio recently passed into law HB 303 or what is being called the D.O.L.L.A.R. deed program. The acronym is short for Deed Over Lender Leaseback Agreed Refinance and provides a loss mitigation alternative for delinquent borrowers. The program will be run by the Ohio Housing Finance Agency, the non-profit that was responsible for distributing over $500,000,000 through the Hardest Hit Funds Program.

The idea is quite simple. A borrower who has defaulted on his mortgage can apply for consideration in the program. In order to qualify, the borrower’s front-end and back-end debt-to-income ratios must fall below the current ratios set by the HAMP program and the borrower must occupy the property. Participation by lenders is optional but those participating must reply to the borrower’s request within 30 days of the submission of the application.

If approved, the borrower and the lender execute a deed-in-lieu of foreclosure. As consideration for the deed, the lender then executes a lease with the borrower that contains an option to purchase. The deed and the lease are then recorded with the county recorder. The term of the lease is for the shorter of the period of time necessary for the borrower to be approved for financing by the FHA or two years from the date of the lease with option-to-purchase agreement. The rental terms shall be one-twelfth per month of the annualized amount due for taxes, insurance, and any condominium or homeowners association dues, if applicable. The lease must also contain an option to purchase by the borrower during the term of the lease.

The lender does not risk having its mortgage extinguished by executing the agreement with the borrower; and, if the borrower defaults under the terms of the lease, he loses his rights under the agreement (including the option to purchase) and is subject to Ohio normal laws of forcible entry and detainer.

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Virginia: State Supreme Court Looks at Subject Matter Jurisdiction in Post-Foreclosure Unlawful Detainer Suits

Posted By USFN, Tuesday, August 2, 2016
Updated: Tuesday, July 19, 2016

August 2, 2016

by E. Edward Farnsworth, Jr.
Samuel I. White, P.C. – USFN Member (Virginia)

Historically, foreclosed borrowers in Virginia have been unable to prevent possession awards in General District Court unlawful detainers by alleging defects in the foreclosure. Such challenges were deemed collateral attacks on title and outside of the statutorily created subject matter jurisdiction of the court. Circuit Courts sitting in their derivative appellate jurisdiction were similarly restrained from considering such defenses. Accordingly, foreclosure purchasers were accustomed to an unfettered path to obtaining an order of possession without much delay.

Borrowers alleging defects in a foreclosure were forced to file separate affirmative suits in the Circuit Court, challenging the sale and seeking remedies to delay enforcement of an award of possession. A recent Virginia Supreme Court decision, however, has granted borrowers a path to present defenses pertaining to challenging the foreclosure sale by mandating prosecution of certain cases in the Circuit Court, rather than in General District Court.

In Parrish v. Federal National Mortgage Association, Record Number 150454 (June 16, 2016), Virginia’s highest Court considered the foreclosed borrowers’ appeal from the Hanover Circuit Court’s award of summary judgment in an unlawful detainer that originated in the General District Court. In the “Grounds of Defense” filed in the General District Court, the Parrishes alleged that the lender violated 12 C.F.R. § 1024.41(g) by proceeding to foreclose where a complete loss mitigation package had been provided more than 37 days prior to sale. The General District Court awarded possession in favor of Fannie Mae, from which the borrowers appealed. In the appeal, Fannie Mae filed a motion for summary judgment, or alternatively, a motion in limine.

The Circuit Court granted Fannie Mae summary judgment, awarding it possession, and the Parrishes appealed to the Virginia Supreme Court. In a 5-2 decision, the Court held that the borrowers had raised a “bona fide claim” that the foreclosure sale, and resulting trustee’s deed, could be set aside. This deprived the General District Court (and the Circuit Court on appeal) of subject matter jurisdiction, requiring dismissal of the unlawful detainer without prejudice, and requiring Fannie Mae to file suit in the Circuit Court in order to obtain possession — where that court’s original jurisdiction permits it to adjudicate issues of title.

The majority in Parrish confirmed that General District Courts have never been granted jurisdiction to try matters of real estate title within actions for unlawful detainer, but they opined that this limitation created a “conundrum because some actions for unlawful detainer necessarily turn on the question of title.” The Court determined that where a plaintiff’s right of possession is based on a claim of title acquired after defendant’s entry, “[t]he question of which of the two parties is entitled to possession is inextricably intertwined with the validity of the foreclosure purchaser’s title” and, because of this intertwining, “the general district court’s lack of subject matter jurisdiction to try title supersedes its subject matter jurisdiction to try unlawful detainer and the court must dismiss the case without prejudice.”

The majority was careful to explain that in order to deprive the court of jurisdiction, such claims “must be legitimate.” The standard outlined by the Court is whether such allegations are sufficient to survive a demurrer had the borrower filed a complaint in the Circuit Court. Applying this newly created standard to the facts of the case, the Court held that the allegations were sufficient to have stated a bona fide claim. The grant of summary judgment was therefore vacated and the case dismissed without prejudice.

With regard to any retroactive application of the ruling, the majority indicated that where a borrower did not previously raise such challenges, the ruling was not subject to collateral attack; and that adverse decisions where the borrower had raised such issues were “voidable” and subject to collateral attack on direct appeal. The impact of Parrish will be a notable increase in costs and eviction timelines where it becomes necessary to proceed through the Circuit Court instead of the more streamlined General District Court process.

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Washington: State Supreme Court Ruling Affecting Pre-Foreclosure Possessory Rights

Posted By USFN, Tuesday, August 2, 2016
Updated: Tuesday, July 19, 2016

August 2, 2016

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

The Washington Supreme Court recently held that deed of trust provisions allowing a lender to “enter, maintain, and secure” a defaulted borrower’s property before foreclosure are unenforceable under Washington law. [Jordan v. Nationstar Mortgage, No. 92081-8 (Wash. July 7, 2016)].

In Jordan, the Court held that entering and securing a property by changing the locks before foreclosure completion constitutes “taking possession” in violation of Washington law. Further, because the standard “entry provisions” found in Paragraph 9 of the Fannie Mae/Freddie Mac Uniform Deed of Trust permit the lender to “take possession” by changing the locks, those provisions are unenforceable in Washington.

Background
The borrower defaulted on her mortgage in January of 2011. Three months later, pursuant to the deed of trust’s entry provisions, the servicer’s vendor inspected the property, determined the house was vacant, and had the lock on the front door changed. The servicer’s vendor posted a sign listing a telephone number to call to gain access to a lockbox with the proper key.

The borrower, who disputes that the property was vacant, came home from work one night and regained access to her home by calling the posted telephone number. She asserts that she vacated the house the next day.

In April 2012, the borrower filed a class action lawsuit in state court against Nationstar Mortgage, alleging trespass, breach of contract, and violations of the Washington Consumer Protection Act and the Fair Debt Collection Practices Act. The trial court certified the class and Nationstar removed the action to federal district court. After both parties moved for partial summary judgment, the district court certified two questions to the Washington Supreme Court:

1. Under Washington’s lien theory of mortgages and RCW 7.28.230(1), can a borrower and lender enter into a contractual agreement prior to default that allows the lender to enter, maintain, and secure the encumbered property prior to foreclosure?

2. Does chapter 7.60 RCW, Washington’s statutory receivership scheme, provide the exclusive remedy, absent postdefault consent by the borrower, for a lender to gain access to an encumbered property prior to foreclosure?

The Court answered both questions in the negative.
Response to Question One — The Court pointed to Washington’s lien theory of mortgages and RCW 7.28.230(1), which prohibit a lender from taking possession of property before foreclosure of the borrower’s home, expressly quoting from the statute: “A mortgage of any interest in real property shall not be deemed a conveyance so as to enable the owner of the mortgage to recover possession of the real property, without a foreclosure and sale according to law.”

The Court held that the servicer’s conduct in this case constituted taking possession because its actions were representative of control. Specifically, rekeying the property had the effect of communicating to the borrower that the servicer “now controlled the property.” The Court stated that even though the servicer did not exclude the borrower from the premises (as she was able to gain a key and enter), she left the next day and did not return. “[The servicer] effectively ousted [Borrower] by changing her locks, exercising its control over the property.”

The Court then held that because the entry provisions authorized changing the locks, these provisions are unenforceable because they conflict with state law.

Response to Question Two — The Court determined that the plain language of the statute and public policy support finding that Chapter 7.60 RCW (receivership) does not provide an exclusive remedy to lenders, but that “[i]t is not before us to determine what particular remedies are available.”

Conclusion
In light of the Jordan decision, lenders and servicers should encourage the legislature to amend RCW 7.28.230(1) to provide for exceptions to the rule that mortgagees cannot take possession of property before foreclosure.

Until then, lenders should not rekey property before foreclosure even if they have evidence that a property is vacant or abandoned. Further, the Jordan holding does not distinguish between abandoned and occupied property. The prohibition on pre-foreclosure possessory actions applies regardless of occupancy status. Moreover, the Court does not address the numerous other actions that lenders take to preserve property under the entry provisions, such as making repairs or maintaining a lawn. If a deed of trust contains the same entry provisions that were held to be unenforceable in this case, lenders cannot rely solely on those provisions as authority.

Servicers or mortgagees seeking possession prior to foreclosure sale should commence the necessary receivership proceedings to legally take possession by court order in advance of the foreclosure sale.

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Washington Court of Appeals: Borrowers’ Bankruptcy Discharge Does Not Impede the Mortgage Lien

Posted By USFN, Tuesday, August 2, 2016
Updated: Monday, July 25, 2016

August 2, 2016

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

The Washington Court of Appeals recently held that it is “settled law” that bankruptcy only discharges a borrower’s personal liability from the underlying debt, leaving the security interest or deed of trust intact. [Edmundson v. Bank of America, No. 74016-4-1 (Wash. Ct. App. July 11, 2016)].

Background: Borrowers defaulted on their mortgage in November of 2008. The following year, in June 2009, they filed a chapter 13 bankruptcy petition and obtained a discharge of their debts in December 2013. The creditor eventually commenced a nonjudicial foreclosure in October 2014. In response, and before the trustee’s foreclosure sale, the borrowers filed suit to restrain the foreclosure and to quiet title to the property, asserting that the deed of trust lien was no longer enforceable. The trial court agreed with the borrowers, ruling that the bankruptcy discharge of their personal liability on the note also discharged the deed of trust. The trial court awarded the borrowers their attorney fees.

On Appeal: The Washington Court of Appeals reversed the trial court’s decision as error, recognizing that the bankruptcy discharge did not affect the right to foreclose the lien or render the lien unenforceable. The appellate court observed that the plain terms of the deed of trust provide for the remedy of foreclosure in the event that the borrowers fail to comply with its covenants, including payment on the note.

Conclusion: This author’s firm has observed an increase in arguments by borrowers that a bankruptcy discharge bars enforcement of the deed of trust and essentially grants a free house to discharged borrowers. While this was never an accurate representation of the law, the Washington Court of Appeals has made it very clear: a bankruptcy discharge does not prohibit subsequent foreclosure. In Oregon, there is another case where the trial judge agreed with the borrower who raised a similar argument; that case is being appealed.

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Wisconsin: Beware of Affirmative Statements in "As Is" REO Sales

Posted By USFN, Tuesday, August 2, 2016
Updated: Friday, July 29, 2016

August 2, 2016

by Patricia Lonzo and Robert Piette
Gray & Associates, L.L.P. – USFN Member (Wisconsin)

Not only does the phrase “buyer beware” ring true for Wisconsin, “seller beware” does as well. A troublesome judicial decision in Wisconsin may require servicers to think twice about relying on the “as is” language typically included in contracts to purchase in REO. The court held Bank of America liable for a deceptive representation that induced the buyer to agree to an as-is sale. [Fricano v. Bank of America, N.A., 2016 Wis. App. 11, 366 Wis. 2d 748, 875 N.W.2d 143]. The representation at issue in Fricano was that the Bank had “little or no direct knowledge about the condition of the property.”

In the case at hand, Bank of America became the owner of the property via a foreclosure. The local real estate agent charged with selling the property discovered severe water damage in the house. The damage was so grave that ceilings were falling down, water was pooling, and water was seeping through to the basement. The local agent reported the condition of the property to Bank of America. The bank approved a trash-out of the property, and it also approved a bid to have mold remediation work performed. The agent initially told the bank that the remediation was complete but later informed the bank that mold still showed on the living room ceiling, in the kitchen, and in the basement. No further mold remediation work took place. Instead, repair work began so that the house could be placed on the market.

The property was placed on the market at a sales price that generated significant interest from buyers. Fricano viewed the property with her fiancé and real estate agent. During their first time through the property the three observed mold in the basement and stairway to the basement. Fricano and her fiancé went through the property a second time with a family member who was familiar with buying foreclosed houses. Fricano put in an offer to purchase, which was one of thirteen offers.

The bank accepted Fricano’s offer, but also provided the disclosures at issue. She was given a Real Estate Purchase Addendum as well as a Water Damage, Toxic Mold Environmental Disclosure, Release and Indemnification Agreement. The documents contained a clause stating that the buyer accepts the property in an “AS IS condition at the time of closing including without limitation, any hidden defects or environmental conditions affecting the Property, whether known or unknown, whether such defects were discoverable through inspection or not.” The documents went on to make disclaimers regarding the physical condition of the house including from water damage or mold, and specifically said that: “Seller does not in any way warrant the cleaning, repairs or remediation, or that the Property is free of Mold.” Moreover, the documents stated that “Buyer has not in any way relied upon any representations or warranties of Seller or Seller’s employees … concerning the past or present existence of Mold or any environmental hazards in or around the Property.” Numerous additional disclaimers were made. The bank represented that it had “little or no direct knowledge about the condition of the property.” The court found that these additional disclosures, which the bank required Fricano to execute, constituted a counteroffer by the bank. The buyer agreed to accept the conditions and waived all claims against the bank relating to the condition of the property.

After having been given the disclaimers and waivers, Fricano proceeded to have the house inspected. The inspector informed Fricano that there had been water leakage and “substantial mold growth.” Fricano was told that mold remained in the home. The inspector recommended that she consult an environmental professional to determine the remediation actions that were necessary. Fricano obtained a quote from a mold remediator, who recommended remediation in the basement and stairs leading to the basement. None of the professionals voiced concerns about mold on the first or second floors of the property. Fricano did not believe that there was mold in the livable areas of the house. She purchased the property. After closing on the house, she began renovations and learned that in fact mold did saturate the living areas of the house. The house was stripped to the studs, remediation took place, and the house was reconstructed. Fricano then sued the bank for misrepresenting that it had “little or no direct knowledge about the condition of the property” when it had actual knowledge of its condition. The claim was brought under Wis. Stat. § 100.18(1), Wisconsin’s deceptive trade practices statute, which is remedial in nature and provides much broader protection than common law misrepresentation claims. Many jurisdictions have similar statutes.

Based upon the thoroughness of the disclaimers and waivers, it is surprising that this case made its way to trial and even more unexpected that the jury, in a conservative county of Wisconsin, awarded damages to Fricano in the amount of $50,000 plus attorney’s fees for a grand total of $372,213.01. The bank asked the judge to overturn the verdict but the trial court denied the motion to do so. The bank appealed. The Court of Appeals affirmed.

The basis for finding the bank liable was that the statement of the bank having “little or no direct knowledge about the condition of the property” was an affirmative statement regarding the condition of the property that was “indisputably false.” The buyer is allowed to rely upon any affirmative statements of the seller. Here, since the bank did have knowledge of the condition of the property, the court concluded that the buyer was falsely induced into agreeing with the as-is clause as a result of the bank’s misrepresentation. In short, for the jury and the appellate court the affirmative “false” statement under Wis. Stat. § 100.18(1) trumped the “as is” clause, disclaimers, waiver, and the buyer’s own knowledge.

REO servicers need to consider erring on the side of caution and disclosing any “known” conditions of the property even though a property is being sold “as is.” At a minimum, REO sellers should not affirmatively state that they have “little or no” knowledge of the condition of the property when in fact they do. It can be argued that under Wis. Stat. § 100.18(1), remaining silent (i.e., making no statements regarding the seller’s knowledge of the condition of the property) while selling the property “as is” would not subject a seller to liability under the statute because no “affirmative misrepresentation” is being made. However, the more prudent course of action is to affirmatively disclose all known substantially adverse conditions of the property along with the efforts (if any) made by the seller to address those conditions. This is particularly true if it is a known substantial condition not readily observable or discoverable by the buyer. Indeed, given the verdict in Fricano, affirmatively disclosing all known substantially adverse conditions can be viewed as the more conservative course of action.

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Oregon: Spotlighted Appellate Cases

Posted By USFN, Monday, August 1, 2016

August 1, 2016

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

Oregon’s legislature was relatively quiet during its non-regular 2016 session with regard to foreclosure legislation. On the other hand, there is judicial news to address. Two notable Oregon appellate cases have been issued in the past year: Hucke set forth certain parameters to prevail on MERS assignment challenges; and Wolf partially opened the door to certain post-sale challenges in potentially requiring some trial court evidentiary record to be made in the face of a borrower’s lawsuit challenging a nonjudicial foreclosure – specifically as to who held the promissory note or, alternatively, MERS’s authority to act for the loan beneficiary.

Hucke — In this case, the Court of Appeals reversed the trial court’s judgment voiding a trustee’s sale, holding that the fact that an assignment of the trust deed was not recorded did not preclude nonjudicial foreclosure. [Hucke v. BAC Home Loans Servicing, L.P., 272 Or. App. 94 (2015)]. Background: the borrower filed suit, asserting that the recorded assignment of the trust deed from MERS, as beneficiary, to Fannie Mae was not effective because MERS was not a “beneficiary” under the Oregon Trust Deed Act (OTDA). However, because the trial court record demonstrated that the originator (GreenPoint Mortgage Funding, Inc.) assigned the trust deed to Fannie Mae when it transferred the promissory note to Fannie Mae, and because that transfer was not a formal, recordable assignment, it did not need to be recorded. Applying the Oregon Supreme Court’s 2013 rulings in Niday and Brandrup on the issue, the appellate court found that transfers of promissory notes need not be recorded before nonjudicial foreclosures can proceed.

As a result, the appellate court determined that Fannie Mae was a successor beneficiary under the OTDA. Fannie Mae, therefore, could appoint a successor trustee and initiate foreclosure proceedings, and the MERS assignment to Fannie Mae was inconsequential to the validity of the foreclosure sale.

Wolf — ORS § 86.797 (1) provides that the property interest of a person, such as a borrower, who received proper notice of a trustee’s sale is foreclosed and terminated by the trustee’s sale. A number of Oregon state and federal courts have concluded that the statute bars post-sale challenges by borrowers who had proper notice of the sale but did not file suit to challenge it pre-sale. Recently, however, the Oregon Court of Appeals held that this statutory bar applies only to a “trustee’s sale” and, thus, does not necessarily preclude a post-sale challenge to the sale of a borrower’s property by someone who was not, in fact, the trustee. [Wolf v. GMAC Mortgage, 276 Or. App. 541 (2016)].

The borrower in Wolf filed suit after the sale but during the eviction efforts, contending that the appointment of LSI Title Company by MERS was invalid because MERS was neither the beneficiary nor did it have authority to make the appointment. The borrower also asserted that LSI was not qualified as a “trustee.” In initially ruling for the lender, the trial court appeared to rely solely on the post-sale statutory bar, and not an analysis of whether the trustee had authority to foreclose. Arguably, though, Wolf is limited to its facts, as the appellate court stated: “We need not resolve, however, whether [ORS 86.797] requires strict compliance with every provision of the [Oregon Trust Deed Act] before a person’s property interests will be terminated by a trustee’s sale.”

Notably, the appellate court did not address the rights of bona fide purchasers in post-sale challenges. Wolf’s contours may be refined further before the end of 2016 because there is at least one other case in the Oregon Court of Appeals concerning the scope of the statutory bar to post-sale challenges.


Hucke and Wolf underscore the importance for trustees, servicers, and lenders of ensuring that the standing of the foreclosing entity can be established and withstand judicial scrutiny. These cases also demonstrate that it is possible to establish the validity of a nonjudicial foreclosure challenged post-sale through other evidence that may not have been apparent in the public title records.

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Minnesota: Dual Tracking Laws

Posted By USFN, Monday, August 1, 2016
August 1, 2016

by Brian H. Liebo
Usset, Weingarden & Liebo, PLLP
USFN Member (Minnesota)

The Minnesota Mortgage Foreclosure Dual Tracking law was enacted in 2013 and codified as Minn. Stat. § 582.043. The relatively new law is comparable to the rules of the Consumer Financial Protection Bureau (CFPB) on dual tracking — with a large difference often initially overlooked by mortgage servicers. While the CFPB rules give borrowers a deadline to apply for loss mitigation of thirty-seven days before the foreclosure sale to qualify for dual tracking protections, the Minnesota statute gives borrowers a more generous deadline of up to seven days prior to the date of the foreclosure sale. Unlike the Minnesota statute, the CFPB dual tracking rules also exclude more borrowers from protection (e.g., borrowers who received bankruptcy relief or who have already gone through the loss mitigation application process, among others).

Since the inception of the dual tracking law, the biggest question that Minnesota practitioners have had is how far “dual tracking” activity would be limited. While some language of the statute is relatively clear, other provisions are more ambiguous. Recent case law may provide some clarification for those latter provisions. Unfortunately, the trend among the courts analyzing the Minnesota dual tracking statute is unfavorable to mortgage servicers and is contrary to initial (and reasonable) interpretations of the statute’s provisions.

Statutory Language — The Minnesota dual tracking statute primarily addresses three different points in a foreclosure: (1) prior to the time that a mortgage servicer refers a loan to an attorney for foreclosure; (2) after a loan has been referred to an attorney for foreclosure but prior to the time that a foreclosure sale has been scheduled; and (3) after a foreclosure sale has been scheduled by a foreclosure attorney but before midnight on the seventh business day prior to a foreclosure sale date.

During each of these three periods, the statute prohibits a mortgage servicer from moving forward with foreclosure activity unless:
• The servicer determines that the mortgagor is not eligible for a loss mitigation option, the servicer informs the mortgagor of this determination in writing, and the applicable appeal period has expired without an appeal or the appeal has been properly denied;
• Where a written offer is made and a written acceptance is required, the mortgagor fails to accept the loss mitigation offer within the time specified in the offer or within 14 days after the date of the offer, whichever is longer; or
• The mortgagor declines a loss mitigation offer in writing.

The statute also prohibits a mortgagee from conducting a foreclosure sale while the mortgagor is complying with the terms of a trial or permanent loan modification (or another loss mitigation option, including where short sale approval has been granted by all necessary parties and proof of funds or financing has been provided to the servicer).

Parsing out the statutory language, it is clear that if a mortgage servicer has received a loss mitigation application before a foreclosure has been referred to an attorney, the servicer must not refer the foreclosure until the terms of the statute have been satisfied. In contrast, the statute appears less clear as to what steps the mortgage servicer can take after a loan has already been referred to an attorney for foreclosure and an application is then received. After that point, the statute provides that if loss mitigation activity is pending, the servicer “shall not move for an order of foreclosure, seek a foreclosure judgment, or conduct a foreclosure sale.” Further, if the servicer receives a loss mitigation application after the foreclosure sale has been scheduled, but before midnight on the seventh business day prior to the foreclosure sale date, the servicer must “halt the foreclosure sale” and evaluate the application.

Although judicial foreclosures can occur in Minnesota, the predominant method of foreclosing mortgages is through nonjudicial foreclosure by advertisement proceedings. That method involves serving various notices and publishing a notice of foreclosure sale for six consecutive weeks. The final point of the foreclosure sale can be postponed to later dates by publishing the postponements and serving additional notices.

The dual tracking statute contains the vague phrase, “halt the foreclosure sale,” which is not contained in any other foreclosure statute and is undefined. However, the statute does appear to indicate that the operative point of a foreclosure where action must be taken to stop the dual activities of loss mitigation and mortgage foreclosure is the time of the foreclosure sale, rather than earlier in the foreclosure proceedings. That interpretation would be consistent with the other statutory provision prohibiting a servicer from “conducting a foreclosure sale” when a loss mitigation application is pending.

Nowhere does the dual tracking statute explicitly prohibit mortgage servicers from commencing or continuing “foreclosure proceedings” after referral while loss mitigation activities are occurring. Instead, the statutory language appears to focus solely on the point of the foreclosure sale with respect to nonjudicial foreclosures. On the other hand, since Minnesota is a “stop and restart state” for foreclosures, halting the foreclosure sale could also mean that the foreclosure sale must be cancelled altogether, and then foreclosure proceedings be restarted later with a new foreclosure sale date. But, given that the legislature could have easily written language requiring that the mortgage foreclosure proceedings be halted in their entirety — instead of just the foreclosure sale — it would appear more reasonable to interpret the statute to allow mortgage servicers to postpone sheriff’s sales if a loss mitigation application is received after a foreclosure referral, rather than require that servicers scrap the whole foreclosure process during the application review period.

Based on the statutory language, mortgage servicers believed they could delay the foreclosure sale by postponing it if they needed more time to complete a loss mitigation application review and denial process. Borrowers’ attorneys also accepted the rationale that a foreclosure sale could be postponed for loss mitigation review, and would routinely request that postponement accommodation while citing the dual tracking statute.

Case Law — Recent cases, however, appear to defy this reasonable interpretation of the statute and indicate that foreclosure proceedings must be cancelled in their entirety (instead of at just the point of foreclosure sale) if timely loss mitigation applications are submitted to mortgage servicers. In Hall v. The Bank of New York Mellon, 2016 U.S. Dist. LEXIS 66642 (D. Minn. 2016), a federal district court appears to have misquoted the dual tracking statute in holding that nonjudicial foreclosure proceedings must be stopped in their entirety once a loss mitigation application is timely submitted. In that case, the borrowers submitted a loan modification application to the mortgage servicer and then received a notice of foreclosure sale two days later.

Prior to the date of the foreclosure sale, the mortgage servicer denied the application and gave the borrowers 30 days to appeal the decision. The borrowers filed an appeal with the mortgage servicer, and the servicer had the sale conducted during the appeal period. While the court in Hall properly identified that “[t]he statute states that servicers must ‘halt’ the foreclosure sale” after receiving timely loss mitigation applications, the court later identified that “the statute requires servicers to ‘halt’ the foreclosure, which means that all proceedings should be suspended or stopped pending an application review” (emphasis added). Hall ultimately held that the borrowers’ allegation that the mortgage servicer “continued to pursue foreclosure” after receiving the loan modification application stated a viable claim for a violation of the dual tracking statute. The broader holding in Hall and the court’s analysis of the statute was surprising given that the court could have focused solely on the fact that the foreclosure sale was held during the alleged appeal period in contravention of the plain language of the statute.

While the Hall decision appears to have resulted from a possible misreading of the Minnesota dual tracking statute, that court may not be alone in interpreting the statute to require the termination of foreclosure proceedings in their entirety upon the submission of a timely loss mitigation application by a borrower. The Hall court cited Mann v. Nationstar Mortgage, LLC, 2015 U.S. Dist. LEXIS 87772 (D. Minn. 2015). However the borrowers in Mann did not claim that the mortgage servicer was required to stop all foreclosure proceedings after they submitted their loss mitigation application for review. Instead, the borrowers asserted that the servicer violated the dual tracking statute “based on its failure to postpone the Sheriff’s Sale” despite having timely received a loan modification application. Notwithstanding that narrow claim, the Mann court made a ruling broader than the exact language of the dual tracking statute, stating that “the purpose of the dual tracking statute is to prevent mortgage servicers from having it both ways: a servicer cannot ‘pursue mortgage foreclosure’ while also considering a borrower’s timely submitted application.” Regardless, the Mann court ultimately focused on whether the foreclosure sale should have been halted or conducted, whereas the Hall court also looked to whether the entire foreclosure proceedings should have been stopped.

The Minnesota Court of Appeals has also looked at this issue and appears to be consistent with the federal district courts. In an unpublished decision, the Court of Appeals wrote, “when a servicer receives a loss-mitigation application, it must halt ‘foreclosure proceedings’ until the application has been processed.” Wells Fargo Bank, N.A. v. Lansing, 2015 Minn. App. Unpub. LEXIS 132 (Minn. Ct. App. 2015). That court also appears to have disregarded that language of the Minnesota dual tracking statute requiring the halting of the foreclosure sale, rather than the halting of the foreclosure proceedings.

None of the foregoing cases is actually binding precedent in Minnesota, being that they are either federal district court level decisions or unreported state court decisions. Still, they are highly illustrative of how the courts are viewing the Minnesota dual tracking laws. Although they may not always be precise in how they are citing the language of the dual tracking statute, the courts do set forth logical reasoning in how they are interpreting the more vague statutory portions. Considering the title of the statute at issue, it is clear that the original purpose of the statute is to prevent mortgage servicers from pursuing two activities at the same time; i.e., processing loss mitigation applications and foreclosure proceedings simultaneously.

In the current environment, the safest approach for servicers would be to stop foreclosure proceedings in their entirety during the pendency of loss mitigation applications or other activities, given the tone of the cited cases, and until binding precedent holds otherwise. Failure to take this conservative route could result in an invalidated foreclosure and an award of attorneys’ fees to borrowers under the dual tracking statute.

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Michigan: Lenders’ Rights against Non-Borrower Third Parties

Posted By USFN, Monday, August 1, 2016

August 1, 2016

by Regina M. Slowey
Orlans Associates, P.C.
USFN Member (Michigan)

On April 13, 2016 the Michigan Supreme Court handed down an opinion in Bank of America, NA v. First American Title Insurance Company, which resulted in a ruling favorable to lenders.

The main issues in the case were threefold: (1) whether the full credit bid rule, as a matter of law, precludes lenders or their assigns from contract claims against non-borrower third parties; (2) whether closing instructions issued to title closing agents constitute a distinct contract between the closing agent and the lenders, unmodified by a closing protection letter (CPL) issued by the agent’s underwriter; and (3) whether the change in wording of the closing protection letter by one word — “in” — is enough to broaden the scope of possible actions required to be indemnified by the underwriter.

Most importantly, to the extent that it conflicts with Bank of America v. First American, the Michigan Supreme Court overruled precedent established in New Freedom Mortgage Corporation v. Globe Mortgage Corporation, 281 Mich. App. 63 (2008). The New Freedom case held that when a mortgagee takes title to a property pursuant to a full credit bid, the mortgagee (or any assigns) are barred from pursuing claims against non-borrower third parties, including actions of fraud or breach of contract against a closing agent or its underwriter via a CPL.

In Bank of America v. First American, the Michigan Supreme Court held that no justification exists to alter the rights and remedies between a mortgagee and non-borrower third parties. Thus, the lender is free to bring an action for damages resulting in the breach of the closing instructions to the closing agent, and for indemnification pursuant to the terms of the closing protection letter issued by the agent’s underwriter.

The Court went on to strengthen the lender’s ability to enforce its rights via closing instructions to the closing agents, ruling that closing instructions are contracts upon which a breach of contract action may lie and, further, that the closing instructions are not altered or truncated by the underwriter’s CPL. This was in direct contradiction to the lower court’s ruling.

Finally, the Court decided that the wording of the closing protection letter should be scrutinized. In the subject case, the underwriter had a broader liability than the underwriter in New Freedom. In New Freedom, the Court stated that the underwriter was not liable because the CPL stated that the insurer was liable only for “fraud or dishonesty of the issuing agent in handling the funds or documents in connection with the closings, which the Court took to limit the liability of the agent to the actions directly connected to handling the funds.”

In contrast, the CPL at issue in Bank of America v. First American Title Insurance Company indicated that the insurer was liable for “fraud or dishonesty of the issuing agent handling the funds or documents in connection with the closings.” The simple lack of the word “in” broadened the liability so that the insurer may become liable for any damages caused by the dishonesty of the agent, despite the fact that the agent did not misappropriate the funds.

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Alaska: State Supreme Court Rules that Foreclosure is “Debt Collection” under FDCPA

Posted By USFN, Monday, August 1, 2016

August 1, 2016 

 

by Richard Ullstrom
RCO Legal – Alaska, Inc.
USFN Member (Alaska, Oregon, Washington)

This article is expanded from one that appeared in the USFN e-Update (April 2016 Ed.).

A divided Alaska Supreme Court has ruled that nonjudicial foreclosures constitute “debt collection” under the federal Fair Debt Collection Practices Act (FDCPA), making a foreclosure trustee a “debt collector” even if it confined its activities solely to those required to process the foreclosure. The Court also held that an FDCPA violation was per se a violation of the Alaska Unfair Trade Practices Act (UTPA), departing from established case law holding that the UTPA did not apply to transactions involving real property, including nonjudicial foreclosures.

In Alaska Trustee v. Ambridge, the foreclosure trustee sent the Ambridges a statutorily-required notice of default (NOD) that fully complied with Alaska law. However, the NOD did not state the total amount of the debt as required by the FDCPA for a first communication with the debtor, and was not followed up within five days by a statement of the total amount due. The Ambridges sued both the foreclosure trustee and its owner, who was not personally involved in the sending of the NOD. The Ambridges claimed that the NOD violated the FDCPA and UTPA, even though they had not been harmed or deceived by it in any way. The trial court ruled in favor of the Ambridges, and the Alaska Supreme Court affirmed.

On the FDCPA claim, although the weight of authority at the federal district court level was to the contrary, the Supreme Court chose to follow the line of cases holding that foreclosure constituted “debt collection” even when no demand for payment of the debt was made and the actions of the foreclosure trustee were only those needed to enforce the creditor’s security interest in the collateral. The dissenting opinion contended that this nullified the exclusion of enforcers of security interests from most of the FDCPA, but the majority reasoned that this exclusion applied only to auto repossession agencies and similar entities. The Supreme Court did reverse the trial court as to the liability of the owner of the trustee company, ruling that personal involvement in the violation was necessary to give rise to liability.

On the UTPA claim, the majority ruled that the FDCPA violation also breached the UTPA because the FDCPA provided that a violation was to be considered an unfair or deceptive act or practice in violation of the Federal Trade Commission Act (FTCA). The Alaska UTPA, in turn, prohibits unfair or deceptive acts or practices and requires that the Alaska courts give consideration to interpretations of the FTCA in applying the UTPA. Thus, even though the NOD was not objectively unfair or deceptive, it was considered a UTPA violation simply because it violated the FDCPA. In reaching this result, the Court distinguished longstanding precedent that the UTPA did not apply to real property transactions including foreclosures by noting that “there are different avenues to coverage under the UTPA.”

This judicial ruling is significant because the UTPA provides for an award of full attorney fees to a successful plaintiff, which will encourage borrowers’ attorneys to assert violations of the FDCPA or federal laws with similar provisions, such as the Truth in Lending Act. The Ambridge opinion is available at http://www.courtrecords.alaska.gov/webdocs/opinions/ops/sp-7084.pdf.

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Reverse Mortgage Concerns: Occupancy Determination

Posted By USFN, Monday, August 1, 2016

August 1, 2016

by Jillian H. Wilson
Wilson & Associates, P.L.L.C.
USFN Member (Arkansas, Mississippi, Tennessee)

The reverse mortgage is one of the more powerful financial tools available to seniors due to its ability to increase their monthly income at a dramatic rate. However, management of the product can be difficult due to complex requirements from both the consumer and industry perspectives. Reverse mortgages are the subject of some criticism as a result of these management issues, but the ability to identify and resolve them makes the product stronger every year.

Surviving Non-Borrower Spouse
To illustrate one concern, we can point to the common anecdote of the surviving non-borrower spouse who quickly discovers a dramatically reduced income (as well as foreclosure notices in the mail) upon the death of his or her significant other. To handle this situation, HUD amended its reverse mortgage program in 2014 to better protect individuals in this scenario by providing some guidelines for a non-borrower spouse to remain in the home with the mortgage in place. The primary changes are: (1) the surviving spouse and borrowing spouse must have been married at the time the loan closed and until the borrowing spouse’s death; (2) the non-borrowing spouse was properly disclosed to the lender during origination and named as such in the mortgage documents; and (3) the surviving non-borrowing spouse must use the property as his or her principal residence.

Occupancy
A primary issue today is the occupancy requirement. Currently for a reverse mortgage, the property must be the borrower’s primary residence. Absences for illness are limited to twelve months. Many lenders satisfy the occupancy requirement with an annual “occupancy certification.” The borrower must complete and return to the lender a certification as evidence that the borrower occupies the property. However, a problem lies in the fact that the security instrument does not discuss or require this occupancy certification; it is merely a procedure used by servicers to determine the occupancy status of the borrower.

Borrowers have encountered trouble satisfying the annual certification due to lack of knowledge, confusion as to this requirement, or a failure to complete it on an annual basis. Moreover, borrowers misplace mail regularly; they become ill and require care for longer than one year; and some lose the ability to read effectively. Any of these factors gives rise to legitimate concern regarding foreclosure based on non-occupancy — particularly when it can lead to an inadvertent finding of non-occupancy. This inadvertence can trigger a foreclosure in conflict with the terms of the security instrument, and subsequently nullify a foreclosure and require proceedings to re-instate the mortgage. These are costs that the mortgage industry would like to avoid.

Is there a better way to determine occupancy with regard to reverse mortgages?
One solution is to conduct an annual inspection, including an occupancy determination. The borrower could have the opportunity to prove his or her occupancy status. This would provide lenders with a more concrete basis for initiation of foreclosure due to non-occupancy. Inspection costs are far less than those incurred in defending a lawsuit for unlawful foreclosure, and would better serve as a lender’s due diligence in loan servicing practices.

Alternatively, lenders proceeding with foreclosure based on non-occupancy could instruct process servers to examine the subject property for proof of occupancy — and, particularly, for evidence of the individuals who are residing there. Many process servers and realtors already have the skills to investigate this information by reviewing utility and mail records. The process server is in the position to deliver a letter describing the occupancy requirement and a copy of the lender’s occupancy certification document to the occupant/borrower. If the occupant is the borrower, the process server can easily make certain that the certification paper is completed and returned to the lender. If the certification matches, foreclosure proceedings can be discontinued, and the borrower can be educated as to the importance of the occupancy certification.

In jurisdictions that employ nonjudicial foreclosures, where no process server is utilized, lenders can modify the certification procedure. For example, lenders can ensure that the certification document uses plain language and states, conspicuously, that the repercussions for not completing the certification process can result in foreclosure. Lenders can also consider making the certification paper the size of a response card with a return envelope, so that it stands out to the recipient and provides a simple means of satisfying the occupancy condition. And finally, lenders in nonjudicial jurisdictions can institute skip trace procedures when non-occupancy is declared on a property. If the current address indicates that the borrowers still occupy the property, additional inspections could be initiated to confirm occupancy and prevent an inappropriate foreclosure.

Lately, the industry has observed an increase in successfully contested foreclosures of reverse mortgages when based on improper findings of non-occupancy. These contested actions are expensive and discredit the financial tools from which many consumers could benefit. In order to maintain a positive consumer/business relationship, it is imperative that these concerns be addressed by ensuring that our industry fulfills a high level of quality across the board.

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Alabama — New Homeowners’ Association Act

Posted By USFN, Monday, August 1, 2016

August 1, 2106

by Pamela King
Sirote & Permutt, P.C.
USFN Member (Alabama)

On May 26, 2015 the Alabama Legislature passed the Alabama Homeowners’ Association Act (Act), which is codified in the Alabama Code §§ 35-20-1 through 14. This is the first Alabama law specifically addressing homeowners’ associations (HOAs). The law applies to HOAs created on or after January 1, 2016. HOAs existing prior to January 1, 2016 may elect to be governed by the Act.

The Act requires an HOA to be organized as a nonprofit corporation, under the Alabama Nonprofit Corporation Act. As a result, HOAs are required to file association documents with the secretary of state’s office, and the secretary of state must maintain the documents in a publicly searchable database. In return, the HOAs are provided statutory basis for adopting and enforcing rules regarding use of common areas, tenant-related issues, and assessments and liens.

The Act specifies the procedures for filing and enforcing assessment liens. Most notable is the lien priority information. The Act does not create a super-lien priority for HOA assessment liens. The statute provides that the lien has priority over subsequent liens, except as to state and county ad valorem taxes, municipal improvement assessments, UCC fixture filings, mortgages, and deeds of trust securing indebtedness.

Procedurally, the applicable HOAs shall have liens for unpaid assessments that arise on and from the date the assessment is due. Written notice of the assessment and lien must be given to the owner, by personal delivery or first-class mail, and the association must record a verified statement of lien within twelve months from the date that the assessment becomes due. The lien may be enforced or foreclosed as set forth in the declaration, the governing documents, or Section 12 of the Act. The HOA may bring an action in court to enforce a lien, and that court may enforce the lien by a sale of the property. Notice of the sale shall be by publication once a week for three consecutive weeks in the counties in which the property is located.

Until now, Alabama law regarding HOAs has been very uncertain. Many HOAs have attempted to create their own “super-priority” status in their individual declarations. These HOAs aggressively pursue all HOA dues after the foreclosure regardless of assessment date. If the dues are not paid after foreclosure, the HOAs will try to collect the delinquent dues from the REO purchaser — which often brings the REO purchaser back to the title underwriter or the closing attorney for resolution. As a result, many title underwriters in Alabama require HOA dues to be paid at REO to avoid the aforementioned scenario. Practically speaking, paying the delinquent HOA dues at the REO point is often times more cost-effective than incurring legal fees to challenge the HOA’s position.

The effects of the Act may take some time to settle in. The Act is not retroactive, and only governs HOAs created after January 1, 2016, and existing HOAs that elect to be governed by the Act. Therefore, it is likely that many HOAs will still assert their contractual “super-priority.” Existing HOAs may elect to maintain the status quo until such time as newly created HOAs begin to exhibit the benefits of the Act. Moving forward, the industry should benefit from the statutory guidance as to the super-priority status, as well as the availability of current and searchable HOA records.

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Legislative Updates: Washington

Posted By USFN, Monday, August 1, 2016

August 1, 2016

by Susana Chambers
RCO Legal, P.S.
USFN Member (Alaska, Oregon, Washington)

This article appeared in the USFN e-Update (June 2016 ed.) and is reprinted here for those readers who missed it.

There are two recent changes to the Washington Foreclosure Fairness Act: one affects how the foreclosure tax is obtained from beneficiaries, reducing overall exemptions from the foreclosure tax; and the second increases the required fee to participate in mediation.

Changes to the Foreclosure Fairness Account
—Legislation enacted in 2011 created the Foreclosure Fairness Account (Account) and imposed a “foreclosure tax” that required payment by any beneficiary issuing a notice of default on owner-occupied real property in Washington. For each owner-occupied residential real property for which a notice of default was issued, the beneficiary is required to remit $250 to the Department of Commerce (Commerce). Certain exceptions applied to the foreclosure tax and excluded any beneficiary or loan servicer that is FDIC-insured, and certifies under penalty of perjury that it has issued less than 250 notices of default in the preceding year.

Funds from the account are allocated among various agencies including Commerce, housing counselor agencies, the attorney general’s Consumer Protection Division, Office of Civil Legal Aid, and the Department of Financial Institutions.

RCW 61.24.172 was amended to change the allocation of the funds in the Foreclosure Fairness Account, redistributing the funds amongst the agencies mentioned above, increasing the portion for some agencies and decreasing the distribution to others.

The statute was further amended to change the foreclosure tax to a tax on the notice of trustee’s sale, rather than the notice of default. Since July 1, 2016 every beneficiary on whose behalf a notice of trustee’s sale for residential real property has been recorded in the county records must:

1. Report to Commerce the number of notices of trustee’s sale recorded for each residential property during the previous quarter. Commerce has confirmed that the report and payment for the 2016 second quarter (April-June) is due by August 14, 2016 and is based on the number of notices of trustee’s sale, rather than notices of default.

2. Remit $250 for every notice of trustee’s sale recorded for each residential property during the previous quarter to Commerce to be deposited into the Foreclosure Fairness Account. The total amount due must be remitted in a lump sum each quarter.

3. Report and update beneficiary contact information for the person and work-group responsible for the beneficiary’s compliance with these requirements.

There are still several exceptions to the foreclosure tax, including:

1. The $250 payment does not apply to the recording of an amended notice of trustee’s sale.

2. If the beneficiary previously made a payment under RCW 61.24.174 as it existed prior to the effective date of the amendment for a notice of default supporting the recorded notice of trustee’s sale, no additional payment is required.

3. The foreclosure tax does not apply to any beneficiary or loan servicer that is FDIC-insured and certifies under penalty of perjury that fewer than 50 notices of trustee’s sale were recorded on its behalf in the preceding year. Commerce has confirmed that beneficiaries will need to recertify their status to be exempt from paying the fees for the remainder of 2016. New exemption forms are available on Commerce’s website: http://www.commerce.wa.gov/.

Failure to comply with the statute is considered an unfair or deceptive act in trade or commerce and an unfair method of competition in violation of the Consumer Protection Act, Chapter 19.86 RCW.

Increase of Mediator Fees — Since 2011, mediation fees charged by the mediator have been capped at $400 (split evenly between the borrower and beneficiary) for up to three hours of mediation. The statute also included a vague reference to “reasonable” fees that mediators were permitted to charge for rescheduling mediation sessions, or for mediations lasting longer than three hours.

Effective May 1, 2016 Commerce has used its statutory authority to increase mediation fees, as published in the Foreclosure Fairness Program Guidelines, available at: http://classic.commerce.wa.gov/Documents/FFP%20Guidelines%201-20-2015.pdf. The new mediation fee is $600 (split evenly between the borrower and beneficiary), and up to $300 for a rescheduling fee.

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