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Controlling What You Can When Managing a Natural Disaster Event

Posted By USFN, Wednesday, July 17, 2019
Updated: Tuesday, July 16, 2019

by Jeremy B. Wilkins, Esq., Devin Chidester, Esq., and Jason Branham, Esq.

Brock & Scott, PLLC
USFN Member (AL, CT, FL, GA, MA, ME, MD, MI, NC, NH, OH, RI, SC, TN, VA, VT)

 

Image courtesy of NASA

 

To parse a phrase from Game of Thrones: Hurricane season is coming (or at this point, is here).  For those of us that live and work in the southeastern U.S. this time of year can and usually does have a huge impact on our lives and businesses.  Effects from the hurricanes in late 2018 are still impacting some areas near the Atlantic Coast.  Point being, a hurricane or any natural disaster will decimate communities for prolonged periods of time.  Specifically, in the default servicing industry, the impacts are wide-ranging, and the effects felt from all parties: creditors to borrowers, law firms to government agencies.  This is further compounded by the multiple unknowns that occur prior to and after the fact of the disaster (i.e., timing of the natural disaster event, extent of damage inflicted, and total geographic impact).  Regardless of the unpredictability, post-disaster success requires preparation, planning, and a proactive mindset with governing those criteria that are within an organization’s domain and control.  Guidance during a natural disaster situation is often waning but instilling proper proactive and pragmatic concepts in an institutionalized and organizational manner through a well-defined business continuity plan will mitigate the overall impact of the proverbial storm. 

Compassion
Compassion is the most important underlying concept to any organization’s business preparedness through a natural disaster.  People and how they are treated is the fundamental root that ensures businesses continue to operate after the event.  As the old saying goes, “Things are replaceable, people are not.”  Any business continuity plan must be drafted in light of compassion towards employees and the likelihood of individual needs that flow from the ramifications of a natural disaster.  People are the most important and most valuable asset of any organization.  Awareness of any community evacuation plans is essential to ensuring employees that elect to evacuate on their own personal volition are afforded enough time while balancing work needs.  Disastrous events threaten the safety and stability of a person’s life, loved ones, home, community, and livelihood for unknown lengths of time.  People are understandably distracted, and decision making becomes difficult.  Imparting an emergency plan that is straightforward and guides, informs, and comforts employees during desperate times is the foundation to a successful emergency plan.  In fact, the organization should look externally to involve itself in the community as part of any clean up and recovery efforts and look internally to help those employees adversely impacted.  There is a collective power in altruism that will inure positively in many ways.

Follow a Written Plan
A viable business continuity plan (“plan”) must be in writing, clear yet instructive, and adequately communicated throughout an entire organization.  The plan will set forth duties, responsibilities, and directives for all staff and management to follow before, during, and after the natural disaster.  In the event you have multiple office locations, the plan should be specific to each office to the extent necessary, but also broadly developed for the entire organization.  The plan should serve as the roadmap for your organization’s response and actions both pre- and post- natural disaster event.  The plan should assess possibilities for a broad array of possible natural disasters including potential levels of severity, responses, and security threats.  After implementation, a viable plan should be subject to continual review to ensure successes are maximized and necessary remedial measures are taken.  The plan is the starting point for managing preparedness and by its very nature is a proactive document that will bind the foregoing components by developing controls within the organization for any possibly natural disaster event.  A plan must be in place within each organization-- even if the likelihood of a natural disaster is slim to none.  It is a fundamental, controllable, and proactive measure to ensure employee safety and business stability post disaster. 

Protect Assets
Your organization is only as viable as the assets that define it, including employees, tangible goods, and infrastructure.  Protecting your assets is culturally rooted in caring for the well-being of your people.  An organization’s duty of protection for its assets is predicated on the idea of not placing the assets in a risky situation.    Having a plan that identifies individual leaders/facilitators, establishing communication through readily available methods of checking in or points of contact (i.e., phone tree, text/email address, online portal, etc.), and having known methods of contact for leaders and management to establish employee safety both before, during, and after the natural disaster event.  For instance, Brock & Scott’s North Carolina foreclosure operations were greatly impacted by Hurricane Florence.  Thankfully, the firm’s Business Continuity Plan and the Emergency Response Plan for the Wilmington office included necessary contact points and team members tasked with identifying employee safety as well as office security.  Regular check-ins helped give peace of mind during a hurricane that devastated Wilmington and the surrounding area.  Similarly, Brock & Scott’s Ft. Lauderdale location uses a plan on the same fundamentals around employee safety, clearly identified check-in methods, evacuation routes, and other asset protecting methods.  Communication with staff is not always easy during a natural disaster, especially with potential power outages, but advance knowledge of everyone’s location and an established system of contact will allow an organization to succeed in the midst of adversity.  Employee safety is paramount and should be encouraged at all costs, then focus needs to be on protecting tangible goods and other non-human assets (i.e., original documents, computers, office security, etc.).   

It is essential to safeguard tangible assets belonging to your organization and any others placed in your care.  Depending upon your location, your office structure should be prepared properly in the event of a prolonged power outage or obstructed access (i.e., downed trees, impassable roads, etc.) for an extended period.  Including a reporting system, having regularly scheduled calls with emergency leadership in your organization, and identifying who is responsible for accessing offices/building locations and how ensures assets are safeguarded.  A good Plan will encourage remedial measures to ensure doors are boarded or locked, tangible items are secured, and technology (computers/servers) are managed to prevent security breach and destruction.  It is prudent to take basic remedial measures such as unplugging all electronics and elevating any computers or other physical items from potentially preventable destruction, such as flooding.

With respect to original documents, preventative measures such as cataloguing ones on hand, returning ones to proper holders, or removing to a secured location in another office will ensure unnecessary destruction and help identify any documents that may be lost.  If it is best to relocate them temporarily, ensure appropriate measures for chain of custody are taken.  These measures are necessarily proactive in nature and keeping your client informed and documented will further instill confidence in preparations.  Importantly, these are measures that should exist within your organization’s Plan and the implementation is within your control.  Every decision or criteria for such that can be made or set prior to the disaster, should be made and set and incorporated in the Plan. 

Communication
Communication is the lifeline of a successful plan.  As always, success at any level requires a communication structure both internally and externally as it pertains to the organization.  As part of a successful plan, you must communicate clearly and directly.  The messaging should not be left to interpretation. 

Employees should all know expectations and duties both pre-disaster and post-disaster as appropriate to their location and job responsibilities.  The means of communication should be consistent and within the confines of resources available under the circumstances.  As previously mentioned, communicating with staff throughout is of the utmost importance.  It goes beyond protecting your employee as an asset; it solidifies the strength of the organization. 

Further, communication outside of the organization to clients, court officials, and vendors should also be done clearly and directly.  It is incumbent to ensure external communications project a sense of organizational strength and address in real time (e.g. office operational hours, court closures and delays).  It is advantageous to have resources physically located outside of the natural disaster impact area that capable of communicating with those inside the impact area to convey the message with accuracy.  Ask yourself: “who needs to know what…and when?”  Relevance and timeliness are key components of effective communication.  Often a state of emergency is declared, and this may have long term impacts to pending litigation, available court resources/schedules, or cause legal remedies for distressed individuals (i.e., FEMA claims, insurance claims, delayed mortgage payments, etc.).  Specific facilities may be damaged, closed, or inaccessible.  External communications are going to be a snapshot of the situation on the ground and they will have a long-term impact if not done so with clarity and purpose in a timely manner.  Even in an event of minimal impact, communication be continuously envisioned, planned for, and part of the written plan. 

Outside the Box Thinking
Admittedly, when a natural disaster hits, you must be prepared to move outside of your comfort zone.  A proactive approach to business operations is necessary and should be part of any governing Plan.  For example, in organizations with multiple office locations, a preventative approach may be to reposition staff from a danger zone to one of safety prior to any disaster hitting.  We are fortunate to have a few days’ notice before hurricanes, winter storms, or the like hit a specific jurisdiction.  Operating from another location may have increased cost, but the business maintains function and is not stopped completely.  Another workaround is to utilize remote access for qualified employees post-disaster.  This takes some pressure off employees who are balancing work needs with the personal stresses of the disaster. 

A plan should have in place the ability to cross train staff in other locations.  This ensures minimal functionality and prevents all operations from coming to a screeching halt.  This is where established and proactive uniformity in processes and methodology within an organization’s Plan can allow for outside of the box success and planning.  Furthermore, as a natural disaster makes its impact, there could be extended power outages and travel routes that could additionally impact delivery services, specifically US Mail and overnight mail delivery options.  This could impact processes at all levels and the downline timelines of matters could be greatly crippled.  Having a backup location for mailings to be sent or processed from will prevent any downturn or timeline delay from occurring.  With Hurricane Florence, Brock & Scott used a backup office location not on the coast.  This allowed for mail collection and processing to have minimal interruptions while travel to and from Wilmington was extremely limited.  Another possible remedial step; include the use of private air travel or even boat couriers to transport documents in and around the impacted locations.

Organizations “weather” natural disasters by having policies in place and a plan which is composed well in advance and proactively implemented which incorporates: a true sense of care for its people, a clear plan of action for likely contingencies, measures to protect physical assets including facilities and property, and a means for effectively communicating relevant information to both internal and external recipients who need it to maximize performance and safety.  After taking these steps, creative and resourceful outside-the-box thinking can take the quality of an organization’s response to an even higher level.

 

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Fifth Circuit Clarifies Servicer’s Loss Mitigation Obligations

Posted By USFN, Wednesday, July 17, 2019
Updated: Tuesday, July 16, 2019

Shawnika L. Harris, Esq.
Barrett Daffin Frappier Turner & Engel, LLP
BDF Law Group (TX, GA, CO, CA, NV and AZ)



In Germain v. US Bank National Association, an opinion out of the 5th Circuit Court of Appeals, the court clarifies a servicer’s obligations in reviewing multiple loss mitigation applications. Additionally, the court sends a warning to borrowers and attorneys who manipulate statutory and judicial safeguards in order to escape the borrower’s mortgage obligations.

In July of 2012, Ocwen Loan Servicing, LLC (“servicer”) began servicing Germain’s loan. By August, Germain defaulted on the loan and the servicer-initiated foreclosure proceedings. Germain submitted his first request for a loan modification, which was denied on the basis that the owner of the note did not allow for modification. Germain brought the loan out of default, and the servicer did not continue processing the borrower’s loss mitigation application.

Over the next two years, Germain went in and out of default several times, filed for bankruptcy, which was later dismissed, and submitted two more applications for a loan modification. The servicer denied each request and presented alternative loss mitigation options. Germain failed to take advantage of any options presented.

In February 2014, the borrower again submitted a loss mitigation application and requested a loan modification. The request was denied in writing on the grounds that the owner of the loan did not allow for loan modification and other loss mitigation options were presented, including the option of a short sale.

In 2015, the servicer accelerated the loan and Germain filed suit alleging two primary claims: (1) the servicer was in violation of the Real Estate Settlement Procedure Act (“RESPA”) by failing to provide a written explanation of its loss mitigation analysis for all four times the borrower submitted an application, and (2) violating the Texas Debt Collection Act (“TDCA”) by proceeding with foreclosure without complying with RESPA and urging Germain to submit loss mitigation applications knowing that it would be treated as a loan modification and subsequently denied.

Section 1024.41 (c) and (d) of the Code of Federal Regulations, relied on by the borrower, states that the loan servicer must evaluate the borrower for all loss mitigation options and provide a written explanation of all options or the specific reasons the borrower was denied for loss mitigation. Section 1024.41(i), which states the servicer is only required to comply with the requirements of sections (c) and (d) for one complete loss mitigation application for the borrower’s mortgage account came into effect in 2014. The court in Germain ruled that servicers should be credited for its compliance, even if that compliance occurred prior to the effective date of the statute.

The court relies on the analysis in Campbell v. Nationstar Mortgage out of the 6th Circuit and the district court opinion in Allen v. Wells Fargo Bank, N.A to determine whether section 1024.41 should apply retroactively in this instance. In Campbell, the court concluded that 1024.41 could not be applied retroactively because doing so would have imposed a duty on the servicer to not foreclose on the property when no such duty existed at the time of the foreclosure. The court in Allen reasoned that a servicer’s past conduct should apply when reading 1024.41(i) because failing to do so would exclude an entire category of borrowers from the limitation on duplicative requests where there was no intention to exclude such borrowers.

The court in Germain reconciles these seemingly conflicting opinions by delineating the difference between applying 1024.41 retroactively to impose a new duty to prior actions and crediting the servicer for its compliance with 1024.41 prior to the effective date of the statute. In other words, section 1024.41(i) should be retroactively applied because the purpose of the statute was to bring servicers into compliance, not make compliant servicers repeat their compliance.

Germain also raised TDCA violation claims which the court quickly dismantled. Germain alleged that the servicer violated the TDCA by threatening to foreclose on the property without complying with RESPA, and “urging [him] to submit a loss mitigation application, although the Defendants knew that [his] application would be treated as a loan modification and would be summarily denied without consideration.” The first TDCA claim was dismissed by the court based on their findings that the servicer was not in violation of RESPA. Germain’s second TDCA claim relied on language in Tex. Fin. Code § 392.304(a)(14) and (19) which forbids fraudulently, deceptively, or falsely misrepresenting the nature of services rendered by the debt collector or any other false representation to collect a debt or obtain information from the consumer. Germain argued that the servicer violated this provision by encouraging Germain to submit loss mitigation applications that would be treated as a request for loan modification and subsequently denied. The court disagreed, reasoning that the servicer did not promise a loan modification, nor did Germain offer any evidence that the servicer requested loss mitigation materials knowing the application would be denied. Further, the servicer provided Germain with several loss mitigation options other than a loan modification, including the option of a short sale. Germain failed to take advantage of any of the suggested options.  

What does the Germain decision mean for mortgage servicers?
First, servicers are only required to comply with the requirements of 1024.41(i) for a single complete loss mitigation application for the borrower’s mortgage loan account. The purpose of the statute is to eliminate the necessity for servicers to review and advise findings on duplicative loss mitigation applications. To be in compliance with 10241.41 the servicer must provide the borrower with one complete written notification of its loss mitigation determination, an explanation for any rejections, and any available options the servicer will provide the borrower. In addition, the court determined that when a servicer has previously provided the borrower with the name of the owner of the note, and that owner has not changed, the servicer’s compliance with 1024.41 is not defeated because the writing does not include the name of the note holder.

Additionally, servicers are not required to raise section 1024.41(i) as an affirmative defense. Germain argued that he did not receive proper notice and adequate time to prepare for the servicer’s motion to dismiss because 1024.41(i) was not raised as an affirmative defense, relying on Amarchand v. CitiMortgage, Inc. where the court contended that section 1024.41(i) was better raised an affirmative defense. The court in Germain disagreed. The court determined that when the defendant raised section 1024.41(i) in their motion for summary judgment, it was an expansion of the denial in their answer, arguing that they did not violate RESPA because they did, in fact, comply with the statute. Therefore, 1024.41(i) should not be considered an affirmative defense, and servicers are not required to raise it as such.

Finally, section 1024.41(i) should be applied retroactively for servicers who were in compliance with the statute prior to its effective date to eliminate the necessity for repeated compliance. The court looks at whether the statute expressly invokes retroactivity, and if not, the court must determine whether the new provision attaches new legal consequences to events completed prior to enactment. Although the court believes that section 1024.41 is not retroactive as a whole, the language of the statute takes into account the servicers past actions. If the servicer was not in compliance prior to the effective date of the statute, their foreclosures cannot be challenged on the basis of compliance because doing so would impose a duty not present at the time of the foreclosure sale. However, if the servicer provided a complete written explanation of their loss mitigation determination to the borrower, the 5th circuit contends that retroactivity applies in order to credit the servicer for the prior compliance.

In the ad hominem conclusion, the Germain court sends a clear message to borrowers and attorneys using the protections put in place to protect borrower’s interests as a weapon to avoid making payments.

 

The history of this case demonstrates beyond cavil that Germain has spent the last 10 years gaming the system through a series of applications for loan modification, a flawed bankruptcy filing, and the institution of this lawsuit. Doing so has enabled him to achieve his one overarching goal: The prolonged occupancy of his residence with little or no payment on his mortgage debt. With the help of cunning counsel, Germain used the intended shield of RESPA, TDCA, and various state and federal laws as a sword to avoid (or at least minimize) his mortgage payments while continuing the decade-long occupancy of his encumbered house. Today's termination of Germain's abuse of the system is long overdue. We caution Germain, and his present and future counsel, if any, that further machinations to prolong this litigation or delay foreclosure proceedings could and likely will be met with sanctions.”


Germain is a win for the industry. It eliminates the need for duplicative response and provides protections for servicers who began CFPB compliance prior to the effective date of the rules.  It also eases the pleading requirements in defending suits alleging CFPB violations. The court also makes clear it will not tolerate continued gamesmanship by borrowers and their counsel to delay foreclosures.

 

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Fifth District Court Holds Bank Entitled to Designate Corporate Representative for Deposition

Posted By USFN, Wednesday, July 17, 2019
Updated: Tuesday, July 16, 2019

Roy Diaz
SHD Legal Group, PA
USFN Member (FL)



In May, the Fifth District Court of Appeal granted certiorari relief to US Bank, quashing a circuit court’s order compelling the bank to produce a specific person for an out-of-state deposition in a residential foreclosure action (U.S. Bank Nat'l Ass'n as Tr. for Certificateholders of Structured Asset Mortgage Investments II, Inc., Bear Stearns Arm Tr., Mortgage Pass-Through Certificates, Series 2006-2 v. Williamson). In Williamson, the bank-initiated foreclosure proceedings against the Williamsons by filing a verified complaint. Five years into the litigation, the bank filed an amended complaint which “was verified by Nicholas Raab, an employee of Bank's loan servicer…”

The borrowers sought to depose Mr. Raab and moved to have him “treated as the Bank’s ‘corporate officer’” under Fla. R. Civ. P. 1.310(b)(6), but the bank objected. The requested designation as corporate officer was significant for two reasons:

  • First, if Mr. Raab was designated as US Bank’s corporate representative, the bank would be required to produce Mr. Raab for deposition in Orange County, Florida, where the bank filed the foreclosure action. Mr. Raab lived and worked in Colorado.

  • Second, if deemed US Bank’s corporate representative, Mr. Raab would be required to testify regardless of his familiarity with the specifics of the Williamsons’ loan or US Bank’s records, policies, and procedures. Notwithstanding the clear language of rule 1.310((b)(6) which gives the bank authority to designate its own corporate representative, the circuit court granted the Williamsons’ motion to compel. The bank sought certiorari relief from the Fifth District Court of Appeal.

Certiorari relief is rarely sought and even more rarely granted. Appellate courts seldomly grant certiorari relief because it pertains only to non-final orders which can be incorporated into a plenary appeal of a final order. Review of non-final orders can lead to piecemeal litigation which the courts understandably seek to avoid. Notwithstanding, if a party can demonstrate the lower court departed “from the essential requirements of the law” and that said departure will result in “material injury…throughout the remainder of the proceedings below” the Court may grant certiorari relief. The District Court of Appeal concluded the order compelling Mr. Raab to appear for deposition in Florida as the bank’s designated corporate representative constituted such a departure.


The District Court of Appeal pointed out that Mr. Raab was not a party to the litigation and was not employed by US Bank but rather the bank’s loan servicer, “a separate corporate entity.”  Although the bank would be required to produce its corporate representative for deposition in Florida under rule 1.310(b)(6), the borrowers were not permitted to unilaterally designate Mr. Raab as the bank’s corporate representative.  The Court explained that only the bank had the authority to designate who would testify at the deposition on the corporation’s behalf. The Court granted certiorari, quashed the order compelling Mr. Raab to appear for the deposition in Florida and the order was final on May 26, 2019.

This ruling is appropriate and consistent with the way the servicing industry operates. Considering the number of servicing staff that touch loans being serviced, it would be untenable to allow an opposing party to select who should testify as the corporate witness. The law simply does not support such a position.

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California Supreme Court Limits Application of the State’s Anti-Deficiency Statute

Posted By USFN, Wednesday, July 17, 2019
Updated: Monday, July 15, 2019

Melissa Coutts, Esq. and Andrew J. Boylan, Esq.
McCarthy & Holthus, LLP
USFN MEMBER (AZ, CA, CO, ID, NM, NV, OR, TX, WA)



In Black Sky Capital, LLC v. Cobb[i], the Supreme Court of California recently held that where a creditor holds two deeds of trust on the same property, a nonjudicial foreclosure of the senior lien does not preclude the creditor from obtaining a monetary judgment on the extinguished junior lien, where there is no allegation of evasive loan splitting or other “gamesmanship scenarios.”

California’s anti-deficiency statute[ii] prohibits a creditor from collecting a deficiency judgment — that is, the difference between the amount of indebtedness and the fair market value of the property — following a nonjudicial foreclosure, even if the property is sold for less than the amount of the outstanding debt.

For the past 20 years, the leading case on this topic has been Simon v. Superior Court[iii], which held that “where a creditor makes two successive loans secured by separate deeds of trust on the same real property and forecloses under its senior deed of trust’s power of sale, thereby eliminating the security for its junior deed of trust, Section 580d [California’s anti-deficiency statute]…bars recovery of any ‘deficiency’ balance due on the obligation the junior deed of trust secured.” Thus, a creditor that forecloses on its senior deed of trust is precluded from any recovery for the amount owing under the junior deed of trust. There have been several cases following the reasoning provided in Simon, as did the trial court in this case.

However, both the Court of Appeal and Supreme Court of California disagreed with this reasoning, instead concluding that although the lienholder is the same for the senior and junior, “[a]ny debt owed on the junior note in this case has no relationship to the debt owed on the senior note.”[iv] The Supreme Court noted that the language of section 580d makes clear that it was only intended to prevent a deficiency judgment on the deed of trust securing the note that was foreclosed, and not under some other deed of trust. Therefore, the anti-deficiency analysis should only apply to the senior deed of trust.

It is important to keep in mind, however, that the Supreme Court’s decision was driven in part by the factual scenario presented in the case. The Court noted that “in Simon, the junior and senior loans were issued just four days apart, and the deeds of trust securing the loans were recorded on the same date.”[v] But in this case, the loans were issued more than two years apart and there was no “evidence of gamesmanship” or “loan splitting.” Therefore, the loans were treated separately, and since no sale occurred under the junior deed of trust, the statute does not bar a deficiency judgment with respect to the note it secured.

Although this case brings some clarity to the issue, it should not be relied upon blindly. The Court spent time reflecting that it has “consistently looked to the purposes of the statute and to the substance rather than the form of loan transactions in deciding the … applicability [of antideficiency statutes].”[vi] And although this case was distinguishable from Simon, the opinion cautions against “gamesmanship scenarios” or where there is clear evidence of intentional loan splitting. Thus, when a creditor holds both senior and junior deeds of trust, a case-by-case analysis should be undertaken to determine whether it is permitted to sue for judgment on the note secured by the junior deed of trust after completion of a nonjudicial foreclosure on the senior.


[i] Black Sky Capital, LLC v. Cobb (2019) 7 Cal.5th 156.

[ii] Code of Civil Procedure Section 580d

[iii] Simon v. Superior Court (1992) 4 Cal.App.4th 63, 66.

[iv] Black Sky, at p.897

[v] Simon, supra, 4 Cal.App.4th at p. 66.

[vi] Coker v. JPMorgan Chase Bank, NA (2016) 62 Cal.4th 6678, 676.

 

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New Jersey Enacts Nine Bills Affecting Residential Foreclosure Process

Posted By USFN, Wednesday, July 17, 2019
Updated: Monday, July 15, 2019

Rosemarie Diamond
Phelan Hallinan Diamond & Jones, PC
USFN Member (FL, GA, NJ, PA)



In late 2018, the New Jersey Judiciary released a report from its Special Committee on Residential Foreclosure. The report contained specific proposals for revising state statutes and court rules to improve the foreclosure process. In response to the Committee’s report, the legislature passed, and Governor Murphy enacted, nine bills affecting the residential foreclosure process.  Signed on April 29, 2019, some of the bills went into effect immediately, with all taking effect by November 1, 2019.

The most immediate impact for lenders is a series of new disclosure requirements for the Notice of Intention to Foreclose (“NOI”) that takes effect between April and November of 2019. As of April 29, 2019, the lender identified in the NOI must disclose whether it is licensed under the New Jersey Residential Mortgage Lending Act (“NJRMLA”) or if it is exempt. The “lender” in the NOI is the intended plaintiff in the foreclosure action, entitled to enforce the note, and the assignee of the mortgage. By August 1, 2019, the NOI must disclose that the borrower has a right to housing counseling at no cost through the court’s foreclosure mediation program and if the mortgaged property meets certain conditions set forth in the statute, the lender must then seek appointment of a rent receiver. And, by November 1, 2019, the NOI must disclose that if the lender initiates foreclosure, the borrower has the option to participate in the foreclosure mediation program. This disclosure must be in English and Spanish. The Court has communicated an expectation that the entire mediation application be provided with the NOI. The mediation application does include an English/Spanish disclosure, but all application forms are written as if the foreclosure action had already been filed, which may confuse borrowers. 

Another critical change to the NOI is the creation of an expiration period.  Effective August 1, 2019, once an NOI is sent the lender has 180 days to file the foreclosure complaint. If the lender fails to meet the deadline a new NOI must be sent and the cure period, which is 30 days, for the borrower must be allowed to run before the complaint is filed. The statute does not contain any exceptions or tolling language.

The legislature shortened the 20-year statute of limitations relating to the date of default. The time frame is now six years from the date of default for mortgages originated on or after April 29, 2019. Also, effective August 1, 2019, the Court may reinstate a foreclosure complaint dismissed without prejudice no more than three times. One caveat to this rule is that if the dismissal was caused by the lender’s obligation to comply with federal laws or regulations then the related reinstatement of the complaint will not count toward the maximum number of allowable reinstatements.

The legislature also codified the Court’s foreclosure mediation program. Much of the structure and process will remain the same, but borrowers will be required to meet with a certified housing counselor and submit a certification of participation. If they do not participate in counseling they cannot participate in mediation. Lenders who fail to mediate in good faith will be subject to civil penalties of up to $1,000 and other sanctions, including the borrower’s attorney’s fees. Also, lenders must be prepared to evaluate borrowers for most loss mitigation options including loan modification, loan workout, refinancing agreement, short sale, deed in lieu of foreclosure, and any agreement leading to the dismissal of the foreclosure action. The mediation program will be funded through a $155 increase in the cost to file a foreclosure complaint.

The sheriff’s sale process is also undergoing significant changes. The sheriff will have 150 days to schedule a sale. This is up from 120 days.  Also, the sale can only be postponed five times without a court order. Postponements will be allocated - two for the borrower, two for the lender, and one that the parties can mutually request. Postponements are lengthened from 14 days to 30 days. Lender’s counsel will be responsible to prepare and provide the Sheriff’s Deed to the sheriff within ten days of the sale. The sheriff has two weeks to deliver the deed, provided the bid has been paid.

The legislature also expanded the requirements for municipal notices. Contact information must be (1) sent to the municipal clerk and chief executive of the municipality, (2) filed with the foreclosure complaint, and (3) recorded with the Lis Pendens. If any of the information in the notice changes, the lender has ten days to mail, file, and record the new notice. The notice must include full names, addresses, and telephone numbers for representatives responsible for receiving complaints and code violations and the full name and contact information for anyone retained by the lender for care, maintenance, security, and upkeep of a vacant and abandoned property. The notice must also contain the telephone number of an in-state representative who can be contacted if the property becomes vacant and abandoned.

The limited lien priority previously provided only to condominium associations has been expanded to all common ownership communities except cooperative corporations.  A qualifying limited priority lien is now cumulative, renewable annually for five years, and no longer subject to expiration after five years. Community associations must provide a unit owner or a purchaser of the unit with a certificate of the amount due within ten days of receiving a request. Any person who relies on the certificate, other than the owner, will be liable only for the amounts on the certificate.  

The legislature created the Residential Mortgage Servicing Act, authorizing the Department of Banking and Insurance (DOBI) to oversee the licensing and registration of mortgage servicers.  There are exemptions to the Act as well as civil and criminal penalties for failure to comply.

Lastly, the legislature changed certain aspects of the expedited foreclosure process enacted in 2008. The changes do not require lenders to expedite foreclosure, but if a lender chooses to do so and the Sheriff cannot expedite the sale then the lender must file a motion requesting appointment of a special master.  Also, if the lender requests a properly supported, expedited foreclosure post-judgment, then the Court must enter an order expediting the foreclosure and cannot require a hearing if the motion is uncontested.

As the industry sorts through the many changes enacted by the New Jersey legislature, it is recommended lenders and their counsel work together to adjust statute of limitations management, timeline reporting, and approvals for new procedures and the associated fees and costs. Over the course of the next year the full effects of the changes will emerge, and we will all gain a better understanding of the long term impact on residential foreclosure process.

 

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Illinois Court Finds General Denial as Admission Condition Precedent

Posted By USFN, Wednesday, July 17, 2019
Updated: Monday, July 15, 2019

Marcos Posada
McCalla Raymer Leibert Pierce, LLC
USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY)



The Appellate Court of Illinois has offered a bit of guidance for practitioners in prosecuting mortgage foreclosure actions. The Court in Bank of N.Y. Mellon v Wojcik, 2019 IL App (1st) 180845, was presented with the issue of whether the trial court erred in denying the defendants’ cross-motion for summary judgment in a foreclosure action concerning defendants’ condominium unit. In answering the Complaint to Foreclose, defendants’ answer denied the deemed allegation found in 735 ILCS 5/15-1504(c)(9) that any and all notices of default or election to declare the indebtedness due and payable or other notices required to be given have been properly given. Bank of New York Mellon v. Wojcik, 2019 IL App (1st) 180845, ¶ 7.

In response, Bank of New York argued that defendants had waived their argument because there were no specific facts raised to show how the condition precedent had not been met. In essence, Bank of New York utilized the requirements of Illinois Supreme Court Rule 133(c). As the Court in Wojcik found, Rule 133(c) requires when pleading a condition precedent, e.g., sending of a notice of default, that it is sufficient to allege that the party completed the conditions on their part and that if the allegation is denied, specific facts must be alleged showing where there was a failure to perform. Bank of New York Mellon v. Wojcik, 2019 IL App (1st) 180845, ¶ 20.

Further, relying on other Illinois decisions, the Wojcik Court stated, “[A] general denial to an allegation of the performance of a condition precedent in a contract is treated as an admission of that performance.” Bank of New York Mellon v. Wojcik, 2019 IL App (1st) 180845, ¶ 21. Accordingly, the Court refused to allow contradiction at the summary judgment stage and instead found that the defendants’ judicial admission in their answer as to the deemed allegations of the Complaint to Foreclose did not lead to an issue of fact, thereby affirming the decision of the trial court denying defendants’ cross-motion for summary judgment.

This opinion sent a strong lesson on Illinois Supreme Court Rule 133(c): “As our supreme court has recognized: "The rules of court we have promulgated are not aspirational. They are not suggestions. They have the force of law, and the presumption must be that they will be obeyed and enforced as written." Bank of New York Mellon v. Wojcik, 2019 IL App (1st) 180845, ¶ 24 citing Bright v. Dicke, 166 Ill. 2d 204, 210, 652 N.E.2d 275, 209 Ill. Dec. 735 (1995).

In practice, it has been common for defendants’ answers to Complaints to Foreclose to include general denials of deemed allegations, including the deemed allegation that required notices were sent. Often, when a party denies a deemed allegation, Illinois Courts have required plaintiffs, at the summary judgment stage, to establish that notices were sent, which makes this opinion particularly beneficial to plaintiffs in foreclosure matters. Adopting the approach in Wojcik in Illinois will improve judicial economy and ensure that cases are decided upon the merits rather than simply making a plaintiff jump through hoops after already establishing a prima facie case for foreclosure.

 

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New York Announces Creation of Consumer Protection and Financial Enforcement Division

Posted By USFN, Wednesday, July 17, 2019
Updated: Monday, July 15, 2019

Megan K. McNamara, Esq.
Berkman, Henoch, Peterson, Peddy & Fenchel, PC
USFN Member (NY)



The New York Department of Financial Services (“DFS”) announced the creation of the Consumer Protection and Financial Enforcement Division (“CPFED”) on April 29, 2019.  In the press release, Linda Lacewell, the acting DFS Superintendent, stated that the CPFED would be a “powerhouse” that combines seven previously separate units and departments into one united division under the leadership of Katherine A. Lemire, the newly appointed Executive Deputy Superintendent. The seven departments that are now consolidated into the CPFED include the Enforcement Division, the Investigations and Intelligence Division, the Civil Investigations Unit, the Producers Unit, the Consumer Examinations Unit, the Student Protection Unit, and the Holocaust Claims Processing Office.

Lacewell stated in the press release that the purpose of the CPFED is to protect and educate consumers against consumer fraud. In addition, the department will enforce state and federal law with respect to banking, insurance, and financial services. The press release specifically stated that the CPFED “is also responsible for developing investigative leads and intelligence in furtherance of the Department’s efforts to enforce the Banking, Insurance and Financial Services laws, with particular focus on the review and response to cybersecurity events and the development of supervisory, regulatory and enforcement policy and direction in the area of financial crimes.”


The creation of the CPFED appears to be a reaction to what is perceived by DFS as a policy shift within the Consumer Financial Protection Bureau (“CFPB”) to be friendlier to the financial services industry leaders. Notably, in January 2018, then DFS Superintendent, Maria Vullo said, “I am disappointed by the new administration’s sudden policy shift, which is clearly intended to undermine necessary national financial services regulation and enforcement.”

Vullo further stated that “DFS remains committed to its mission to safeguard the financial services industry and protect New York consumers, and will continue to lead and take action to fill the increasing number of regulatory voids created by the federal government.”

Since January 2018, the scene and its players have changed dramatically.  Specifically, Vullo left her position as DFS Superintendent, with Lacewood taking over, and the CFPB appointed Kathy Kraninger as its director in place of acting director Mick Mulvaney. This shakeup is expected to have a dramatic impact on the shape of both CFPB and DFS. As a result, mortgage servicers and their lawyers may be paying close attention to the climate change and the affect that it will have on the foreclosure process.

In late 2016, New York State implemented new regulations with respect to vacant and abandoned properties, also known as “zombie-houses.” These regulations put greater requirements on lenders and mortgage servicers to secure and maintain vacant properties that are in foreclosure. In addition, the failure to comply came with the potential for substantial fines from DFS. The creation of the CPFED is likely to yield additional regulations in line with the zombie-house initiative, and as such, will likely lead to foreclosure actions being a prime focus of the division.    

While it is hard to predict the direction of this newly created department, it is expected to involve cybersecurity. DFS promulgated 23 NYCRR Part 500, a regulation establishing cybersecurity requirements for financial services companies, which took effect March 1, 2017.  These requirements may affect how the CPFED will focus its efforts on enforcing these regulations as DFS did with zombie-houses.

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U.S. Supreme Court Sets Legal Standard for Violations of Bankruptcy Discharge Order

Posted By USFN, Monday, July 8, 2019

by Kinnera Bhoopal, Esq.

McCalla Raymer Leibert Pierce, LLC

USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY)

 

  

On June 3, 2019, the U.S. Supreme Court issued an opinion in Taggart v. Lorenzen, 2019 U.S. LEXIS 3890 after a series of appeals in the lower courts. The Ninth Circuit courts vacillated on the type of legal standard to apply in a bankruptcy related civil contempt case ranging from strict liability to a subjective standard. However, the U.S. Supreme Court unanimously decided that the legal standard to apply when determining whether to impose civil contempt sanctions for violating a discharge order is an objective standard termed “the fair ground of doubt.” Id. at 133.

The Petitioner, Bradley Taggart, was sued by the Sherwood Company in State Court. Before the trial started, Taggart filed a Chapter 7 bankruptcy case and received a discharge. After the discharge order was entered, Sherwood moved to recover attorney fees that were incurred post-petition from Taggart. Both the State Court and the Bankruptcy Court agreed that Taggart was liable for the attorney fees. These courts followed the guidance of a Ninth Circuit case,
Boeing North American, Inc. v. Ybarra (In re Ybarra), 424 F.3d 1018 (9th Cir. 2005). The Ybarra Court held that post-petition attorney fees stemming from pre-petition litigation were usually discharged unless the debtor “returned to the fray” post-petition. Id. at 1024. The State Court and Bankruptcy Court determined that because Taggart undertook actions with respect to the litigation with Sherwood Company following the discharge, and thus returned to the fray, Sherwood’s petition to recover attorney fees did not constitute a violation of the discharge order.  Taggart v. Lorenzen, 2019 U.S. LEXIS at 133-134. 

 

Taggart appealed to the Federal District Court, which concluded that Taggart did not “return to the fray” and thus remanded the case to the Bankruptcy Court. Based on the District Court’s ruling, the Bankruptcy Court held Sherwood in civil contempt for violating the discharge order employing a strict liability standard. Under this standard, any violation of the discharge order whether malicious or innocuous, reasonable or not, would be subject to sanctions. Since Sherwood was aware that a discharge order was entered and intentionally sought to collect a debt, it was held in civil contempt. In re Taggart, 522 B.R. 627 (Bankr. D. Or. 2014).

 

Sherwood appealed, and the Bankruptcy Appellate Panel vacated the sanctions, which the Ninth Circuit affirmed by employing a more liberal legal standard referred to as the subjective standard. Lorenzen v. Taggart (In re Taggart), 888 F.3d 438 (9th Cir. 2018). The Ninth Circuit found that Sherwood had a subjective, good faith belief that the post-petition attorney fees were not discharged thus it held that Sherwood was not in civil contempt. See id. at 444. The Ninth Circuit went further to state that a good faith belief precludes a finding of civil contempt even if the creditor’s beliefs are unreasonable. Therefore, a creditor’s subjective belief of righteousness is sufficient to evade sanctions under this legal standard. See id. at 444.

 

Given the divergent legal standards employed by the lower courts, the U.S. Supreme Court granted certiorari to answer the narrow question of what the applicable legal standard is when a bankruptcy discharge order is violated. The Supreme Court’s analysis began with the statutory provisions of 11 U.S.C. §524 and §105, which authorize bankruptcy courts to impose civil contempt sanctions.  Section 524 of the United States Bankruptcy Code (“Bankruptcy Code”) states “a discharge order operates as an injunction against the commencement or continuation of an action, the employment of process, or an act to collect, recover or offset” a discharged debt. Given that Section 524 of the Bankruptcy Code evokes injunctions, the U.S. Supreme Court reasoned that parallels may be drawn from the long-standing history governing injunction violations, which it then applied to the bankruptcy paradigm.

 

The U.S. Supreme Court explained that civil contempt also exists outside of bankruptcy and in those contexts the U.S. Supreme Court has held that there should not be a finding of civil contempt when there is “a fair ground of doubt” about whether a party acted unlawfully. This is an objective standard because a party’s subjective belief that he was complying with an order will not insulate him from civil contempt if the party’s belief was objectively unreasonable. This standard also acknowledges that civil contempt is a severe remedy such that explicit notice of what constitutes unlawful conduct is necessary before holding a party in civil contempt.

 

Moreover, the U.S. Supreme Court noted that a problem with the strict liability standard is that it is all encompassing and would promote excessive use of an extraordinary remedy for any perceptible breach regardless of the reasonableness of a creditor’s conduct. Conversely, the subjective standard relies too heavily on a creditor’s state of mind, which is difficult to prove. Additionally, the subjective standard deviates from principles of equity because a party’s subjective belief does not have to be reasonable or prudent to evade liability.

 

Based upon the findings detailed above, the U.S. Supreme Court ruled that an objective standard is the prevailing legal standard to apply in bankruptcy related civil contempt cases. It further held that a creditor may be held in civil contempt for violating a bankruptcy discharge order when there is not a “fair ground of doubt” as to whether the creditor’s conduct was unlawful under the discharge order. Consequently, the Supreme Court vacated and remanded the case to the Ninth Circuit Court of Appeals to review the matter using the objective standard.

 

In issuing this ruling, the U.S. Supreme Court struck a balance between protecting the integrity of a bankruptcy discharge order while not exposing creditors to an excessive risk of liability. Therefore, Bankruptcy Courts in every jurisdiction are now required to use the more moderate, “fair ground of doubt,” standard when determining whether to hold a party in civil contempt for violating a bankruptcy discharge order. While the U.S. Supreme Court’s ruling is of national importance it is particularly notable for the Ninth Circuit where creditors previously enjoyed a more favorable, deferential, standard of review. However, the U.S. Supreme Court’s standard will help foster equity between the competing interests of debtors and creditors in a more clear and objective manner.

 

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If Mortgage Debt is Not Paid in Full, Funds Beyond Mortgagee’s Bid are Not Surplus Proceeds

Posted By USFN, Monday, June 17, 2019
Updated: Tuesday, June 18, 2019

by Matthew Levine, Esq.
Trott Law, PC
USFN Member (MI, MN)

The Michigan Court of Appeals, once again, addressed the rights of a foreclosing mortgagee to foreclosure sale proceeds.  In re Claim for Surplus Funds, BAERE Co. v Specialized Loan Servicing, LLC, Case No. 344016, the foreclosing party, Specialized Loan Servicing, LLC. (“SLS”) brought a mortgage loan to foreclosure and submitted a bid in the amount of $20,300.00, which represented only a portion of the $51,915.75 total debt.   On the date of sale, a third party successfully purchased the property for $51,915.75. The Kent County Sheriff turned $20,300.00 over to SLS, however, the Sheriff held onto the remaining funds.

Prior to the foreclosure sale, BAERE Co. purchased the subject property from the mortgagor. Following the foreclosure both BAERE and SLS filed claims for the funds held by the sheriff. SLS claimed the funds as the mortgage remained unsatisfied. BAERE claimed the funds as the successor to the mortgagee under MCL 600.3252.  Given the fact that two parties claimed the same funds, the issue was left for the court to “make an order in the premises directing the disposition of the surplus moneys or payment thereof in accordance with the rights of the claimant or claimants or persons interested,” MCL 600.3252.

BAERE made two arguments that ultimately became the subject of appeal. First, it argued that, because SLS received $20,300.00 as proceeds from the sale, and a foreclosure satisfies the underlying mortgage, SLS was not entitled to the remaining funds. Second, BAERE argued that because SLS provided a specified bid in an amount less than the total debt, it was acquiescing to satisfaction of the debt in an amount less than the total debt. The Kent County Circuit Court found in favor of SLS and BAERE appealed. While this issue has been with the Michigan Court of Appeals, this represents the first published opinion directly on the topic.

The primary questions were whether the mortgage was satisfied upon receipt of its bid amount and whether there was a surplus. MCL 600.3252 includes the phrase “after satisfying the mortgage on which the real estate was sold.” The Court of Appeals noted:


The terms “satisfy” and “surplus” are not defined in the statute. As a result, we will consult the dictionary to determine the common and ordinary meanings of the words. See Krohn v Home-Owners Ins Co, 490 Mich 145, 156; 802 NW2d 281 (2011). The word “satisfy” is defined, in relevant part, as “to carry out the terms of (as a contract); DISCHARGE,” and “to meet a financial obligation to.” Merriam-Webster’s Collegiate Dictionary (11th ed). Merriam-Webster’s collegiate Dictionary (11th ed) defines “surplus,” in pertinent part, as “the amount that remains when use or need is satisfied.”


The Court of Appeals held that satisfaction of the mortgage, as used in MCL 600.3252, necessarily means satisfaction of the debt, unless the total amount due under the mortgage is paid. In the matter before the Court, the total debt was not paid, therefore, the mortgage was not satisfied. Specifically, the Court held


 it is unambiguous that ‘satisfying the mortgage’ refers to paying off the entirety of the debt secured by the mortgage. In other words, satisfying a mortgage and extinguishing the mortgage are not synonymous. It is therefore beyond dispute that respondent’s mortgage was not ‘satisfied,’ and no surplus funds existed for petitioner to seek.


BAERE alternatively argued that submission of a bid amount less than the total debt is an express agreement to accept less than the debt amount as satisfaction, thus any additional amount would constitute a surplus. The Court of Appeals held that a bid sheet is not a contract or a binding admission establishing the debt (“We are aware of no law requiring mortgagees to bid the full amount owed during a foreclosure sale, and we decline to create any such law.”)

It is, of course, possible that one of the parties will appeal this decision, and that the Michigan Supreme Court will agree to hear the matter; however, this appears to be an unlikely outcome. Assuming the Michigan Court of Appeals decision remains in place, it is expected that counties across Michigan will modify their procedures in order to comply with BAERE.   Until such a time that procedures fully complying with BAERE are implemented, each case should be reviewed on an individual basis for a determination as to whether the foreclosing entity is entitled to additional funds from the sheriff’s sale proceeds.

 

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USFN Briefing Follow-up: REO/Eviction

Posted By USFN, Monday, June 17, 2019

by Camille R. Hawk, Esq.

Walentine O’Toole, LLP

USFN Member (IA, NE)

During April’s REO/Evictions USFN Briefing, the panel covered a number of topics, including: legislative updates from Connecticut, California, New Hampshire and Ohio; case law updates from Rhode Island, Ohio, Illinois and the U.S. Supreme Court; and industry issues such as FEMA protection in Nebraska and Iowa and gas explosions in Massachusetts. Panelist Camille Hawk gives an update on Nebraska and Iowa flooding and disaster issues below.

Post webinar downloads and a schedule up upcoming topics
may be found on the USFN Briefings webpage.

As you likely are aware, there were announced major disaster declarations for several counties in Nebraska and Iowa due to recent flooding in March 2019.  FEMA coordinated efforts to assist those impacted. 

 

Lenders started placing files on hold in March for a period of time (originally through June 19, 2019) in order to assist borrows in their recovery process.  Between March 2019 and June 2019, the recovery in the states has been slow and much damage continues to impact homeowners, their businesses, and farming operations.   Examples of the impact include entire herds of livestock being lost, delayed ability to plant crops, and the inability to plant crops this year due to the washing away of the soil.  Many roads and bridges are destroyed by the water, resulting in closed roads that needed to be rebuilt.  

 

The impact is further worsened in several counties by additional rain and flooding in May and early June, which may result in extended FEMA holds. It is expected that those impacted, particularly the farm communities, will take years to fully recover.  

 

The specific farming impact is expected to trickle down to other industries locally and nationally, causing yet further financial hardships for homeowners.  Grocery prices and transportation prices are expected to increase, and those increases will not be limited to the Midwest.  The flooding in these states, along with the flooding in other areas of the country, will compound the resulting issues.  The FEMA holds may come to an end soon, but the impact will continue with increased defaults and increased need for loss mitigation.  Circumstances will turn around, but it will just take time. 

 

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Freddie Mac Adjusts Approved Attorney Fees

Posted By USFN, Monday, June 17, 2019

by Edward Kirn, Esq.
Powers Kirn, LLC
USFN Member (NJ, PA)

On April 18, 2019, Freddie Mac released its most recent Guide Bulletin to Servicers addressing many important items, including making adjustments to the approved attorney’s fees and title expenses associated with uncontested foreclosures, some much needed adjustments to the approved Servicer reimbursement amounts for attorney fees associated with specific bankruptcy services, and also made some adjustment to the expense limit for skip tracing and investigative reports.  The bulletin also addressed changes and updates to property insurance loss settlements, partial releases of a lien and grants of easements and an Investor reporting change initiative.

Freddie Mac and Fannie Mae have consistently led the industry in establishing standards and benchmarks to ensure that the law firms handling the default servicing legal representation are justly compensated for the work they perform.  To this end, they have been responsible stewards of the industry.  Freddie and Fannie have also been welcoming business partners, always receptive to discussing the pressing issues that face our industry and equally responsive in collaborating with USFN and other industry participants in developing working solutions to ensure that the default servicing industry operates as smoothly and efficiently as possible.

 

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U.S. First Circuit Court of Appeals Allows Integrated Business Record Exception to Hearsay

Posted By USFN, Monday, June 17, 2019

by Robert Wichowski, Esq.
Bendett & McHugh, PC
USFN Member (CT, MA, ME, NH, RI, VT)

On May 30, 2019, the First Circuit United States Court of Appeals handed down its decision affirming the judgment for Plaintiff in an appeal taken from the United States District Court for the State of Maine.  In an opinion written by former United States Supreme Court Justice David Souter, the First Circuit held that the District Court did not err in allowing into evidence a prior mortgage loan servicer’s business records without live witness testimony from the prior servicers where Maine State Courts require live witness testimony or testimony from a qualified witness with personal knowledge of the record keeping practices of the prior servicers for the admission of such records.

In the District Court case, US Bank (“plaintiff”) sued Jones (“defendant”) for breach of contract and breach of the underlying promissory note for her failure to make payments on her mortgage loan.  During plaintiff’s case, it submitted computer printouts which contained an account summary of the loan.  The account summary contained entries from a time before the current servicer serviced the loan.  The District Court admitted the summary as proof of the amount due on the loan with only witness testimony from a representative of the current servicer.

On appeal, defendant claimed that the records relied upon by the District Court should not have been admitted into evidence or relied upon by the court because the records were not supported by the testimony of a custodian or qualified witness with personal knowledge of the record keeping of the prior servicers.  Defendant argued that the witness for the servicer was not a qualified witness because she lacked knowledge about how prior servicers kept their records. Defendant also argued that to allow this exhibit into evidence would be inconsistent with the corresponding state court rule of evidence.    

Maine state courts, both on the trial level and upon appellate review, have been disallowing the entry of business records into evidence where there was no live witness testimony containing personal knowledge of the record keeping practices of prior loan servicers. (see KeyBank National Association v. Estate of Eula W. Quint, 2017 ME 237 (Dec. 21, 2017)). The Court of Appeals rejected both arguments holding that the Federal Rules of Evidence did not preclude the admission of such records and that since the Maine Rules of Evidence were functionally identical to the corresponding federal rules, they were procedural and not substantive and thus, the District Court did not have to defer to the state court’s interpretation of the rules. 

As such, and as the District Court found the witness to be knowledgeable, trained and experienced in analyzing the servicer’s records, the District Court did not abuse its discretion in allowing these records because the evidence presented demonstrated that the exhibit is what it claims to be and accurately reflects the data in the servicer’s database. The court was very clear that decisions of this type were to be made on a case by case basis and should involve a determination of the trustworthiness of the underlying information. 

While this decision is not blanket authority to proceed with prior servicer business records in the federal, and certainly not in the State Court in Maine, it provides a basis for admission of such records in Federal Court actions and brings some rare good news from a case that began in Maine.

 

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New Hampshire Bill Proposes Change in Foreclosure Process from Nonjudicial to Judicial

Posted By USFN, Monday, June 17, 2019

by Joseph A. Camillo, Jr., Esq.                                   

Brock and Scott, PLLC

USFN Member (AL, CT, FL, GA, MA, MD, ME, MI, NC, NH, OH, RI, SC, TN, VA, VT)

On January 2, 2019, the New Hampshire House of Representatives reintroduced “An Act relative to Foreclosure by Civil Action” under House Bill 270.  Like the 2018 introduction (HB1682-FN), it has passed in the House and was referred to the Senate Commerce Committee (where the bill was killed last year). This bill provides that foreclosure of a mortgage would be by a civil action in the superior court in the county in which the mortgaged premises or any part of it is located.  The bill would also repeal the provisions for nonjudicial power of sale mortgages pursuant to RSA 479:25 and reenact it to require commencement of foreclosure by civil action.

Specifically, the bill sets forth the process for a judicial foreclosure wherein all parties having an interest appearing of record at the registry of deeds up through the time of recording the complaint or clerk’s certificate must be joined. An exception would be a party in interest having a superior priority to the foreclosing mortgage, whose interest will not be affected by the proceedings. Parties with a superior interest must be notified of the action by sending a copy of the complaint by certified mail. Parties without a recorded interest may intervene in the action for purposes being added as party in interest any time prior to the entry of judgment.

The action shall be commenced pursuant to superior court rules and the mortgagee shall, within 60 days of commencing the action, record a copy of the complaint or clerk’s certificate in each registry of deeds where the mortgaged property lies. Furthermore, the mortgagee will have to certify and provide evidence that all steps mandated by law to provide notice to the mortgagor have been strictly performed. The complaint shall also contain a certification of proof of ownership of the mortgage note, as well as produce evidence of the mortgage note, mortgage and all assignments and endorsements of the mortgage note and mortgage.

Other requirements include that the complaint contain the street address of the mortgaged property; book and page number of the mortgage; state the existence of any public utility easements recorded after the mortgage but before the commencement of the action; state the amount due and what condition of the mortgage was broken, and by reason of such breach, demand a foreclosure and sale.

Within ten  days of filing the complaint, the mortgagee shall provide a copy of the complaint or clerk’s certificate as submitted to the court to the municipal tax assessor of the municipality in which the property is located, and if the property is manufactured housing as defined in RSA 674:31, to the owner of any land leased by the mortgagor.

A 90 day right of redemption is also being proposed, wherein the property may be redeemed by the mortgagor, by the payment of all demands and the performance of all things secured by the mortgage and the payment of all damages and costs sustained and incurred by reason of the nonperformance of its condition, or by a legal tender thereof, within 90 days after the court’s order of foreclosure.

Most alarming is the clause that acceptance, before the expiration of the right of redemption and after the commencement of foreclosure proceedings, of anything of value to be applied on or to the mortgage indebtedness constitutes a waiver of the foreclosure. Unless an agreement to the contrary in writing is signed by the person from whom the payment is accepted or if the bank returns the payment to the mortgagor within ten days of receipt.  The receipt of income from the mortgaged premises that the mortgagee or the mortgagees assigns while in possession of the premises does not constitute a waiver of the foreclosure proceedings of the mortgage on the premises.

The mortgagee and the mortgagor may enter into an agreement to allow the mortgagor to bring the mortgage payments up to date with the foreclosure process being stayed as long as the mortgagor makes payments according to the agreement.  If the mortgagor does not make payments according to the agreement, the mortgagee may, after notice to the mortgagor, resume the foreclosure process at the point at which it was stayed.


As such, all mortgage foreclosures would take place following a civil action in superior court.  A mortgage foreclosure would be treated as a routine equity case estimated to have a filing fee of approximately $250.00.

The impact to servicers will be such that what was once a streamlined process, taking approximately 90-120 days, would be significantly extended to the same time frame that exists in other judicial states such as Maine, Vermont and Connecticut.  This would also require careful scrutiny of demands to determine how to comply with the historical nonjudicial paragraph 22 language in light of the new judicial process. 

Servicers can also expect a spike in contested matters by virtue of borrowers’ filing answers, affirmative defenses, counterclaims, and engaging in discovery, as well having to prepare witnesses to testify at trial.  Two aspects of the judicial process that were not mentioned are

 

1. the mediation process and

 

2. a nonjudicial notice and publication requirement for the sale, but either could be added to the proposed bill at a later date. 

 

In conclusion, this proposed bill, if passed, would make foreclosing in New Hampshire much more difficult, time consuming and expensive; and there is no doubt that all of the issues that have surfaced in the traditional judicial states will have to be similarly addressed and litigated in New Hampshire.

 

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Adoptive Business Records in Ohio’s Courtrooms

Posted By USFN, Monday, June 17, 2019

by Rick D. DeBlasis, Esq. and Charles E. Rust, Esq.
Lerner, Sampson & Rothfuss
USFN Member (KY, OH)

The “business records exception” of Ohio Evidence Rule 803(6) is an indispensable ally of the lender’s trial lawyer.  The rule against hearsay prohibits the use of records to prove a lender’s case, unless the record is offered by the testimony of the custodian or other qualified witness who has personal knowledge of the record-keeping system in which the record is maintained.  This requirement has made its way to the forefront of foreclosure litigation recently, due to the prevalence of servicing changes during the life a loan.  Now, the majority of Ohio’s appellate courts has addressed the nuances of authenticating adoptive business records, i.e., those created and maintained by a prior servicer.

In Ohio, the idea that the records of a prior servicer may be authenticated by a subsequent servicer originates from a 2006 credit card case in Ohio’s First District Court of Appeals.[1]  The court held that "exhibits can be admitted as business records of an entity, even when that entity was not the maker of those records, provided that the other requirements of [Evid.R.] 803(6) are met and the circumstances indicate that the records are trustworthy."[2]  The majority of Ohio’s Appellate Districts have directly adopted or discussed this general notion, or it has been applied by the respective common pleas courts.[3]  But this begs the question:  what circumstances indicate that the records of a prior servicer are indeed trustworthy?

Recently, some Ohio courts of appeals have held that “trustworthiness of a record is suggested by the profferer's incorporation into its own records and reliance on it.”[4]  Others have held that “[o]ne circumstance that indicates the trustworthiness of such a document proffered as a business record might be the ongoing relationship between the business creating the document and the incorporating business.”[5]  At a fundamental level, such logic is consistent with the notion that “[t]he rationale behind Evid.R. 803(6) is that if information is sufficiently trustworthy that a business is willing to rely on it in making business decisions, the courts should be willing to rely on that information as well.”[6]

It is likely not enough for an affiant to aver simply that the records of a prior servicer are incorporated into the records of the current servicer.[7]  The records of a prior servicer must be incorporated and relied upon in the ordinary course of business to meet the trustworthiness requirements of Evidence Rule 803(6).[8]  Thus, the summary judgment affidavit of a transferee servicer should explicitly indicate both incorporation of the records of the prior servicer into its own and reliance upon those records in the ordinary course of business.

Other averments can augment trustworthiness.  For example, the transferee servicer may have, or may have had, an ongoing relationship with the transferor servicer, such that the new servicer has become familiar with and relied upon, without issue, the old servicer’s record-keeping system for many years.[9]  The new servicer may have acquired the old servicer.[10]  Failure to include such language in the lender’s affidavit could be the difference between the court awarding summary judgment and the court finding a genuine issue of material fact warranting trial.

 

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[1] Great Seneca Financial v. Felty, 170 Ohio App.3d 737, 2006-Ohio-6618, 869 N.E.2d 30, ¶ 14 (1st Dist.).

[2] Id.

[3] See Ocwen Loan Servicing, LLC v. Malish, 2d Dist. Montgomery No. 27532, 2018-Ohio-1056, ¶ 23; Sec'y of Veterans Affairs v. Leonhardt, 3rd Dist. Crawford No. 3-14-04, 2015-Ohio-931, ¶¶ 57-59; Carrington Mtge. Servs., LLC v. Shepherd, 5th Dist. Tuscarawas No. 2016 AP 07 0038, 2017-Ohio-868, ¶ 34-36; U.S. Bank N.A. v. Hill, 6th Dist. Ottawa No. OT-17-029, 2018-Ohio-4532; Bank of New York Mellon v. Kohn, 7th Dist. Mahoning No. 17 MA 0164, 2018-Ohio-3728; RBS Citizens, N.A. v. Zigdon, 8th Dist. Cuyahoga No. 93945, 2010-Ohio-3511; Ohio Receivables, LLC v. Dallariva, 10th Dist. Franklin No. 11AP-951, 2012-Ohio-3165, ¶¶ 19-21; Green Tree Servicing, LLC v. Roberts, 12th Dist. Butler No. CA2013-03-039, 2013-Ohio-5362, ¶¶ 30-31.

[4] Ocwen Loan Servicing, LLC v. Malish, supra.

[5] PNC Mtge. v. Krynicki, 7th Dist. Mahoning No. 15 MA 0194, 2017-Ohio-808, ¶ 13; Sec'y of Veterans Affairs v. Leonhardt, supra, ¶ 59.

[6] U.S. Bank, N.A. v. Lawson, 5th Dist. Delaware No. 13CAE030021, 2014-Ohio-463, ¶ 20.

[7] Bank of N.Y. Mellon v. Roulston, 8th Dist. Cuyahoga No. 104908, 2017-Ohio-8400.

[8] See Deutsche Bank Trust Co. v. Jones, 2018-Ohio-587, ¶ 17.

[9] Ocwen Loan Servicing, LLC v. Malish, supra.

[10] Id.

 

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South Carolina Enacts Servicemembers Civil Relief Act

Posted By USFN, Monday, June 17, 2019

by John S. Kay, Esq.
Hutchens Law Firm
USFN Member (NC, SC)

In late April, the Governor of South Carolina signed House Bill 3180 to enact the South Carolina Servicemembers Civil Relief Act (“Act”). The Act took effect on April 26, 2019 and its provisions are applicable to contracts entered into, extended, or amended on or after July 1, 2019. The Act is intended to expand and supplement the protections of the federal Servicemembers Civil Relief Act ("SCRA"). The definition of “military service” will affect South Carolina National Guardsmen who are on active duty for a period of more than thirty days. The new Act also provides that the dependent of a service member engaged in military service has the same rights and protections afforded a service member under the Act and under the federal SCRA.

Specifically, the Act includes protections for South Carolina National Guardsmen under a call to active:

service authorized by the President of the United States or the Secretary of Defense for a period of more than thirty days in response to a national emergency declared by the President of the United States; or

- duty authorized pursuant to Article 15 for a period of more than thirty consecutive days. 


It is important to note that, in general, the federal SCRA applies to National Guard members on Title 32 duty only under limited and unusual circumstances. Those circumstances, however, happen to mirror those outlined above in the South Carolina version of the SCRA. So, the new statute actually does not provide any additional “call to duty” coverage for active duty status National Guard members other than that already provided for under the federal statute.

The Act does provide some other protections to service members, including the right to terminate certain kinds of contracts after receiving “call up” orders to relocate for a period of service for at least 90 days to an area that does not support the services provided under the contract.  Specifically listed in the statute are contracts for: telecommunication services, internet services, television services, gym memberships and satellite radio services. Unlike some provisions of the federal SCRA, the South Carolina version requires the service member to provide written notice of the termination of the contract to the service provider along with a copy of the orders requiring the service member to relocate.

The South Carolina SCRA allows the service member, a dependent, or the South Carolina Attorney General to bring a civil action against a person who intentionally violates a provision of the act and authorizes penalties that include injunctions, restitution and a civil penalty not to exceed $5,000.   Fifty percent of the civil penalties imposed would be remitted to the South Carolina general fund, and the balance may be retained by the Office of the South Carolina Attorney General to support enforcement or public education efforts related to the purpose of the new statute.

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North Carolina: Lost Notes Can Be Used in Power of Sale Foreclosure When Present Holder Lost Note

Posted By USFN, Monday, May 20, 2019

by Jeffrey A. Bunda, Esq.
Hutchens Law Firm
USFN Member (NC, SC)

In an October 2, 2018 published opinion from the North Carolina Court of Appeals, the Court confirmed that a lender who lost the original promissory note while it was in physical possession of the original note may proceed with a power of sale foreclosure proceeding before the Clerk of Court.

In In re Frucella, No. COA 18-212 (October2, 2018), the homeowners appealed the Clerk’s order authorizing a foreclosure sale for a hearing de novo before a Superior Court judge. At the Superior Court hearing, lender’s counsel presented a pair of “lost note” affidavit executed by the same affiant.

The first affidavit described the circumstances by which the lender seeking to foreclose came into possession of the original Note, and that after it obtained possession, the Note was lost. The second affidavit tracks the elements required to establish the right to enforce a lost promissory note under North Carolina’s U.C.C.§ 3-309 e.g., that the party seeking to enforce the Note had that right when it was lost; the loss was not the result of a transfer/assignment; and that a due and diligent search had been made to locate the Note and it could not be found. The Superior Court entered its own order authorizing a foreclosure sale, from which the homeowners appealed.

In affirming the trial court’s order, the Court of Appeals expanded the scope of “who” could avail themselves of North Carolina’s quasi-judicial foreclosure process. Although the Court had signaled its intent to head in this direction in an earlier unpublished decision in In re Iannucci, No. COA 16-738 (February7, 2017), the holding of the Frucella Court is contained in a published decision and, with that, carries the gravitas of precedent. Before Frucella, courts strictly held that only the “holder” e.g., party in possession of the original appropriately endorsed promissory note could use the streamlined power of sale foreclosure process.

However, under North Carolina’s Uniform Commercial Code, a party who was not the holder could still enforce the Note if it was either a non-holder in possession with the rights of a holder (example: missing or defective endorsement in the chain) or a party who had lost the Note while it was in possession of the Note. Those two classes of lender were previously required to file a judicial foreclosure proceeding, which entails formal litigation and all its trappings like discovery, mediation and trial, rather than being able to proceed with the more efficient power of sale foreclosure process.

In attempting to defeat the lender’s efforts to foreclose via the streamlined power of sale process, the homeowners presented evidence that parties prior to the petitioning lender had held the Note. Although, as the trial court noted, the homeowners “presented no credible evidence tending to show that any other entity is the holder of the debt or there is an actual controversy “regarding the foreclosing lender’s current status. In essence, the Court rejected the long-held urban legend that there is a risk of “multiple judgments” or “double jeopardy” of duplicative foreclosure actions when homeowners simply cast doubt that the party asking for payments isn’t the one who is entitled to collect them.

The expansion of the class of persons permitted to go before the Clerk in power of sale foreclosure proceedings may open the door to the third and final class of person – the non-holder in possession with the rights of the holder – to give the quasi-judicial foreclosure route a whirl. This ruling does not change the fact that North Carolina’s Uniform Commercial Code does not allow a servicer to use a lost note affidavit (LNA) in a power of sale foreclosure proceeding if the prior servicer lost the Note. In those situations, the loan must still be foreclosed judicially, unlike the vast majority of jurisdictions which allow a direct successor to rely on LNAs.

The Frucella expansion may change because as of press time, the homeowners have sought discretionary review to the North Carolina Supreme Court.


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South Carolina: Lender’s Loan Application Process Did Not Violate Attorney Preference Statute

Posted By USFN, Monday, May 20, 2019

By John S. Kay, Esq.
Hutchens Law Firm
USFN Member (NC,SC)

In 2017, the South Carolina Supreme Court issued a decision finding that the loan closing process used by Quicken Loans, Inc. (Quicken) in South Carolina did not constitute the unauthorized practice of law. Boone v. Quicken Loans, Inc., 803 S.E. 2d. 707 (S.C.2017).

Now, in its recent decision in Quicken Loans, Inc., v. Wilson, (S.C. Appellate Case No. 2016-001214 2019) the South Carolina Supreme Court has weighed in on whether the loan application process utilized by Quicken in the context of a residential real estate mortgage transaction violates the South Carolina Attorney Preference Statute (“SCAPS”), S.C. Code section 37-10-102 (2017).

In the Quicken Loans, Inc., v. Wilson case, Quicken brought a foreclosure action against the borrowers based upon a default on the note and mortgage. The borrowers objected and alleged the Quicken loan application process utilized at loan origination failed to comply with the requirements of SCAPS. SCAPS requires a lender to ascertain a borrower’s preference for an attorney to represent him or her in the upcoming loan closing. The lender can comply with the statute in one of two ways:

  • Preference information can be included on or with the credit application on a form similar to the one distributed by the South Carolina Department of Consumer Affairs; or
  • Provide written notice to the borrower of the preference information with the notice being delivered or mailed to the borrower no later than three business days after the application is received or prepared.

The telephonic process used by Quicken to ascertain the borrower’s attorney preference during the loan application process prompts the banker to ask the borrower as to whether the borrower will select an attorney to represent him or her in the transaction. If the borrower indicates that he or she does not have an attorney preference, the attorney preference form used by Quicken is prepopulated to specify that the borrower will not be using the services of legal counsel. If the borrower indicates that he or she does wish to use a specific attorney, the form prepopulates requesting the borrower contact the lender with his or her preference of attorney.


The Quicken system cannot generate a loan application without the attorney information being listed. If no attorney preference is listed, Quicken’s affiliate company receives the referral to act as the settlement agent and subcontracts with an attorney to perform those services.

The Special Referee assigned to hear the case granted the borrowers’ motion for summary judgment and found that the process used by Quicken did violate SCAPS. In addition, the Special Referee found that the process was “unconscionable”, as defined by the statute which would have the potential for forfeiture of finance charges and other penalties. On appeal, the South Carolina Department of Consumer Affairs appeared in the case and filed an amicus brief urging the Court to find that the attorney preference ascertainment process used by Quicken was a violation of SCAPS. The Supreme Court disagreed and held that the Quicken process did not violate SCAPS.

The Court found that the banker/agent asked the borrowers about their attorney preference and only prepopulated the form after ascertaining that the borrowers did not have a preference. Quicken then sent the attorney preference form to the borrowers within the required time period and the borrowers signed and returned the form without any questions. The Court also added that SCAPS did not require Quicken to provide a list of attorneys to choose from, nor require Quicken to ascertain that initial preference in writing. The Court further pointed out that that the process ascertained the borrowers’ preference information and obtained confirmation of that information in writing.

This case marks the second time that the loan origination process used by Quicken has been challenged in state court in South Carolina and Quicken has prevailed in both cases. Interestingly, the borrowers in Boonev. Quicken Loans, Inc. had also filed an action against Quicken in state court alleging a similar violation of SCAPS as that alleged in Quicken Loans, Inc., v. Wilson. The case was removed to Federal Court and Quicken prevailed in that case on summary judgment.

In Boone v. Quicken Loans, Inc. and Quicken Loans, Inc., v. Wilson, the Court took steps to point out that the borrowers had stated that they had no objection to the application process itself and, more importantly, did not state any objection to the attorneys assigned by the lender to handle the loan closing process. These two cases appear to show that the South Carolina Supreme Court is keeping its focus on protecting the consumer, but the Court will not find a violation of law if the lender is in compliance with the intent of the applicable case or statute, and there is clear evidence that the consumer has not been harmed in the transaction.


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New Jersey: Appellate Court Finds Lost Notes May Be Enforced Even if Not in Possession When Lost

Posted By USFN, Monday, May 20, 2019

by Michael B. McNeil, Esq.
Powers Kirn, L.L.C.
USFN Member (NJ, PA)

For years, lenders and servicers in New Jersey have faced uncertainty when seeking to prosecute a mortgage foreclosure where the underlying promissory note has been lost.

New Jersey’s version of the Uniform Commercial Code (UCC) uses the old language for section 3-309(a), which states that: “A person not in possession of an instrument is entitled to enforce the instrument if the person was in possession of the instrument and entitled to enforce it when loss of possession occurred[.]” N.J.S.A.12A:3-309(a).

Some courts around the country have strictly construed this language, holding that a party cannot enforce a lost note unless it was both in possession of and entitled to enforce the note when it was lost. See, e.g.,
Dennis Joslin Co., LLC v. Robinson Broadcasting Corp., 977 F. Supp. 491(D.D.C. 1997). Notably, in response to this case and its progeny, the drafters of the UCC amended section 3-309 in 2002 to remove the possession requirement.

However, the New Jersey Legislature has not adopted the amendment to section 3-309 and there had been no reported decision addressing whether the Joslin Court’s reading of the section will apply in this State.

Thus, the stage was set for the recent decision in
Investors Bank v.Torres, 197 A.3d 686, 457 N.J. Super.53 (N.J. Super. Ct. App. Div. 2018). In this case, the note was lost at least a year prior to the transfer of the lost note affidavit and mortgage assignment to Investors Bank.

Predictably, the borrower relied upon the Joslin Court’s reading of section 3-309(a) and argued that Investors Bank was not entitled to enforce the note since it was not in possession of the note when it was lost.

However, the court expressly rejected the holding of Joslin, and instead held that the right to enforce a lost note is transferrable by one who was both in possession of and entitled to enforce the note at the time it was lost, and that to enforce the lost note, the transferee need only prove the terms of the instrument and the transferee’s right to enforce the instrument as required by section3-309(b).

The court reached this decision by reading section 3-309 in conjunction with other provisions of the UCC, which lead the court to the conclusion that this result furthers the UCC’s purpose of expanding commercial practices and of not denying transacting parties the benefits of their bargains.

The court also relied upon common law principles of assignment and equitable principles of unjust enrichment to prevent what, in the court’s view, would have been an otherwise absurd and unjust result.


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Status of Title Post FC Sale in North Carolina – You Better Get It Right the First Time!

Posted By USFN, Monday, May 20, 2019

by Jeremy B. Wilkins, Esq. and Devin Chidester, Esq.
Brock & Scott, PLLC
USFN Member (AL, CT, FL, GA, MA, ME, MD, MI, NC, NH, OH, RI, SC, TN, VA, VT)

In North Carolina, once the clock strikes midnight on the 10-day statutory upset bid period1 the finality of the foreclosure process closes the door on prior owners. The remaining title issues, though, may prevent the door from being locked for good. Absent purchase by a third-party, the property is commonly anointed as Real Estate Owned(“REO”) and the former note holder must ensure the property is suitable or an expeditious preservation, marketing, and re-sale process.

If the subject property reaches status, impediments must be nonexistent as the former note holder will need to realize the liquidity of the asset to minimize potential loss. Accordingly, an essential element to successfully moving an asset in REO is the status of the title on the subject property at time of foreclosure, a process managed by local counsel.

Manifesting the intent of contractual obligations predicated on a future REO purchase/sale agreement requires knowing what type of title product is required post-foreclosure sale. Generally, the dividing line between moving foreclosed property is the difference between marketable and insurable title standards. Certain investors may require a less rigorous product than others2. Simply put, reviewing and approving the chain of title must be done correctly by local counsel from the onset of the foreclosure process or the post-sale implications may be damning to a property transfer.

In North Carolina, reviewing title for property in REO requires knowing how to fix title prior to the rights of the parties to the foreclosure becoming fixed3. This includes the validity of the procedural process of the foreclosure as set forth under Chapter 45 of the North Carolina General Statutes. Consequently, flaws in the foreclosure process can create flaws in the ability to market the subject property as an asset in REO. Therefore, a foreclosure must be prosecuted with a forward-looking mentality to deliver an asset in REO free of impediments. In other words, when viewing the asset post-foreclosure sale, the subject property’s title must have aged well. The challenge rests on the ability to cure title issues through a combination of clearing title by the foreclosing firm, cooperation with title insurance companies, and/or applying certain judicial intervention measures (i.e., judicial foreclosure, quiet title, declaratory actions, etc.).

Similar to the way an errant post on social media has the tendency to age terribly, so will a poor pre-foreclosure title product. If issues lurk after foreclosure, then reparations will require unwanted timeline delays and/or excessive and unnecessary costs.

Poorly aged title correlates to a lack of prudence in title examination and not using appropriate title curative measures. Unfortunately, in the post foreclosure context, reputational damage is extremely costly because one cannot exercise the delete function and start from scratch as you can on social media.

Under North Carolina law, you must slowly unwind the process, revise the public record, admit to the world that proper review was missed and a mistake exists. Hence, prudent review and proper due diligence are paramount when reviewing title at the beginning of the foreclosure process. Title documents provided to local counsel should mirror the level of quality of an attorney search. Proper measures will ensure the desired result for the asset, post-foreclosure sale, while executing to perfection the intended vision for the foreclosing note holder.

For the REO asset’s chain of title to age gracefully, local counsel must ensure pre-foreclosure title is rooted in achieving successful and marketable title in the future. The following tips are best practices to ensure the status of title ages elegantly. The following tips are sensible measures that can be taken in North Carolina, all within the control of local counsel, to ensure the foreclosure chain of title is delivered through the REO process flawlessly.

1. Foreclosure Title Search
Local counsel must ensure that the vendor completing the title search does so completely and accurately. The title search at foreclosure is performed at the beginning of the process but has implications throughout the entirety of the foreclosure. Starting with the first legal stage, the title search is supplemented with updates predicated upon milestones (pre-first legal, pre-hearing, pre-sale). The title search should be viewed in totality with the updates and vetted in all stages of the foreclosure. The more corners cut, the more the title ages terribly. Be thorough in review so decisions can be made with clarity.

2. In-house Title Curative
Local counsel should engage in house title curative measures to clear up title issues prior to a foreclosure sale expeditiously and find solutions that would bypass judicial intervention(e.g. procuring satisfactions of prior liens or curing errors in recorded documents by operation of statute through a curative affidavit, N.C.G.S.§47-36.2).

3. Title Claim Escalation
Local counsel should ensure title insurance coverage is identified early in the review process and title claims are handled expeditiously as needed. Moreover, title claims should be zealously escalated by local counsel striking a balance between continuity of title insurance coverage and prompt resolution of claimable issues.

4. Milestone Awareness
Local counsel must fundamentally grasp and act within the applicable foreclosure milestones promulgated by specific client service level agreements(“SLA”). Knowing the milestone stage and status of title product at that stage allows local counsel to control foreclosure advancement while ensuring finality of the REO asset transfer.

5. Be Forward-Looking During the Foreclosure Process
As discussed earlier, when local counsel starts the foreclosure process, the umbrella mindset for each file must consider the future ramifications so title will not age with impediments and time is carved out to fix issues before it is too late. In North Carolina, failure to critically think, control, and act, as it pertains to the status of title, may create a costly situation requiring sale rescission, court intervention, and unnecessary additional delay and costs. However, if local counsel takes the pragmatic, proactive approach from the onset of the foreclosure process and gets it right, title will age gracefully and move through REO as intended.

1 See Generally, N.C.G.S. §45-21.27

2 In North Carolina, marketable title is statutorily defined as a 30-yearperiod whereby the title is free and clear from defects. N.C.G.S. §47B-2. Thus, as a best practice, marketable title for REO should have a clear30-year timeframe. Insurable title carries a lower standard whereby defects may exist in the chain of title, but a title insurance company has agreed to provide coverage against said defects. Insurable title is contractually rooted and shorter search periods are more appropriate to determine the status of the chain of title for REO purposes.

3 Rights are fixed under N.C.G.S §45-21.27 (a), therefore, the high bidder has an insurance interest in the property and can demand a deed be tendered.

 

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Ohio Senate, House Bills Focus on Lending Industries, Notaries

Posted By USFN, Monday, May 20, 2019

by Ellen L. Fornash, Esq.
Anselmo Lindberg & Associates, LLC
USFN member (IL)

The State of Ohio was busy this past holiday season, passing three different bills, all signed by then-Governor John Kasich on December 19,2018, and scheduled to take effect 91 days after filing with the Secretaryof State.

House Bill 489
Entitled in short as a bill to “address financial institution regulation and consumer protection,” House Bill 489 was initially aimed at undoing some of the effects the Dodd-Frank had on smaller banks and credit unions while still protecting consumers.

The motivation behind the Ohio Financial Institutions Reform Act was to regulate banks only in a manner that would not affect the institutions soundness and security. The Bill permits analytics to be conducted on publicly available information regarding state banks, credit unions and entities registered and licensed in Ohio. However, if an institution meets certain requirements, said institution would be subjected to less frequent regulatory checks of no more than once every 24 months. Failure to comply exposes an institution to civil liability.

House Bill 489 adds a definition of “mortgage servicer” to Ohio Revised Code Section 1322, “Mortgage Brokers, Loan Officers.”

Also, Revised Code Section 1349.72,governing Consumer Protection was added and requires a person before attempting to collect a debt secured by residential real property to send written notice via US Mail to the residential address of the debtor if the debt is: 1) a second mortgage or junior lien on the debtor’s residential real property; and, 2) the debt is in default.

Written notice must be in 12-point font and must include:

  • The name and contact information of the person collecting the debt;
  •  The amount of the debt;
  • A statement that the debtor has a right to an attorney;
  • A statement that the debtor may qualify for relief under Chapter 7 or 13;
  • A statement that a debtor maybe able to protect his residence from foreclosure through the Chapter 13 process; and
  • If requested in writing by the debtor, the “owner” of the debt shall provide a copy of the note and loan history to the debtor.

Failure to comply authorizes civil liability, but also provides a bona fide error defense. The notice requirements set forth by this House Bill are strikingly similar to those imposed upon debt collectors under the Fair Debt Collection Practices Act, but extend these requirements to “persons” rather than debt collectors and pertain only to junior mortgages.

(Editor’s note: For more on Ohio Revised Code Sections 1322 and 1349.72, please see the article by Rick D. De Blasis and Charles E. Rust here).

House Bill 480
The next Bill to affect the lending industry is House Bill 480, which establishes requirements for multi-parcel auctions, which are not currently addressed in the Ohio Revised Code, and gives the Ohio Department of Agriculture the power to regulate the auctions.

House Bill 480 amends Ohio Revised Code sections 2329 (Execution against real property) and 4707(Auctioneers). The Bill defines a multi-parcel auction as one involving real or personal property in which multiple parcels or lots are offered for sale in whole or part. The Bill further establishes advertising requirements placed upon auctioneers, including the mandate that all advertisements short of road signs must state that the auction will be offered in various amalgamations, whether individual parcels, combinations or all parcels as a whole.

The Bill goes on to clarify that online auctions are to be held for seven calendar days (previously simply seven days), excluding the day the auction opens for bidding.

Senate Bill 263
Finally, Senate Bill 263, titled in short, the “Enact Notary Public Modernization Act,” increases requirements for commission of a notary and enacts requirements or notarization of electronic documents. Notably, to obtain a notary commission, one will now have to submit to a criminal records check completed within the preceding six months (R.C. 147.022). Already commissioned attorneys will be exempt from this requirement. Although the new requirement is not retroactive, notaries seeking to renew their commission will have to comply.

The bulk of the Bill is dedicated to online notarizations. The Bill permits a commissioned notary to apply to perform online notarizations via live video, electronic signatures and electronic notary seals. Online notary commissions expire after five years – including those issued to attorneys.

Those seeking online commission must participate in an educational course; non-attorney applicants must also pass a test. Bill 263 passes oversight of the appointment and revocation of notary commissions from the Court of Common Pleas to the Secretary of State. Lastly, in short, the Bill deems an online notarized document to be an “original document.”

While these changes do not have any effect on our current notary procedures, current non-attorney notaries in Ohio will have additional hoops through which to jump upon renewal of their current licenses.

State Supreme Court Rules in Bank of N.Y. Mellon v. Rhiel
Finally, closing with a case law update, the Supreme Court of Ohio sided with lenders when it issued its opinion in Bank of N.Y. Mellon v. Rhiel on December 20, 2018, when it held that:


 1. “In response to certified questions by the bankruptcy appellate panel, it was determined that the failure to identify a signatory by name in the body of a mortgage agreement did not render the agreement unenforceable as a matter of law against that signatory;” and

 

2. “It was possible for a person who was not identified in the body of a mortgage, but who signed and initialed the mortgage, to be a mortgagor of his or her interest.” Bank of N.Y. Mellon v. Rhiel, 2018-Ohio-5087, 2018 Ohio LEXIS 3007.

 

Both Marcy and Vodrick Perry initialed and signed a mortgage, however, the definition of “borrower “within the mortgage only included Vodrick’s name. The bankruptcy trustee determined that the mortgage did not encumber Marcy’s interest in the real property.

The bankruptcy court disagreed and allowed extrinsic evidence to make its determination that Marcy intended to encumber her interest. The Bankruptcy Appellate Panel for the US 6th Circuit Court of Appeals asked the Ohio Supreme Court to clarify, after noting the conflicting decisions of prior bankruptcy cases and controlling decisions issued by Ohio courts of appeals. The Ohio Supreme Court held that signing a mortgage may be enough to bind the signatory despite not being named in the body of the mortgage itself.


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Ohio Legislature Enacts New Requirements for Mortgage Servicers

Posted By USFN, Monday, May 20, 2019

by Rick D. DeBlasis and Charles E. Rust

Lerner, Sampson & Rothfuss

USFN Member (KY, OH)


On March 20, 2019, two provisions of Ohio law took effect, which impose new requirements on mortgage servicing.

Section 1322.07(A) - Certificate of Registration Requirements
First, an amendment to Revised Code Section 1322.07(A) requires mortgage servicers to obtain a certificate of registration from the Superintendent of Financial Institutions for the “principal office and every branch office” from which they conduct mortgage servicing in Ohio. Under the statute, unregistered persons are prohibited from conducting mortgage servicing in Ohio.

Additionally, “[a] registrant shall maintain an office location for the transaction of business as a mortgage lender, mortgage servicer, or mortgage broker in this state.” This language allows for two interpretations: 1) servicers are required to maintain a brick and mortar location in Ohio; or 2) servicers are required to maintain a brick and mortar location somewhere for the transaction of business in Ohio.

According to advisory guidance from Ohio’s Division of Financial Institutions,2017 amendments to the statute eliminated the brick and mortar requirement1. Because the most current amendment simply adds “mortgage servicer” to the existing statute, absent a contrary advisory opinion, the statute does not appear to impose Ohio brick and mortar requirements on servicers. Because the most current amendment simply adds “mortgage servicer” to the existing statute, absent a contrary advisory opinion, the statute does not appear to impose Ohio brick and mortar requirements on servicers.

Section 1349.72 - New Requirements for Junior Lien Collections
The second major change affects persons collecting debt that is in default and secured by “a second mortgage or junior lien” on residential real property. Though the new law raises many unanswered questions, Revised Code Section 1349.72 requires creditors and collectors of junior liens to provide defaulting debtors with an entirely new notice before attempting to collect the debt.

The new notice must:

  • Print in at least 12-point type
  • Provide contact information for the person collecting the debt
  • Include the amount of the debt• Include a statement that the debtor has a right to an attorney
  • Include certain specific notices about bankruptcy options

Section 1349.72 also requires the “owner” of a debt to provide a copy of the note and loan history to the debtor upon written request. For noncompliance, the statute authorizes a private right of action for aggrieved debtors but allows the collector a defense if the collector:


1) demonstrates that noncompliance was due to “bona fide error;” 2)sends a notice of error to the debtor within 60 days of discovery and prior to initiating action stating how it will make restitution; and 3) makes reasonable restitution to the debtor. “Bona fide error” is limited to “an unintentional clerical, calculation, computer malfunction or programming, or printing error.” Strict compliance with the new notice requirements should be a priority.

Given the potential for financial penalties and litigation, lenders and servicers, and their agents, operating in the State of Ohio are strongly encouraged to work with their attorneys to address the intricacies of these new requirements and develop strategies for compliance.

1 See Ohio Department of Commerce, Division of Financial Institutions, Ohio Residential Mortgage Lending Act H.B. 199 Implementation Guidance.

(Editor’s note: For information on Ohio House Bills 480 and 489, and Senate Bill 263, please see the article by Ellen L. Fornash here).

 


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CFPB: Year in Review & Advance

Posted By USFN, Monday, May 13, 2019

by Lance Olsen
McCarthy & Holthus, LLP
USFN Member (AZ, CA, CO, ID, NM, NV, OR, TX, WA)

Alan Wolf
The Wolf Firm
USFN Member (CA)

To properly review the work of the Consumer Financial Protection Bureau (referred to in this article as the “Bureau”) in 2018, we must start in 2017.

In November 2017, the former director of the CFPB resigned to pursue elected office. On the way out, the former director attempted to appoint his own successor; President Trump however appointed his own temporary head of the CFPB, Mick Mulvaney. Most observers seemed to agree that the Bureau director did not have the authority to name his or her own successor, and thus Mulvaney assumed control of the Bureau as 2017 ends (even though it wasn’t until July 2018 that a lawsuit challenging the authority of Mulvaney to act was finally dismissed).

With the change in leadership came a visible change in approach. As a Congressman, Mulvaney had criticized what he perceived to be a lack of oversight and accountability in the structure and operation of the Bureau. Against this backdrop, a change was observed early on in the focus and direction of regulation.

On January 16, 2018 the Bureau announced that it would engage in a rule making process to reconsider the Payday Rule put forward under prior leadership. The Payday Rule imposes restrictions on certain small loan practices and policies. As most of the provisions of that Payday Rule are not effective until August 2019, the January 2018 announcement was perceived by many as notice of the intent of the new Bureau to act independently of old policy.

In February 2018, the Bureau issued its Strategic Plan for the next five years. Within that plan, one significant change from the prior-issued plan was removal of the reference to the Bureau’s authority to enforce against unfair, deceptive or abusive acts or practices. Suggested in the new plan is a turn away from focus on perceived potential abuses to a protection of free and informed choice. Specifically, the new plan called for “free, innovative, competitive, and transparent consumer finance markets where the rights of all parties are protected by the rule of law and where consumers are free to choose the products and services that best fit their individual needs.”

Also, in February 2018, members of the Office of Fair Lending and Equal Opportunity were transferred to  the Office of the Director and their mission was clarified as a focus on advocacy, coordination and education over enforcement. Whether by coincidence or design, 2018 saw nine reported settlements of consent orders resolving previously filed enforcement actions with one newly filed complaint.

By April 2018, the Bureau issued a “call for evidence to ensure the Bureau is fulfilling its proper and appropriate functions to best protect consumers.” Once again, the call for evidence is viewed as an intent to focus more on protection of choice overactive effort to discover enforcement opportunities and push the envelope of consumer protection.

Finally, in June 2018, shortly before the deadline to nominate a permanent director of the Bureau, the White House nominated Kathy Kraninger, a direct report of Mick Mulvaney at the Office of Management and Budget, for confirmation by the United States Senate. Although not much is known about Kraninger’s views on the appropriate role and direction of the Bureau, those with concerns over Mulvaney’s stewardship have expressed concern over her apparent connection and past work under his tutelage.

Changes in 2019
It’s said that predicting the future is easy, the difficult part is in getting it right. With that admonishment, here is what has happened so far in 2019.

As expected, Kraninger was confirmed as the new Director of the Bureau in December. Since she was chosen as a disciple of Mulvaney, and has absolutely no consumer or financial regulatory experience, her path will most likely be to follow the actions of Mulvaney. However, recent actions have indicated that she does not feel obligated to follow through on all of Mulvaney’s initiatives. One example is the proposed changes to the Consumer Advisory Board.

New Position on Fair Debt Collection Practices Act
The Bureau also evidenced its new position on the Fair Debt Collection Practices Act (“FDCPA”) in filing an amicus brief supporting the position of the foreclosing creditor and its law firm in Obduskey v. Wells Fargo.

In its amicus brief, the Bureau made two main policy arguments. First, it argued that nonjudicial foreclosures are not subject to the FDCPA, except in those limited circumstances where the foreclosure is done where “there is no present right to possession of the property claimed as collateral through an enforceable security interest.” Section 1692f(6)(A).In short, the Bureau took the position that the FDCPA is only applicable if you foreclose where there was no right to foreclose.

Next, the Bureau made a policy argument that if you follow state law, you do not violate the FDCPA. Specifically, the Bureau states:


Nonjudicial foreclosure is ‘the enforcement of [a] security interest’ 15U.S.C. 1692a(6), and filing a notice with a public trustee is undisputedly a necessary step in that process in Colorado. Deeming such activities debt collection could bring the FDCPA into conflict with state law and effectively preclude compliance with state foreclosure procedures. No sound basis exists to assume Congress intended that result.

In a 9-0 opinion, the Supreme Court agreed with the CFPB and industry on holding that one who does no more than enforce security interests does not fall within the definition of a debt collector. It appears likely that in its formal rule making, which as of press time is reportedly set for later in the spring, the Bureau will take the position that the FDCPA has no application to the mortgage servicing industry, as long as there is a right to foreclose under state law and the state laws are followed.

States Will Take Consumer Positions Abandoned by the Bureau; States Will Not Be as Effective as Bureau
Third, it appears that States are ready and willing to take up the consumer positions apparently abandoned by the Bureau but may not be entirely able to — they lack the resources and skills to make the same impact as the Bureau. The push by states to replace the Bureau has evolved into two paths: 1) State Bureau type legislation; and 2) Prosecution of the Bureau’s rules and regulations by state attorneys general.

State bureau type legislation includes the following:

 

1. Maryland Consumer Financial Act of 2018

 

2. New Jersey’s existing Division of Consumer Affairs adds an Office of Consumer Protection Established to enforce the enhanced Consumer Fraud Act

 

3. Pennsylvania Consumer Financial Protection Bureau

 

 Even without this new legislation, state attorneys general have significant powers to enforce certain types of Federal consumer legislation. For example, Section 1042 of the Consumer Financial Protection Act (CFPA) empowers state attorneys general to bring civil actions to enforce the provisions of the CFPA as well as regulations issued by the Bureau under Title X of Dodd-Frank— including the dreaded provision prohibiting unfair, deceptive or abusive acts or practices (UDAAP).See 12 U.S.C. § 5552 (effective June 29, 2012).


In addition, various federal consumer protection statutes give direct enforcement authority to state attorneys general including the Real Estate Settlement Procedures Act, the Truth in Lending Act, and the Fair Credit Reporting Act. Indeed, when Mulvaney spoke at the National Association of Attorneys General conference in February 2018 he invited the state attorneys general to act under these provisions declaring that he would be “looking to the state regulators and state attorneys general for a lot more leadership when it comes to enforcement.”

While Mulvaney’s statement may be viewed as the Bureau’s nod to the belief that states “know better” how to protect their own consumers, having states take the lead has the practical effect of weakening the enforcement mechanism. By bowing out of the process, the states have lost the power, resources and information provided by the Bureau to conduct joint investigations, coordinate enforcement actions and negotiate joint settlements.

In fact, where states have pursued multi-state enforcement actions, without the Bureau’s involvement, they are often hampered by fewer resources with the result of much smaller penalties against mortgage servicers and other industry players. This trend is likely to continue as states take the lead in pursuing consumer issues.

The Bureau has been a fascinating study in the wide swing of a pendulum. Despite attempts to ameliorate those wide swings, 2019 looks to be a better year than most for a mortgage servicer.


Copyright © 2019 USFN. All rights reserved.

Spring USFN Report

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Recent U.S. Supreme Court Decision to Have Significant Industry Impact

Posted By USFN, Wednesday, May 8, 2019

by Richard P. Haber, Esq.
McCalla Raymer Leibert Pierce, LLC
USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY)

In its most significant opinion impacting default law firms in several years, the United States Supreme Court issued its decision in Obduskey v. McCarthy & Holthus LLP on March 20,2019. The issue decided whether McCarthy & Holthus LLP (“McCarthy”) is considered a “debt collector” for purposes of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq., (the “FDCPA”). In a 9-0 decision, the Court held that McCarthy– and therefore other default firms and trustee companies whose primary business is the pursuit of nonjudicial foreclosures– is not a “debt collector” for purposes of the majority and most meaningful provisions of the FDCPA.

The case stemmed from a nonjudicial foreclosure that McCarthy pursued against Dennis Obduskey in the State of Colorado. The specific question arose from the FDCPA’s statutory definition of “debt collector” which, in relevant part, is:


[A]ny person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, either directly or indirectly, debts owed or due or asserted to be owed or due another.

For the purpose of section 1692f(6)of this title, such term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement `of security interests.15 U.S.C. § 1692a(6).


The Court has characterized the first section as the “primary definition “and the second section as the “limited-purpose definition.” A party included in the primary definition is subject to the full extent of the FDCPA, including its main requirements: that a “mini-Miranda” warning be given when communicating with a debtor; that a debt validation notice be sent by the debt collector; that, upon receiving a consumer dispute as to the validity or amount of a debt, the debt collector cease collection activity until it verifies the debt; and the prohibition on making false, deceptive or misleading representations in connection with a debt, such as misstating a debt’s “character, amount, or legal status.”

However, a party covered only by the limited-purpose definition is merely subject to the FDCPA’s requirement that it not “tak[e] or threaten to take any nonjudicial action to effect dispossession or disablement of property if: (A) there is no present right to possession of the property claimed as collateral through an enforceable security interest; (B) there is no present intention to take possession of the property; or (C) the property is exempt by law from dispossession or disablement.” 15 U.S.C. § 1692f(6).

McCarthy argued that because its primary business – the pursuit of nonjudicial foreclosures where no deficiency judgment is permitted – is plainly the enforcement of security interests, it is subject only to the limited-purpose definition. The firm further argued that by using the word “also “in the limited-purpose definition, Congress could not have meant for enforcers of security instruments to be included in the primary definition.

Obduskey, the homeowner, countered by arguing that it was possible or McCarthy to be covered by both the primary and limited-purpose definitions, rather than just one or the other. He argued that the limited-purpose definition was meant to capture parties who do not outwardly seek to collect debt by sending demand letters and having other direct communications with consumers, such as the “repo man” who has no interaction with the consumer at all but merely comes in the middle of the night to repossess a car.

McCarthy, and various amicus curiae in support of its position (including USFN), also argued that subjecting the firm to the Act would cause conflict with state foreclosure laws, which was not an intention of Congress when enacting the FDCPA. For example, the FDCPA limits debt collectors from communicating with third parties about the debt, but Colorado foreclosure law requires advertising the foreclosure sale. Thus, accepting Obduskey’s position would mean that McCarthy was violating the FDCPA merely by following Colorado foreclosure law anytime it advertised a foreclosure sale.

Finally, McCarthy argued that the legislative history of the FDCPA supports its interpretation because there was, at one point, competing bills before Congress – one of which would have clearly included enforcers of security instruments in the primary definition and one that would have completely excluded enforcers of security instruments from the Act altogether. The final statute was therefore a compromise of the two bills, whereby the limited-purpose definition was created to regulate only certain activity of security instrument enforcers.

Obduskey also advanced some other arguments, including that McCarthy did more than just “enforce” a security instrument and therefore the other acts it took should bring it within the primary definition. Additionally, Obduskey argued that a ruling in favor of McCarthy would create a “loophole” in the FDCPA, allowing those pursuing foreclosures to engage in various abusive practices otherwise forbidden by the Act.

In reaching its conclusion that McCarthy is only subject to the limited-purpose definition of “debt collector” and not the primary definition, the Court relied on the three primary arguments outlined above:(1) the Act’s text itself ; (2) a determination that Congress wanted “to avoid conflicts with state nonjudicial foreclosure schemes”; and (3) the legislative history of the FDCPA.

While the Court made sure “not to suggest that pursuing nonjudicial foreclosure is a license to engage in abusive debt collection practices like repetitive nighttime phone calls,” the decision makes clear that default firms and trustee companies whose primary business is the pursuit of nonjudicial foreclosures are not subject to the vast majority of FDCPA requirements. In the same way, a firm whose principal business purpose is the pursuit of foreclosures in a judicial state where the foreclosure judgment simultaneously acts as a money judgment against the borrower personally, is a “debt collector” covered by the full extent of the FDCPA because of the money judgment component.

With respect to judicial foreclosures, the Court specifically stated “whether those who judicially enforce mortgages fall within the scope of the primary definition is a question we can leave for another day,” but there is a good argument that the holding in
Obduskey v. McCarthy& Holthus LLP extends to firms specializing in judicial foreclosures that result only in in rem judgments, without an in persona deficiency component.

Because the term “debt collector” is defined based on the “principal purpose” of the business, an interesting question is how the
Obduskey v. McCarthy & Holthus LLP decision will impact multistate firms that practice in both judicial and nonjudicial states. Arguably a firm can have only one “principal purpose” and if a majority of the firm’s revenue is generated from nonjudicial foreclosures, judicial foreclosures where there is no deficiency judgment and other non-collection-related activities, it would seem that the firm as a whole should be excluded from the primary definition of “debt collector.”

Another open question is what effect, if any, this case will have on the banks and servicers whose loans are at issue. The
Obduskey v. McCarthy & Holthus LLP decision arguably affects only the default firms and trustee companies that are on the front lines pursuing nonjudicial foreclosures. It seemingly does not change the fact that servicing a mortgage loan for another party would capture a bank or services within the FDCPA’s primary definition of debt collector because those banks and servicers are entities “who regularly collects or attempts to collect, either directly or indirectly, debts owed or due or asserted to be owed or due another.”

Finally, it remains to be seen whether Congress reacts to the decision by amending the FDCPA. The Court was clear that it ruled based on the text of the Act as currently drafted and its perception of Congressional intent. But, of course, Congress is free to amend the Act if it wants to sweep nonjudicial foreclosure firms and trustee companies into the broader FDCPA requirements.


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Recent Cases Help to Interpret the Fair Debt Collection Practices Act

Posted By USFN, Wednesday, May 8, 2019

by William H. Meyer
Martin Leigh PC 
USFN Member (KS, MO) 


Property Preservation is Not Debt Collection Under FDCPA —
Schlaf v. Safeguard Prop., LLC, 899 F.3d459 (7th Cir. 2018)

In Schlaf v. Safeguard Prop., LLC, a property preservation company was sued by a borrower under the Fair Debt Collection Practices Act (“FDCPA”). After the borrower had been in default, the property preservation company was directed by the lender to inspect the property and to leave a door hanger that requested the borrower to contact the lender. On these facts, the borrower sued the preservation company. The borrower claimed that the inspection was abusive and that the door hanger did not make disclosures required by 15 USC § 1692g and §1692e (11) (i.e. creditor name, amount of debt, the debtor’s right to dispute the debt, mini-Miranda statement).

The 7th Circuit disagreed with the borrower, ruling that the preservation company was not a debt collector and therefore not subject to the FDCPA. In reaching that conclusion, the 7th Circuit relied on the door hanger’s text which contained no payment demand, no settlement offer, no payment options, no reference to the borrower’s debt, and listed only the lender’s name and telephone number. The 7th Circuit also found it persuasive that the preservation company made no attempt to collect payments and instructed its employees not to discuss the reason for the inspection.

The Federal Circuits Split on if the FDCPA Applied to Nonjudicial Foreclosures — Obduskey v. Wells Fargo, 879 F.3d 1216 (10th Cir. 2018)

In Obduskey v. Wells Fargo, a law firm nonjudicially foreclosed on the borrower’s home. The law firm initiated the foreclosure by sending the borrower a notice stating its intent to foreclose, details about the debt and a disclosure that the law firm may be considered a debt collector attempting to collect a debt.

The borrower responded and disputed the debt. The law firm did not respond and proceeded to foreclose. The borrower sued the law firm asserting that the law firm violated the FDCPA by failing to respond to the borrower’s debt validation request. Recognizing a split among the federal circuits, the 10th Circuit ruled that nonjudicial foreclosures are not covered by the FDCPA and that the law firm was not obligated to respond to the borrower’s debt validation request.

Additionally, the 10th Circuit reasoned that if the FDCPA applied to nonjudicial foreclosures, then a trustee foreclosing a deed of trust would essentially always breach the FDCPA in order to comply with Colorado’s statutory scheme for conducting nonjudicial foreclosures.

In reaching its conclusion, the 10th Circuit limited its opinion to nonjudicial foreclosures. The Court found that judicial foreclosures do contain an element of debt collection because such a lawsuit could result in deficiency judgment and presumably the FDCPA would be held to apply to judicial foreclosures.

On March 20, 2019, the Supreme Court affirmed Obduskey v. Wells Fargo and resolved the circuit split regarding the FDCPA’s application to nonjudicial foreclosures. The Supreme Court’s decision is discussed in this feature article.

Safe Harbor Language in a Debt Collector’s Notice to a Borrower Does Not Protect the Debt Collector from Misleading Information Also Contained in the Notice - Boucher v. Fin. Sys. of Green Bay, 880 F.3d 362 (7th Cir. 2018)


In Boucher v. Fin. Sys. of Green Bay, a debt collector sent a Wisconsin borrower a notice that closely tracked safe harbor language that 7th Circuit had previously ruled to comply with the FDCPA—except for one thing. The debt collector’s notice indicated that the Wisconsin borrower may be liable for “late charges and other charges.” The borrower sued the debt collector under the FDCPA asserting that the “late charges and other charges” language in the notice violated the statute. The debt collector countered that its notice tracked the safer harbor language and the notice could not violate the FDCPA as a matter of law.

Basing its decision in part on Wisconsin law, the 7th Circuit found the debt collector’s notice was misleading to an unsophisticated consumer particularly given that Wisconsin law does not allow a debt collector to recover late charges and other charges. Accordingly, the 7th Circuit agreed with the borrower that the notice was confusing to the unsophisticated consumer.

In addition to limiting the value of “safe harbor” language, the 7th Circuit cautioned lower courts against dismissing FDCPA claims based upon deceptive notices. That is because the 7th Circuit suggests that “district court judges are not good proxies for the ‘unsophisticated consumer’ whose interest the [FDCPA] protects.”


A Technical Violation of the FDCPA’s Mini-Miranda Requirement is Not Always Actionable – Hagy v. Demers & Adams, 882 F.3d 616 (6th Cir. 2018)

In Hagy v. Demers & Adams, the lender and borrower settled a dispute pursuant to which the borrower quit claimed secured property to the lender and the lender waived its right to pursue a deficiency. The lender’s lawyer sent a confirmation letter to the borrower’s attorney confirming the settlement. However, that letter did not contain the obligatory § 1692e (11) disclosure (i.e. this is a communication from a debt collector).

Despite the completed settlement, the lender continued to attempt to collect the deficiency against the borrower. That resulted in the borrower suing the lender’s law firm and asserting a § 1692e (11) violation. Reasoning that even if the law firm’s letter constituted a procedural violation of the FDCPA, the 6th Circuit rejected the borrower’s claim because the letter was true (the dispute had been settled and the lender had agreed to waive the borrower’s deficiency) and because the borrower could not articulate how the borrower was harmed by the letter. Furthermore, the borrower used the law firm’s letter to defend itself from the lender’s attempt to collect on a settled debt.

Debt Collector’s Failure to Notify a Borrower that a Debt Dispute Must Be Made in Writing is Actionable Under the FDCPA - Macy v. GC Srvs. L.P., 897 F.3d 747 (6th Cir. 2018)

In Macy v. GC Srvs. L.P., a debt collector notified a borrower that the borrower had 30 days to dispute the debt identified in the notice. However, the debt collector’s notice did not state the borrower’s debt dispute must be made in writing. The borrower sued alleging that the debt collector’s notice violated § 1692g (a)(4) of the FDCPA.

The debt collector moved to dismiss, arguing that the alleged violation (i.e. the notice’s failure to state the borrower must dispute the debt in writing) did not constitute harm sufficiently concrete to satisfy the FDCPA’s injury in fact standing requirement. The district court denied the debt collector’s motion to dismiss. The debt collector then petitioned the 6th Circuit for interlocutory review and the Court granted that request.

On appeal, the 6th Circuit ruled that the debt collector’s notice – which failed to advise the borrower that a debt dispute must be in writing –was potentially actionable and the Court declined to dismiss the case at the motion to dismiss stage of the proceedings. However, the 6th Circuit’s opinion mentioned that, for purposes of its analysis of the debt collector’s motion to dismiss, that the Court was precluded from considering information from outside of the complaint showing that the debt collector treated verbal debt disputes the same as “written” disputes. It is possible that the 6th Circuit may have ruled differently had the case not been at the motion to dismiss stage where the Court was required to assume that all allegations in the complaint were true.

This case’s result is intriguing given that in another 2018 decision (Hagy v. Demers & Adams), the same 6th Circuit Court of Appeals ruled that a minor or procedural violation of the FDCPA was not actionable.

A Debt Collector’s Duty to Verify a Debt is Very Limited - Walton v. EOS CCA, 885 F.3d 1024 (7th Cir. 2018)


In Walton v. EOS CCA, a creditor notified debtor that the debtor owed an outstanding balance on a closed telephone account. The creditor further advised the debtor if the balance was not paid then the account would be turned over to a collection agency. The account was then turned over to a debt collector who sent a notice that incorrectly stated the debtor’s account number but the remaining information in the notice was correct (i.e. debtor’s name, address, amount owed and social security number).The debtor disputed owing the debt.

In response to the debtor’s dispute, the debt collector verified that the debt information that it received from the creditor matched what was in the debt collector’s notice to the debtor. (The debt collector did not separately contact the creditor to verify that the initial information that the creditor initially provided to debt collector was correct.) The debt collector also reported the debt to credit reporting agencies but noted in the report that the debt was disputed.

On these facts, the debtor sued the debt collector under the FDCPA alleging that the debt collector failed to “reasonably” investigate the information the debtor disputed because the debt collector did not separately contact and confirm the account information with the creditor.

The 7th Circuit agreed with the debt collector and concluded that the debt collector’s obligation to verify a debt was very limited. It ruled that it “would be both burdensome and significantly beyond the [FDCPA’s] purpose to interpret § 1692g(b) as requiring a debt collector to undertake an investigation in whether the creditor is actually entitled to the money it seeks.”


The Federal Circuits Are Split on When the FDCPA’s One-Year Statute of Limitations Period Begins to Run -
Rotkiske v. Klemm, 890 F.3d 422 (3rd Cir. 2018)

In Rotkiske v. Klemm, a law firm obtained a default judgment against a borrower for $1,500 in 2009. However, the borrower was never actually served with process because someone other than the borrower accepted service. In 2014, the borrower discovered the judgment while applying for a loan. In 2015, the borrower sued the law firm under the FDCPA for wrongfully taking the judgment.

The law firm moved to dismiss the lawsuit as being time barred by the FDCPA’s one-year statute of limitations period. The law firm argued that the limitations period runs from the date of the alleged FDCPA violation (i.e., the 2009 judgment) and not from the date the violation is alleged to have been discovered (i.e., in 2014). The 3rd Circuit, recognizing a split in authority with the 4th and 9th Circuits, ruled that the FDCPA’s statute of limitations runs from the date the alleged violation occurred. In this case, that was in 2009 when the law firm obtained the default judgment and not in 2014 when the borrower discovered the alleged FDCPA violation.

Tax Collection is Not Debt Collection Under the FDCPA - St. Pierre v. Retrieval-Masters Creditors Bureau, Inc., 898 F.3d 351 (3rd Cir. 2018)


In St. Pierre v. Retrieval-Masters Creditors Bureau, Inc., a motorist failed to timely pay highway tolls. A debt collector mailed the motorist a payment demand. However, the motorist’s account number was visible from outside of the letter’s envelope. Based on that violation, the motorist sued the debt collector under the FDCPA.

On appeal, the 3rd Circuit addressed two issues: 1) the fact the motorist’s account information was visible from outside the envelope actionable given the debt collector’s argument that the motorist could not have been damaged by this act; and 2) is collecting an unpaid highway toll or tax the collection of a debt under the FDCPA?

The 3rd Circuit ruled that revealing a debtor’s account number through an envelope window implicates a core FDCPA concern (protecting a debtor’s privacy), and such violations are always actionable under the FDCPA. However, the 3rd Circuit ruled collecting a highway toll is more akin to tax collection. The 3rd Circuit ruled, following a host of other authorities, that tax collection is not a debt encompassed by the FDCPA. Accordingly, the FDCPA does not apply to tax collection. This result is interesting in that the collection was not handled by the government itself but by anon-governmental debt collector.

Copyright © 2019 USFN. All rights reserved.

Spring USFN Report

 

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USFN Briefing Follow-up: Obduskey v. McCarthy Holthus LLP

Posted By USFN, Tuesday, April 16, 2019

by Caren Jacobs Castle, Esq.
The Wolf Firm
USFN Member (CA)


As a follow up to the April 3 USFN Briefing webinar on the U.S. Supreme Court’s decision in the case of Obduskey v. McCarthy Holthus LLP, several questions were submitted that the presenters were unable to address due to time constraints.  Here is insight into two of the more common questions from the webinar.

Does the sending of reinstatement or payoff letters fall within the Obduskey decision, or alternatively does it fall within the Fair Debt Collection Practices Act (“FDCPA”)?

What we do know is Obduskey covers the four corners of each state’s nonjudicial foreclosure process.  As the Court noted …”we here confront only steps required by state law, we need not consider what other conduct (related to, but not required for, enforcement of a security instrument) might transform a security-interest enforcer into a debt collector subject to the main coverage of the Act” (Justice Breyer, Opinion of the Court).

Therefore, to determine if reinstatement or payoff letters constitute actions of a debt collector or a security-interest enforcer, one must look to the four corners of the state statute.  Are the providing of the figures statutorily required, or alternatively, contractually required?  If they are statutorily required Obduskey should control and the sending of the letters should fall outside of the FDCPA.  If, however, the statute does not specifically require the trustee and/or attorney who is conducting the nonjudicial foreclosure to provide reinstatement or payoff letters, then the outcome is no longer clear.  One can anticipate that the next line of litigation post-Obduskey will be surrounding the issues of just what is included within the four corners of the state statute and what is not.

What are examples of violations of the FDCPA in the nonjudicial foreclosure scenario, by way of example, commencing a foreclosure in violation of the automatic stay, commencing a foreclosure on a released security instrument, or commencing a foreclosure in the name of an improper party (no assignment of the security instrument or endorsement of the note).

Steps taken prior to the commencement of the foreclosure may not be protected under the Obduskey decision.  Pre-foreclosure notices, such as a contractually or investor required breach or demand letters, that are not a statutorily required prerequisite to commencement of the foreclosure would appear to be outside the Supreme Court decision.  Similarly, loss mitigation letters sent by the firm or trustee, if not statutorily required, would fall outside of the Supreme Court decision.  If commencing a nonjudicial foreclosure against a nonexistent lien could be deemed abusive, a time barred debt, or in the name of a party who is not the current holder or beneficiary, could be deemed abusive collection efforts, then FDCPA may well apply.  As the Court states, “this is not to suggest that pursuing nonjudicial foreclosure is a license to engage in abusive debt collection practices…enforcing a security interest does not grant an actor blanket immunity from the Act” (Justice Breyer, Opinion of the Court).

Each firm and trustee will need to continue to appropriately evaluate each matter to ensure foreclosure is proceeding with proper authority and documentation.  One should always remember that regardless of FDCPA applicability, there are state consumer protection statutes that may not mirror the FDCPA distinction between debt collector and security instrument enforcer.  As previously noted, while Obduskey does provide clarification that conduct required to complete a nonjudicial foreclosure is not conduct by a debt collector, just what conduct is outside the Obduskey decision remains to be litigated. 

© Copyright 2019 USFN. All rights reserved.
April e-Update


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