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Washington: Deed of Trust Enforceability

Posted By USFN, Monday, May 2, 2016

May 2, 2016

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

The Washington Supreme Court issued a decision in OneWest Bank, FSB v. Erickson (Feb. 4, 2016), reversing a Court of Appeals ruling that invalidated the lender’s deed of trust because an Idaho court had appointed a conservator who encumbered Washington property. The Supreme Court applied full faith and credit to the Idaho order and found that foreclosure was proper.

Background: In 2007, Erickson’s father (McKee) executed a quitclaim deed for the subject property conveying title to Erickson. Erickson failed to record that instrument until 2011. In the interim, an Idaho court appointed a conservator to manage McKee’s property, which included facilitating a reverse mortgage that Erickson also approved. When McKee died, OneWest — as successor in interest to the originating lender — commenced a judicial foreclosure and Erickson sued to stop the process.

Erickson asserted three theories: (1) that OneWest should have known she possessed title to the property when the reverse mortgage was originated; (2) that the conservator lacked authority to encumber Washington property; and (3) that OneWest did not hold the secured note it was seeking to enforce. The trial court granted summary judgment to OneWest.

The Supreme Court agreed with this outcome and reversed the Court of Appeals, holding that Washington courts must give full faith and credit to the Idaho proceeding, and Erickson could not collaterally attack the resulting decision. The Supreme Court found that the Idaho orders at issue fell within that court’s in personam jurisdiction to adjudicate McKee’s interest in out-of-state property, and did not rise to the level of directly transferring legal title because the mortgage was not a conveyance under Washington law (which adopts a lien theory).

The Supreme Court further ruled that Erickson took title to the property subject to OneWest’s reverse mortgage because Erickson’s “secret” interest was not publicly recorded, even though the quitclaim deed had been disclosed in earlier court records.

Additional findings were made by the Supreme Court on other issues raised in the case, including admissibility of the Idaho order as a business record, proper notarization of the deed of trust, and OneWest’s status as the note holder. All matters were resolved in OneWest’s favor.

Erickson provides clear guidance that deeds of trust may still be enforced in Washington even when they were originated by virtue of extrajurisdictional authorization.

The Supreme Court’s opinion is at http://www.courts.wa.gov/opinions/pdf/912831.pdf.

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Michigan: Substantive BK Rule Changes (Eastern District)

Posted By USFN, Monday, May 2, 2016

May 2, 2016

by Kim Rattet
Trott Law, P.C.
USFN Member (Michigan)

At the start of 2016 the U.S. District Court for the Eastern District of Michigan entered Administrative Order 16-AO-006, calling for fundamental changes to the Local Bankruptcy Rules. The revised local bankruptcy rules, which went into effect February 1, 2016, are directly impacting the local practices in consumer bankruptcy cases, particularly as they relate to chapters 7, 11, and 13. As such, it is worth reviewing the adjustments that are taking place to satisfy the new guidelines.

Chapter 13 — Changes relating to chapter 13 bankruptcy cases were especially extensive:
• Under E.D. Mich. Rule 2015-3, there are new rules for trustee’s procedures following a chapter 13 plan completion. It was previously stated that “any pre-petition or post-petition defaults have been cured and the claim is in all respects current, with no escrow balance, late charges, costs or attorney fees owing.” Now, the language has been updated to eliminate the latter portion. As such, the current rule reads: “with respect to any secured claim that continues beyond the term of the plan, any pre-petition or post-petition defaults have been cured. [E.D. Mich. L.B.R. 2015-3(a)(3)].
• Clarity has also been added to Section (a)(4) of chapter 13 cases, which outlines that in instances where the stay has been terminated as to a creditor, the response to a notice of a final cure under Fed. R. Bankr. P. 3002.1 no longer applies.
• Lastly, payment changes are now in place that allow for a “Notice of Inability to Comply with Timing Requirements.” Applicable for creditors whose claims are secured by a mortgage where the debtor’s payment obligation is susceptible to change multiple times in a 60-day period, a creditor may file a “Notice of Inability to Comply with Local Rule 3001-2(a) Deadline” as an attachment to any proposed payment change filed under subpart (a). Should an objection not be made within 14 days, or unless otherwise stated by the court, the trustee must execute the payment change stated in the notice of payment change versus the previous 21 days after service of the notice.

Chapter 7 — There is now a new form that must be used in chapter 7 reaffirmation agreements. For a reaffirmation without an attorney certification, a coversheet must be included with the motion as specified in § 524(k)(1) and Fed. R. Bankr. P. 4008. The motion needs to be titled and filed in the ECF event, “Motion for Approval of Reaffirmation – Presumption of Undue Hardship Applies.”

Chapter 11 — For chapter 11 bankruptcy cases in which a combined plan and disclosure agreement are entered, there is a seven-day window prior to the first scheduled date of the confirmation hearing to file an election, as outlined under § 1111(b).

All Bankruptcy Cases — There are also several revisions to general bankruptcy requirements. Listed below are a few of the noteworthy changes:
• Transfer of Claims – According to E.D. Mich. L.B.R. 3001-1, “any assignments or other evidence of a transfer of claim filed after the proof of claim has been filed must include the claim number of the claim to be transferred.”
• Motion for Relief from the Stay or Stipulation – This new requirement is interesting as it eliminates any timing advantage for filing a motion for release versus filing a stipulation. As written in the approved changes, any motion seeking relief from the stay must be served under Fed. R. Bankr. P. 4001 and signed by all interested parties (i.e., the debtor, trustee, any party with interest in the property, or any party requesting notice). In the event that the signatures of all required parties are not received, a motion to approve the stipulation must be filed.
• Procedure for Ex Parte Motions – Under E.D. Mich. L.B.R. 9037, an official procedure has been established for parties seeking to restrict access to documents containing protected private information. The unredacted information must be in violation of the Fed. R. Bankr. P. 9037(a) before a party can file an ex parte motion, which will restrict access to the pleading while the motion is pending. Upon granting the motion, there is a seven-day window to file a redacted replacement document.

For a complete breakdown of all of the changes, visit the website for the U.S. Bankruptcy Court for the Eastern District of Michigan (http://www.mieb.uscourts.gov/).

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Spring 2016 USFN Report

 

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California: Challenging an Assignment Post-Foreclosure: Borrower has Standing

Posted By USFN, Monday, May 2, 2016

May 2, 2016

by Kayo Manson-Tompkins
The Wolf Firm
USFN Member (California)

The California Supreme Court has held that a borrower has standing to challenge an assignment of a deed of trust post-foreclosure. [Yvanova v. New Century Mortgage Corporation, 2016 Cal. LEXIS 956; WL 639526 (Feb. 18, 2016)]. Specifically, the Court concluded that, “a home loan borrower has standing to claim a nonjudicial foreclosure was wrongful because an assignment by which the foreclosing party purportedly took a beneficial interest in the deed of trust was not merely voidable but void, depriving the foreclosing party of any legitimate authority to order a trustee’s sale.”

This was a very surprising result. The great weight of authority in California — and throughout nonjudicial states — had been that a borrower did not have standing to challenge an assignment of mortgage, and thus a foreclosure could not be overturned if there was an improper assignment. [See, e.g., Jenkins v. JPMorgan Chase Bank, N.A., 216 Cal. App. 4th 497, 156 Cal. Rptr. 3d 912 (2013); Siliga v. Mortgage Electronic Registration Systems, Inc., 219 Cal. App. 4th 75, 161 Cal. Rptr. 3d 500 (2013); Fontenot v. Wells Fargo Bank, N.A., 198 Cal. App. 4th 256, 129 Cal. Rptr. 3d 467 (2011); and Herrera v. Federal National Mortgage Assn., 205 Cal. App. 4th 1495, 141 Cal. Rptr. 3d 326 (2012)].

The California Supreme Court disagreed with this logic, stating that the borrower does not owe monies to the “world at large” but to the entity that is legitimately entitled to payment and to enforce the debt against the security. The “harm” caused to the borrower is the loss of his home. The Supreme Court reversed the Court of Appeals’ judgment and remanded the case to reconsider whether Yvanova could file an amended complaint to plead wrongful foreclosure.

Borrowers now have another arrow in their quiver to potentially shoot down otherwise valid foreclosures. Cognizant of the upheaval this ruling would cause, the Supreme Court tried to carefully limit its holding. First, the Court made clear that its decision was limited to the issue of whether a borrower has standing to challenge an assignment of the deed of trust in a post-foreclosure proceeding. By doing so, the Court did not overturn decisions that precluded borrower standing on challenges made pre-foreclosure sale. Specifically, the Court stated:

"[D]isallowing the use of a lawsuit to preempt a nonjudicial foreclosure, is not within the scope of our review, which is limited to a borrower’s standing to challenge an assignment in an action seeking remedies for wrongful foreclosure … the concrete question in the present case is whether plaintiff should be permitted to amend her complaint to seek redress, in a wrongful foreclosure count, for the trustee’s sale that has already taken place. We do not address the distinct question of whether, or under what circumstances, a borrower may bring an action for injunctive or declaratory relief to prevent a foreclosure sale from going forward."

Additionally, the Court made clear that it expressed no opinion as to whether the assignment was actually void, or whether any other challenges made by the borrower to the foreclosure were valid.

The immediate outcome of the Yvanova decision is that lenders and servicers will no longer be able to use a demurrer to quickly, and cost effectively, resolve litigation challenging the assignment (i.e., seek dismissal for the borrower-plaintiff’s failure to state a cause of action). Instead the matter will have to be litigated, thereby causing increased discovery costs as well as more lengthy and costly trials. Further, and despite the Court’s clear language that its ruling only applied to post-foreclosure actions, a rash of cases wrongfully using the Yvanova decision to challenge pending foreclosures can be anticipated.

Potential Title Claims — Finally, it is expected that the Yvanova case will result in previously precluded title claims now being raised in eviction proceedings. California eviction judges generally follow longstanding judicial decisions that title issues are not properly before the court in an eviction proceeding. For example, Old National Financial Services, Inc. v. Seibert, 194 Cal. App.3d 460 (1987), states at 465:

“... where the plaintiff in the unlawful detainer action is the purchaser at the trustee’s sale, he or she ‘need only prove a sale in compliance with the statute and the deed of trust, followed by a purchase at such sale and the defendant may only raise objections on that phase of the issue of title. Matters affecting the validity of the … primary obligation itself … are neither properly raised in this summary proceeding for possession, nor are they concluded by the judgment.’ (citations omitted).” (Emphasis is the court’s.)

The reasoning behind this rule is simple: “Because of its summary character, an unlawful detainer action is not a suitable vehicle to try complicated ownership issues …” [Mehr v. Superior Court, 139 Cal. App. 3d 1044, 1049 (1983)].

Nonetheless, even prior to the Yvanova decision, there were some California eviction judges who ignored precedent and believed that defendants were able to raise title issues as a defense to eviction, especially where those title issues related to alleged wrongful assignments. The Yvanova decision adds fuel to this fire.

Another case now pending before the California Supreme Court may definitively decide whether or not title issues can be raised in eviction proceedings. That is, Boyce v. T.D. Service Co., 235 Cal. App. 4th 429 (2015), which was ordered de-published pending review. Although the primary issue in Boyce concerns whether the lower court was in error in granting judgment based on res judicata, the underlying defense by the borrower was an alleged void assignment. The Boyce case has been ongoing since 2012, and the California Supreme Court was awaiting its decision in Yvanova before rendering an opinion in Boyce.

If the California Supreme Court allows defendants to litigate title in eviction actions, it will transform an otherwise summary proceeding into a lengthy and expensive trial. However, even if the pending decision in Boyce limits the ability to litigate title issues in eviction actions, Yvanova holds that a borrower has the right to challenge the validity of the beneficiary’s right to foreclose in a post-sale wrongful foreclosure action. Accordingly, the borrower can simply seek a stay of the summary eviction action, pending the separate title litigation. Of course, this will cause significant delays in obtaining possession of the property.

The California Supreme Court has spoken and, while it has tried to limit its ruling, the practical effect will be an increase in the frequency of litigation and a rise in the cost of that litigation.

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MERS Challenges Statute Affecting “Nominee” Recording Fees: Connecticut Supreme Court Upholds Statute

Posted By USFN, Monday, May 2, 2016

May 2, 2016

by Adam L. Bendett
and Robert J. Wichowski
Bendett & McHugh, PC
USFN Member (Connecticut, Maine, Vermont)

In the case of MERSCORP Holdings, Inc. v. Malloy, 320 Conn 26 (Feb. 23, 2016), the Connecticut Supreme Court has upheld the validity of a statute that tripled the recording fees for any entity referring to itself as a “nominee.” The Connecticut State Legislature amended Connecticut General Statute § 7-34a(a)(2) and § 49-10(h) in 2013 to increase the cost of recording documents related to a mortgage by the nominee of that mortgage. For a release of mortgage or assignment of mortgage, the recording costs increased from $53 to $159 for the first page; the cost for each additional page has not changed and remains at $5. Similarly, the recording of a mortgage increased from $53 for the first page to $159, with the cost for each additional page still $5.

The legislation also altered the allocation of the recording fees. In Connecticut, land records are kept on a town-by-town basis and are maintained by the town clerks of each town. For example: prior to 2013, out of the $53 fee for recording the first page of a mortgage, the state received $38, the town received $3, and the town clerk received $12. After July 2013, from the $159 paid to record the first page of a MERS mortgage, the state receives $110, the town receives $39, and the town clerk retains $10. Allocations are similarly adjusted for the increased recording fees imposed on MERS assignments and releases. The recording fees for all other filers not identified as a “nominee of a mortgagee” were unchanged by the legislation.

The parties agreed that Mortgage Electronic Registration Systems, Inc. (MERS) is presently the only entity that qualifies as the nominee of a mortgage and that the legislature passed the bill with MERS in mind. Accordingly, MERS and MERSCORP Holdings, Inc. are the only two entities required to pay the increased fees. The parties also agreed that the purpose of the legislation, at least partially, was a revenue enhancing measure to help balance the state budget.

The Lawsuit — MERS had initially filed the lawsuit on July 2, 2013 against representatives of the state, seeking, inter alia, that the court declare the referenced statutes as unconstitutional under the equal protection clause of both the federal and state constitutions as well as the dormant commerce clause of the U.S. Constitution. After hearing argument on the parties’ cross-motions for summary judgment, the trial court granted summary judgment in favor of the defendants, upholding the constitutionality of the statutes. The plaintiffs appealed to the Appellate Court; the Supreme Court transferred the case to its own docket sua sponte (i.e., on its own motion).

Following argument and consideration of the many amicus briefs — including those filed by the American Land Title Association, the Connecticut Bankers Association, the Connecticut Mortgage Bankers Association, and the Connecticut Fair Housing Center — the Supreme Court affirmed the judgment of the trial court and upheld the constitutionality of the increased recording fees.

In upholding the trial court’s ruling, the Supreme Court considered these recording fees a hybrid of taxes and user fees because the fees are used to both compensate the town clerks for the service of recording and maintaining the documents, as well as to generate revenue for the state and the municipalities.

Equal Protection Analysis
— In deciding whether the increased recording fees violate the equal protection provisions of the federal and state constitutions, the Court held that the statute did not affect a fundamental right or suspect class and therefore (so long as the increased fee was rationally related to some government purpose) assessing nominees such as MERS a higher recording fee would not infringe equal protection. Further, the Court opined that the primary purpose of the tax or fee was to raise more money to help balance the state budget. The Supreme Court proceeded to hold that the increased fee was rationally related to this legitimate purpose of raising revenues. It found “at least” two conceivable bases on which the legislature might have reasonably imposed higher recording fees on nominees such as MERS.

First, it found that the legislature may have concluded that MERS was better able to shoulder the recording costs (although it later stated in its dormant commerce clause analysis that most of the increased costs were borne by homeowners). Second, it reasoned that the legislature may have determined that the MERS system reduces the number of assignments recorded over the life of a mortgage loan and, therefore, the initial recording fee for a mortgage in favor of MERS as nominee — as well as the final fee paid for a release or an assignment out of the MERS system — compensate for the lost recording fees that would have been due without the MERS system.

Dormant Commerce Clause — With respect to this clause of the U.S. Constitution, the criteria that the Court considered in determining the constitutionality question was whether the law was facially discriminatory against interstate commerce; and, secondly, even if it were found to be facially neutral, whether the law’s practical effect was to impose an undue burden on interstate commerce.

The Court determined that the law was not facially discriminatory. It found that the law on its face did not favor Connecticut-based financial companies when, in fact, most of the recording fees would likely be paid by Connecticut residents in mortgage closings, and not by out-of-state banks or mortgage servicers who will receive the benefits of the MERS recordings because assignments of mortgages will not be required. In addition, the Court found that there was no existing Connecticut-based nominee database system, or one likely to be created, to compete with the MERS system due to the national nature of the secondary mortgage market. Also, the Court found the intention of the statute was not to impose the increased fees on only a mortgage transaction with a national character, but solely on nominees that utilized MERS or any other virtual recording system implemented to facilitate the transfer of loans on the secondary market. Furthermore, the Court found that MERS was not substantially similar to other companies because of the manner in which it used the public land records, which gave MERS greater benefits.

Lastly, the court found that the statute and the increased recording fees on MERS documents did not impose an undue burden on interstate commerce. This holding was based, in part, on the fact that the increased fees were not found to have adversely impacted the MERS business model or the secondary market in general in Connecticut.

Conclusion — Absent a successful petition for certiorari to the U.S. Supreme Court, which must be filed on or before May 23, 2016, it would appear as though the increased recording fees for MERS-related documents are the law in Connecticut. The increased recording fees seem to have been successfully implemented by the adoption of a statute by the state legislature — as an alternative to previously unsuccessful lawsuits against MERS, by deed recording offices in other states, for loss of recording revenues occurring as a result of the utilization of the MERS system.

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The End of the “Good Through” Quote? Even Asking for Estimated Fees and Costs may Violate FDCPA

Posted By USFN, Monday, May 2, 2016

May 2, 2016

by Steven J. Flynn
McCalla Raymer, LLC
USFN Member (Georgia)

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

Lee S. Perres
Pierce & Associates, P.C.
USFN Member (Illinois)

Recent federal court decisions have sent mixed messages to the financial services industry regarding the legality of including estimated fees and costs in communications submitted to borrowers — in connection with the payoff or reinstatement of consumer loans, as well as in judicial proceedings seeking to collect on consumer debts.

Third Circuit
Courts sitting in the Third Circuit (comprised of Delaware, New Jersey, Pennsylvania, and the District of the Virgin Islands) have issued a line of decisions that appear to support a commonsense approach to the issue: inclusion of estimated fees and costs in reinstatement correspondence (and in judicial filings seeking to collect on consumer debts) will not violate the Fair Debt Collection Practices Act (FDCPA), provided the communication or filing conspicuously identifies those estimated fees and costs as not yet having been actually incurred as of the date of the correspondence or filing.

See Kaymark v. Bank of America, N.A., 783 F.3d 168, 175 (3d. Cir. 2015) (holding that inclusion in verified foreclosure complaint of estimated fees and costs, which had not yet been incurred by law firm as of the date complaint was filed, violated FDCPA, but noting that complaint “did not convey that the disputed fees were estimates or imprecise amounts”); McLaughlin v. Phelan Hallinan & Schmieg, LLP, 756 F.3d 240 (3d. Cir. 2014) (correspondence from law firm to debtor violated FDCPA where attorneys’ fees and costs included in amount claimed to be due and owing from debtor had not yet been incurred, and where such fees and costs were not identified in correspondence as being estimated); Stuart v. Udren Law Offices, P.C., 25 F. Supp. 3d 504, 511 (M.D. Pa. 2014) (inclusion of estimated attorneys’ fees and costs in payoff statement sent by law firm to borrower did not violate 15 U.S.C. § 1692e, where such fees were clearly marked in correspondence as being “anticipated” and where payoff statement notified borrower that such anticipated fees and costs were “not yet due, but may become due during the time period set forth in [the payoff statement]” (alteration supplied)); and Beard v. Ocwen Loan Servicing, LLC, 2015 WL 5707072, at *7-8 (M.D. Pa. 2015) (loan servicer, law firm, and law firm employee violated the FDCPA by transmitting reinstatement quote to borrower that included fees and costs not yet incurred where reinstatement quote did not clearly and conspicuously notify the borrower that such fees and costs were merely “anticipated,” and had not yet been incurred as of the date reinstatement quote was transmitted).

Eleventh Circuit
Late last year, the Eleventh Circuit Court of Appeals weighed in on the issue of the propriety of including “estimated” attorneys’ fees and costs in reinstatement and payoff quotes to borrowers with its unreported decision in Prescott v. Seterus, Inc., 2015 WL 7769235 (11th Cir. Dec. 3, 2015). The Eleventh Circuit is comprised of Alabama, Florida, and Georgia. In Prescott, the Court of Appeals appeared to adopt a “bright-line” approach to the issue, holding that the inclusion of “estimated” attorneys’ fees in a reinstatement quote provided to the borrower violated two provisions of the FDCPA — despite the fact that the fees and costs in question were clearly marked as “estimated” and were listed in a separate section of the letter labeled “Estimated Charges Through 9/27/2013.”

In reversing the trial court’s grant of summary judgment to the loan servicer on the borrower’s FDCPA claims, the appellate court held that the inclusion by the loan servicer of estimated attorneys’ fees in the reinstatement balance provided to the borrower violated 15 U.S.C. § 1692f(1), which prohibits a debt collector from using “unfair or unconscionable means to collect or attempt to collect any debt,” including “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.” (Alteration supplied.) The court reasoned that the inclusion of estimated fees in the reinstatement quote violated 15 U.S.C. § 1692f(1) because the terms of the borrower’s security instrument did not obligate the borrower to pay estimated fees, but required the borrower to pay only those attorneys’ fees that were actually incurred by the lender up to the time that the reinstatement quote was provided to the borrower.

In Prescott, Seterus made use of the Fannie Mae/Freddie Mac Florida uniform mortgage instrument, likely the most widely-used mortgage document in Florida (with similar versions in wide use across the country). The Prescott court also determined that the inclusion by the servicer of estimated attorneys’ fees and costs in the reinstatement quote provided to the borrower violated 15 U.S.C. § 1692e(2)(B), which prohibits debt collectors from making the false representation of any “compensation which may be lawfully received by any debt collector for the collection of a debt.” The court explained that the loan servicer could not lawfully receive the estimated fees from the borrower under the terms of the borrower’s security instrument because those fees had not yet actually been incurred at the time the reinstatement quote was provided to the borrower.

Citing the “least sophisticated consumer” standard utilized to evaluate claims brought under the FDCPA, the Eleventh Circuit also determined that the least sophisticated consumer would not have understood the terms of his or her security instrument to require the payment of “estimated” or “anticipated” fees and costs in order to reinstate the borrower’s loan. Further, the court held that the loan servicer was not entitled to escape liability under the FDCPA based upon a “bona fide error” defense, as the loan servicer’s inclusion of the estimated attorneys’ fees in the reinstatement balance was not the result of a factual or clerical error. (The Eleventh Circuit also reversed the district court’s grant of summary judgment to the loan servicer on the borrower’s claim under the Florida Consumer Collections Practices Act.)

The Aftermath
Following the Prescott decision, one concern is the adoption of a “one-size-fits-all” approach that fails to recognize, firstly, that Prescott is an unreported decision impacting only three states; and, secondly, some other states either require the inclusion of estimated fees by statute or the state’s judges insist on the provision of payment quotes to include estimated fees and costs for the “good through” date.

Another concern is distinguishing between an “estimated” expense and an “incurred” expense, which may at first appear to be straightforward, but is not. A fee or cost may be incurred and known; estimated, but not yet incurred; or, incurred but still estimated (e.g., because the precise amount is not known until the invoice is delivered or the vendor has confirmed the expense amount). Moreover, the decision in Prescott hinged on the agreement between the lender and borrower as contained in the security instrument. While this language is uniform to all security instruments for GSE-backed loans, other security instrument forms are in use that may contain different terms with respect to the collection of fees and costs.

Federal versus State
While avoiding the practices found to be unlawful in Prescott will protect debt collectors from liability in Alabama, Florida, and Georgia, following Prescott in other states may well land a debt collector in hot water. In Illinois, for example, state law requires payoff demand statements to be valid for “the lesser of a period of 30 days or until the date scheduled for judicial sale.” The statute specifies that the payoff demand statement “shall include ... estimated charges (stated as such) that the mortgagee reasonably believes may be incurred within 30 days from the date of preparation of the payoff demand statement.” This presents a Hobson’s choice: violate federal law and risk an FDCPA lawsuit, or violate state law and risk sanctions from the court that may also impact the foreclosure case.

It is possible that federal law may preempt state law in such conflict situations, but that would require a judicial decision in the requisite jurisdiction — the resolution of which would likely take a number of years as the case proceeds through the appeals process.

While servicer and law firm behavior may change following Prescott, borrower conduct will not. The typical borrower does not contact the law firm for updated figures before tendering payment and usually tenders payment at the end of the “good through” period. As Prescott informs us, both the provision of a payment quote containing estimated charges that have not been incurred, and accepting that payment, constitute a violation of the FDCPA in at least three states. The contrary may be true in three other states, and the issue is open for decision in most of the rest.

Some state laws may require the inclusion of estimated fees and costs in payment quotes. If servicers or law firms provide payment quotes with “good through” dates but without estimated charges, they need to be aware of the “Groundhog Day” phenomenon. That is, the borrower is provided with a payment quote with a “good through” date, the borrower tenders payment on the last day, the tender is rejected as “short” because there are now new “actual” charges to add to the quote, a revised quote is provided with an extension to the “good through” date, and then this process repeats itself.

One solution may be for servicers that do not qualify as debt collectors to take over the payment quote process, because they could then provide estimated fees without risking violating the FDCPA. Note, however, that the CFPB may still use the powers granted to it under the Dodd-Frank Act to pursue financial service providers for unfair, deceptive, or abusive acts or practices even if the provider is not subject to the FDCPA. [12 U.S.C. § 5536(a)(1)(B)].

Alternatively, a state-by-state approach needs to be worked out. Local requirements and customs can be taken into account when providing payment quotes, with the statements drafted so as to minimize FDCPA exposure while simultaneously making a reasonable effort to follow the local requirements.

Prescott requires servicers and their law firms to rethink the entire approach to providing payoff or reinstatement quotes. Some specific points for deliberation are conveniently listed below.

“PAYOFF AND REINSTATEMENT QUOTES – SOME SPECIFIC POINTS FOR CONSIDERATION”

• Is the only “safe” quote one that simply presents the actual amount due as of the date of the quote, with no estimated fees and no “good through” date?
• If a court can determine that a payment quotation that carefully delineates estimated charges is a violation of the FDCPA because it misleads the “least sophisticated consumer,” then does a quote specifying an amount due and a “good through” date (e.g., 30 days hence) also mislead the consumer because his tender of that amount is met with a new demand several hundred, or thousand, dollars higher?
• In many situations, servicers are not debt collectors with respect to their delinquent borrowers. Following foreclosure referral, in most jurisdictions it is likely the law firm would be considered a debt collector when communicating with delinquent borrowers, exposing the firms to possible FDCPA liability. Providing payoff and reinstatement quotes is not properly a part of the foreclosure referral, but has become a task passed on to the law firms. To avoid or limit their legal risks, law firms may decide to forego their involvement in the providing of payment quotations.
• Servicers may want to take over the activity of communicating payment quotes to borrowers. They can then control the entire process and manage the risks associated with it.
• It may be necessary, in those states where it is even possible, to put the foreclosure on hold when providing a payment quote so as to (hopefully) avoid incurring new fees and costs.
• Before providing the payment quote, to the extent of being feasible and appropriate, servicers may wish to make any then-due corporate advances (e.g., for taxes or insurance), as well as necessary property inspection and preservation payments.
• Alternatively, servicers may be able to block any corporate advances or other payments for the “good through” period, provided that doing so would not result in any adverse situation or violate an investor or insurer requirement.
• If servicers continue providing “good through” dates, it may be necessary for them to do one or both of the following: provide short “good through” periods (e.g., 5 days) and absorb any advances, fees, and costs incurred during the “good through” period, including legal fees and costs.
• Will servicers guarantee to pay law firms for all of the fees and costs that are ultimately incurred? Even if a servicer agrees, for whatever reason, to accept a short tender?

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Rhode Island — Supreme Court Confirms HOA Priority Over a First Mortgage

Posted By USFN, Monday, May 2, 2016

May 2, 2016

by Joseph A. Camillo, Jr.
Shechtman Halperin Savage, LLP
USFN Member (Rhode Island)

From the late 1980s to the present, “super-priority” lien laws have been enacted throughout the country, enhancing the power and ability of a homeowners association (HOA) to collect fees at the peril of mortgage holders. These statutes are the single biggest emerging threat to lenders due to confusion as to how priority legislation works. Given the high number of defaults, many first and second mortgage interests have been lost due to misconceptions about priority lien laws.

In December 2015 the Rhode Island Supreme Court confirmed the super-priority aspect of a condominium lien foreclosure sale under the Rhode Island Condominium Act, Title 34 Chapter 36.1-3.21, et seq. [Twenty Eleven, LLC v. Botelho, 127 A.3d 897, 2015 R.I. LEXIS 112 (R.I. 2015)]. The Court ruled that a first mortgage and all other junior liens are extinguished by an HOA sale where the mortgagee failed to either (i) pay the assessments, or (ii) exercise its right of redemption.

In order to fully appreciate the Botelho decision, it is helpful to look at the history of the super-priority lien. In the 1980s HOA/condominium liens were junior to a mortgage interest and meaningless. Associations were unable to collect the fees necessary to ensure the maintenance of the buildings and common areas. For this reason, lenders were unwilling to make these types of loans as condominiums were considered high risk collateral due to their deteriorating conditions. The high risk classification changed when super-priority lien statutes were enacted, improving associations’ ability to collect fees on a timely basis. With the help of the super-priority lien, most associations began to have healthier balance sheets and better maintained buildings. This made them more attractive as collateral and offered a gateway to first-time homeownership.

The super-priority lien is a double-edged sword, however, because the very legislation that makes the collateral more viable also grants an HOA the power to extinguish a lender’s mortgage interest. The statutory scheme specifies a “split-lien” concept: a priority HOA lien consists of a “super-priority” lien that is higher in priority than the first mortgage, as well as a “priority” lien for any additional unpaid assessments that is lower in priority to the first mortgage but higher in priority to a second mortgage and junior liens.

R.I.G.L. 34-36.1-3.16 (b)
— creates a super-priority lien for six months of regular condominium assessments; up to $2,500 in attorneys’ fees, and up to $5,000 for foreclosure costs. When any portion of the unit owner’s share of the common expense has been delinquent for at least sixty days, the association shall send a notice stating the amount of the delinquency to the unit owner and to the first mortgagee by certified and first-class mail. If the delinquent amounts are not paid, the HOA has the right to proceed to foreclose its lien. The statute sets forth very specific notice requirements. Additionally, the first mortgagee has a 30-day right of redemption. In order to redeem the property, the first mortgagee must tender payment of all assessments due on the unit, together with all allowable attorneys’ fees and costs incurred within 30 days of the date of the post-foreclosure sale notice; otherwise the right of redemption terminates and the unit is conveyed free of the mortgage.

Turning to the facts in Botelho: the borrower purchased a condominium unit financed by a loan that was secured by a first mortgage on the property. He fell delinquent on his condominium assessment fees, and the association sold the property to Twenty Eleven, who received a deed conveying title to property upon payment of the purchase price. PNC Bank (holder of the first mortgage) did not redeem the association’s lien within the statutory time period. The borrower had also fallen behind on his mortgage payments. After the association’s foreclosure sale, PNC sought to exercise its nonpayment remedies and foreclose on its mortgage. As owner, Twenty Eleven filed suit to enjoin the foreclosure sale and to quiet title, seeking a declaration that PNC’s interest was extinguished by the condominium lien foreclosure. In a bench decision, the superior court determined that PNC’s mortgage survived the association’s sale and Twenty Eleven’s ownership interest was subject to the PNC mortgage; PNC’s motion to dismiss was granted. On appeal, the Rhode Island Supreme Court reversed and remanded the matter for further proceedings.

In its decision, the Supreme Court confirmed the “split-lien” concept as “unconventional” and that the drafters of the Uniform Condominium Act intended to “’… strike[] an equitable balance between the need to enforce collection of unpaid assessments and the obvious necessity for protecting the priority of the security interests of mortgage lenders.’ Commissioners’ Comment 2 to § 34-36.1-3.16 ….” The Supreme Court cited other cases interpreting the plain meaning of the statute, including “‘however unconventional, the super[-]priority piece of the [condominium assessment] lien carries true priority over a [first mortgage or] first deed of trust’ SFR Investments ….” [SFR Investments Pool 1, LLC v. U.S. Bank, 334 P.3d 408, 413 (Nev. 2014)].

The Supreme Court further addressed the balance of a minimal condominium assessment nullifying a much larger loan, identifying solutions and actions that first mortgagees can take such as: (1) “’… pay the 6 *** months’ assessments demanded by the association rather than having the association [foreclose] on the unit.’… This payment can then be added on to the principal balance of the mortgage”; (2) “… require payment of assessments into an escrow account …”; or (3) redeem under § 34-36.1-3.21(a)(4) by “… tendering payment to the association in full of all assessments due on the unit together with all attorneys’ fees and costs incurred by the association in connection with the collection and foreclosure process within 30 days of the date of the post-foreclosure sale notice sent by the association ….” The Court observed that the notice requirement to first mortgagees demonstrates the legislative intent that foreclosure on a super-priority lien extinguishes a first mortgage “… because it provides the first mortgagee with notice of the lien and an opportunity on the front end to satisfy the lien in order to avoid foreclosure (and, thus avoid losing its security interest) ….”

The Botelho case is confirmation that a first mortgage will be extinguished by a foreclosure sale of a super-priority HOA lien in Rhode Island. Accordingly, upon receipt of any document that appears to be legal in nature from a condominium/HOA, lenders and servicers should immediately contact counsel and forward all documents for review. It is at this critical stage that immediate action must be taken to protect the mortgage interest and mitigate costs.

The earlier the priority amounts are determined and paid, the less association legal fees and costs are included in the priority amount. For that reason, a written request to the association should be made for a statement or ledger identifying all amounts owed, to which the HOA response is due within ten days. Thereafter, all efforts should be made to identify the priority amount and have it paid. Should the first mortgagee fail to protect its lien and a sale occurs, arrangements should be made to redeem immediately. Even if a lender/servicer finds that the post-sale redemption period has expired extinguishing the mortgage, in a small number of instances other options may exist, such as contesting the sale process or negotiating with the high bidder.

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Spring 2016 USFN Report

 

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Post-PTFA: A Look at the States (One Year Later): North Carolina

Posted By USFN, Monday, May 2, 2016

May 2, 2016

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

Although the federal Protecting Tenants at Foreclosure Act (PTFA) expired December 31, 2014 when Congress declined to extend its terms, North Carolina enacted legislation effective October 1, 2015 to provide similar protections to tenants occupying foreclosed residential property. North Carolina Session Law 2015-178 added a new section to the power of sale foreclosure statute, § 45-21.33A, which provides that:

• A foreclosure sale purchaser who does not intend to occupy the property as his primary residence “shall assume title subject to the rights of any tenant to occupy the premises until the end of the remaining term of the lease or one calendar year from the date [that] the purchaser acquires title, whichever is shorter.”
• The tenant’s rights are qualified:
(i) He may not be the borrower — or spouse, parent, or child of the borrower;
(ii) There must be a written lease that is not terminable at will, and the rent must not be substantially less than fair market value; and
(iii) If there is an “imminently dangerous condition” [as defined in N.C.G.S. § 42-42(a)(8)] on the premises as of the date of acquisition, then the tenant has no right to continue occupying the premises.
• The tenant must be provided with at least a 90-day notice to vacate if: (a) the purchaser will occupy the premises as his/her primary residence; (b) the tenant has only an oral lease; or (c) if the lease is terminable at will.

There are no reported (or even unreported) judicial decisions interpreting the new section, but litigation can be expected. As was the case with the federal PTFA, litigation is likely to focus on such topics as: what documents are sufficient to establish a lease (a “written lease” is required under the NC law); when did the lease begin and when does it end; and what qualifies as “substantially less” than fair market rent?

As was also a problem in complying with the federal law, both identifying the tenant and communicating successfully with him to obtain accurate information about the claimed tenancy will be among the difficulties faced by mortgage lenders and investors taking title to REO after the foreclosure sale.

If a tenant does not qualify for either the lease assumption or the 90-day notice period, the standard 10-day notice period prevails (for residential properties containing less than 15 rental units). N.C.G.S. § 45-21.29.

Copyright © 2016 USFN and Hutchens Law Firm. All rights reserved.
Spring 2016 USFN Report

 

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Post-PTFA: A Look at the States (One Year Later)

Posted By USFN, Monday, May 2, 2016

May 2, 2016

by Kevin Dobie
Usset, Weingarden & Liebo, PLLP
USFN Member (Minnesota)

More than a year following the expiration of the federal Protecting Tenants at Foreclosure Act (PTFA), asset managers are still negotiating the state-by-state approach to addressing tenants occupying foreclosed properties. While some may find the piecemeal approach difficult and daunting, the PTFA is unlikely to make a comeback any time soon.

Federal S.730 and Federal H.R.1354 were introduced in March 2015 to make the PTFA permanent. Federal S.1491 was introduced in June 2015, proposing the same permanent PTFA bill within a larger piece of legislation (the Community Lender Regulatory Relief and Consumer Protection Act of 2015). Hearings have been held on this second piece of legislation, and Senate cosponsors have signed onto S.1491 as recently as November 2015, but there has been no activity since then. All three bills remain in their respective Senate and House committees. The website govtrack.us gives each of the bills a 1 or 2 percent chance of becoming law.

PTFA critics assert that the act does not address long-term leases, and it is expensive to prove that a lease is not bona fide, which is often required when a landlord and tenant enter into a below-market rate lease shortly before the foreclosing entity acquires the property. In general, proving that a lease is not bona fide requires an expert witness on the rental market and, oftentimes, the real estate listing agent is not familiar with rental rates in the area in order to testify to such. Proponents of the act note that it is unfair that tenants may be summarily evicted shortly after entering into a bona fide lease, especially where the tenant is current on his rent payments.

Asset managers must continue to monitor eviction laws on a state-by-state basis. As for Minnesota, the state law largely mirrors the PTFA, and it is likely here to stay. In Minnesota, foreclosure purchasers must send a 90-day notice to all tenants and must continue honoring bona fide leases for the duration of the lease. If the mortgagor or a close relative is the occupant, there is no notice requirement, and foreclosure purchasers may commence eviction actions immediately after the redemption period expires.

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Spring 2016 USFN Report

 

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Post-PTFA: A Look at the States (One Year Later): Illinois

Posted By USFN, Monday, May 2, 2016

May 2, 2016

by John Blatt
Anselmo Lindberg Oliver LLC
USFN Member (Illinois)

While it has been more than a year since the expiration of the federal Protecting Tenants at Foreclosure Act of 2009 (PTFA), the sunset of the PTFA has had little effect on post-foreclosure eviction timelines in states that have passed their own version of the act. Illinois serves as an example of this as it passed its own version of the PTFA in 2013. While Illinois timelines remain largely unchanged, a local ordinance in the City of Chicago has dramatically increased the time and cost of post-foreclosure evictions.

Illinois post-foreclosure evictions proceed according to the Forcible Entry and Detainer Act (FED), which used to allow owners to proceed against any occupants with a mere 7-day demand notice. The PTFA increased the notice requirement to bona fide tenants in all states to 90 days, unsurprisingly impacting case timelines. Prior to the PTFA’s expiration, Illinois amended the FED to impose the same 90-day demand notice requirement.

Bona fide leases are defined by the Illinois Mortgage Foreclosure Law as follows: (1) the tenant is not the mortgagor or a member of their immediate family; (2) the lease was the result of an arm's-length transaction; (3) the lease requires the payment of rent that is not substantially less than fair market value, unless the rent is reduced or subsidized by a federal, state, or local subsidy; and (4) the lease was either (a) entered into before the filing of the foreclosure lis pendens, or (b) entered into after the lis pendens, but the term of the lease is for one year or less.

While similar to the PTFA, bona fide leases in Illinois directly relate to the filing of the foreclosure lis pendens. This addition was likely included to address the growing amount of tenants presenting 4-year leases that were entered into on the eve of the foreclosure sale.

Determining the existence of bona fide tenants is complicated by the fact that mortgagor-landlords in foreclosure often do not keep accurate records of leases and payments made by their tenants. This imperfect information places evicting plaintiffs at a distinct disadvantage because they cannot assess who has a bona fide lease before the notice must be served. Serving an occupant with a 7-day demand is attractive, but risky, as the presentation of a bona fide lease renders the eviction void. Judges across Illinois often find leases bona fide under the most tenuous of circumstances. If a bona fide tenant does appear, the 7-day demand is no longer sufficient and the eviction must be dismissed, which increases the costs and time of an otherwise straightforward case. Because of the risks inherent in serving occupants with the 7-day demand, most owners conservatively continue to serve all occupants with a 90-day demand.

Chicago — The most onerous undertaking imposed on post-foreclosure purchasers in Illinois falls within the confines of the City of Chicago. On September 23, 2013 the City of Chicago enacted the Keep Chicago Renting Ordinance (KCRO), which mandates that post-foreclosure purchasers allow bona fide tenants to remain in the unit provided that they stay in good standing (i.e., they pay rent). The KCRO excludes not-for-profit owners that have been operating as such for at least the last five years and their primary purpose is to provide financing for the purchase or rehabilitation of affordable housing. Very few owners fall into this narrow exclusion. Thus, the City of Chicago forces most post-foreclosure purchasers to become landlords.

Under the KCRO, an owner must offer a bona fide tenant a renewal or extension of their current lease for twelve months, and the monthly rent must not exceed 102 percent of the prior year’s lease. The statute mandates lease extensions in perpetuity until the building is sold to a third-party purchaser, the tenant chooses to move, or the owner refuses to offer further lease extensions. Failing to offer a bona fide tenant a lease extension subjects the owner to a mandatory cash-for-keys arrangement whereby the owner must pay $10,600 in relocation assistance per rental unit.

The provisions of the KCRO cannot be taken lightly; the statute provides bona fide tenants a private right of action for violations. The penalty for ignoring the KCRO is a statutory fine of $21,200 (including attorneys’ fees and costs). Tenants in foreclosed rental properties are aware that the going rate for vacating the property is $10,600, which has dramatically increased the cost of cash-for-keys settlements.

Nevertheless, the KCRO is not without weakness and a constitutional challenge may unwind the statute in its entirety. The Illinois Constitution prohibits local governments from enacting ordinances that conflict with statutes passed by the Illinois Legislature. In 1997 the Illinois Legislature passed the Rent Control Preemption Act (RCPA), which prohibits local governments from controlling the amount of rent charged for leasing private property. The KCRO stands in direct conflict with the RCPA by forcing owners to offer leases, but limiting rent to 102 percent of the prior year. The KCRO’s rent control provision is not severable and, therefore, a successful challenge will render the entire statute unconstitutional. Unfortunately, striking down the KCRO will require a ruling at the appellate level, which takes time. Until then, post-foreclosure owners must adhere to the strict terms of the KCRO or suffer potentially costly consequences.

In summation, while Illinois post-foreclosure evictions have not varied significantly since the sunset of the PTFA, the KCRO is wreaking havoc in the City of Chicago. The KCRO is vulnerable to a constitutional challenge, but until the appellate court issues a favorable ruling, owners must be vigilant in their adherence to the statute’s guidelines.

Author’s Note: For a more in-depth analysis of the KCRO, see Post-Foreclosure Evictions: Illinois by Jill Rein in the USFN Report (Spring 2014 Ed.) posted in the online Article Library at www.usfn.org.

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Spring 2016 USFN Report


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Post-PTFA: A Look at the States (One Year Later): Florida

Posted By USFN, Monday, May 2, 2016

May 2, 2016

by Roger Bear
Florida Foreclosure Attorneys, PLLC
USFN Member (Florida)

In June 2015 Florida Statute 83.561 was enacted. The statute provides that if a tenant is occupying residential premises that are the subject of a foreclosure sale, upon issuance of a certificate of title (COT) following the foreclosure sale, the purchaser named in the COT takes title subject to the rights of the tenant. The statute specifies that the tenant may remain in possession of the premises for 30 days following the date of the purchaser’s delivery of a written 30-day notice of termination. The statute sets out a form for the 30-day notice of termination, which must be substantially followed. The distribution of the written termination notice shall be by mailing or delivery, or — if the tenant is absent from the premises — by leaving a copy at the residence.

The form of termination notice specified by the statute is set out in the text box below:

[FLORIDA] NOTICE TO TENANT OF TERMINATION
You are hereby notified that your rental agreement is terminated on the date of delivery of this notice, that your occupancy is terminated 30 days following the date of the delivery of this notice, and that I demand possession of the premises on (date). If you do not vacate the premises by that date, I will ask the court for an order allowing me to remove you and your belongings from the premises. You are obligated to pay rent during the 30-day period for any amount that might accrue during that period. Your rent must be delivered to (landlord’s name and address).

Florida Statute 83.561 does not apply if:
(a) The tenant is the mortgagor in the subject foreclosure or is the child, spouse, or parent of the mortgagor in the subject foreclosure.
(b) The tenant’s rental agreement is not the result of an arm’s-length transaction.
(c) The tenant’s rental agreement allows the tenant to pay rent that is substantially less than the fair market rent for the premises, unless the rent is reduced or subsidized due to a federal, state, or local subsidy.
If any of these three exceptions apply, a termination notice is not required, and upon issuance of a COT following the foreclosure sale, the purchaser named in the COT may immediately seek the issuance of a writ of possession.

Florida is a judicial foreclosure state, and the new statute only applies to foreclosure sales held as part of a judicial foreclosure proceeding. Therefore, the new statute does not apply to properties acquired through a deed-in-lieu of foreclosure.

Copyright © 2016 USFN. All rights reserved.
Spring 2016 USFN Report


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Legislative Updates: Ohio

Posted By USFN, Monday, May 2, 2016

May 2, 2016

by Andrew Top
and William L. Purtell
Lerner, Sampson & Rothfuss
USFN Member (Kentucky, Ohio)

House Bill Aims to Facilitate Faster Foreclosures — Ohio HB 134 was unanimously passed in the Ohio House of Representatives on November 17, 2015 and, as this article is being written in early spring, is in the Ohio Senate for deliberation. This bill proposes many changes to the foreclosure process in Ohio that are aimed at facilitating faster foreclosures in certain situations. As with most legislation, changes can be expected during the legislative process. Below is a summary of three key sections of the bill.

Expedited Foreclosures — The section of the proposed legislation that is receiving the greatest attention is the proposal for “expedited” foreclosures on residential properties proved to be vacant and abandoned. Under the current version of the proposed legislation, once a complaint in foreclosure is filed, a mortgagee can file a motion to request an expedited foreclosure from the court. Once the motion for the expedited foreclosure is filed, the court is then required to rule on that motion no later than 21 days after the last default date of service on a defendant. Before the court can grant the judgment and expedited foreclosure, the mortgagee must make several different showings to the court.

First, the mortgagee must show by a preponderance of evidence that there is a monetary default, and that the mortgagee has standing to bring the foreclosure action. Secondly, the mortgagee must show by clear and convincing evidence that at least three of the following eleven factors exist: (1) the utilities to the property have been disconnected; (2) the windows or other entrances are boarded up; (3) the doors to property are smashed and/or broken off; (4) trash or debris has accumulated on the property; (5) the furnishings and/or window treatments are removed; (6) the property is the object of vandalism; (7) a mortgagor has submitted a written statement confirming that the property is abandoned; (8) a governmental official determines that no one appears to reside in the property after an inspection; (9) a government official provides the court with a written statement attesting to the vacancy and abandonment; (10) the property has been sealed by the government authority; or (11) there are other indicators of vacancy and abandonment. Then, the court must confirm that the borrower is in default of answer contesting the complaint in foreclosure, and that no defendant has contested the determination of vacancy or abandonment by any other written instrument. If the court is satisfied that all of the above elements are proven, the court may rule in favor of the mortgagee on the vacant and abandoned issue and it will, at the same time, award a decree of foreclosure in the same entry. The sheriff is then required to sell the vacant/abandoned property within 75 days of the praecipe for order of sale submitted by the mortgagee.

Second Sale Provision — In addition to the “expedited” element, changes are made to the foreclosure sale and deed process. Each sale advertisement will include a provision for a second sale, which shall be held 7-30 days after a first sale that failed for lack of bids. At this second sale, there will be no minimum bid required. The sheriff shall, however, require a deposit of $5,000 to $10,000 to cover the costs and taxes in the event that the winning bid is insufficient to cover these costs. In addition, once the sale is complete, the sheriff will be statutorily required to record the prepared deed within 14 days after sale confirmation. If this is not completed for any reason, the purchaser can ask the court to order the plaintiff to record a certified copy of the confirmation entry in lieu of a deed. The clerk will separately issue a certified copy of the confirmation to the auditor, who cannot refuse the transfer of the property due to any taxes that have accrued since the date of sale.

Post-Sale Taxes — The proposed legislation provides that the purchaser at sale will be liable for all pro-rated taxes as of the date following the sale. Rather than having the county estimate the current-year taxes and hold a pro-rated amount for the next tax bill (which slows down the confirmation process and sometimes requires an additional second confirmation entry), the buyer simply accepts title subject to all taxes that accrue the day after the sale.

Copyright © 2016 USFN. All rights reserved.
Spring 2016 USFN Report


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Legislative Updates: Nebraska

Posted By USFN, Monday, May 2, 2016

May 2, 2016

by Camille R. Hawk
Walentine, O’Toole, McQuillan & Gordon, L.L.P.
USFN Member (Nebraska)

While vacant property ordinances are not new to many of you across the United States, Nebraska (specifically, Omaha) has its first “Vacant and Abandoned Property Ordinance.” We creditors’ attorneys watched with some concern as these kinds of ordinances were sweeping across the nation, wielding power against creditors as lienholders — often in the form of a stick and not a carrot. Granted, it is best that properties be maintained for all involved. No one, including the creditor, wants a deteriorating or dilapidated property, which then reduces its value, as well as the value of the properties surrounding it, or causes a danger to the public.

Further, the general taxpayer should not have to foot the bill for the responsibilities of owners who allow their properties to be in disrepair. That being said, with the passage of these types of ordinances, the creditor as a lienholder and not an owner can now be held responsible for the abandoned and vacant properties, often with great burden and financial impact.

Chapter 48 of the Omaha Municipal Code (entitled “Property Maintenance Code of the City of Omaha”) now includes Division 15 (entitled “City of Omaha Vacant and Abandoned Property Ordinance”). It became effective December 2, 2015 and covers the City of Omaha and properties within a three-mile radius of the city. Simply put, it established a vacant and abandoned property registration program wherein owners and sometimes lienholders (i.e., the “responsible party”) must register the properties, pay a $500 registration fee every three months, and provide evidence of maintenance of the properties.

The applicable properties must be vacant and show evidence of vacancy. Additionally, the lienholder can become the responsible party in the event that the property is the subject of a decree of foreclosure in favor of the lienholder, a deed-in-lieu of foreclosure that has been delivered to the lienholder, or in the event that the lienholder is the highest bidder at a foreclosure sale.

The responsible party must register the abandoned real property and pay the fee within thirty days of the notice to do so from the Permits and Inspections Division (P&I Division). The registration is to be done with a form specified by the P&I Division. Failure to timely register an abandoned real property, neglected building, or vacant parcel as defined within the ordinance can lead to registration by the city itself, with fees and penalties assessed upon the land and against the responsible party. Failure or refusal to perform such duties outlined in the ordinance can also lead to personal liability of the responsible party, including but not limited to criminal violations and penalties.

The responsible party (specifically the lienholder) must have timely and regular inspections of the abandoned real property and is responsible to ensure that the property is well secured and maintained. The use of property managers does not negate the duties of the responsible party, and the inspection requirements become even more frequent.

A property may be removed from the registration requirements under certain circumstances, but the registration is non-transferrable; a new registration is required for each change of ownership. A thorough review of the new ordinance is a must for anyone, creditor or attorney, dealing with real property in and around Omaha, Nebraska.

Copyright © 2016 USFN. All rights reserved.
Spring 2016 USFN Report



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Legislative Updates: Illinois

Posted By USFN, Monday, May 2, 2016

May 2, 2016

 

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

In an effort to balance the scales in an environment that is increasingly shifting towards condominium associations in Illinois, a series of bills were recently introduced in the Illinois House of Representatives. While many of these affect the rights of the owners of condominium units, one bill in particular (HB4490) has the potential to affect the post-foreclosure market. If passed, it would represent a significant benefit for lenders and servicers in regards to fees and assessments claimed due by condominium associations.

HB4489 — states that a unit owner has the right to fairness in litigation, allows unit owners to bring actions against the association without naming other homeowners, voids any provision limiting a unit owner’s right to commence litigation against the association, provides that a unit owner’s compliance with a demand does not affect his ability to challenge the demand, requires reasonable attorney fees to be awarded to the unit owner or association under certain circumstances, states that (in litigation) the board must represent the best interest of all owners, and provides that, in litigation, the association may not be represented by counsel who also represents the board of managers.

HB4491 — provides for certain defenses for a unit owner in a forcible action and puts limits on the association seeking attorney fees.

HB2606 — requires that any person who makes payments for common expenses shall be furnished a copy of any legally binding agreement between the unit owner’s association and each management company retained by the association.

The problem at hand is that the current Illinois Condominium Property Act (ICPA) contains a confusing “reach back” provision that allows associations to charge REO buyers for certain prior unpaid assessments. Currently, section 9.2 of the ICPA states that “[a]ny attorney’s fees incurred by the Association arising out of a default by any unit owner … shall be added to, and deemed part of, his respective share of the common expense.” 765 ILCS 605/9.2(b). Under section 9(g)(4) of the ICPA, the association has the ability to collect from an REO buyer “the proportionate share, if any, of the common expenses for the unit which would have become due in the absence of any assessment acceleration during the 6 months immediately preceding institution of an action to enforce the collection of the assessments.” In simpler terms, a purchaser at an REO transaction must pay the association up to six months of unpaid assessments owed by the previous owner.

Attorneys in Illinois are sharply divided over whether, and to what extent, an REO buyer is responsible for pre-foreclosure association attorney fees. This has caused a deluge of disputes over pre-foreclosure attorney fees prior to — and at — Illinois REO closings. House Bill 4490 appears to be aimed at this problem.

HB4490 — would amend section 9.2 to read, “[i]f a court awards attorney’s fees incurred by the Association arising out of a default by any unit owner … the Association may add these fees to the unit owner’s respective share of the common expense. No attorney’s fees may be added to the unit owner’s part of the common expense unless a court first awards attorney’s fees.” (Proposed changes are underlined for clarity.)

One major issue that mortgagees currently have to deal with when attempting to sell a foreclosed property in an REO transaction is association attempts to collect unpaid assessments under section 9(g)(4), which often include large amounts of attorney fees in addition to prior assessments. While the payment of these back-assessments is ultimately the responsibility of the subsequent purchaser, it frequently ends up being the seller’s problem as disputes stall the transaction. Buyers who are represented by counsel will often refuse to pay the back-assessments, contending either that it is not their client’s responsibility or that the fees are too high. This leaves the REO seller with a Hobson’s choice between paying the illegitimate fee demands or foregoing the sale.

If passed, HB4490 would clarify that attorney fees may only be included in common expenses — including those allowed for by section 9(g)(4) — if a court previously awarded those fees. Unless associations can present a court order awarding fees, they would have no claim for them at an REO closing.

HB4490 would not solve all issues that section 9(g)(4) creates. It would, however, clear a particularly intractable roadblock that has derailed many REO transactions and forced payment of unjustified association demands in others. [As this article was going to press, HB4490 had been re-referred to the Rules Committee. Further developments will be covered in future USFN publications.]

Copyright © 2016 USFN. All rights reserved.
Spring 2016 USFN Report


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Florida: Non-Resident Surety Bond Requirement Repealed

Posted By USFN, Thursday, April 7, 2016
Updated: Thursday, April 7, 2016

April 7, 2016

 

by Matthew L. Kahl
Aldridge Pite, LLP – USFN Member (California, Georgia)

Chapter 2016-43, Florida Laws, was approved by the Florida governor on March 10, 2016 and will become effective July 1, 2016.

The new law, which originated as Senate Bill 396, repeals Section 57.011, Florida Statutes, removing the requirement for a non-resident plaintiff in a civil action to post a surety bond in the amount of $100 for court costs.

Section 57.011 required this surety bond to be filed within 30 days after commencing an action and permitted the defendant to motion the court to dismiss the subject action if the plaintiff failed to file the bond (after 20 days’ notice to the plaintiff). Thus, this was a common affirmative defense or the basis for a motion to dismiss raised by borrower’s counsel in defending foreclosure actions. With the repeal of this section, civil actions will no longer be dismissed for this procedural deficiency.

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


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Michigan: Post-Foreclosure Abandonment is all about Occupancy

Posted By USFN, Thursday, April 7, 2016
Updated: Thursday, April 7, 2016

April 7, 2016

 

by Caleb J. Shureb
Orlans Associates, P.C. – USFN Member (Michigan)

The vast majority of foreclosures in the state of Michigan receive a statutory six-month redemption period. During this period, the owner-occupants maintain all of the rights and privileges that they held prior to the foreclosure. In an effort to reduce blight and criminal activity, while simultaneously attempting to preserve the integrity of the local real estate market, the Michigan legislature provided MCL 600.3241a. This statute allows for a foreclosing mortgagee to reduce the typical statutory redemption period from six-months to 30 days (or until the required 15-day notice period expires, whichever is later).

Contrary to the belief of many real estate agents, the operative factor in determining abandonment is occupancy. While there are many definitions that can be applied to the term “abandoned,” MCL 600.3241a unambiguously states that there is a conclusive presumption that the premises have been abandoned if neither the mortgagor nor persons claiming under the mortgagor are presently occupying or will occupy the premises. (The reader will note that had the legislature intended to exempt the abandonment process from those properties that are listed for sale, or even simply secured, they certainly could have.)

In the event that a foreclosing mortgagee believes the property to be unoccupied, notification to their local counsel can result in a significant reduction in the redemption period. The abandonment process includes a notice that is posted at the time of making the official personal inspection; a copy of the notice is submitted by certified mail, return receipt requested, to the mortgagor at the mortgagor’s last-known address. This notice states that the foreclosing mortgagee considers the premises abandoned and provides the instructions by which a contest to the abandonment can be submitted.

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Washington: Appellate Court Reviews Statutory Authority to Evict a Foreclosed Former Owner

Posted By USFN, Tuesday, April 5, 2016
Updated: Thursday, March 31, 2016
April 5, 2016
 
by Joseph H. Marshall
RCO Legal, P.S. – USFN Member (Alaska, Oregon, Washington)

 

A recent troubling, unpublished judicial decision holds that the grantee of a trustee’s sale purchaser lacks statutory authority to evict a former owner from foreclosed premises, and that eviction is premature where the former owner can show “color of title.” Selene RMOF II REO Acquisitions II, LLC v. Ward, Wash. Ct. App., Div. 1 (Feb. 29, 2016).

 

Relief must be sought via an ejectment action, where title (not just possession) can be resolved. Servicers who purchase Washington assets — not at, but subsequent to, foreclosure sales — will be well-advised to consult with counsel about the proper procedure for evicting former owners on a case-by-case basis.

 

Division One of Washington’s Court of Appeals barred plaintiff Selene from evicting defendant Ward by means of unlawful detainer because Selene was not the trustee’s sale purchaser, and also because Ward claimed color of title based on a notarized, but unrecorded, 2004 quitclaim deed.

 

Background
In 2012, Selene bought the property from LaSalle Bank (as trustee for certain mortgage loan asset-backed certificates). LaSalle had purchased the property at a deed of trust foreclosure sale in January 30, 2009. Dreier, the grantor of that deed of trust, had purchased the property in 2007 from one Chester Dorsey, as attorney in fact for Fred and Grace Brooks; the Brookses had bought the property from Dorsey in his personal capacity in 2005.

 

Dorsey had been quitclaimed the property by Vanessa Ward in 2001, but Ward claimed that she never “followed through” with her conveyance to Dorsey and that he had fraudulently executed the 2001 deed. He then quitclaimed the property back to her in 2004; however, that deed was not recorded.
Selene filed the unlawful detainer in 2014, alleging that Ward occupied the property as a tenant.  Ward claimed that she was not a tenant and instead had color of title. The trial court granted a writ of restitution for Selene. Ward appealed and prevailed, with the appellate court analyzing questions of law.

 

Appellate Analysis
Firstly, Selene was not the purchaser at the trustee’s foreclosure sale; the LLC was the quitclaim grantee of the sale purchaser. Selene thus lacked authority to evict because the unlawful detainer statute gave only sale purchasers the authority to evict. The court noted that Selene presented no authority as to why it should be treated like a sale purchaser, and the court did not sua sponte examine the usual function of a quitclaim deed to convey any rights of the grantor to the grantee, presumably including any rights of a trustee’s sale purchaser.

 

Secondly, unlawful detainer only applies to persons who lack “color of title” under RCW 59.12.030(6). Noting that the statute itself did not define color of title, the court looked to an IRS tax foreclosure case, Puget Sound Investment Group, Inc. v. Bridges, 92 Wash. App. 523, 963 P.2d 944 (1998). Bridges held that the defendant therein had color of title via a statutory warranty deed (details of which the court omitted) and that the unlawful detainer statute did not provide for tax sale purchasers to bring evictions (though it so authorized deed-in-lieu grantees).

 

Like the Bridges defendant, Ward’s unrecorded quitclaim deed gave her color of title, thus rendering an unlawful detainer action premature until an ejectment action could resolve the issue. Selene, therefore, had the burden to establish superior title.

 

Finally (and somewhat perfunctorily), the court determined that Ward could defend against the unlawful detainer action even though she had not served and noted her motion to dismiss and, further, that Ward’s claims under RCW 61.24.040(1) were not waived (even though she had not restrained the trustee’s sale). Moreover, the appellate court found that the issues as to Ward’s bona fide purchaser status, the impact of the trustee’s deed, and Ward’s knowledge of the trustee’s sale were beyond the scope of the unlawful detainer action and appeal.

 

Although the Selene decision is unpublished and cannot be cited as precedent, there is little question that analogous facts appealed to Division One in Washington will likely yield a similar result unless this case is reconsidered. If a servicer purchases subsequently from the trustee’s sale purchaser, and a former borrower/owner produces some kind of deed, this may well raise sufficient color of title to defeat a summary eviction action.

 

Evictions in Washington can be converted to civil ejectment/quiet title actions, but the process will take longer than eviction proceedings, which are limited to right of possession determinations.

 

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The Utah Reverse Mortgage Act – How to Prove a Deceased Borrower Has Received Notice?

Posted By USFN, Tuesday, April 5, 2016
Updated: Thursday, March 31, 2016

April 5, 2016

 

by Brigham J. Lundberg
Lundberg & Associates – USFN Member (Utah)

During the 2015 general legislative session, the Utah legislature enacted The Utah Reverse Mortgage Act, Utah Code §§ 57-28-101, et seq., which codifies requirements for reverse mortgages in Utah and addresses the treatment of loan proceeds, priority, foreclosure, and lender default. Particularly troublesome, the Act stated that for defaulted reverse mortgages, prior to commencing foreclosure, the servicer must give the borrower written notice of the default and provide at least 30 days after the day on which the borrower receives the notice to cure the default.

As predicted in this firm’s 2015 legislative update (see USFN Report, Summer 2015 Ed.), this legislation has posed significant challenges to servicers of defaulted reverse mortgages. Servicers have had to implement procedures attempting to determine when a borrower receives a demand letter, either by (i) altering mailing practices to use some form of return receipt request, or (ii) using a third-party vendor or foreclosure counsel to accomplish the same. Still, such efforts are often ineffective because many notices return unclaimed or undeliverable. This is commonly due to the fact that the majority of reverse mortgage defaults are caused by the borrower’s death. 

While proof of receipt of the demand letter is more readily accomplished for a reverse mortgage in default because of the borrower’s non-occupancy of the property or failure to pay taxes or insurance, proof of receipt by a deceased borrower has proven quite difficult, if not impossible. Servicers and foreclosure counsel have been left to investigate whether any probate action has commenced and, if so, to serve the personal representative of the estate. In cases where no probate exists, service has been attempted upon potential heirs, if any. Accordingly, the demand process for defaulted reverse mortgages has been drawn out significantly, often resulting in servicers finding themselves in danger of violating investors’ “first legal” timeline requirements.

In short, full compliance with the requirement that a borrower of a defaulted reverse mortgage be given 30 days after the borrower receives a demand letter to cure the default has proven to be very challenging — leaving servicers to make the decision to proceed based on their “best efforts” to comply. Relief may be just around the corner, however, as proposed corrective legislation is currently before the Utah legislature. It would only require that a borrower be given a 30-day cure period from the date that the demand letter is sent to (not received by) the borrower.


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South Carolina: Supreme Court Dismisses Lawsuit by County Officials Seeking Rejection and Removal of MERS-Related Documents from the Public Index

Posted By USFN, Tuesday, April 5, 2016
Updated: Wednesday, April 6, 2016
April 5, 2016
 
by John S. Kay
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

 

South Carolina now becomes the most recent state to have a legal decision weighing in on the validity of MERS documents, but not in the usual fashion that we have seen in most states. In fact, the result of the case does not resolve the issue as to whether MERS documents are valid in South Carolina at all. [Kubic v. MERSCORP Holdings, Inc., Op. No. 27619 (S.C. Sup. Ct. Mar. 30, 2016)].

 

County Administrators and Registers of Deeds in five South Carolina counties instituted lawsuits against MERSCORP, as well as various banks and mortgage servicers, alleging that those institutions had engaged in a practice of fraudulent recording of documents that disrupted the integrity of the public index. The South Carolina Supreme Court consolidated the lawsuits and assigned the case to a Business Court trial judge. MERSCORP and the banking institution defendants filed a motion to dismiss, asserting that the complaint failed to state a cause of action and that the action was barred by section 30-9-30 of the South Carolina Code (2007). The trial court denied the motion and the defendants petitioned the South Carolina Supreme Court for a writ of certiorari, which the Supreme Court granted.    

 

Section 30-9-30(B) provides that if the clerk of court or register of deeds reasonably believes that a document presented to him or her is materially false or fraudulent, or is a sham legal process, the clerk of court or register of deeds may refuse to accept the document for filing. The statute further provides that within thirty days of written notice of such a refusal by the clerk of court or register of deeds, the person presenting the document may commence a lawsuit requiring the clerk of court or register of deeds to accept the document for filing. 

 

The county administrators contended that the statute provided them, by implication, with a right to commence an action to remove MERS-related documents from the public index. The Supreme Court disagreed and found that the plain meaning of the statute afforded the right to bring such an action to the person attempting to file the document, rather than to the county clerk of court or register of deeds. Consequently, the trial court was reversed, and the Supreme Court dismissed the plaintiffs’ case.
 
So where are we regarding the MERS issue in South Carolina? The Supreme Court may have provided the answer in the decision itself. In dicta, the Court indicated “the statute already provides a remedy to government officials by allowing them to remove or reject any fraudulent records; by its express language a judicial blessing or directive is not required (and thus, not permitted) in performance of this executive function.” One can assume that the county administrators in South Carolina may start rejecting MERS mortgages and require lenders to commence a lawsuit in order to have the document recorded.

 

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SCRA Recommended Practices: Notices & Affidavits

Posted By USFN, Tuesday, April 5, 2016
Updated: Wednesday, April 6, 2016

April 5, 2016

 

by J.D. Fichtner
McCalla Raymer, LLC – USFN Member (Georgia)

Compliance with the federal Servicemembers Civil Relief Act (SCRA) (50 U.S.C.A. §§ 3901-4043) has always been, and remains, a major concern in the American mortgage servicing industry. The reasoning for the importance of compliance with this particular law is two-fold: One, there is a unique moral component to compliance with this law that does not necessarily exist with other laws. The idea behind the SCRA — to protect the rights and property of those who choose to fight for our country — is something that resonates with Americans. Second, the penalties for violating the SCRA are severe (See 50 U.S.C.A. § 4041). For example, the Department of Justice recently entered into a $123 million settlement with five major servicers for an estimated 1,000 SCRA violations.

Investor Concerns
Mortgage investors have begun raising major concerns regarding two facets of SCRA compliance: (1) sending notice of potential SCRA rights in any default or collections action; and (2) the filing of affidavits in judicial actions. The SCRA does not explicitly require that servicers perform either of these actions; however, there is an argument that the SCRA contemplates these actions. Additionally, following these methods is an effective way of showing compliance with the requirements of the SCRA.

Notices — The SCRA places the burden of notifying servicemembers and other protected persons upon “the Secretary” of the servicemember’s respected service (50 U.S.C.A. § 3915). In the majority of cases, this will be the Secretary of Defense. Nonetheless, it is best for firms and servicers to include information concerning potential SCRA benefits any time they are pursuing legal or collections action. This is in order to give anyone who may be protected the opportunity to come forward and assert his or her protection.

Many investors and servicers now require that their servicers and vendors send some notice of potential SCRA benefits. In almost every action contemplated in the servicing industry (whether it be foreclosure, eviction, etc.), notice is required to be mailed to the subject property and/or to the borrowers/owners/occupants. Correspondingly, it is sound to include SCRA benefits information in all notices that a servicer, law firm, or vendor may send.

Affidavits
— The SCRA does contemplate the filing of an affidavit attesting to the military status of defendants in civil actions, specifically in cases where a default judgment is sought or granted (50 U.S.C.A. § 3931). Section 3931 of the SCRA obliges all American courts to require plaintiffs to file an affidavit “stating whether or not the defendant is in military service and showing necessary facts to support the affidavit” or “if the plaintiff is unable to determine whether or not the defendant is in military service, stating that the plaintiff is unable to determine whether or not the defendant is in military service” in any civil action “in which the defendant does not make an appearance.”

While the SCRA induces all courts to follow this affidavit requirement, many courts do not apply this portion of the SCRA, either by not compelling that an affidavit as to military status of the defendant be filed prior to issuing a default judgment, or by not requiring sufficient language in the affidavit. Consequently, many investors and servicers now direct their law firms and vendors to file affidavits of military status in all judicial proceedings where they are listed as the plaintiff. The general practice is to file an affidavit asserting that the named defendant is not protected by the SCRA, along with a copy of a Defense Manpower Data Center (DMDC) record check showing the same. Many investors take this a step further and have very specific requirements regarding the form of the affidavits, the timing of the record checks, the execution and filing of these affidavits, as well as the language contained in the affidavit.

Correspondingly, a recommended practice would be to ensure that in every judicial action filed, an affidavit as to the military status of the defendants, along with a DMDC record check attached as an exhibit, is submitted. This ensures that, even if a court is not applying section 3931, the relevant entity is in compliance with the section and can prove this in a potential action regarding an SCRA violation. It is also prudent for the affidavit to contain language addressing anyone else who may be affected by the litigation but is not named as a defendant (i.e., occupants in an eviction action who are not named as defendants because they are not required to be).

This language can be as simple as something along the lines of “[Plaintiff] is unaware of the military status of any John/Jane Does who may be affected by this judgment.” With that being said, it is important to keep in mind that many courts have their own specific requirements as to what may be filed and what forms must be used. In certain jurisdictions, filing an affidavit not on the court’s forms may create more problems than it solves, especially if the court has its particular SCRA affidavit procedure that conflicts with this suggestion. Accordingly, every effort should be made to take varying jurisdictional requirements into consideration.

Conclusion
There are steps that can be taken to help ensure compliance with the SCRA that are not explicitly contemplated or required by the SCRA. This brief article covers two relatively easy points. Specifically, the inclusion of SCRA benefits information in all notices sent, and the filing of an affidavit as to the defendant’s military status in all judicial actions.

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Purchaser of Defaulted Debt Not Subject to FDCPA Liability because it Acts as Creditor, Not Debt Collector

Posted By USFN, Tuesday, April 5, 2016
Updated: Wednesday, April 6, 2016

April 5, 2016

 

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

The U.S. Circuit Court for the Fourth Circuit — which governs Delaware, Maryland, North Carolina, South Carolina, Virginia, and West Virginia — has issued a significant published opinion favorable to creditors in Henson v. Santander Consumer USA, Inc., No. 15-1187 (4th Cir. Mar. 23, 2016).

Plaintiff consumer borrowers alleged that Citi made loans to them for the purchase of automobiles and, when they defaulted, Citi repossessed the vehicles and sold the loans (bearing deficiency balances) to Santander. The complaint asserted that after Santander purchased the debt, it began communicating with plaintiffs in an attempt to collect the debts owed in violation of the FDCPA, allegedly misrepresenting the amount of the debt and Santander’s entitlement to collect it. The district court granted Santander’s motion to dismiss the complaint pursuant to Rule 12(b)(6) on the basis of Santander’s defense that it was not a debt collector under 15 U.S.C. § 1692a(6).

On appeal, the plaintiffs maintained that the default status of the debt at the time Santander purchased it determines its status as a debt collector because of one of the exclusions to the definition of “debt collector” contained in 15 U.S.C. § 1692a(6)(F)(iii). Excluded from the definitions is “any person collecting or attempting to collect any debt . . . owed or due … another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained ….” (Emphasis is the court’s.)

The Court of Appeals disagreed:

We conclude that the default status of a debt has no bearing on whether a person qualifies as a debt collector under the threshold definition set forth in 15 U.S.C. § 1692a(6). That determination is ordinarily based on whether a person collects debt on behalf of others or for its own account, the main exception being when the “principal purpose” of the person’s business is to collect debt. Id. at 8. (Emphasis is the court’s.)

The court noted that § 1692a(6) defines “debt collector” in two parts: classes of persons included within the term, and classes of persons excluded from the definition. The first part of § 1692a(6) “defines a debt collector as (1) a person whose principal purpose is to collect debts; (2) a person who regularly collects debts owed to another; or (3) a person who collects its own debts, using a name other than its own as if it were a debt collector.” (Emphasis is the court’s.) The second part of § 1692a(6), defining the classes of persons excluded from the definition of “debt collector,” includes the exclusion in § 1692a(6)(F)(iii): “[t]he term [debt collector] does not include . . . any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained by such person.” Id. at 10.

Because the plaintiffs contended that Santander had purchased the debt before it engaged in the alleged unlawful collection efforts, the complaint failed to demonstrate that Santander was collecting debts owed to another. The second part of the definition did not, therefore, come into consideration — i.e., whether Santander was excluded from the definition of “debt collector” based on whether the debt was already in default when Santander obtained it. Simply put, the court cannot reach the plaintiffs’ claim that the debt was in default because that could only be considered if Santander were not seeking to collect its own debt.

The appellate opinion is significant on this principal point. It is also interesting because the court knocks down a number of other contentions made by the plaintiffs that might be replicated in other litigation brought by consumers, including that Santander, which had been a debt collector with respect to these same loans before it purchased them, remained a debt collector afterwards. The court observed that Congress’s intent in adopting the FDCPA was to target abusive conduct by persons acting as debt collectors. Because many financial companies such as Santander carry out a wide variety of activities (including lending money, collecting their own debt, servicing their own debt, and servicing other persons’ debts), the plaintiffs’ argument would have the effect of subjecting all of Santander’s activities to the FDCPA, which was not what Congress intended.

Henson clarifies the manner in which the analysis of whether a person is a creditor or a debt collector should be made. The plaintiffs had tried to turn the analysis on its head by arguing the exclusion first, before considering the principal definition. This judicial decision should provide clarity to all entities concerned about FDCPA compliance: providing they wait to commence collection activity until they have completed the purchase of the debt obligations, they will be acting as creditors and, therefore, largely immune from complaints relying on the FDCPA. And, if they had been debt collectors while acting for the noteholders under a prior arrangement, they can transform their status from debt collector to creditor.

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Official Bankruptcy Forms – Some Changes, Effective 4/1/2016

Posted By USFN, Tuesday, April 5, 2016
Updated: Wednesday, April 6, 2016

April 5, 2016

 

by USFN Staff

Effective April 1, 2016, automatic adjustments were made to dollar amounts stated on several Official Bankruptcy Forms. The adjustments apply to cases filed on or after April 1, 2016. For detailed information, see http://www.uscourts.gov/rules-policies/pending-rules-amendments/pending-changes-bankruptcy-forms. Among the changed forms is Official Form 410, Proof of Claim, Line 12.

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New Mediation Program in the First Judicial Circuit of Illinois Effective April 1, 2016

Posted By USFN, Tuesday, April 5, 2016
Updated: Thursday, March 31, 2016
April 5, 2016
 
by Mary Spitz
Anselmo Lindberg Oliver LLC – USFN Member (Illinois)

 

The First Judicial Circuit of Illinois (which includes the counties of Alexander, Jackson, Johnson, Massac, Pope, Pulaski, Saline, Union, and Williamson) recently approved and implemented a Mandatory Mortgage Foreclosure Mediation Program, effective April 1, 2016. The program, administered by the Dispute Resolution Institute, logistically bears a large resemblance to the mediation program in Champaign County, Illinois. Specifically, it is an opt-out program with an “Initial Intake Conference” that the lender and/or the lender’s counsel is not allowed to attend.
 
The program is limited to borrower-occupied residential property only; further, borrowers who are currently seeking relief in bankruptcy may not proceed with mandatory mediation. The program administrator will determine eligibility for mediation on a case-by-case basis at the initial intake conference, and will then set a pre-mediation conference date, which requires the appearance of lender and lender’s counsel (in person or by telephone).

 

If an agreement cannot be reached through participation in pre-mediation conferences, the program administrator may set a formal mediation. If the matter goes to a formal mediation, the lender’s counsel must appear in person, and the lender must be available in person or by telephone. Upon either reaching an agreement or determining that mediation is no longer helpful, the program administrator or the mediator will terminate mediation and the matter will return to the trial court for either dismissal of the action or further foreclosure proceedings.

 

When compared with the other mediation programs in Illinois, there is nothing of particular note or concern regarding this mediation program recently implemented in the First Judicial Circuit. It is much of the same that is seen in other Illinois counties.

 

Additionally, the counties within the First Judicial Circuit are located in the very southern-most tip of Illinois where the populations are very small. As a result, the volume of cases in these counties is also very small. Therefore, lenders should not anticipate a large number of mediations occurring in these counties moving forward.
 

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Foreclosure Relief and Extension for Servicemembers Act of 2015 was Signed by the President

Posted By USFN, Tuesday, April 5, 2016
Updated: Wednesday, April 6, 2016

April 5, 2016

 

by Jienelle R. Alvarado
Trott Law, P.C. – USFN Member (Michigan)

On March 31, 2016 the Foreclosure Relief and Extension for Servicemembers Act of 2015 (the Act) was enacted, becoming Public Law No. 114-142. The Act amends the Honoring America’s Veterans and Caring for Camp Lejeune Families Act of 2012 by extending the time period in the provision of the Servicemembers Civil Relief Act (SCRA) that grants safeguards to active duty servicemembers against foreclosure.

Specifically, the protections provided by 50 USC § 3953 (previously cited as 50 USC Appx § 533) will be extended for one year following the completion of the servicemember’s military service. The one-year protection under § 3953 of the SCRA will continue through December 31, 2017. Absent further amendments, the extended time period under § 3953 of the SCRA will revert back to the prior version on January 1, 2018.

 

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Foreclosure Relief and Extension for Servicemembers Act of 2015 was passed by Congress

Posted By USFN, Tuesday, April 5, 2016
Updated: Tuesday, April 19, 2016

April 5, 2016

 

by Jienelle R. Alvarado
Trott Law, P.C. – USFN Member (Michigan)

On March 21, 2016 the Foreclosure Relief and Extension for Servicemembers Act of 2015 (the Act) was passed by Congress, and the bill is awaiting the President’s signature. The Act amends the Honoring America’s Veterans and Caring for Camp Lejeune Families Act of 2012 by extending the time period in the provision of the Servicemembers Civil Relief Act (SCRA) that grants safeguards to active duty servicemembers against foreclosure.

Specifically, the protections provided by 50 U.S.C. § 3953 (previously cited as 50 U.S.C. Appx § 533) will be extended for one year following the completion of the servicemember’s military service. The one-year protection under § 3953 of the SCRA will continue through December 31, 2017. Absent further amendments, the extended time period under § 3953 of the SCRA will revert back to the prior version on January 1, 2018.

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FHA Rule Change Reduces Cap on Late Fees

Posted By USFN, Tuesday, April 5, 2016
Updated: Wednesday, April 6, 2016

April 5, 2016

 

by Rebecca B. Redmond
Sirote & Permutt, P.C. – USFN Member (Alabama)

FHA servicers and lenders: There’s another rule change. Under FHA’s reduced late fee cap, which became effective March 14, 2016, late charges for case numbers assigned on or after the rule’s effective date will be limited to four percent of principal and interest. Taxes and insurance can no longer be factored into late charge calculations.

This new cap on late fees — one of the many changes set forth in the recently revised FHA handbook (i.e., online FHA Single Family Housing Policy Handbook 4000.1) — is sure to add to the ever-increasing compliance costs for servicers as fees decrease. Meanwhile, pressure mounts on lenders to provide proper closing cost disclosures in light of this revised rule. Compliance is mandatory.

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