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The 2016 American Land Title Association Title Insurance Commitment

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018

by Ellen Fornash
Anselmo Lindberg & Associates, LLC – USFN Member (Illinois)

In June 2016, in an effort to become more streamlined and comprehensive, the Board of Governors of the American Land Title Association (ALTA) approved revision recommendations to the 2016 ALTA Title Insurance Commitment. These took effect on August 1, 2016. The 2016 Commitment form combines two 2006 versions of the form and became generally put into use nationwide in 2017. Not only did the board seek to promote a better understanding and uniformity of the commitment provisions and formatting, it sought to define the scope and purpose of a title commitment itself. The most significant revisions to the commitment are five-fold:


1. Of greatest importance to mortgagees and lenders, the 2016 ALTA commitment now limits underwriter liability solely to contract claims. Previously, lenders often attempted to sue title companies under tort theories and, in some courts, were successful (U.S. Bank, N.A. v. Integrity Land Title Corp., 929 N.E.2d 742, 2010 Ind. LEXIS 396). Many lenders inferred a title commitment to be an abstract of title and/or legal opinion of the state of the title provided for the benefit of the lender. In actuality, any information concerning the state of the title included in a title commitment is for the benefit of the title company in making its determination of coverage. The 2016 ALTA forms clearly mirrors Illinois case law when stating in no uncertain terms that liability is therefore limited to matters of contract only (First Midwest Bank, N.A. v. Stewart Title Guar. Co., 218 Ill. 2d 326, 843 N.E.2d 327, 2006 Ill. LEXIS 14, 300 Ill. Dec. 69). This limitation is boldly stated in a “Notice” on the first page of the commitment form, and also in Condition 3(a). The notice states that the “commitment is not an abstract of title, report of the condition of title, legal opinion, opinion of title, or other representation of the status of title.”

2. Liability is further limited by the 2016 ALTA commitment to exclude claims against the insurer that arise from settlement or closing defects. It is common practice for an agent of the insurer to conduct the settlement or closing; however, the agent at the closing is not acting on behalf of the underwriter for purposes of the closing. Misperceptions of the agent’s scope of representation have also led to tort claims against the insurer. Therefore, the 2016 ATLA commitment sets forth that the closing agent is not the title company’s agent for purposes of the closing.

3. The 2016 ALTA commitment now requires that a specific length of time limiting the validity of the commitment be inserted into the commitment itself. This is commonly six months.

4. The 2016 ALTA commitment promotes uniformity amongst all underwriters by requiring the inclusion of specific sections:

a. NOTICE: Defines the scope and purpose of the commitment and limits liability;
b. Commitment to Issue Policy;
c. Commitment Conditions: Includes a definitions section and, again, limits liability;
d. Schedule A: Now requires the inclusion of a specific dollar amount of coverage;
e. Schedule B, Part 1: Sets forth the requirements that must be met to issue the policy;
f. Schedule B, Part 2: Includes both general and specific exceptions to coverage.


5. Finally, the new form requires a written or electronic signature by the company or its agent.


In addition to title commitments, title companies in Illinois offer two other relevant products. A Tract Search (also called a property report) is a collection of information obtained from the county records about a particular person and property. Much of the information accumulated may not actually attach to the property in question or be relevant to a foreclosure. Furthermore, this product does not offer any insurance to the lender. Minutes of Foreclosure, on the other hand, specify only title information and liens that do attach to a specific foreclosed property. Minutes of Foreclosure include “necessary and permissible parties” to a foreclosure action before the action is filed. This specialized search offers protection to a lender throughout the foreclosure process and in post-sale transactions as well.

The Tract Search or property report is equivalent in the states of Illinois, Ohio, and Kentucky. Again, this product searches for a large amount of data, including transfers of ownership, judgments, and liens against the property. These searches are taken from the public record, typically extend back 40 to 60 years, and offer a basic level of protection — but no insurance.

A Title Abstract is similar to the Tract Search but is not limited to a certain amount of time. It is more expensive and time-consuming, but covers the entire history of the property to its point of origin, or as far back as public record allows. Again, this is not insurance. Insurance will require a Title Commitment and Policy, which will indemnify against any loss due to a defect or encumbrance on property not specifically excepted in the policy.

The states of Ohio and Kentucky do not offer Minutes of Foreclosure; however, Ohio Revised Code § 2329.191 requires a Preliminary Judicial Report to be filed in every action demanding the judicial sale of real property. The Preliminary Judicial Report must include, among other items, the name and address of every recorded lienholder on the real property. The Preliminary Judicial Report is prepared by a title company and requires that a title search be conducted.

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Clarification on Alabama Redemption Law

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018 and May 1, 2018

by Andy Saag
Sirote & Permutt, P.C. – USFN Member (Alabama)

On April 23, 2015 Alabama changed its redemption law to allow for a shortened right of redemption period from one year to 180 days for certain residential properties on which a homestead exemption was claimed in the tax year during which the sale occurred. The new law also required the mortgagee to mail a notice of a mortgagor’s right to redeem residential property at least 30 days prior to the foreclosure date by certified mail with proof of mailing. However, many questions remained unanswered after that new law became effective, including:


• How long was the right of redemption if notice was not provided?
• Was production of the proof of mailing sufficient to satisfy the legal requirement that notice was provided?
• What was the statute of limitation for bringing an action related to sending the notice?


These questions were answered by the Alabama legislature when, in February 2018, it amended Alabama Code Section 6-5-248(h). The new law clarifies that a right of redemption cannot be exercised later than one year after the date of foreclosure even if the required notice was not sent. The new law also provides that possession or production of the proof of mailing of the notice would constitute an affirmative defense to any action related to the notice requirement. Finally, the law specifically limited the time frame in which actions related to the notice requirement can be brought to one year after the date of the foreclosure sale.

The Alabama legislature should be commended for passing this legislation as it will help to avoid piecemeal, and likely conflicting, rulings from courts across the state. Court filings and any judicial rulings from around the state regarding the right of redemption will continue to be monitored by this author’s firm.

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Florida: Borrower’s Property Surrender in Bankruptcy Creates a Rebuttable Presumption in Foreclosure Action

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018 and May 1, 2018

by Robyn Katz
McCalla Raymer Leibert Pierce, LLC – USFN Member (Connecticut, Florida, Georgia, Illinois)

Florida Senate Bill 220 passed both houses of the legislature unanimously and was signed by the governor on March 19, 2018. This act relates to bankruptcy matters in foreclosure proceedings. It authorizes lienholders to use certain documents filed under penalty of perjury in the defendant’s bankruptcy case as an admission in the mortgage foreclosure case. SB 220 applies to foreclosure cases filed on or after October 1, 2018.

The act creates a rebuttable presumption that the defendant has waived any defense to the foreclosure if a lienholder submits documents filed in the bankruptcy case evidencing the debtor’s intent to surrender the subject property — provided those documents have not been withdrawn by the defendant. Additionally, if a final order is entered in the defendant’s bankruptcy case which discharges the defendant’s debts or confirms the repayment plan that provides for the surrender of a property, that also creates the same rebuttable presumption. The defendant is not precluded, however, from raising a defense in the foreclosure action based on an action or inaction of the lienholder that is subsequent to the filing of the document in the bankruptcy case which evidenced the defendant’s intention to surrender the mortgaged property to the lienholder.

This law will allow the plaintiff’s counsel in foreclosure proceedings to swiftly rebut defenses filed by borrowers who have surrendered the subject property in their bankruptcy case, as those defenses will be deemed as waived. Pleadings and orders entered in the bankruptcy cases can be reviewed to provide the state court with appropriate documentation evidencing the defendant’s intent to surrender the subject property.

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New York: More on Enforcing Forbearance Agreements

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018

by Bruce J. Bergman
Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. – USFN Member (New York)

Must a borrower scrupulously adhere to the requirements of a forbearance agreement to derive benefit from it? A concise appellate decision and order confirms that, indeed, punctilious performance is required. [Interaudi Bank v. Moorgate Investments Limited, 145 A.D.3d 549, 44 N.Y.S.3d 35 (1st Dept. 2016)].

Because it seems that courts tend to be liberal in finding breaches to be de minimis, lenders and their counsel may often be skeptical that settlement agreements or forbearance agreements will be strictly enforced. Interestingly, though, and certainly gratifyingly from the point of view of a lender or servicer, such agreements are enforced with regularity according to their very terms. Such is the lesson of the subject case, and the story is but a short one.

A defaulted mortgage elicited a mortgage foreclosure action, which in turn led to a forbearance agreement whereby an extension of the loan maturity date was granted — specifically conditioned, however, upon the plaintiff’s receipt of $1,000,000 towards reduction in the principal sum. The source of this $1,000,000 was to be from proceeds of certain art sales by the loan payment guarantor at two auctions (to be conducted on a denominated date in November 2015). Importantly, the agreement stated that time was of the essence for this compliance.

The borrower-defendants, however, failed to comply with the terms of this condition. The monies were not paid and, thus, the loan maturity date was not extended.

While the trial court under these circumstances declined to grant summary judgment to the foreclosing plaintiff, the Appellate Court (the First Department) reversed, concluding that the agreement was clear and the failure to perform by the borrower (guarantor, actually) meant that the loan maturity was not extended and the foreclosure could proceed.

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South Carolina: Appellate Review of Quiet Title Action after Tax Sale

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018

by Ronald Scott and Reginald Corley
Scott & Corley, P.A. – USFN Member (South Carolina)

In the recent 2018 South Carolina Court of Appeals case, Equivest Financial, LLC v. Ravenel, which involved a quiet title action on a property sold at tax sale, the appellant (Ravenel) raised multiple issues on appeal. Specifically, the appellant asserted that: (1) the trial court erred in failing to take testimony; (2) the tax sale was void because the property was not levied, advertised, and sold in the name of the true owner; (3) judicial estoppel does not apply because Ravenel was not a party to the previous action; and (4) the delinquent tax collector did not comply with statutory requirements in sending notice to Ravenel. The court addressed these arguments by finding that: (1) the attorney for the appellant did not preserve the first issue for appeal, and (2) the doctrine of res judicata applied, barring the appellant from raising the other issues.

Background
The facts, briefly, are that Ravenel (just prior to filing bankruptcy) conveyed the subject property to her children for five dollars in consideration. In the subsequent bankruptcy proceeding, Ravenel failed to indicate this perceived fraudulent conveyance in her schedules; likewise, Ravenel did not tell her children about the conveyance or physically deliver the deed to them. After Ravenel filed bankruptcy she failed to pay her annual property taxes. As required by statute, the Charleston County Delinquent Tax Collector (DTC) sent notices to the children based on their addresses listed on the most recent deed of record. After multiple attempts to notify the children of the delinquent taxes on the property (i.e., notice by publication, issuance of a final notice of property redemption, and a failure of Ravenel to pay the redemption amount of $27,849.06), the property was sold at tax sale to Equifunding, who conveyed the property to the respondent in this action, Equivest Financial LLC. After this conveyance, Ravenel’s children brought a quiet title action, seeking to have the tax deed set aside. This case deals with the appeal of that action.1 The main issues in the appeal related to the doctrines of judicial estoppel and res judicata.

Judicial Estoppel

First, the court considered whether Ravenel was judicially estopped from claiming a position inconsistent with the one that she held in a previous court action. The five elements of judicial estoppel are: (1) two inconsistent positions taken by the same party or parties in privity with one another; (2) the positions must be taken in the same or related proceedings involving the same party or parties in privity with each other; (3) the party taking the position must have been successful in maintaining that position and have received some benefit; (4) the inconsistency must be part of an intentional effort to mislead the court; and (5) the two positions must be totally inconsistent.2

In the present case, with respect to the third element, the court found that Ravenel was not successful in establishing that she was the true owner of the property. Here, Equivest Financial LLC was found to be the true owner of the property by the trial court; therefore, the court of appeals found that judicial estoppel did not apply.

Res Judicata

Second, the court considered whether the elements of res judicata were met and thereby barred all other claims. The court found the three-element test was met: (1) the action involves the same identity of the parties or their privies; (2) the subject matter is identical; and (3) the prior suit adjudicated the issue with a final, valid judgment on the merits.3

In this case, Ravenel’s interests were essentially the same interests as her children’s interests in the property. Accordingly, Ravenel was deemed to be the real individual in interest with regard to the subject property. Further, the court found that the subject matter element was met because the case presented to the court was the identical issue surrounding whether the tax sale was valid. Finally, the court found that the trial court heard the first case in full and made a ruling on the issue, which the court of appeals affirmed. Due to the fact that the three elements of res judicata were met, all claims were barred.


1 Equivest Fin., LLC v. Scarborough, 2013 WL 8541673, Op. No. 2013-UP-495 (S.C. Ct. App. filed Dec. 23, 2013).
2 Auto-Owners Ins. Co. v. Rhodes, 405 S.C. 584, 598, 748 S.E.2d 781, 788 (2013).
3 7 S.C. Jur. Estoppel and Waiver § 27 (1991).

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Attorney Fees and Costs Recoverable against Foreclosed Borrowers in Virginia Unlawful Detainer Actions (Effective 7/1/18)

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018 and May 1, 2018

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

In the 2018 regular session, foreclosure purchasers realized a benefit by way of House Bill 311. Signed into law by the governor on March 9, 2018, and becoming effective July 1, 2018, this bill provides for additional remedies (including reasonable attorney fees and costs) against borrowers who fail to vacate after foreclosure. Virginia courts are adherent to the “American Rule,” which only permits a prevailing party to recover attorney fees and costs where contractually permitted or authorized by statute. For this reason, attorney fees and costs for post-foreclosure eviction actions have not been available in the Commonwealth. Most, if not all, common deed of trust forms fail to address recovery of post-foreclosure fees and costs associated with obtaining possession, and Virginia statute did not provide such a remedy.

Specifically, House Bill 311 amends Virginia Code § 8.01-126 (the Virginia unlawful detainer statute) and addresses the legal status of foreclosed borrowers who occupy the property on the date of foreclosure. The newly minted § 8.01-126(C)(4) states that foreclosed borrowers are “tenants-at-sufferance” and such tenancy is terminable by sending a written 3-day notice of termination. The new statute effectively negates Johnson v. Goldberg, 207 Va. 487 (1966), where the Virginia Supreme Court held that foreclosed borrowers, as tenants-at-sufferance, are not entitled to any notice to quit or vacate. After expiration of the notice, the foreclosure purchaser is permitted to file an unlawful detainer. Where notices to vacate mailed to foreclosed borrowers are currently more a requirement of court custom and preference, they will become a material condition to seeking possession as a matter of law.

The new section also enables claims for damages and fair rental value, in addition to attorney fees and court costs: “Such tenant shall be responsible for payment of fair market rental [sic] from the date of such foreclosure until the date the tenant vacates the dwelling unit, as well as damages, and for payment of reasonable attorney’s fees and court costs.” While these new remedies can be sought as part of the unlawful detainer, this new provision seems to also provide an avenue for a separate cause of action where the borrower vacates after the expiration of the termination notice, but prior to filing the unlawful detainer, and the property has been detained for a significant time thereafter and/or has been damaged by the borrower. Similarly, such remedies could be sought after a “lock out” pursuant to an order of possession, or through bifurcation of the unlawful detainer action into a ruling on possession and a later hearing, post-lock out, to determine “final rent and damages.” Bifurcation is commonly used in landlord/tenant cases.

Operationally, when the statute becomes effective, notices to vacate should be revised to recite this statue’s applicability to borrowers — and that failure to vacate may subject them to a claim for fair rental value, damages, and reasonable attorney fees and costs. This may give greater incentive to borrowers to timely vacate rather than exploit the administrative time required by the judicial eviction process. Perhaps it will also compel borrowers to evaluate the merits of contesting the eviction more prudently. It should be noted that this statute does not apply to occupancy by foreclosed tenants of the borrower, which is addressed by Virginia Code § 55-225.10(C).

 

While these remedies will be available come July 1, 2018, whether to pursue them should be carefully considered by servicers and outsourcers, as Virginia general district courts will likely require witnesses to establish these monetary claims (which are separate and apart from merely seeking possession). Seeking these new remedies may add additional time, cost, and effort to the standard eviction process where possession is the primary desired outcome. A monetary judgment, after all, may only be as good as its collectability.

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Virginia Legislature Adds New Sale Notice Requirements for Deceased Borrowers and Their Estates

Posted By USFN, Tuesday, April 17, 2018
Updated: Monday, April 16, 2018

April 17, 2018 and May 1, 2018

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

House Bill 755/Senate Bill 422 (relates to foreclosure after death of owner) — For those who practice in both judicial and nonjudicial foreclosure states, the different treatment of deceased borrowers and their estates is readily apparent. In Maryland (quasi-judicial) and the District of Columbia (judicial), for example, the personal representative of the estate must be served with the foreclosure pleadings. If such fiduciary has not yet been established, one must be appointed to proceed. Notices of sale and all other filings are mailed to the personal representative.

By contrast, Virginia, a nonjudicial state, does not require the appointment of a personal representative to foreclose — not even to receive notice of sale. Virginia Code § 55-59.1(A) only compels that sale notice be sent to the present owner at the “last known address as such owner and address appear in the records of the party secured” and does not specifically address heirs and personal representatives. Notices of sale must be mailed no more than 14 days prior to sale.

Although not requiring a personal representative to foreclose, the Virginia legislature’s passage of House Bill 755/Senate Bill 422 does amend Virginia Code § 55-59.1(A) to include additional deceased borrower notice requirements. The amendment expands the source from which entitled notice recipients are derived to also include recorded probate documents. Effective July 1, 2018, Virginia Code § 55-59.1(A) will read in part:


If the secured party has received notification that the owner of the property to be sold is deceased, the notice required by clause (a) shall be given to (1) the last known address of such owner as such address appears in the records of the party secured; (2) any personal representative of the deceased’s estate whose appointment is recorded among the records of the circuit court where the property is located, at the address of the personal representative that appears in such records; and (3) any heirs of the deceased who are listed on the list of heirs recorded among the records of the circuit court where the property is located, at the addresses of the heirs that appear in such records.


The amended statute will legally entitle personal representatives and heirs to notice of sale, if the probate documents have been recorded. The statute does limit the notice address for these individuals to what is specifically referenced in the probate documents.

This statute also presents new concerns and quagmires. In many cases the servicer may be aware of the deceased borrower at referral — but probate instruments have yet to be recorded. Unlike subordinate deeds of trust and association statements of lien, which must be recorded more than 30 days prior to sale to trigger the right to notice, the amended statute does not contain the same “safe harbor” language regarding the recording of the probate documents in relation to the sale date. Where an allegation of failure to notify is advanced, it is uncertain how Virginia courts will interpret this distinction where the probate documents are recorded prior to sale but after the last pre-sale title update and the mailing of notices. How title insurers will treat this scenario is equally uncertain. Another new issue is that not all “heirs” listed on a “List of Heirs” are legal heirs under Virginia law. On face value, the amended statute seems to confer standing to challenge the foreclosure on notice grounds to individuals with no cognizable legal interest in the property.

Virginia best practice has traditionally been to direct notice to heirs and personal representatives appearing on the referral, foreclosure correspondence, and the pre-foreclosure title searches and updates, regardless. To this end, the amendment should not change processing in the ordinary course. However, where a notice might have been missed, resort can no longer be made to the statute’s limiting language confining the entitled recipient to whoever appears in the servicer’s records. With this new statutory amendment and the current industry focus on successors-in-interest, it is more important than ever for Virginia trustee firms and servicers to timely communicate concerning deceased borrowers and any known heirs or personal representatives.

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The Sixth Circuit Applies Spokeo to Dismiss FDCPA Claims for Lack of Cognizable Injury

Posted By USFN, Tuesday, March 13, 2018
Updated: Monday, March 12, 2018

March 13, 2018

by Ellen Fornash
Anselmo Lindberg & Associates, LLC – USFN Member (Illinois)

On February 16, 2018 the U.S. Court of Appeals for the Sixth Circuit vacated summary judgment and dismissed claims under the Fair Debt Collection Practices Act (FDCPA) against an Ohio attorney and his firm in Hagy v. Demers & Adams, 2018 U.S. App. LEXIS 3710, 2018 FED App. 0032P (6th Cir.). Drawing on the U.S. Supreme Court’s holding in Spokeo, Inc. v. Robins, 578 U.S. __, 136 S. Ct. 1540 (2016), the Sixth Circuit found that the debtors failed to show that the violation caused any harm and, therefore, failed to establish standing under U.S. Const. Art. III.1 (The Sixth Circuit is comprised of Kentucky, Michigan, Ohio, and Tennessee.)

The underlying facts of the dispute are quite plain and begin in 2002, when the Hagys obtained a note and mortgage on a mobile home and property upon which the home rested.2 Eight years later the Hagys defaulted on their loan, and foreclosure proceedings were commenced.3 Settlement was achieved and thereafter, on June 30, 2010, the lender’s counsel, Demers & Adams, sent the Hagys’ attorney a letter advising that no deficiency judgment would be pursued.4 The Hagys filed suit.5 In addition to claims against their lender for telephonic collection attempts on a waived debt, the Hagys filed claims against Demers & Adams, alleging that the June 30th letter failed to disclose that it was from a debt collector, in violation of 15 U.S.C. 1692e(11). On the FDCPA claims, the Hagys were awarded statutory damages, costs, and over $74,000 in attorneys’ fees.7 Demers & Adams appealed.

Among other errors, Demers & Adams asserted that the district court lacked jurisdiction due to the Hagys’ lack of standing.8 In consideration of this argument, the Sixth Circuit noted that any dispute set forth before a federal court under U.S. Const. Art. III must, at a minimum, contain a particular injury caused by the defendant to be remedied by the court.9 The appellate court found that no such burden was met.10 The court agreed that Demers had a duty under the FDCPA to include a required disclosure in its correspondence, and that the duty was breached; however, the court held that Congress lacked the authority to create an injury on behalf of a claimant.11

The Sixth Circuit observed that no harm or injury was caused by the letter from Demers; in fact, the letter served to give the Hagys peace of mind. Leaning on Spokeo, the court agreed that “a bare procedural violation” does not equate to actual harm or injury.12 Further, in its finding of summary judgment, the district court had relied on Church v. Accretive Health, Inc. for its holding that a bare violation sufficed to create an injury. Church has since been rejected by the Sixth Circuit Court of Appeals.13 Because no cognizable injury existed, or was even alleged, the FDCPA claims were dismissed for lack of standing.

While the holding in Hagy appears to extend further protection to debt collectors in the Sixth Circuit, it should be noted that the underlying facts in Hagy are somewhat incredibly favorable to the debt collector. The court makes mention throughout its opinion that the very letter upon which the lawsuit was based served to help the debtors — not to hurt them. Moreover, the debtors admitted that the letter did just that. Such a perfect set of facts are few and far between.

Since Spokeo was first reported nearly two years ago, the decision has been interpreted and applied numerous times. Interpretations of Spokeo in the context of the FDCPA have resulted in findings of the existence of standing despite a lack of tangible injury in the majority of cases.14 Without a similarly favorable fact pattern, despite Hagy, this debtor-friendly trend may continue.

 


Hagy v. Demers & Adams, 2018 U.S. App. LEXIS 3710, 2018 FED App. 0032P (6th Cir.), citing Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 194 L. Ed. 2d 635, 2016 U.S. LEXIS 3046, 84 U.S.L.W. 4263, 100 Empl. Prac. Dec. (CCH) P45, 556, 26 Fla. L. Weekly Fed. S 128.
2  Hagy v. Demers & Adams, 2018 U.S. App. LEXIS 3710, 2018 FED App. 0032P (6th Cir.) [*2].
3  Id., [*2].
4  Id.
5  Id., [*3].
 Id.
7  Id., [*5].
8  Id.
9  Id., [*6]; citing, Lujan v. Defenders of Wildlife, 504 U.S. 555, 112 S. Ct. 2130, 119 L. Ed. 2d 351, 1992 U.S. LEXIS 3543, 60 U.S.L.W. 4495, 92 Cal. Daily Op. Service 4985, 92 Daily Journal DAR 7876, 92 Daily Journal DAR 8967, 22 ELR 20913, 34 ERC (BNA) 1785, 6 Fla. L. Weekly Fed. S 374.
10  Id.
11  Id., [*7].
12  Id., [*9]; citing, Spokeo, 136 S. Ct. at 1550.
13  Id., citing, Lyshe v. Levy, 854 F.3d 855, 2017 U.S. App. LEXIS 6855, 2017 FED App. 0088P (6th Cir.), 2017 WL 1404182, declining to follow Church v. Accretive Health, Inc., 654 Fed. Appx. 990, 2016 U.S. App. LEXIS 12414.
14  Ezra Church, Brian Ercole, Christina Vitale, Warren Rissier, Ken Kliebard, The Meaning of Spokeo, 365 Days and 430 Decisions Later, Law360, New York, Mary 15, 2017.


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District of Columbia: Treacherous Footing Continues for Lenders Facing Condominium Association Foreclosure Sales

Posted By USFN, Tuesday, March 13, 2018
Updated: Monday, March 12, 2018

March 13, 2018 and May 1, 2018

by Matthew Fischer and Christianna Kersey
Cohn, Goldberg, & Deutsch, LLC – USFN Member (District of Columbia)

Continuing the tectonic shifts begun with its decision in Chase Plaza Condominium Ass’n v. JPMorgan Chase Bank, N.A., 98 A.3d 166, (D.C. 2014), the Court of Appeals recently issued an opinion in Liu v. U.S. Bank, N.A. No. 16-CV-262, CAR-6539-14 (D.C. Mar. 1, 2018) that further undermines the position of mortgage lenders after a condominium association initiates a foreclosure sale.

As readers will recall, in Chase Plaza, the court interpreted D.C. § 42-1901 and its provisions regarding the six-month “super-priority” of condominium association liens to wipe out mortgage lenders, including those in “first” position. As a result of that 2014 decision, a number of related cases have been working their way through the superior court to the court of appeals. In Liu, the appellate court overturned a superior court’s grant of summary judgment for the bank and, once again, ruled in favor of third-party purchasers at a condominium association foreclosure auction.

The Liu opinion expanded upon the ruling in Chase Plaza holding that, even in the face of a sale allegedly conducted “subject to the first mortgage or deed of trust,” a holder of a deed of trust in first position could still be wiped out. The court of appeals ruled that the statute specifically prohibited the ability of the condominium association to apparently “waive” the super-priority status per D.C. Code. § 42-1901.07. In footnote 9 of the decision, the appellate court explicitly withheld its views over a “split-lien” and how it would rule in the event that the condominium lien at issue were longer than six months. In Liu, the lien was for less than six months and, thus, the court side-stepped the question for now. More importantly, the court of appeals found little merit in the bank’s argument for equitable estoppel based upon a reasonable reliance on the stated terms of sale, due to both the action of the bank (which attempted to pay off the condominium association lien) and the “expression provision” of the statute among other reasons.

In footnote 9, the appellate court also avoids the issue as to whether the foreclosure sale should be set aside due to the bank’s stated desire to not seek to set aside the sale. The opinion in Liu, therefore, offers some possible avenues of attack for future litigants. First, the court leaves open the question of how it would treat a lien that was in excess of six months. Second, the court seems to invite mortgage lenders to seek to have sales in question set aside, though such arguments might be better suited to the superior court. Finally, different facts could present a stronger case for equitable estoppel in the event that a mortgage lender did not seek to pay off a condominium lien, and failed to do so.

Closing Words
Despite this latest ruling, concerns of mortgage lenders were addressed by the Council of the District of Columbia in passage of the Condominium Owner Bill of Rights and Responsibilities Amendment Act of 2016. This legislation directly dealt with issues arising out of Chase Plaza and its progeny, by specifically requiring that a condominium association send notice to any holder of a first deed of trust (or first mortgage of record), their successors and assigns, including assignees, trustees, substitute trustees, and MERS. Moreover, the legislation requires the association to expressly state whether the foreclosure sale is either for the six-month priority lien, not subject to the first deed of trust, or for more than the six-month priority lien (which is subject to the first deed of trust).

While boding well for the future, the Amendment Act does not address condominium association foreclosures that occurred prior to its enactment, leaving mortgage lenders stranded until these pre-Chase Plaza cases work their way completely through the courts.

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Kansas Unlicensed Creditors Beware: Maryland Appellate Ruling’s Potential Impact on Creditors Enforcing Kansas Consumer Debts

Posted By USFN, Tuesday, March 13, 2018
Updated: Monday, March 12, 2018

March 13, 2018

by William H. Meyer
Martin Leigh, P.C. – USFN Member (Kansas)

In Kansas, creditors who originate, take assignments of, and enforce consumer obligations must be aware of — and comply with — the Kansas Uniform Consumer Credit Code (UCCC) and its supervision and licensing requirements. See K.S.A. 16a-2-301. A creditor’s failure to comply with these requirements could result in the creditor being unable to use the Kansas courts to enforce its debts, and can potentially put finalized judgments, including foreclosures, at risk. Clearly, creditors and creditors’ counsel need to be well informed of the Kansas UCCC and how the failure to follow it can short-circuit any, otherwise straightforward, lawsuit. Several states have adopted statutes similar to the Kansas UCCC and its regulatory scheme; one such state is Maryland.

Maryland Backdrop
A Maryland appellate decision found that a creditor’s failure to obtain proper licensure completely prevented it from foreclosing on mortgage loans. That appellate decision is styled Blackstone v. Sharma, 161 A.3d 718 (Md. Ct. Spec. App. 2017). [For convenient reference, also see “Maryland: Foreign Statutory Trust (which acquired a Loan Post-Default) is a ‘Collection Agency’ and Prohibited from Foreclosing without a Debt Collection License” (USFN e-Update, June 2017 ed.)].

Blackstone applies the Maryland Collection Agency Licensing Act. The Maryland case arises from mortgage loans that were assigned to an unlicensed creditor who sought to foreclose the deeds of trust that secured the mortgage loans. The borrowers challenged the foreclosures asserting that, without a license, any judgment that the creditor obtained against them would be void. The Maryland trial court and appellate court agreed with the borrowers and ruled that the creditor’s foreclosure actions were barred.

The Blackstone case has drawn national attention because it not only calls into question pending Maryland foreclosure cases, it also casts doubt over completed foreclosures that could be set aside as void. The Blackstone case is not over yet; Maryland’s highest court held oral argument in November 2017, and a decision is widely anticipated.

Kansas Context
The effect of Blackstone on Kansas foreclosures is not clear. As noted above, the Kansas UCCC requires that creditors enforcing consumer mortgages be licensed (like the Maryland statute). In 2013 the Kansas Court of Appeals looked at the licensing issue in Brand Investments, LLC v. Adams, 303 P.3d 727 (Kan. Ct. App. 2013) (Affirmed. Decision without published opinion).

Brand was a foreclosure action in which — over a year after the foreclosure judgment — the borrower challenged the creditor’s right to foreclose because the creditor was not licensed, as required by the Kansas UCCC. The borrower’s legal argument was that, because the creditor was unlicensed, the creditor lacked standing to bring the foreclosure action. Accordingly, the borrower contended that the Kansas trial court lacked subject matter jurisdiction to hear the case and, therefore, the foreclosure judgment was void as a matter of law. In a nuanced opinion, the Kansas Court of Appeals rejected the borrower’s argument.

The Kansas Court of Appeal’s opinion distinguished “standing” from the “capacity to sue.” The court described that a party’s standing to sue arises when a party suffers a cognizable injury and there is a causal connection between the injury and the challenged conduct. In slight contrast, the court described a party’s capacity to sue as the right to come to court for relief concerning the subject of the action. That subtle distinction is important because the lack of standing is jurisdictional and a challenge to a judgment entered by a court that lacks subject matter jurisdiction can be challenged and defeated at any time — i.e., there is no certainty or finality for a judgment entered with this defect. However, the lack of capacity to sue is an affirmative defense. If a borrower does not timely raise lack of capacity as an affirmative defense, then the defense is waived, and the foreclosure judgment is far harder to challenge after the fact —particularly if a year or more passes after the judgment is entered.

Based on this distinction, the Kansas Court of Appeals ruled that the creditor’s failure to obtain a license did not create a standing issue but, instead, only a lack-of-capacity-to-sue question. In this case, the borrower failed to timely assert an affirmative defense based upon the creditor not being licensed. Therefore, the issue was deemed to be waived and the creditor’s foreclosure judgment was affirmed.

In Closing
Although Brand was a victory for the creditor, it’s a cautionary tale. Creditors should be mindful of the UCCC licensing requirement in Kansas prior to purchasing loans or initiating collection in the state.

In short, Maryland’s Blackstone decision creates a wave of uncertainty regarding the legality of numerous completed and pending mortgage foreclosure actions in Maryland (and elsewhere with similar licensing requirements). However, the Kansas Court of Appeals decision in Brand suggests that if a borrower fails to timely raise the licensing issue (or at least within a year of the judgment being entered) then even an unlicensed creditor could successfully foreclose (in the absence of a timely challenge), and that judgment would be difficult to set aside later. As noted above, however, Brand is an unpublished Kansas appellate court decision and the law is subject to change.

Creditors (and attorneys representing them) seeking to acquire and enforce consumer debts in Kansas can obtain regulatory and licensing information from the State Bank Commissioner of Kansas at http://www.osbckansas.org/cml/applications.html.

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South Carolina: Pending Legislation Update

Posted By USFN, Tuesday, March 13, 2018
Updated: Monday, March 12, 2018

March 13, 2018 and May 1, 2018

by Ronald Scott and Reginald Corley
Scott & Corley, P.A. – USFN Member (South Carolina)

House Bill 4520
This bill is currently before the South Carolina House. If enacted, it would provide that there be a derivation clause requirement on all deeds and mortgages, executed after June 1, 2018, to include a clause setting forth the name of the party who prepared the mortgage. To be successfully recorded by the clerk of court/registrar of deeds, HB 4520, in effect, will require that all deeds and mortgages include identifying contact information regarding the preparer of the instrument.

One possible reason for this proposed bill is for the state lawmakers to seek compliance, by mortgage lenders and banks, with the state’s extremely strict Unauthorized Practice of Law requirements that a South Carolina-licensed attorney be involved in all aspects of real estate mortgage closing. See Matrix Financial Services Corp. v. Frazer, 384 S.C. 134, 714 S.E.2d 532 (2011), citing State v. Buyers Serv. Co., 292 S.C. 426, 357 S.E. 2d 15 (1987) (Performing a title search, preparing title and loan documents, and closing a loan without the supervision of an attorney constitutes the unauthorized practice of law).

Senate Bill 864
This bill is pending in the South Carolina Senate. It relates to the filing and recording of fees that may be charged by the registrar of deeds. SB 864 includes a $35 flat rate fee for certain documents to be filed and recorded, as well as a flat fee of $10 for other specified documents. SB 864 parallels its companion bill, which is currently at the same stage before the South Carolina House as bill 3337.

Senate Bill 833
This proposed bill is presently before the South Carolina Senate. If passed, SB 833 will authorize the governing body of a state county to create a procedure and method of enforcement that requires owners of residential and/or commercial real property to keep the property clean; free of rubbish, conditions that constitute a nuisance, debris, and other disorders that make the property unsightly.

Status Check — All three of these bills were pending as of April 2018. The status of each bill was viewed as of April 19 and is reported as follows:

House Bill 4520 — On January 9, 2018, House referred to Committee on Judiciary (in Committee).
Senate Bill 864 — On January 9, 2018, Senate referred to Committee on Judiciary (in Committee).
Senate Bill 833 — On March 14, 2018, Senate Committee report: “Favorable with amendment Judiciary.”

Go to http://www.scstatehouse.gov/billsearch.php, then enter a bill number to view the current status of a specific bill and its contents.


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Connecticut State Court Interprets Interplay between Connecticut General Statute § 49-15(b) and Bankruptcy Code § 362(c)(4)(A)

Posted By USFN, Tuesday, March 13, 2018
Updated: Monday, March 12, 2018

March 13, 2018

by Linda J. St. Pierre
McCalla Raymer Leibert Pierce, LLC – USFN Member (Connecticut, Florida, Georgia, Illinois)

In a recent case, the court was asked to decide whether Connecticut General Statute § 49-15(b) automatically reopens the law day in a judgment of strict foreclosure when: (1) an owner files a petition for relief under the bankruptcy code after entry of a judgment, but before the law day passes; and (2) there is no automatic stay in effect under 11 U.S.C. § 362. [U.S. Bank, as Trustee for the BS Arm Trust, Mortgage Pass-Through Certificates, Series 2005-1 v. Morawska (Conn. Super. Ct. 2018)].

State Statute
Connecticut General Statute § 49-15(b) provides in relevant part “Upon the filing of a bankruptcy petition by a mortgagor under Title 11 of the United States Code, any judgment against the mortgagor foreclosing the title to real estate by strict foreclosure shall be opened automatically without action by any party or the court, provided, the provisions of such judgment, other than the establishment of law days, shall not be set aside under this subsection, provided no such judgment shall be opened after the title has become absolute in any encumbrancer or the mortgagee, or any person claiming under such encumbrancer or mortgage.”

Background – Multiple Bankruptcy Filings
During the pendency of the underlying foreclosure action, the owner of the property filed bankruptcy four times. The last bankruptcy she filed was within one year of her two prior bankruptcy filings, which were both dismissed within that one-year period. Pursuant to 11 U.S.C. § 362(c)(4)(A) and (B), “if a single or joint case is filed by or against a debtor who is an individual under this title, and if 2 or more single or joint cases of the debtor were pending within the previous year but were dismissed, other than a case refiled under a chapter other than chapter 7 after dismissal under section 707(b), the stay under (a) shall not go into effect upon the filing of the later case ….” By virtue of § 362(c)(4)(A), the later-filed bankruptcy by the owner did not implement the automatic stay. As a result, the plaintiff moved for an order affirming that title had vested in the plaintiff absolutely.

Court’s Analysis
The court granted the plaintiff’s motion deeming title vested. In its analysis, the court raised three points. First, it noted that a literal and narrow reading of § 49-15(b) conflicts with the expressed intent of state and federal law. Second, a narrow, conservative construction of § 49-15(b) does not address the problem of repeated bad-faith bankruptcy filings in foreclosure actions identified by both state and federal law. Third, as a matter of statutory construction, the first sentence of § 49-15(b), standing alone, requires resetting of the law days after any filing of a bankruptcy petition before the law days have run. However, the last sentence (which must be read in conjunction with the first sentence) states that in order to move forward with resetting the law days, a mortgagor must file an affidavit affirming that the “automatic stay authorized pursuant to 11 U.S.C. § 362” has been terminated. The first sentence, therefore, contemplates that law days must be reset due to operation of an automatic stay. Thus, if no automatic stay comes into play, the law day will pass.

Author’s Note: Connecticut is a judicial state. Author’s firm represented the plaintiff in the case summarized in this article.


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Oregon: Proof of Standing Clarified in Appellate Ruling

Posted By USFN, Tuesday, March 13, 2018
Updated: Monday, March 12, 2018

March 13, 2018

by John Thomas
McCarthy & Holthus, LLP – USFN Member (Washington)

On February 28, 2018 the Oregon Court of Appeals issued an opinion reversing and remanding the trial court’s summary judgment decision in favor of the foreclosing plaintiff, on the basis that the loan servicer’s declaration in support of its motion for summary judgment did not establish that the plaintiff was the holder of the note at the time that the judicial foreclosure was initiated (as it contained inadmissible hearsay on that point). [U.S. Bank National Association, as Trustee for the Structured Asset Investment Loan Trust, 2005-10 v. McCoy, 290 Or. App. 525 (2018)].

Generally, to have standing, a loan beneficiary seeking to foreclose judicially must hold the note (negotiable instrument) at the time that the foreclosure complaint is filed. Although the servicer’s summary judgment declaration in McCoy asserted that “[Plaintiff] was the holder at the time this foreclosure action was initiated and remains the holder of the Note and beneficiary of the Deed of Trust,” the borrower moved to strike the testimony as inadmissible hearsay. In agreeing with the borrower, the Court of Appeals observed that the servicer’s declaration did not establish that the witness had personal knowledge as to the whereabouts of the note, nor was there a business record accompanying the declaration specific to the possession of the note.

As a result of McCoy, servicers should anticipate more challenges to foreclosures from borrowers (and potentially judges) where a servicer’s affidavit filed in support of a dispositive motion for entry of judgement does not adequately demonstrate either that the witness has personal knowledge of the possession of the note at the time the foreclosure was filed, or does not include a record of the collateral file whereabouts (containing the promissory note) attached to the declaration as an exhibit (such as a screen printout).

Servicers should expect a more thorough declaration for execution along these lines from default counsel.

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CFPB Issues Final Rule re Bankruptcy Periodic Statements

Posted By Rachel Ramirez, Tuesday, March 13, 2018
Updated: Monday, March 12, 2018

March 13, 2018

 

by USFN Staff

The Consumer Financial Protection Bureau (CFPB or Bureau) has issued a final rule on the timing requirements for bankruptcy periodic statements. According to the CFPB: “The final rule gives mortgage servicers more latitude in providing periodic statements to consumers entering or exiting bankruptcy, as required by the Bureau’s 2016 mortgage servicing rule.”

Excerpted directly from the March 8, 2018 CFPB release, “[t]he Truth in Lending Act requires mortgage servicers to provide periodic statements to borrowers, and the Bureau has developed sample forms for servicers to use. The 2016 mortgage servicing rule requires that servicers send modified periodic statements or coupon books to certain consumers in bankruptcy starting April 19, 2018. The rule also addressed the timing for servicers to transition to providing or ceasing to provide modified periodic statements to consumers entering or exiting bankruptcy. After issuing the rule, however, the Bureau learned that certain technical aspects of the timing of this transition may create unintended challenges and be subject to different legal interpretations. In October 2017, the Bureau sought public comment on a proposed rule that would provide greater certainty to help servicers comply. Today the CFPB is finalizing that proposed rule. Specifically, the final rule provides a clear single-statement exemption for servicers to make the transition, superseding the single-billing-cycle exemption included in the 2016 rule.

The effective date for the rule is April 19, 2018, the same date that the other sections of the 2016 rule relating to bankruptcy-specific periodic statements and coupon books become effective.”

 

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Connecticut: Appellate Court Holds that Failure to Schedule an Asset on Bankruptcy Schedules Strips Debtor of Standing to Prosecute

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

by Linda J. St. Pierre
McCalla Raymer Leibert Pierce LLC – USFN Member (Connecticut, Florida, Georgia, Illinois)

A decision was rendered in Beck and Beck, LLC v. Costello, AC 39034 (Conn. App. Ct. 2017), which held that the debtor in a Chapter 7 case lacked standing to bring amended counterclaims and cross claims against the plaintiff because of a failure to properly list the counterclaims and cross claims on his bankruptcy petition.

Background
This decision stems from an action brought in the state superior court against the debtor seeking unpaid legal fees. During the pendency of that case, the debtor filed an answer, a special defense, and a four-count counterclaim alleging breach of contract, breach of the implied covenant of good faith and fair dealing, professional malpractice, and violation of the Connecticut Unfair Trade Practices Act. The plaintiff in that action then filed a motion to strike (due to legal insufficiency), which was granted. The debtor proceeded to file amended counterclaims and cross claims that were essentially identical to the original ones. These were also stricken at the request of the plaintiff, on the same grounds. The debtor appealed that decision.

Bankruptcy Court
During the pendency of the state court appeal, the debtor filed a voluntary Chapter 7 petition. He checked “none” on Schedule B where the form asked for a description of “[o]ther contingent and unliquidated claims of every nature, including counterclaims of the debtor.” The bankruptcy trustee issued a report of no distribution, determining that there was no property available for distribution, and the bankruptcy case was subsequently closed.

State Superior Court
Prior to oral argument on the appeal, the plaintiff filed a motion to dismiss the debtor’s counterclaims on the basis that the claims had not been abandoned by the Chapter 7 trustee and, therefore, remained property of the estate — the real party in interest as to the claims. The appellate court remanded that issue back to the superior court for a decision on standing. The trial court, upon the filing of a motion to dismiss by the plaintiff on the same standing arguments, granted the motion to dismiss, determining that the debtor did not have standing because the bankruptcy trustee had not abandoned the counterclaims and cross claims. This appeal followed.

State Appellate Review
During his appeal, the debtor contended that the bankruptcy trustee abandoned the counterclaims and cross claims when she filed her report of no distribution. The plaintiff countered that the trustee never abandoned those claims because the bankruptcy trustee was not made aware of the counterclaims and cross claims that the defendant had pending against the plaintiff.

The appellate court held in favor of the plaintiff, stating “that upon the filing of a bankruptcy petition, all prepetition causes of action become the property of the bankruptcy estate [citation omitted]; and that in order to revest in the debtor through abandonment, the assets must be properly scheduled. … Because the defendant failed to include the counterclaims and cross claims on his schedule B—personal property form, we conclude that the bankruptcy estate owns the defendant’s amended counterclaims and cross claims. … Accordingly, the [trial] court correctly determined that the defendant lacks the requisite standing to bring the amended counterclaims and cross claims against the plaintiff and counterclaim defendant. The judgment is affirmed.”

Closing
This decision provides a powerful argument to creditors who face post-bankruptcy dilatory and costly litigation.

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Kansas: Court of Appeals Reaffirms Need to Prove Standing at “First Legal Filing”

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

by Blair Gisi
SouthLaw, P.C – USFN Member (Iowa, Kansas, Missouri)

Kallevig Decision (April 2017)
In April 2017 the Kansas Supreme Court made a significant and dramatic ruling that the plaintiff in a foreclosure action must prove its standing at the filing of any petition to foreclose mortgage (also referred to as a “first legal filing”). See FV-I, Inc. v. Kallevig, 306 Kan. 204 (2017).

In summation, Kallevig found: (1) under the Uniform Commercial Code, as “the holder of the instrument,” a plaintiff must show that the note was made payable to the plaintiff or was endorsed in blank and that the plaintiff was in possession of the note; and (2) “either in the pleadings, upon motion for summary judgment, or at trial [the plaintiff must demonstrate] that it was in possession of the note with enforcement rights at the time it filed the foreclosure action,” and that a lack of standing cannot be cured by a post-petition assignment granting enforcement rights in the note.

Dixon Decision (September 2017)
More recently, in Deutsche Bank National Trust Co. (as Indenture Trustee) v. Dixon, 2017 Kan. App. Unpub. LEXIS 834 (Kan. Ct. App. 2017), the Kansas Court of Appeals bolstered the notion that it is in a foreclosing plaintiff’s best interest to prove standing prior to the initiation of a foreclosure action via a properly endorsed note.

Dixon involved an assertion from the borrower that the plaintiff lacked standing to bring a 2012 foreclosure action. The borrower’s argument was “that the allonge to the note was not attached to the note when the endorsement was executed, rendering the endorsement ineffective in creating a bearer instrument in the hands of [Deutsche Bank National Trust Company].”

The complex procedural background involves a first foreclosure action that was filed in 2007 by a predecessor in interest to the plaintiff in the second foreclosure action. (Standing in this subsequent foreclosure action is at the center of the 2017 Dixon decision discussed in this article.) After a transfer of the loan, and issues regarding inconsistencies as to the actual owner of the note, the first foreclosure action was ultimately dismissed by the district court. In any event, when the second foreclosure action was filed in 2012, the petition to foreclose attached a copy of the promissory note with an allonge endorsed in blank.

In this second foreclosure action, the borrower relied on several cases in support of his argument that there was no evidence that the allonge was actually affixed to the note, specifically:


In re Shapoval, 441 B.R. 392 (Bankr. D. Mass. 2010), involving a Massachusetts bankruptcy court requiring additional evidence as to the bank’s standing to file a claim in the debtor’s bankruptcy case where the bank submitted a copy of the note without any endorsement and, later, an unattached allonge that contained an endorsement in blank.

Guzman v. Deutsche Bank National Trust Co., 179 So. 3d 543 (Fla. Dist. App. 2015), in which the Florida District Court of Appeals held that the bank lacked standing because it did not provide any evidence that the endorsements predated the filing of the initial petition, and standing could not be established by presenting an undated allonge after the proceeding commenced.

U.S. Bank Natl. v. George, 50 N.E.3d 1049 (Ohio App. 2015), where the copy of the note attached to an affidavit (intended to cure a break in the chain of endorsements giving U.S. Bank standing) did not actually contain any endorsement to U.S. Bank. Thus, because there was no unbroken chain of endorsements from the original lender to U.S. Bank, U.S. Bank was not entitled to a summary judgment of foreclosure.


In Dixon, the appellate court distinguished the matter before it from these three cases due to the fact that the plaintiff attached a copy of the note with an attached allonge, endorsed in blank, at the time it filed the subject foreclosure action, as well as with its summary judgment motion. In further support of its decision, the court went on to explain that the rationale for requiring an endorsement or allonge attached to the note is to avoid fraud and to promote the general “policy of providing a traceable chain of title, thereby promoting the free and unimpeded negotiability of instruments.”

Assertions that the plaintiff in Dixon had “unclean hands” and that dismissal of a number of the borrower’s counterclaims was improper were also rejected by the appellate court, but are outside the scope of this article. The district court’s decision granting summary judgment in favor of the plaintiff-bank was affirmed.

Conclusion
The takeaway from the Dixon decision is that, in Kansas, the best practice for establishing standing to bring a foreclosure action is to be able to demonstrate that the plaintiff was in possession of the properly endorsed note (whether special or in blank) and that the plaintiff is the of-record assignee of the mortgage — as of the date of filing the foreclosure petition.

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Florida: State Court Ruling that Standing is Not Transferable (After Suit is Filed) is Reversed by Appellate Court

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

by Roy A. Diaz
SHD Legal Group, P.A. – USFN Member (Florida)

A Florida appellate court reversed a final judgment, which had been entered in favor of a borrower in a foreclosure action based on the bank’s alleged lack of standing. [US Bank, NA as Legal Title Trustee for Truman 2012 SC2 Title Trust v. Glicken, 2017 Fla. App. LEXIS 15541 (Fla. 5th DCA Oct. 27, 2017).]

Background
The original plaintiff (Wells Fargo) filed a one-count foreclosure complaint against the borrower; copies of the note, allonge, and mortgage were attached to the complaint. The allonge attached to the note (and the complaint) contained a blank indorsement from the original lender. While the foreclosure was pending, Wells Fargo “assigned the mortgage and transferred possession of the note to US Bank.” The lower court entered an order substituting US Bank as the party plaintiff. US Bank filed the original note, allonge, and mortgage with the trial court. The note and allonge were identical to the copies attached to the complaint. The case proceeded to trial and, at the close of evidence, the borrower sought an involuntary dismissal of the case, asserting that US Bank lacked standing.

The defendant contended that US Bank lacked standing at the time of trial because no evidence had been admitted showing that Wells Fargo assigned the note, not just the mortgage, to US Bank. The lower court agreed (to the extent that it found US Bank lacked standing) and dismissed the bank’s foreclosure, holding:


“Standing is not transferrable and US Bank was not the holder of the note as of the date of the filing. It wasn’t the attorney enact [sic] of the—Wells Fargo. It wasn’t a successor in interest, it wasn’t purchased by, there was no way in which the two entities became one entity. There are a number of ways in which this happens, it evolves [sic] in a variety of lawsuits we see. In this case, you cannot transfer by selling the note. You cannot transfer standing. My ruling here is for the defendant.”


The lower court entered a final judgment in favor of the borrower, and an appeal on behalf of US Bank was filed in the Fifth District Court of Appeals (Fifth DCA).

Appellate Review
The Fifth DCA reversed the ruling, explaining that the lower court erred in its findings regarding standing. The appellate court pointed out that the note is a negotiable instrument and, once indorsed in blank, it can be transferred by possession alone; neither an assignment of the note nor evidence of an assignment is necessary if a party has actual possession of the original, endorsed note. The Fifth DCA concluded that US Bank presented sufficient evidence of its standing to foreclose when it attached the note and allonge with a blank indorsement to the foreclosure complaint, and then proffered the identical note and allonge at trial.

As stated in the appellate court’s decision, “When the note with an undated blank indorsement has been attached to the original complaint, this is sufficient to prove standing provided that the plaintiff produces the original note at trial or files it with the trial court with the same indorsement and there are no subsequent contradictory indorsements.”

Editor’s Note: The author’s firm represented the appellant, US Bank, NA as Legal Title Trustee for Truman 2012 SC2 Title Trust, in the subject case.

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Connecticut: Appellate Court Affirms Trial Court’s Order for Borrowers to Reimburse Future Tax & Insurance Advances by Lender

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

by James Pocklington
McCalla Raymer Leibert Pierce, LLC – USFN Member (Connecticut, Florida, Georgia, Illinois)

The Connecticut appellate decision in JPMorgan Chase Bank, N.A. v. Essaghof, 177 Conn. App. 144 (Oct. 10, 2017), as well as the strong language used in that decision, is extremely positive for foreclosing lenders — and may have application in other equitable judicial foreclosure jurisdictions. The Essaghof foreclosure action began in early 2009 and was heavily litigated through trial, concluding in July 2015, during which time the lender expended in excess of $330,000 for real estate taxes and homeowner’s insurance.

Trial Court Grants Equitable Relief
After losing at trial and in their attempts for a reversal at the trial court level, the borrowers took an appeal in December 2015. In response to the mounting costs caused by the borrowers’ delays, the lender brought a motion for equitable relief, requesting that the trial court order the borrowers to reimburse the lender for all future tax and insurance advances. In February 2016 the trial court granted that motion, ruling that the obligation to maintain taxes and insurance is not an issue of the foreclosure, and that it would not be affected by the trial court and appellate litigation. The borrowers amended their appeal to challenge the trial court’s authority to enter the equitable order.

Appellate Analysis
After a review of the authority granted trial courts to “examine all relevant factors to ensure that complete justice is done,” the appellate court upheld both the trial court’s authority to make the ruling and the ruling itself. In one of the strongest statements in recent years, the appellate court eviscerated the borrower’s claims and explicitly confirmed for other trial courts that they, too, are empowered to take such actions when they believe it is warranted. Specifically, the court stated:


“We cannot conceive of any abuse of discretion on the part of the trial court. The court understandably was concerned that, absent an order requiring the defendants to pay for their own property taxes and homeowner’s insurance, they would experience a windfall because they would be allowed to live on their property for free at the plaintiff’s expense until the conclusion of the foreclosure proceedings. Such a result is plainly within the realm of issues that the court’s equitable powers were designed to address. … The court did not abuse its discretion in determining that a balancing of the equities justified ordering the defendants to pay for expenses that they would have been required to pay no matter the outcome of this case.” Id. at 162.


The Takeaway
One of the larger concerns faced by foreclosing lenders during lengthy litigation is the expense incurred through continued advances. The Connecticut Appellate Court confirmed that a trial court may require that those costs be borne by a borrower. The borrowers have petitioned the Connecticut Supreme Court for certification.

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Circuit Split Deepens: Tenth Circuit Opines that Colorado Nonjudicial Foreclosure Activity is Not Debt Collection under the FDCPA

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

by Holly Shilliday and Andrew Boylan
McCarthy & Holthus LLP – USFN Member (Washington)

In a published opinion — and adding to the current split among the circuits — the Tenth Circuit Court of Appeals has ruled that the Fair Debt Collection Practices Act (FDCPA), set forth in 15 U.S.C. §§ 1692 – 1692p, does not apply to nonjudicial foreclosure proceedings in the state of Colorado. Obduskey v. Wells Fargo Bank, 2018 U.S. App. Lexis 1275 (10th Cir., Jan. 19, 2018). In a win for the industry, the court ultimately sided with the Bank (and these authors’ law firm McCarthy & Holthus) in ruling that the enforcement of a security interest, by way of a nonjudicial foreclosure proceeding, does not constitute debt collection under the FDCPA.

Background
The borrower in Obduskey defaulted on a loan secured by his personal residence. Beginning in 2009, the Bank initiated several nonjudicial foreclosures, none of which was completed. The Bank retained the Law Firm in 2014 to pursue a nonjudicial foreclosure. The Law Firm sent a debt validation letter to the borrower pursuant to 15 U.S.C. § 1692g, wherein it represented that it was retained to initiate foreclosure, stated that it “may be a debt collector,” and referenced the content under 15 U.S.C. § 1692g, including the amount owed to the current creditor, Wells Fargo. The borrower disputed the validity of the debt and alleged that the Law Firm initiated foreclosure before verifying the debt as required under the FDCPA.

The borrower’s complaint included several claims against the Bank and the Law Firm, including one for violation of the FDCPA. The district court dismissed the claims, with prejudice, upon separate motions filed by the Bank and the Law Firm. Regarding the FDCPA claim, the district court ruled that Wells Fargo was not liable because it began servicing the loan prior to default. The district court further concluded that the Law Firm was not a “debt collector” under the FDCPA because “foreclosure proceedings are not the collection of a debt.” The borrower appealed the trial court’s dismissal order.

After the parties fully briefed the case, the Tenth Circuit asked for supplemental briefing regarding whether the FDCPA applies to nonjudicial foreclosure activity. The Tenth Circuit had previously declined to address this issue due to pleading deficiencies in the complaint. [See Burnett v. Mortg. Elec. Registration Sys., Inc., 706 F.3d 1231, 1239 (10th Cir. 2013); Maynard v. Cannon, 401 F. App’x 389, 395 (10th Cir. 2010).] Despite similar issues with the borrower’s complaint in this case, the court recognized the need for clarity on the issue and agreed to hear the case.

Legal Analysis
The Tenth Circuit affirmed the lower court’s dismissal order. Obduskey at *14. First, since Wells Fargo began servicing the loan before it went into default, the court agreed that the Bank was not a debt collector under 15 U.S.C. § 1692(a)(6)(F). Id. at *4-5. Next, the court examined the circuit split on whether the FDCPA applies to nonjudicial foreclosures. Obduskey at *6. Courts across the country have long been divided on this contentious issue.

The Fourth, Fifth, and Sixth Circuits (as well as the Colorado Supreme Court) have found that nonjudicial foreclosures do constitute debt collection under the FDCPA. [Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373 (4th Cir. 2006); Kaltenbach v. Richards, 464 F.3d 524 (5th Cir. 2006); Glazer v. Chase Home Fin. LLC, 704 F.3d 453 (6th Cir. 2013); Shapiro & Meinhold v. Zartman, 823 P.2d 120 (Colo. 1992) (en banc).]

The Ninth Circuit reached the opposite conclusion in Ho v. ReconTrust Co., 858 F.3d 568 (9th Cir. 2016). The Ho case was closely watched, highly publicized, and saw amicus briefs from both sides of the industry (including the CFPB). Ultimately, the Ninth Circuit found that nonjudicial foreclosures do not qualify as debt collection under the federal act. In Ho, the appellate court affirmed a leading district court case in its jurisdiction, which held that “foreclosing on a trust deed is an entirely different path” than “collecting funds from a debtor.” [Hulse v. Ocwen Federal Bank, 195 F. Supp. 2d 1188, 1204 (D. Or. 2002)]. The Ninth Circuit further reasoned, in Ho, that “Following a trustee’s sale, the trustee collects money from the home’s purchaser, not from the original borrower. Because the money collected from a trustee’s sale is not money owed by a consumer, it isn’t ‘debt’ as defined by the FDCPA.”

Relying on Ho and the plain language of the statute, the Tenth Circuit concluded that the FDCPA applies to the collection of debt (i.e., money) and not to the enforcement of a security interest. Obduskey at *7-8. A nonjudicial foreclosure is the enforcement of a security interest and is not an attempt to collect money from a debtor. Id., citing Ho at 572 (quoting 15 U.S.C. § 1692a(5)).

The Tenth Circuit’s ruling hinged on the “critical differences” between nonjudicial and judicial foreclosures, including whether a deficiency action is being pursued. Obduskey at *8. Pursuant to Colorado law, a separate lawsuit must be filed in order to obtain a deficiency judgment. Id., citing C.R.S. § 38-38-106(6) (2017) and Bank of America v. Kosovich, 878 P.2d 65, 66 (Colo. App. 1994). The court also agreed with the policy considerations raised by Wells Fargo and the Law Firm, including potential conflicts between state and federal law. Obduskey at * 10-11. To avoid casting too wide of a net, the court did limit its holding to nonjudicial foreclosure proceedings and to the facts of the case at hand, finding that “[the Law Firm] did not demand payment nor use foreclosure as a threat to elicit payment.” Id. at *12-13. “It sent only one letter notifying [the borrower] that it was hired to commence foreclosure proceedings.”

Conclusion
Given the split among the circuits, the issue of the applicability of the FDCPA to nonjudicial foreclosures may be ripe for consideration by the U.S. Supreme Court.

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District Court Reverses Bankruptcy Court’s Sanction of Mortgage Servicer for Including Fees on Monthly Statements without First Filing Required Notices

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

by Joel W. Giddens
Wilson & Associates, PLLC – USFN Member (Arkansas, Mississippi, Tennessee)

On December 19, 2017 the U.S. District Court for Vermont reversed a $375,000 sanction. The sanction had been imposed by the chief bankruptcy judge for the District of Vermont on a mortgage servicer for billing fees to debtors without first filing the required notices under Federal Rule of Bankruptcy Procedure (FRBP) 3002.1(c) and for violation of bankruptcy court orders. The bankruptcy court imposed sanctions following a finding of contempt in three Chapter 13 bankruptcy cases on motions filed by the standing Chapter 13 trustee against the servicer. The request by the trustee asking the bankruptcy court to find the servicer in contempt was based on FRBP 3002.1(i)’s “failure to notify” section and for violation of “deem current” orders entered at the completion of two of the Chapter 13 cases.

Background in Bankruptcy Court
FRBP 3002.1, effective December 1, 2011, requires the holder of a claim secured by the debtor’s principal residence to file a detailed notice setting forth fees, expenses, or charges it seeks to recover from the debtor within 180 days after the expenditure is incurred. FRBP 3002.1(i) provides a bankruptcy judge with the authority to take certain actions if the holder fails to disclose a fee or charge, including: precluding the holder from presenting the omitted information — in any form — as evidence in any contested matter or adversary proceeding in the case (unless the failure was substantially justified or harmless); or awarding “other appropriate relief,” including reasonable expenses and attorney fees caused by the failure.

The bankruptcy court imposed a $75,000 sanction ($25,000 in each of the three cases) pursuant to FRBP 3002.1(i) for the servicer’s inclusion of property inspection fees, NSF fees, and late charges on monthly billing statements sent to the debtors over a 25-month period during their bankruptcy plans that had not been included on a FRBP 3002.1(c) notice, and were more than 180 days old. The fees included on the billing statements were fairly minimal (a total of $258.75 in one case; $86.25 in the second case; and $317.00 in the third case); the servicer admitted that they had been included in violation of the bankruptcy rule. In one of the cases, the servicer had already been sanctioned for not applying post-petition payments pursuant to the confirmed plan and had agreed to remediate its practices to comply with local Vermont bankruptcy rules. The imposition of the $300,000 sanction related to the same fees and late charges on the monthly statements and were on statements sent out to the debtors within days after the entry of the “deem current“ orders.

District Court’s Review
The bankruptcy court imposed the sanctions not only pursuant to FRBP 3002.1(i) but also pursuant to 11 U.S.C § 105(a) that provides bankruptcy judges with the authority to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of” the bankruptcy code, and pursuant to its “inherent authority.” The district court analyzed each basis used by the bankruptcy court to impose sanctions and concluded that the bankruptcy court had extended its authority beyond the bounds of the bankruptcy rules, the bankruptcy code, procedural due process, and constitutional protections in contempt proceedings.

First, the district court looked at whether FRBP 3002.1(i) authorized the imposition of punitive damages. The Chapter 13 trustee argued that the “plain language” of the rule embodies a grant of broad authority to craft appropriate remedies and that the sanction imposed by the bankruptcy court fell within the scope of that authority. The trustee pointed out that the power to impose monetary sanctions is necessary to deter mortgage creditors from attempting to collect unauthorized fees and charges, and to avoid the “absurd” result of mortgage creditors facing no negative consequences for violating the rule. The mortgage servicer contended that the history of FRBP 3002.1 (as reflected in meeting minutes of the Advisory Committee on Bankruptcy Rules) demonstrated that, in addition to attorney fees and costs, the rules’ drafters intended the scope of “other appropriate relief” to be limited to discretionary exclusion of information that should have been disclosed and did not indicate an intent to provide a basis, by itself, for disallowance of a claim entirely. The total amount of the sanction, the servicer pointed out, was more than the cumulative amount of its claims, which would be tantamount to their disallowance. That the sanction was ordered by the bankruptcy court to be paid to a non-profit legal service provider in Vermont, and that the debtors were not harmed by the servicer’s actions, was additional proof that the sanction was punitive in nature.

The district court found that the analysis of the extent of the bankruptcy court’s authority to impose sanctions under FRBP 3002.1(i) turned on this principle: “that, however broadly the language of [FRBP] 3002.1(i) sweeps, the powers it bestows cannot be without limit. At the absolute minimum, these powers cannot extend beyond the outer bounds of the Bankruptcy Court, as delineated by statute and precedent.” Because the bankruptcy court exceeded the outer bound of its authority under § 105 (as discussed later in the opinion), the district court concluded that the bankruptcy court also went beyond the scope of FRBP 3002.1.

The district court then turned to the sanction imposed by the bankruptcy court pursuant to 11 U.S.C § 105(a) and the bankruptcy court’s inherent authority. The court acknowledged that there was no debate that bankruptcy courts, like district courts, are vested with inherent authority to craft orders necessary to carry out their mission and may exercise inherent authority to respond to violations of its orders. The court further acknowledged that there was a broad consensus among circuit courts that § 105 empowered bankruptcy courts to adjudicate civil contempt and impose compensatory sanctions in a wide variety of factual and procedural contexts. The court noted, however, that there was a deep division among the appellate courts as to whether bankruptcy courts have the power to punish criminal contempt or impose punitive sanctions. There was no controlling authority in the Second Circuit. (Connecticut, New York, and Vermont comprise the Second Circuit.)

A Look to Other Circuits
After a review of the evolution of the contempt authority of bankruptcy courts and decisions in other circuits, the district court was most persuaded by the decisions that restrict the authority of bankruptcy courts to impose punitive damages. In the case of In re Dyer, 322 F.3d 1178 (9th Cir. 2003), the Ninth Circuit held that neither § 105 nor the bankruptcy court’s inherent authority were proper authority for imposition of “serious” punitive damages — specifically pointing out that § 105 contains no explicit authority to award such damages; rather, only those remedies “necessary” to enforce the bankruptcy code. Civil contempt sanctions (i.e., compensatory damages) are adequate to meet that goal, rendering serious punitive damages unnecessary. While the Dyer court declined to set an amount that rose to “serious” punitive damages, the $50,000 award at issue in that case was sufficient to fall outside of the authority conferred by § 105. The Dyer court further noted that bankruptcy courts are ill-equipped to provide the procedural protections that due process of law requires before the imposition of punishment, and that the administration of punishment by an Article I bankruptcy judge raises constitutional concerns.

In the same vein, the district court found persuasive the Fifth Circuit’s holding in In re Hipp, 895 F.2d 1503 (5th 1990). There, due to the lack of tenure and compensation protections afforded Article III judges, it was constitutionally impermissible for bankruptcy courts to exercise criminal contempt powers.

Finally, the district court found that the narrower construction of the bankruptcy court’s statutory and inherent punitive sanction was consistent with the direction of Second Circuit precedent addressing the scope of bankruptcy contempt authority in other contexts.

Another Appeal: Awaiting Second Circuit’s Ruling
In the end, the district court suggested that 11 U.S.C. § 105 makes it permissible for a bankruptcy court to enter a preliminary finding of criminal contempt with the preparation of proposed findings of fact and conclusions of law. This would allow the offending party an opportunity to make a record of objections but leave the adjudication of the objections, and entry of a final order of contempt, to the district court. Whether bankruptcy courts will follow this suggested procedure remains to be seen. While persuasive authority, the district court’s opinion is not binding precedent and is now on appeal to the Second Circuit Court of Appeals.

The district court’s opinion can be found at PHH Mortgage Corporation v. Sensenich, 2017 U.S. Dist. LEXUS 207801 (D. Vt. 2017).

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

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

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

On January 11, 2018 the New Hampshire House of Representatives introduced House Bill 1682-FN, “An Act relative to procedures for foreclosure.” A public hearing was held on January 24, 2018.

The 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 the statute to require commencement of foreclosure by civil action.

Proposed Process
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 — except 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 the sending of a copy of the complaint by certified mail. Parties without a recorded interest may intervene in the action for purposes of being added as a 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 offer 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 mortgage property; state the 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 after the filing of 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.

Redemption
A 90-day right of redemption is also being proposed, wherein the property “may be redeemed by the mortgagor, after the condition thereof is broken, 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.”

Waiver of the 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, unless the bank returns the payment to the mortgagor within ten days of receipt. The receipt of income from the mortgaged premises by the mortgagee or the mortgagee’s 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.

Conclusion
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.

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 in increased time for the preparation of witnesses to testify at trial.

Two aspects of the judicial process that are not mentioned in the bill are: (1) the mediation process; and (2) a nonjudicial notice and publication requirement for the sale. Nonetheless, either could be added to the proposed bill at a later date. In conclusion, if this proposed bill is passed, it would make foreclosing in the Granite State 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. Further updates will be provided when they are available.

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Fraud Scheme Impacting Title — Postscript from California

Posted By USFN, Thursday, February 1, 2018
Updated: Friday, March 16, 2018

February 1, 2018

by Abe Salen
The Wolf Firm
USFN Member (CA)

Fraud has consistently been a silent sword used by borrowers and their agents to stall the foreclosure process and keep the non-paying borrower in the property.

Over the last 18 months, a grand scheme has been uncovered by both federal and state law enforcement in which the borrower is generally a non-participant. Rather, the perpetrating entity conducts a public or semi-private search for properties with loans in foreclosure — often properties that have been in foreclosure for some time (several months to multiple years), but with no record of a sale having occurred. The scheme has reached significant levels in California.

The process is this: once the property is identified, the perpetrating entity begins its fraudulent scheme by recording a bogus assignment. That same day, this entity substitutes in a subsidiary as the foreclosing trustee. Thereafter the “new” trustee immediately (often within 1-3 days) records a Trustee’s Deed Upon Sale, transferring the property to the fraudulent beneficiary. With a recorded transfer in hand, the perpetrating entity sends out private invitations to known REO investors seeking bids for the purchase (at pennies on the dollar) of the subject property. This scheme is “grand” because it encompasses several hundred properties throughout California, with many more suspected — including properties throughout the West Coast and neighboring states, and eastward.

The problems are clear. With the fraudulent recordings occurring so quickly, it may be difficult for servicers and trustees to become aware of the fraudulent cloud on title until a bona fide purchaser is in the mix. Several title companies are now aware of this particular scheme. Further, at least one county has filed criminal charges against the perpetrating entities, with several more jurisdictions conducting in-depth investigations. The FBI is also investigating, and this scheme has gained the attention of numerous media outlets throughout the country.

This situation provides a serious reminder that servicers/trustees must stay vigilant in their due diligence as they begin the foreclosure process, and ensure that the title searches remain current throughout the process. Updating title reports at regular intervals during the process is recommended, especially when files are placed on hold, in order to confirm that title remains unaffected — not just from borrower conduct but also from possible third-party perpetrators.

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FDCPA Case Law: 2017 in Review

Posted By USFN, Thursday, February 1, 2018
Updated: Monday, January 29, 2018

February 1, 2018

by Andy Saag
Sirote & Permutt, P.C.
USFN Member (Alabama)

and William H. Meyer
Martin Leigh PC
USFN Member (Kansas)

The Fair Debt Collection Practices Act (FDCPA) continues to be actively argued and litigated around the country. This article highlights case law from 2017 (and some from late 2016) related to the scope of the FDCPA, standing, overshadowing, and collection of time-barred debt.

Who Is A Debt Collector?
The FDCPA defines a “debt collector” as one who “regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” 15 U.S.C. § 1692a(6).

In Henson v. Santander Consumer USA Inc., the U.S. Supreme Court analyzed the exceptions under §1692a(6)(F), recognizing that, “under the definition at issue before us you have to attempt to collect debts owed another before you can ever qualify as a debt collector.” 137 S. Ct. 1718, 1721-22 (2017) (emphasis in original). The Court held that “a debt purchaser ... may indeed collect debts for its own account without triggering the [FDCPA].”

Additionally, the definition of “debt collector” excludes any person “collecting ... a debt which was not in default at the time it was obtained.” 15 U.S.C. § 1692a(6)(F)(iii); see also Kurtzman v. Nationstar Mortgage LLC, 2017 WL 4511361, *3 (11th Cir. Oct. 10, 2017), quoting Davidson v. Capital One Bank (USA), N.A., 797 F.3d 1309, 1316 (11th Cir. 2015) (“a non-originating debt holder [does not qualify as] a ‘debt collector’ for purposes of the FDCPA solely because the debt was in default at the time it was acquired”).

The Fourth Circuit and Ninth Circuit have adopted divergent views as to whether foreclosure-related activities constitute “debt collection.” In McCray v. Federal Home Loan Mortgage Corp., 839 F.3d 354 (4th Cir. 2016), the Fourth Circuit observed that “[t]he FDCPA’s definition of debt collector … does not include any requirement that a debt collector be engaged in an activity by which it makes a ‘demand for payment.’” Thus, “to be actionable under the FDCPA, a debt collector needs only to have used a prohibited practice ‘in connection with the collection of any debt’ or in an ‘attempt to collect any debt’” (emphasis added). Id., citing Powell v. Palisades Acquisition XVI, LLC, 782 F.3d 119, 123 (4th Cir. 2014). In McCray, the Court found “all of the defendants’ activities were taken in connection with the collection of a debt or in an attempt to collect a debt” (emphasis added).

By contrast, the Ninth Circuit has decided that “[a]n entity does not become a general ‘debt collector’ if its ‘only role in the debt collection process is the enforcement of a security interest.’” Ho v. ReconTrust Co., N.A., 858 F.3d 568, 573 (9th Cir. 2016). Nonetheless, the Ninth Circuit identified a limited definition of “debt collector” in the foreclosure context to include security interest enforcers, who are regulated only through §1692f(6).

In Dowers v. Nationstar Mortgage, 852 F.3d 964 (9th Cir. 2017), the Ninth Circuit cited to Ho and affirmed the dismissal of claims against a loan servicer in all respects except as to an alleged violation of § 1692f(6). The Ninth Circuit then reached the same conclusion in Mashiri v. Epsten Grinnell & Howell, 845 F.3d 984 (9th Cir. 2017). Relying on Ho, Mashiri states, “where an entity is engaged solely in the enforcement of a security interest and not in debt collection, like the trustee and unlike Epsten, it is subject only to § 1692f(6) rather than the full scope of the FDCPA.” Id. at 990.

The analyses in both Dowers and Mashiri, however, overlook the parties’ posture in the Ho litigation. Ho “affirms the leading case of Hulse v. Ocwen Federal Bank, 195 F. Supp. 2d 1188, 1204 (D. Or. 2002), which held that ‘foreclosing on a trust deed is an entirely different path’ than ‘collecting funds from a debtor.’” See Ho, 858 F.3d at 572; see also id. at note 3 (“… Hulse is indeed the leading case for what other courts have recognized as the majority position”).

Notably, the defendants in Mashiri made the same concession as the parties in Ho; i.e., that the foreclosure trustee defendant was a “debt collector.” Mashiri, 845 F.3d at 989 (“For the first time in its answering brief, Epsten argues that it is subject only to § 1692f(6)”); Ho, 858 F.3d at 573 (“All parties agree that ReconTrust is a debt collector under the narrow definition [that would implicate § 1692f(6)]”). Moreover, in Ho, the trustee was not even accused of a § 1692f(6) violation. 858 F.3d at 573; see also Park v. Lehman Brothers Bank, FSB, 694 Fed. Appx. 602 (9th Cir. Aug. 3, 2017), citing Ho at 572-573 (“Quality [Loan Service Corporation] … may be a debt collector for the limited purpose of section 1692f(6), but [the plaintiffs] didn’t allege that Quality violated this section”).

As the Ninth Circuit observed in Ho, to impose debt collection liability in connection with state foreclosure law would produce an impermissible conflict. Ho, supra at 576; see also Tyson v. TD Services Co., 690 Fed. Appx. 530, 531 (9th Cir. 2017) (“the practices that T.D. Service engaged in were strictly in accordance with the law of California regarding the nonjudicial foreclosure duties of a trustee under a deed of trust”). Consequently, it is important to take a nuanced view of what factors led to the Ho, Dowers, and Mashiri appellate rulings.

In sum, although Santander is clear that collecting one’s own debts does not trigger FDCPA liability, with the Ho decision denied a certiorari petition on December 4, 2017, the law among circuit courts remains unclear on the subject of whether foreclosure activities bring lenders and trustees under the scope of § 1692a(6).

Standing
The U.S. Supreme Court established in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), that a plaintiff must show an injury-in-fact in order to establish standing. Further, the Spokeo case stated that an injury-in-fact is present if the borrower can show an invasion of a legally protected interest that is concrete and particularized. Below are a few cases dealing with “Spokeo Standing” over the past year. As you will see, there is very little consistency as to what does or does not constitute an injury-in-fact.

In Estate of Caruso v. Financial Recoveries, 2017 WL 2704088 (D.N.J. June 22, 2017), a debt collector mailed a collection letter to the debtor’s estate in an envelope with a visible barcode and nine-digit number, which the plaintiff alleged was a violation of the FDCPA. The debt collector moved for summary judgment and asserted that the estate lacked standing. The court agreed, noting that the estate failed to provide evidence that the barcode and nine-digit number disclosed any private information on its face or when read by a barcode scanner. Accordingly, the Court held that the estate did not prove it suffered an injury sufficient for Article III standing and granted the motion in favor of the debt collector.

In Yeager v. Ocwen Loan Servicing, 2017 WL 701387 (M.D. Ala. Feb. 22, 2017), a borrower sued for violations of the FDCPA after the servicer allegedly failed to send the validation notice within five days of its initial communication to them. The court found that the borrowers were unable to show that they “suffered ‘an invasion of a legally protected interest’ that is ‘concrete and particularized’ and ‘actual or imminent, not conjectural or hypothetical.’” Therefore, the court held that the borrowers were unable to show actual harm and lacked standing.

In Ben-Davies v. Blibaum & Associates, P.A., 2017 WL 2378920 (4th Cir. (D. Md.) June 1, 2017), a borrower filed suit against her debt collector under the FDCPA for allegedly demanding payment of an incorrect sum based on the calculation of an interest rate not authorized by law. The trial court dismissed the borrower’s claims and held that she failed to sufficiently allege an injury-in-fact to establish standing. However, on appeal, the Fourth Circuit reasoned that since the borrower alleged that she suffered actual, existing, intangible harm (i.e., “emotional distress, anger, and frustration”) as a “direct consequence” of the alleged violations, she met the requirements set out in Spokeo. Accordingly, the court remanded the case for further proceedings.

In May v. Consumer Adjustment Company, Inc., 2017 WL 227964 (E.D. Mo. Jan. 19, 2017), a borrower filed suit against a debt collector under the FDCPA because its collection letter included the amount of the debt without informing her that the amount owed included interest that would continue to accrue. In considering the debt collector’s motion to dismiss for lack of standing, the district court noted that a debt collector’s violation of the FDCPA disclosure requirements may result in concrete injury. However, in this case, the court ruled that the borrower failed to allege any actual harm from the collection letter’s lack of disclosure regarding accruing interest. Thus, without proof of any actual or imminent concrete harm, the court found that the allegations did not amount to an injury-in-fact, and the complaint was dismissed.

In Benali v. AFNI, Inc., 2017 WL 39558 (D.N.J. Jan. 4, 2017), a debt collector sent collection letters on behalf of a lender to the plaintiff, charging a processing fee for payments that were made electronically. It was undisputed that the plaintiff never had an account with the lender and that the applicable state law neither expressly permits nor prohibits a processing fee for credit card payments. The district court concluded that the plaintiff alleged bare statutory violations but did not establish a concrete harm sufficient to support standing. The court held that merely receiving the collection letter, without more, was not sufficient to confer standing because the alleged debt did not belong to the plaintiff. Additionally, there was no risk that the plaintiff would pay the processing fee because he immediately realized that he did not have an account with the lender. Because the plaintiff failed to show any actual or threatened harm, the court held that he lacked standing and granted summary judgment in the debt collector’s favor.

In Carney and Gumpper v. Russell P. Goldman, P.C., 2016 WL 7408849 (D.N.J. Dec. 22, 2016), the plaintiffs filed a putative class action against a law firm engaged to collect defaulted student loan debts for purported violations of the FDCPA. The law firm filed a motion to dismiss, contending the debtors lacked Article III standing to bring this case. The district court denied the law firm’s motion and found that the debtors did allege a clear injury-in-fact harm for purposes of Article III standing. The purported injury was that the law firm made false, misleading, and deceptive representations to debtors by listing (in its collection letters) attorneys’ fees and costs that had not yet been incurred. The debtors claimed that because of these alleged misrepresentations, they suffered informational and economic injury. Following the ruling in Spokeo, the court held that the alleged injury was particularized and the harm was concrete enough to satisfy Article III standing requirements. Accordingly, the motion to dismiss was denied.

Finally, in Kaymark v. Udren Law Offices, P.C., 2016 WL 7187840 (W.D. Pa. Dec. 12, 2016), the plaintiff filed a class action lawsuit against a law firm, alleging violations of the FDCPA because a pre-foreclosure letter included an itemized list of the debt and stated that the figures were calculated as of July 12, 2012, when in fact some of the charges had not yet been incurred. The district court, in considering the U.S. Supreme Court’s decision in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), concluded that the borrower had established standing by alleging a concrete injury-in-fact. The district court found that the foreclosure complaint’s demand for alleged estimated or anticipated fees was material and thus actionable under the FDCPA. The district court noted that a statement under the FDCPA is “material” if it is capable of influencing the decision of the least sophisticated debtor. Accordingly, the court did not dismiss the FDCPA claims.

Overshadowing
In a February 2017 order, the U.S. District Court of the District of Colorado addressed a debtor’s claim that the creditor’s communications violated the FDCPA’s prohibition against overshadowing (i.e., a notice containing information that contradicts the notice of a debtor’s rights such as the right to dispute the debt within 30 days). In that case, styled Hamilton v. Capio Partners, LLC, 237 F. Supp. 3d 1109 (D. Colo. 2017), the District Court interpreted the FDCPA’s requirement that “a debt collector must inform a consumer that she has the right to dispute the validity of a debt claim within thirty days of receiving notice of a debt collection action . . . [that the notice] ‘may not overshadow or be inconsistent with the disclosure of the consumer’s right to dispute the debt or request the name and address of the original creditor’ . . . [and] ‘[a] notice is overshadowing or contradictory if it would make the least sophisticated consumer uncertain as to her rights.’” Id. at 1113.

The operative language from the notice at issue in Hamilton stated: “We have been authorized to extend to you a special offer of settlement for $180.00. This offer will save you 40%. If you choose to accept this offer, payment must be received in this office on or before 05/21/2015. This settlement offer and the deadline for accepting it do not in any way affect your right to dispute this debt and request validation of this debt during the 30 days following your receipt of this letter as described on the reverse side. If you do not accept this settlement offer you are not giving up any of your rights regarding this debt.” Id. at 1111-12.

In resolving the overshadowing issue, the District Court first addressed the debtor’s claim that overshadowing is a fact issue for the jury, and therefore not appropriate for a determination at summary judgment. The District Court disagreed and cited to supporting opinions from the Sixth, Seventh, and Ninth Circuits, noting that the Tenth Circuit has not yet addressed this issue.

The District Court next addressed the debtor’s argument that a notice that contains both a settlement offer and a notice of the debtor’s rights results in the notice of the debtor’s rights being overshadowed. The District Court disagreed, citing a number of supporting decisions. The District Court explained further that overshadowing has been found in those cases where creditors have stated an intent to take action within 30 days of sending the notice to the creditor and making claims such as “the debt collector would hold the consumer’s account ‘for 10 days ... to give [her] the opportunity to settle this obligation;’” or “if the debt was not paid within ten days then the debt collector would pursue legal action;” and “‘THIS IS A DEMAND FOR IMMEDIATE FULL PAYMENT’ and ‘PHONE US TODAY. IF NOT PAY US—NOW.’” The District Court explained that notices with this type of language “flatly contradicted the [FDCPA’s] thirty-day validation requirement.” Id. at 1114. In short, an overshadowing claim presents a narrow legal issue that can be determined through a dispositive motion.

In an October 2016 order, the U.S. District Court for the Eastern District of Missouri addressed a debtor’s claim that the creditor’s communication violated the FDCPA’s overshadowing provision. In that case, styled Tilatitsky v. Medicredit, Inc., 2016 WL 5906819 (E.D. Mo. 2016), the debtor asserted that the creditor’s 30-day debt validation notice was overshadowed because it was set forth in the letter’s fourth paragraph and after the notice had requested that the debtor pay the debt in full and provided the creditor’s contact information along with various payment options (phone payment, express mail, MoneyGram, check, or credit card).

In considering the overshadowing claim, the district court noted that although it must utilize the “unsophisticated-consumer standard” it must maintain “an objective element of reasonableness to protect debt collectors from liability for peculiar interpretations of collection letters.” “[S]tatements that are merely susceptible of an ingenious misreading do not violate the FDCPA.” Id. at 3-4. “[W]hen the letter itself does not plainly reveal that it would be confusing to a significant fraction of the population, the plaintiff must come forward with evidence beyond the letter and his own self-serving assertions that the letter is confusing in order to create a genuine issue of material fact for trial.”

The debtor in Tilatitsky intended to use an expert witness to explain why the creditor’s notice was confusing and overshadowing. However, the debtor failed to disclose the expert witness and the district court excluded the expert’s testimony.

The district court then granted summary judgment in favor of the creditor because the debtor could not rely on his self-serving claims that the creditor’s notice “confused him, and he has failed to timely present extrinsic evidence showing that the Collection Letter would reasonably confuse or deceive an ‘unsophisticated consumer’ as to his or her dispute, validation, and verification rights.”

Time-Barred Debt

In a May 2017 opinion, the U.S. Supreme Court ruled that a creditor did not violate the FDCPA in the context of a Chapter 13 bankruptcy proceeding when the creditor filed a proof of claim on a facially time-barred debt. The FDCPA claim from that case, styled Midland Funding, LLC v. Johnson, 137 S. Ct. 1407, 1412 (2017), was asserted in a lawsuit filed by the debtor after the creditor’s proof of claim was disallowed in the bankruptcy proceeding. The Court’s opinion in Johnson is factually limited and could be considered to only apply in the context of bankruptcy proofs of claim. In short, the decision should not be viewed as a safe harbor regarding any attempts to collect time-barred debts.

In an October 2017 order, the U.S. District Court for the Eastern District of Missouri addressed the FDCPA on a time-barred debt issue and ruled for the tenant/debtor and against the landlord/creditor and its attorneys. That case, styled Morgan v. Vogler Law Firm, P.C., 2017 WL 4387351 (E.D. Mo. 2017), evolved from the creditor evicting the debtor, a subsequent collection lawsuit filed by the creditor’s attorneys, the debtor’s bankruptcy, and a violation of the automatic stay by the creditor’s attorneys. Of several FDCPA issues raised in the case, one was the debtor’s claim that the debt was time-barred. The district court’s order, without hesitation, found for the debtor on the time-barred debt issue — ruling that “[Missouri’s] five-year statute of limitations applied to plaintiff’s landlord’s claim for unpaid rent. [#38 at 9 (citing § 516.120 RSMo).] Thus, plaintiff’s landlord could not recover for payments that had been due more than five years before the lawsuit was initiated. (Id.) Because § 1692e prohibits debt collectors from filing a time-barred lawsuit to collect a debt, defendants violated § 1692e.”

In a December 2016 order, the U.S. District Court for the District of Kansas addressed the FDCPA time-barred debt issue in the context of a notice sent by the creditor to the debtor. That case, styled Boedicker v. Midland Credit Management, Inc. (D. Kan. 2016), addressed whether a notice sent by the creditor (which was modeled on a FTC-approved safe harbor example) violated the FDCPA. The creditor’s notice stated, in part, that the “law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it.” The debtor contended that this notice failed to satisfy the FDCPA because the notice did not also warn the debtor of a potential revival of a time-barred claim. The district court rejected that argument and ruled for the creditor, noting that the creditor’s notice exactly matched the FTC-approved language, and because no case has ruled that a debt collector must warn the debtor of the risk of reviving a time-barred claim.

In a September 2016 order, the U.S. District Court for the Eastern District of Missouri addressed the FDCPA time-barred debt issue based upon a creditor’s notice to a debtor. That case, styled Young v. Ditech Financial, LLC, 2016 WL 4944102 (E.D. Mo. 2016), was filed by a debtor seeking relief from an old derogatory credit report. The debtor alleged that the creditor violated the FDCPA by failing to disclose that it was a debt collector and by attempting to collect a time-barred debt.

The district court rejected the FDCPA claim based upon the creditor’s alleged failure to disclose its status as a debt collector because the creditor’s billing statements specifically disclosed that the creditor was a debt collector. Further, the district court rejected the FDCPA claim based on the creditor’s attempt to collect on a time-barred debt because in “the Eighth Circuit, ‘no violation of the FDCPA has occurred when a debt collector attempts to collect on a potentially time-barred debt that is otherwise valid’” without “a threat of litigation or actual litigation.” Id. citing Freyermuth v. Credit Bureau Services, Inc., 248 F.3d 767, 771 (8th Cir. 2001) (“[A] statute of limitations does not eliminate the debt; it merely limits the judicial remedies available”). Because the debtor did not allege that the creditor threatened to bring suit, or actually sued, in order to collect on the debt, the district court dismissed this FDCPA claim.

Editor’s Note: A special thank you to Joshua Schaer, formerly with RCO Legal (and now with Perkins Coie, LLP), who contributed greatly to this article.

 

Copyright © 2018 USFN. All rights reserved.
Winter USFN Report

Note for consideration of the USFN Award of Excellence: This article is a "Feature."

 

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CFPB: Mortgage Servicing Rules Update: Stay the Course. Be Vigilant. Relief may be on the Way.

Posted By USFN, Thursday, February 1, 2018
Updated: Monday, January 29, 2018

February 1, 2018

by Wendy Walter
McCarthy Holthus LLP
USFN Member (Washington)

October 19, 2017 arrived and the first segment of the Consumer Financial Protection Bureau’s (CFPB) promulgated servicing regulations went into effect without much ceremony. The CFPB has other concerns, and a massive leadership change could mark the pivotal point for this controversial agency. For almost a year, the agency had been the subject of speculation regarding the political ambitions of its former director, Richard Cordray, who was rumored to be interested in running for governor of Ohio in the 2018 election. Cordray, after failing to launch the controversial arbitration rule, resigned on November 24, 2017 — cutting short his five-year term by approximately six months.

Acting Director Appointment x 2
In his wake, the former director took a parting shot to the Republican administration and attempted to appoint his chief of staff, Leandra English, to the acting director position. In a November 27th piece in the National Review, author Ronald Rubin indicated that this appointment was an attempt to cover up evidence of employee misconduct related to the arbitration rule, as well as alleged indiscretions against CFPB senior managers. Rubin is a former enforcement attorney at the CFPB; he was also a keynote speaker at the USFN Legal Issues seminar in July 2017.

President Trump, using his authority under the Vacancy Act, appointed Mick Mulvaney to the acting director position. It was quite a controversy when it came to light that two acting directors appointed to the same position were each likely to show up to work on the Monday following Thanksgiving. The president’s appointment was challenged, with English filing a lawsuit seeking a temporary restraining order. Heard on November 27th, Judge Timothy Kelly (a Trump nominee) denied the TRO — as well as a preliminary injunction on January 10th. This legal reasoning was further supported by the CFPB’s general counsel in a memo dated November 25, 2017, in which she concluded “that the President possesses the authority to designate an Acting Director for the Bureau under the [Federal Vacancies Reform Act], notwithstanding [12 U.S.C.] § 5491(b)(5).”

Mulvaney Takes Charge
The president’s appointee hit the ground running — “kicking the tires” on the organization. After assuming the position, Mulvaney imposed a hiring freeze and a regulatory freeze. The civil penalties fund was frozen for 30 days. He promised to review all pending lawsuits and made it clear that things will be different in all areas: enforcement, investigations, and rulemaking. Under President Trump’s directive, Mulvaney will try to protect “people without trampling on capitalism.” He also commented at how frightening the scope of his powers as acting director might be. The legal challenges presented speak volumes on how powerful and impactful this agency has become.

What’s Next?

So where does this leave the regulations effective in April 2018? They are on the books and will take effect unless there is rulemaking to invalidate their effectiveness. In light of the fact that there needs to be a permanent director appointment, plus given the hundreds of lawsuits at issue — not to mention the three proposed rules open for comment — there is certainly a lot to sift through. Broad structural issues might be the focus, rather than the “surgical precision” necessary to fix the regulations that have been promulgated in mortgage servicing. Other industries including payday lending, debt collection, and student lending may be breathing a sigh of relief as the proposed regulations and regulatory agenda will be scrapped.

The acting directorship is valid for 200 days, or indefinitely if there isn’t an appointment by the Senate. Even if the Democrats can muster enough votes to block appointment of the next director, it will not help them: Acting Director Mulvaney and his team are Republicans, have a completely different agenda than former Director Cordray, and are not fans of the Bureau and the massive amount of power that is held by its director. Mortgage servicers should keep a close eye as this 1,500-person agency fundamentally changes and an air of transparency blows through.

Copyright © 2018 USFN. All rights reserved.
Winter USFN Report

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Get Ready for CFPB Periodic Statements

Posted By USFN, Thursday, February 1, 2018
Updated: Monday, January 29, 2018

February 1, 2018

by Marcy J. Ford
Trott Law, P.C.
USFN Member (Michigan)

and Daniel A. West
SouthLaw, P.C.
USFN Member (Iowa, Kansas, Missouri)

Servicers, sharpen your pencils: now is the time to gather resources for development and deployment with regard to bankruptcy periodic statements. While compliance with the Consumer Financial Protection Bureau (CFPB or Bureau) mandate is not required until April 19, 2018, the reality is that rollout should occur well before that deadline. There are still many unanswered questions and further CFPB clarification is unlikely. The industry will have to rely on logic and reason, as well as prior holdings to formulate statements and implement policies and procedures that will (hopefully) ensure the highest likelihood of consistent compliance.

A small contingent of mortgage creditor representatives met with the CFPB last October, with a goal of obtaining clarity on significant statement requirements. Several questions were presented to the CFPB in advance of the meeting. While the Bureau representatives were careful not to engage in any prohibited ex parte communication, they were also prepared and willing to provide guidance by pointing to alternative Rule provisions. They also indicated that the Bureau would further consider possible unintended negative consequences of the Rules, and whether additional commentary was warranted. Below is a summary of the questions and responses from that meeting.

A request that statement requirements be suspended for up to 90 days following a servicing transfer of loans in bankruptcy. This would permit servicer system and payment reconciliation, and allow trailing trustee funds to hit the new servicer account (as transfer of claims are generally not filed with the court until after the actual transfer date).
CFPB Response: The Bureau representatives indicated that they did not intend to make a change to the requirement at this time. It was suggested that Section 1026.31(d)(2) allows for an estimate based on the best information available. Servicers must note on the statement that the data is an estimate. It was also suggested that leaving fields blank is not considered to be in the spirit of compliance. There was no definitive response from the CFPB as to whether use of estimates was a possible FDCPA violation, but they indicated this would be under further review for commentary.

A request for comment on whether servicers could or should use the Chapter 12/13 model format in a Chapter 11 case where the debtor proposes to cure a default over time.
CFPB Response: The Bureau representatives indicated that no official comment was anticipated; however, parties should look to section 41(f); and, if additional information does not violate 41(c) comment 2, then servicers could include additional loan level details normally reserved for Chapter 12 and Chapter 13 statements. Moreover, it was stressed that all loan level detail called for in the Chapter 11 model form must still be provided.

A request for clarification as to whether it is permissible to continue to send the Chapter 11 bankruptcy statement during the period where a Chapter 11 case has been “administratively closed,” but no final decree or discharge has been entered.
CFPB Response: The Bureau representatives referenced 41(f) comment 4, which provides that a periodic statement can be modified to comply with bankruptcy rules. Further, the it was suggested that if a case is still considered “active,” despite an administrative close, then servicers should be sending the required modified statement.

A request for Rule amendment for a statement exemption in Chapter 12 and 13 cases until after case confirmation. The request was based on FDCPA concerns, lack of finalized case information, and the likelihood of consumer confusion.
CFPB Response: The Bureau representatives again referenced section 1026.31(d)(2), which allows for the disclosed use of estimated data; i.e., where “information necessary for an accurate disclosure is unknown to the creditor, the creditor shall make the disclosure based on the best information reasonably available at the time the disclosure is provided, and shall state clearly that the disclosure is an estimate.”

A request for clarification as to whether the exemption to sending periodic statements in a “property surrender” situation is similarly applicable to early intervention notice requirements in surrender situations.
CFPB Response: No. The Bureau representatives made it clear that the difference in treatment between periodic statements and early intervention notices was intentional. They believe that sending an early intervention notice to a discharged debtor would not be a violation of the discharge injunction as only one notice is required, and there is nothing in the Rule that would require the inclusion of a demand for payment. It was further pointed out that section 1024.39 of Regulation X provides servicers with the flexibility to adjust the notice, so as to not violate the discharge injunction.

A request for confirmation of applicability of successors-in-interest (SII) rules to bankruptcy cases.
CFPB Response: The Bureau representatives indicated that confirmed SII who filed bankruptcy would trigger the bankruptcy rule requirements. Thus, confirmed SII should be added to bankruptcy (and SCRA) search requirements. The CFPB further reminded the attendees that where there is a surviving borrower or an estate of the deceased borrower, there is no requirement to send information/notices to the SII; however, this may fly in the face of bankruptcy requirements to file a claim and/or participate in a bankruptcy case.

A request for additional clarification of the ability to add disclaimers and other language to charge-off final statements to avoid an unintended violation of the automatic stay or discharge injunction.
CFPB Response: The Bureau representatives indicated that this provision would be revisited to determine whether additional commentary is necessary. In the interim, however, they indicated that they believed servicers would use the modified discharge statement and add the charge-off disclosures. Thus, the bankruptcy disclaimers already set forth within the underlying modified periodic statement would/should protect the servicer from potential stay violation and discharge injunction risk.

A request for additional clarification on the transitional single-billing-cycle exemption.
CFPB Response: The Proposed Interim Rule for a single-statement exemption, as published in the Federal Register on October 16, 2017 (and released the same day as the industry’s face-to-face meeting with CFPB), addressed this request. Under the proposed change, servicers receive a one-month waiver/exemption on sending any statement when a transition event occurs. Transition events include (but are not limited to) the initial filing, surrender, stay termination, and case dismissal. There will likely be several transition trigger events in a case, which may lead to multiple (and even successive) exemption periods. If a statement has already been sent prior to the transition event, there is no need to correct the already-issued statement, and the exemption will roll to the following month.

Note: the Public Comment period closed on November 17, 2017. Comments can be found on the CFPB website. Servicers will need to implement system and procedure enhancements to effectively track the multiple transition trigger events so as to accurately manage statement production.

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Winter USFN Report

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

 

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