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Wholly Unsecured Lien Can be Stripped in a “Chapter 20” Case

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Elizabeth M. Abood-Carroll
Orlans Associates, P.C. – USFN Member (Michgan)

A bankruptcy appellate panel (BAP) in the Sixth Circuit recently reversed a bankruptcy court and ruled that a wholly unsecured lien can be stripped in a “chapter 20” case. In the bankruptcy world, a “chapter 20” is an unofficial term that refers to a debtor who files and completes a chapter 7 case and subsequently files a chapter 13 case in a short period of time.

The debtor in In re Cain, 2014 Bankr. LEXIS 3060 (BAP 6th Cir. July 14, 2014), obtained a chapter 7 discharge. A few months later, she filed a chapter 13 case seeking, in relevant part, to avoid a wholly unsecured second mortgage on her residence. Due to the chapter 7 discharge within the preceding four years, the debtor was not eligible for a discharge in her chapter 13 case, pursuant to 11 U.S.C. § 1328(f).

Upon the successful completion of her chapter 13 plan, the debtor filed a motion to avoid the second lien. The motion was unopposed. The bankruptcy court denied the motion by relying on 11 U.S.C. § 1325(a)(5)(B), which says a chapter 13 plan must provide for a secured creditor to retain its lien until either the debt is paid in full or the debt is discharged. Because the debt was not paid in full and the debtor was ineligible for a discharge, the bankruptcy court ruled that the debtor was not entitled to strip the second mortgage in her chapter 13 case.

The BAP found the lower court had erred in denying the lien strip. The B.A.P. recognized that the issue has not been addressed by the Sixth Circuit; and it relied on Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663(6th Cir. 2002), which permits a lien strip on a debtor’s principal residence if it is wholly unsecured under 11 U.S.C. § 506(a). The relevant inquiry is whether the claim is secured or unsecured.

In regards to the debtor’s ineligibility to receive a discharge, the BAP ruled that ineligibility under § 1328(f) does not prevent the debtor from receiving other types of relief under Chapter 13.

In this case, there was no dispute that the second lien had no value. Consequently, the BAP ruled that second lien was to be treated as an unsecured claim and was not protected by the requirements of § 1325. The determining factor was the wholly unsecured status of the creditor’s claim rather than the debtor’s ineligibility for a discharge.

(Note: The Sixth Circuit is comprised of Kentucky, Michigan, Ohio, and Tennessee.)

© Copyright 2014 USFN. All rights reserved.
September e-Update

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Wisconsin: Equitable Assignment Upheld

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

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

The Wisconsin Supreme Court upheld the long-standing theory of equitable assignment resulting in a victory for PHH Mortgage Corporation and, in turn, a victory for MERS in Dow Family, LLC v. PHH Mortgage Corporation, 2014 WI 56, 848 N.W.2d 728 (July 10, 2014). The court concluded that old law is good law as it pertains to equitable assignment. Having affirmed that equitable assignment is “alive and well in Wisconsin,” the majority opinion did not take issue with the MERS assignment. This decision exemplifies why it is important to maintain possession of the note and the records surrounding its custody. Possession of the properly endorsed note is what will win a case.

Dow Family has a unique set of facts. The court of appeals decision was previously reported on in the USFN’s September 2013 e-Update; therefore, the facts of this case might sound familiar to you. Dow Family purchased a property from PHH’s borrower. During that transaction Dow Family obtained a title commitment that indicated that there were three mortgages on the property. The commitment showed that the first and third mortgage were to US Bank. The mortgage in first lien position was actually to MERS as nominee for US Bank. This first mortgage is the mortgage now held by PHH. The mortgage was assigned to PHH from MERS after the Dow Family purchased the property. While the assignment was recorded after Dow purchased the property, PHH had been transferred the note and servicing of the loan shortly after its origination years earlier.

Dow Family had been convinced by the seller’s attorney that the first mortgage on title had been paid off in full by the subsequent mortgage on title to US Bank. The closing went ahead and Dow Family purchased the property without obtaining a satisfaction or release of the PHH mortgage. Nor were any closing funds applied to satisfy the PHH mortgage. The PHH Mortgage borrower then immediately defaulted on his mortgage. Once the true facts were revealed, that the first mortgage on title had not been paid off by the subsequent US Bank mortgage, Dow Family filed an action to extinguish the lien on the property and PHH initiated a foreclosure action.

The attorney for the Dow Family sought to paint his client as a victim of the MERS system. A system that, Dow Family argued, was unfair, deceptive, and deserving to be rejected in Wisconsin. Dow Family advanced a number of legal arguments attempting to support their position, including that the note and mortgage were separated and, alternatively, that the statute of frauds was violated resulting in an unenforceable mortgage.

Instead of rejecting the MERS system, the court rejected Dow Family’s arguments. The court found that equitable assignment is a valid legal theory stemming back to the 1800s in Wisconsin case law. The legal theory of equitable assignment focuses on the fact that the note is an inherently valuable document. When the note is transferred, the mortgage is transferred with it. The right to enforce the mortgage is equitably assigned to the new note holder by operation of law when the note is transferred. Assignments out of MERS do not typically take place until an event occurs making the assignment necessary, which may be years after the note was transferred. The court further found that equitable assignment has been codified in the Wisconsin Statutes in § 409.203(7).

The Dow Family decision strikes down the various legal arguments centered on the time delay between the transfer of the note and the recording of an assignment of mortgage. The lesson from Dow Family is not a new one but its importance cannot be overlooked; possession and production of the original note when necessary are crucial in a foreclosure action.

© Copyright 2014 USFN. All rights reserved.
September e-Update

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CFPB Updates Informal Non-Binding Guidance on Servicing Transfers

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Wendy Walter
RCO Legal, P.S. – USFN Member (Alaska, Oregon, Washingtn)

On August 19th, the Consumer Financial Protection Bureau (CFPB or Bureau) replaced its February 2013 guidance directed at servicers and related to servicing transfers with Bulletin 2014-01. This new bulletin gets into detail on the recent issues the Bureau has found in examinations of servicers engaged in servicing transfers. The bulletin also discusses application of the new servicing rules in a service transfer situation and outlines a new disclosure process for certain loan servicing transactions.

Findings in recent examinations
— Based on recent examinations conducted by the Bureau, it was discovered that servicers failed to properly identify loans that were in a trial or permanent modification with the prior servicer at the time of transfer. Also it found that transferee servicers failed to honor trial or permanent modifications that were offered by the prior servicer. The Bureau is also concerned with finding that borrowers have had to resubmit financial documents to the transferee servicer because the prior servicer did not send the transferee servicer the complete record. These situations are deemed by the Bureau to be in violation of UDAAP (Unfair and Deceptive Acts and Practices) prohibition and if they occurred after January 10, 2014, they potentially violated the requirements for the servicers to have policies and procedures to avoid issues when a loan is being service-transferred. 12 CFR 1024.38(b)(4).

Application of Servicing Rules to Service Transfer Situations — In the non-binding guidance, the Bureau also points out that if there is a service transfer, the transferee servicer might have to comply with the early intervention and written notice requirements again even though the default originated with the prior servicer. This is confusing for a borrower, but it could set the clock back on pre-foreclosure loss mitigation because of a servicing transfer. Another highlight from this section is that the Bureau indicates that its examiners will heavily scrutinize any servicer that takes longer than 30 days from receipt of a complete loss mitigation application at the transferor servicer where the borrower could suffer negative consequences because of the delay.

Disclosure of Service Transfer Plans in “Appropriate” Cases — In certain cases (probably larger portfolio sales), the CFPB will require a servicer to submit plans to the Bureau, prior to the transfer, explaining how it is going to manage associated customer risks. The CFPB, in turn, will use these plans to help formulate a subsequent examination that the Bureau may conduct post-transfer.

For more information, here is a link to the bulletin on the CFPB’s website: http://files.consumerfinance.gov/f/201408_cfpb_bulletin_mortgage-servicing-transfer.pdf.

© Copyright 2014 USFN. All rights reserved.
September e-Update

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Alaska Supreme Court: Unfair Trade Practices Act Does Not Apply to Nonjudicial Foreclosures

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

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

The Alaska Supreme Court recently issued a ruling concerning the reach of Alaska’s Unfair Trade Practices Act (UTPA). The court reaffirmed earlier decisions holding that the UTPA did not apply to real property transactions and that, despite recent amendments to the statute, this exclusion applies to nonjudicial deed of trust foreclosures on real property.

Alaska’s UTPA prohibits “unfair or deceptive acts or practices in the conduct of trade or commerce.” A person suffering damages from a violation may recover the greater of three times actual damages or $500. Even without damage, a plaintiff may obtain an injunction against the alleged violator. But probably most important, successful plaintiffs may recover their actual attorneys’ fees and costs incurred in bringing the action. This provision has created a strong incentive for plaintiff attorneys to bring UTPA claims in foreclosure challenges.

In Alaska Trustee, LLC v. Bachmeier, the plaintiff alleged that the foreclosure trustee had violated the UTPA by including in a reinstatement quote the fees and costs incurred in processing the foreclosure. Because the foreclosure statute referred only to “attorney fees and court costs” instead of “trustee fees” or “foreclosure costs,” the borrower asserted that the inclusion of the foreclosure expenses was not permitted and that doing so was a UTPA violation. The trial court agreed, and the trustee petitioned the Supreme Court for review.

On review, the court held that inclusion of the foreclosure expenses in the quote was proper and that, consistent with precedents holding that the UTPA did not apply to real property transactions, the UTPA did not apply to nonjudicial deed of trust foreclosures on real property. It rejected Bachmeier’s argument that two recent amendments had overturned this line of authority.

The 2007 Mortgage Lending Regulation Act brought certain mortgage lending practices within the UTPA but, as the foreclosure trustee did not originate mortgage loans, the amendment was inapplicable. The 2004 amendment defining “goods or services” to include those “provided in connection with … a transaction involving an indebtedness secured by a borrower’s residence” also did not help Bachmeier. The amendment’s language did not change the longstanding exclusion of real property transactions from the types of goods and services included in the UTPA. The legislative history supported this conclusion, showing that the bill including the amendment had been concerned only with telephonic solicitations. There was no suggestion that the legislature had intended to bring real estate transactions in general, or foreclosures in particular, within the UTPA.

By eliminating the ability of plaintiffs’ attorneys to recover full fees by claiming a UTPA violation, the Bachmeier decision should greatly reduce the number of frivolous foreclosure challenges in Alaska.

To view the court’s opinion, follow this link: http://www.courtrecords.alaska.gov/webdocs/opinions/ops/sp-6935.pdf.

© Copyright 2014 USFN. All rights reserved.
September e-Update

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North Carolina: Legislative Updates

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

by Jeffrey A. Bunda & Sarah D. Miranda
Hutchens Law Firm
USFN Member (North Carolina)

Unlike many states, the North Carolina General Assembly seems to be reversing the Great Recession-era trend of increasing consumer protection by, instead, repealing certain regulations and streamlining the process of liquidating distressed property. Amendments were made last year to three state statutes that are relevant to servicing loans in North Carolina.

Powers of Attorney
— The first of those changes involve the recording requirements for powers of attorney. The legislature sought to address questions about where and when a power of attorney (POA) should be recorded when the selling entity may own property in multiple counties across the state, but has its power of attorney recorded in only one county. This situation arises most often in an REO context. Under the old statute, there was no way to tell whether the conveying entity had authority to act for the principal (e.g., a servicer executing a deed) unless the conveying deed specifically referenced the deed book and page of the recorded POA. A title searcher attempting to determine if there was authority for the attorney-in-fact to sign the conveyance deed would have to search all North Carolina counties or guess at the county in which the POA might have been recorded.

N.C.G.S. Section 45-28, as re-written, provides new clarity by requiring that a POA affecting real property shall be registered in the county in which the principal is domiciled or where the real property is located. If the principal is not a NC resident, the POA may be recorded in any county in the state where the principal owns real property. If that real property lies in more than one county, the POA shall be registered in any one of those counties. The revised statute, which went into effect June 26, 2013, goes on to state that if the conveying deed is recorded in a different county other than the one where the POA is registered, the conveyance must contain the recording information for the POA in order for it to be located. It should be noted that failure to comply with the new statute does constitute an infraction; however, it will not affect the validity or enforceability of the conveyance deed from the bank to the new owner. While the practical effect of this legislation may seem onerous to servicers liquidating statewide portfolios, this legislation will cut down on REO-related inquiries, delays in closings, and even lost contracts by comforting the buyer that the attorney-in-fact indeed has authority to act for the principal.

Evictions — The next legislative amendment is important to note in the context of evictions. North Carolina House Bill 802 revised portions of the existing landlord and tenant law by shortening the time periods for judgments to be entered from previously “not in excess of ten days” to requiring judgment on the same day on which the conclusion of all the evidence and submission of legal authority occurs. In addition, the bill also shortened the time period for a landlord to dispose of personal property remaining on the premises after the landlord has been given possession. The previous ten-day period has been replaced with a shorter seven-day period to dispose of personal property remaining on the premises following lawful possession by a landlord. During the seven-day period, the landlord may move the personal property for storage purposes, but shall not throw away or otherwise dispose of such personal property prior to the expiration of the seven-day period. These changes apply to all evictions on or after September 12, 2013, and assist the servicer during the post-lockout period to promptly dispose of any personal property and transfer the asset into its REO portfolio.

COB Authority re Foreclosure Suspension — Lastly, the most dramatic reversal in North Carolina’s mortgage servicing legislation is the outright repeal as of August 23, 2013, of the Commissioner of Banks’ (COB) authority to unilaterally suspend foreclosures if it suspected that a “material violation” of law occurred with either the origination or the servicing of the loan. In 2008 and 2009, the consumer advocacy groups persuaded the General Assembly to enact sweeping reforms to existing North Carolina foreclosure and servicing law, including the adoption of the S.A.F.E. Mortgage Licensing Act. This act gave broad power to the COB to regulate previously unregulated servicers and exercise broad authority over servicing activities — especially in the context of foreclosure. N.C.G.S. Section 45-21.16B gave the commissioner the authority to prohibit the clerk of court from considering a foreclosure petition if, in its own discretion, it felt that a violation of prevailing origination and servicing law (state and federal) had occurred. This “stay” was only good for 60 days. Regardless, the law left the servicer no avenue for appeal or for due process unless it was able to persuade the commissioner’s office that, in fact, no material violation of origination or servicing law had occurred.

The program was enacted as part of the legislation that created the North Carolina State Home Foreclosure Prevention Project (SHFPP), which was in response to the subprime mortgage crisis that preceded the Great Recession in the final years of the last decade. The purpose of the SHFPP was to inform homeowners about governmental and non-profit homeownership preservation assistance. The commissioner also oversaw this program.

Shortly after the SHFPP was renewed in 2010 (and expanded to include all “home loans”), oversight of the SHFPP was transferred to the North Carolina Housing Finance Agency (HFA). The legislation that transferred the oversight of the SHFPP to the HFA, however, did not give it the power to “suspend” foreclosures. This power remained with the COB. The General Assembly recognized, though, that since the COB no longer had its hand in foreclosures, it should not have a role in deciding whether to suspend a foreclosure. Accordingly, this power, although rarely used, was removed from the COB, but the HFA did not receive it.

Conclusion — This article is meant only as a summary of some of the statutory revisions relevant to mortgage servicers, and the authors recommend that servicers contact their local NC counsel for more detailed information on how to ensure compliance with the legislative changes.

© Copyright 2014 USFN. All rights reserved.
Summer 2014 USFN Report

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The Big Switch: MSRs from Bank to Nonbanks Effects on Default Servicing

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

by Robert Schneider
Ronald R. Wolfe & Associates, P.L.
USFN Member (Florida)

Background
On February 9, 2012, the five largest mortgage servicers in existence at the time reached an agreement (National Mortgage Settlement) with the federal government and 49 states to address an array of default servicing concerns that had been raised initially by consumers, and later lawmakers. Since that time, far-reaching federal regulations (see, e.g., 2013 Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending Act (Regulation Z) Mortgage Servicing Final Rules) have been enacted and implemented, creating stringent default servicing policies regarding the handling of everything from lender-placed insurance to loss mitigation.

During this same period there has been a noticeable, parallel trend within the mortgage servicing industry to shift mortgage servicing rights (MSRs) of residential mortgages from these very same large bank servicers to nonbank servicers. While such moves may have initially gone relatively unnoticed, nonbank servicers and those traditional banks transferring servicing rights to them, have come under regulatory and political scrutiny due to the transfer of MSRs.

Most of the servicers subject to the National Mortgage Settlement continue to maintain large servicing portfolios. That being said, nonbank servicers’ portfolios no longer pale in comparison. In 2011, the ten largest mortgage servicers were traditional banks, whereas four of the top ten servicers by portfolio size are now nonbanks. Due to this recent and relatively rapid MSR acquisition, along with the retreat of some banks from residential mortgage servicing, nonbank servicers are experiencing growth. With this growth, however, come unavoidable growing pains.

Loss Mitigation Implications

The CFPB’s regulatory effects on loss mitigation, generally, have been explored at length in other USFN articles (see, e.g., CFPB: Mortgage Servicing Final Rules – Loss Mitigation by Andrew Saag in this edition of the USFN Report, as well as CFPB Amendments to the 2013 Mortgage Rules by Donna Case-Rossato and Wendy Walter, and CFPB: Mortgage Servicing Final Rules under RESPA (Reg X) by Wendy Walter). Still, the applicability of those loss mitigation rules may come into question, for example, when a loan service releases after a short sale has been approved, or a service transfer occurs after the borrower has submitted documents for modification review.

In the case of a modification, federal regulations dictate that the transferee servicer must have policies and procedures in place to identify whether a modification agreement exists, but the transferee servicer is still largely dependent on the transferor servicer to provide sufficient information such that it can determine whether or not a loan should still be placed on a loss mitigation hold. Even more commonplace are the issues that arise when a transferee servicer is generally aware of loss mitigation activity between the prior servicer and the borrower, subjecting the loan to a CFPB hold, but is not in possession of proof of loss mitigation from the transferor servicer such that a court would be willing to continue a final hearing and allow loss mitigation activity to occur without a final dismissal of a pending foreclosure. These issues are becoming more prevalent and may result in misunderstandings that become the subject of litigation.

Litigation Implications

What transferee servicers are even more likely to encounter are new defenses being raised in litigation, solely on the basis of the transfer of MSRs. In judicial states like Florida, many cases have been delayed through litigation for years, and courts are often setting aged cases for trial on the court’s own volition. This can present a problem when the servicing rights for a delinquent loan transfer to a new servicer anywhere from a few months to only a few days before trial.

At trial, whether the action was filed in the name of the servicer or the loan’s investor, it is often the servicer that will provide a representative to testify regarding the delinquent status of the loan. Given that the servicer will be called upon to testify regarding not only the total amount due but also the fulfillment of conditions precedent, and the ability of it or the investor to bring the action, this can become rather difficult when limited information is available to the acquiring servicer. (See. e.g., Hunter v. Aurora Loan Services, LLC, 2014 WL 1665739 (Fla. 1st DCA 2014)). From a practical perspective, such late transfers are also likely to put a strain on the travel schedules of the acquiring servicer’s representatives.

In a perfect world, litigation issues emanating solely from the transfer itself (i.e., a witness’s knowledge of the creation and maintenance of the loan records) would be resolved through cooperation between the releasing and acquiring servicer. By simply having the prior servicer present at a trial or an evidentiary hearing to testify regarding what that servicer’s records show with respect to the amounts due and owing could make up for the lack of knowledge of the new servicer. In reality, however, most MSR sales present a relatively clean break for the transferor servicer, requiring the transferee servicer to sometimes settle matters set for final hearing on the basis that it lacks the necessary information to prosecute a pre-existing foreclosure.

Political and Financial Implications

On a much larger scale, what nonbank servicers and traditional bank servicers will likely encounter for the remainder of 2014 and beyond is increased political scrutiny. New York, no stranger to the politics of foreclosure and mortgage servicing, wasted little time before publicly calling into question the trend of traditional banks transferring MSRs to nonbanks. On February 12, 2014, the Superintendent of Financial Services for the State of New York spoke at the New York Bankers Association Annual Meeting. The view elucidated by the superintendent about the trend of nonbank MSR acquisitions, when painted in the best light, can be described as apprehensive. In the most genuine light, it can better be described as distrustful. Superintendent Lawsky has called the trend “troubling” and took issue with what he viewed as “disproportionately distressed” servicing portfolios of nonbank servicers who “cut corners.”

While Lawsky’s stated belief of the cause of the trend is relatively undisputed (the creation of more demanding capital requirements for traditional banks already holding mortgage servicing rights), his provocative statements make clear that he and others like him will be scrutinizing the transfer of MSRs and will be vocal as they do so. He stated that he viewed the trend as an “extraordinarily challenging issue” that his office “must confront.” Lawsky made good on his statements when he effectively halted a $39 billion MSR transfer between a traditional bank and a nonbank two weeks later. That transfer remains in limbo at the time of this writing.

Conclusion
Every industry goes through changes and the mortgage servicing industry is clearly no exception. After the Great Recession, the United States financial industry, and the mortgage servicing industry in particular, were understandably subjected to increased regulation and scrutiny. It appears, however, that even as servicers exit the industry or scale back on their servicing involvement, they will still be very much under the microscope of the regulatory and political powers.

© Copyright 2014 USFN. All rights reserved.
Summer 2014 USFN Report

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The Continuing Saga of Eminent Domain of Mortgages By Local Governments in California

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

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

The concept of eminent domain being used by local governments in California to seize underwater mortgages began in 2012. This concept was created not by local governments, but by a private entity named Mortgage Resolution Partners (MRP). The concept was to have local governments use eminent domain to seize underwater mortgages, permit private investors to purchase an existing mortgage at a discounted rate and then create a new mortgage at the reduced amount thus reducing the payment for the borrower. MRP spearheaded this concept due to the number of foreclosures that might result in vacant properties which, in turn, would blight local communities. Although on the surface it may seem that this concept was for the betterment of the public, in actuality this “concept” appears to be a private entity taking private property for a private use.

The True Meaning of Eminent Domain

California Constitution Article I § 19 grants state and local governments the power of eminent domain, where private property is taken for public use upon payment of just compensation. Typically eminent domain is used to take over structures to clear the path for a highway, road, public school, post office, fire department, library, or other structure for use by the public. This section also enables state or local governments to exercise the power of eminent domain for the purpose of protecting public health and safety, preventing serious criminal activity, responding to an emergency, or remedying environmental contamination that poses a threat to public health and safety.

This section does not, however, grant the power to state or local governments to exercise the power of eminent domain for the purpose of taking private property for private use. Furthermore, this section does not allow a local government to use the power of eminent domain to strong-arm lenders to take less than just compensation for the sale of its loans even if such sale were to result in the owner of a residence being allowed to remain in the property. Nor does it allow a private entity to facilitate a new mortgage with lower payments for the owner, obtain closing fees, and then share fees with the local government that used the power of eminent domain to enable the taking.

California Statute Governing Eminent Domain

Pursuant to California Code of Civil Procedure § 1240.030, the power of eminent domain may be exercised to acquire property for a proposed project only if all of the following are established: (a) The public interest and necessity require the project; (b) The project is planned or located in the manner that will be most compatible with the greatest public good and the least private injury; and (c) The property sought to be acquired is necessary for the project.

As indicated above, although the justification indicated for using eminent domain is to avoid blight in the community, which is a public purpose, the taking of an underwater mortgage ultimately benefits the owner of the private property and not the public as a whole. Therefore, what MRP and the local governments are attempting to do by using eminent domain does not meet the requirements of CCP § 1240.030.

San Bernardino County
The attempt to use eminent domain powers by local governments is not new to California. MRP first approached the County of San Bernardino with this proposal. The county formed a joint-powers authority with the cities of Ontario and Fontana in order to consider MRP’s proposal. Once the news was out about MRP’s proposal, numerous industry groups including the American Bankers Association, the California Bankers Association, and the Mortgage Bankers Association, banded together to oppose this proposal. Furthermore, U.S. Rep. John Campbell (R-Irvine, CA) introduced legislation to prohibit government sponsored entities (GSEs) from purchasing or guaranteeing loans in counties or cities that use eminent domain to seize underwater mortgages. On August 9, 2012, the Federal Housing Finance Administration said it “has significant concerns about the use of eminent domain to revise existing financial contracts, the resulting loss of which will ultimately be borne by the taxpayers and would have a chilling effect on the extension of credit to borrowers and investors.” As a result of this tremendous outcry, the JPA decided against considering MRP’s proposal.

City of Richmond
When San Bernardino County decided against MRP’s proposal, and due to the impending federal legislation, MRP set its sights on the city of Richmond, California. Richmond’s seizure program is limited to loans held by residential mortgage-backed securitization trusts (RMBS Trusts) and excludes GSEs and loans held by banks. This is to minimize opposition from local banks and federal agencies and target only performing loans that were under water. The seizure program is intended to assist homeowners at risk of defaulting on their mortgage loans and thereby somehow avoid urban blight. However, as indicated above, the target is “performing loans.” In actuality, it is intended to generate significant sums for MRP and its investors with payment to the city in exchange for the use of its eminent domain powers, and will likely generate private benefits for the homeowners selected. The seizure program conflicts with federal power under the Commerce Clause. It runs afoul of the Contracts Clause. In effect, the city seeks to abrogate debts of its citizens owed to out-of-town entities and permit a local speculator to reap the profits.

The city of Richmond contacted the RMBS Trusts, proposing to purchase the mortgages at 80 percent of the fair market value. When the RMBS Trusts declined, the Richmond’s mayor sent a letter to the RMBS Trusts on July 31, 2013, stating that if the financial institutions do not cooperate, the city will seize the loans using eminent domain in the following fashion: (1) have a condemnation hearing; (2) file an eminent domain suit in California; and (3) use an expedited procedure known as “quick take” to obtain a court order giving the city possession of the loans. As a result of the threatened action, the securitized trusts of Wells Fargo Bank and Deutsche Bank filed a lawsuit seeking injunctive and declaratory relief against the city of Richmond in the U.S. District Court for the Northern District of California. A similar suit was filed by the securitization trust of Bank of New York Mellon. Unfortunately, these cases were both dismissed within two months of the filing. The court held that a claim is not ripe if it rests on “contingent future events that may not occur.” Furthermore, it held that the Fifth Amendment taking claim asserted by the RMBS Trusts was premature until the government had in fact taken something and denied just compensation. The RMBS Trusts filed appeals in the U.S. Court of Appeals for the Ninth Circuit, which were consolidated by the court; however, the appeals were dismissed on May 21, 2014.

The city of Richmond is one vote short of approving the MRP proposal. There are several other municipalities (North Las Vegas, NV; El Monte, CA; La Puente, CA; Orange Cove, CA; Pomona, CA; and San Joaquin, CA) and likely more in further states, that are waiting to hear whether the city of Richmond proceeds with its efforts to exercise its powers of eminent domain. Until then, the saga of eminent domain of mortgages by local governments in California will continue.

© Copyright 2014 USFN. All rights reserved.
Summer 2014 USFN Report

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HOA Talk: Connecticut: Special Assessments Part of Priority Debt?

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

by James Donohue
Bendett & McHugh, P.C.
USFN Member (Connecticut, Maine, Vermont)

The question before the court in Cedarwood Hill Estate Condo. Ass’n v. Danise, 57 Conn. L. Rptr. 164 (Nov. 8, 2013), was whether “special assessments” should be considered part of the priority debt as defined by C.G.S. § 47-258(b) and modified by Public Act 13-156.

In Connecticut, § 47-258(b) gives an HOA a priority debt over a first or a second mortgage. Public Act 13-156, which became effective in June 2013, inter alia, specifically excludes late fees, interest, or fines from the calculation of the priority debt. The Act also extends the priority to include nine months of common expense assessments based on the periodic budget adopted by the association from the previous amount of six months. As noted in the court’s decision, “common expense assessments” is not defined in § 47-258(b). While the plaintiff HOA asserted that special assessments are adopted by the association as part of the periodic budget and, therefore, are includable in the priority debt, the defendant mortgagee contended that special assessments fall under other assessments, which do not enjoy the priority status.

The court stated “late fees, interest, and fines are excluded by the new language of the Public Act, and they do not otherwise appear to meet the common sense definition of common expense assessments based on a budget adopted at least annually by the association.” The court then went on to say “[t]his categorical difference supports the plaintiff’s position that the special assessments in this case, which are common to all unit owners, are common expense assessments for the purposes of § 47-258(b).”

At the initial judgment hearing, the court found that the affidavit of debt provided by the plaintiff was insufficient and denied the judgment without prejudice. After argument, the plaintiff submitted an updated affidavit, which specifically asserted that the special assessments were adopted as part of the annual budget. The court then granted judgment to the plaintiff, finding the priority debt to include the special assessments.

While not all assessments may be included in the nine-month priority, when an HOA can provide evidence that the assessment was approved as part of the annual budget process and is assessed as to all units, it can be part of the priority calculation. As the priority debt is the payment needed for a defendant mortgagee to redeem the property in the HOA’s foreclosure action, it is beneficial to review affidavits of debt carefully so as not to be overcharged.

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Summer 2014 USFN Report

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Connecticut: Public Act 14-89

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

by Robert Wichowski and David Borrino
Bendett & McHugh, P.C.
USFN Member (Connecticut, Maine, Vermont)

Connecticut Public Act 14-89 (formerly House Bill 5353) (the Act) has been signed into law. The Act will significantly affect the business of mortgage servicing in Connecticut. The Connecticut Department of Banking was the impetus for legislative adoption of the Act, which is formally entitled, “An Act Concerning Mortgage Servicers, Connecticut Financial Institutions, Consumer Credit Licenses, The Foreclosure Mediation Program, Minor Revisions to the Banking Statutes, The Modernization of Corporation Law and Reverse Mortgage Transactions.”

The Act creates licensing, reporting, bonding, a code of conduct, and other requirements for mortgage servicers. It also extends the sunset date for the state’s mediation program into 2016 and creates a task force to examine reverse mortgages (home equity conversion mortgages). A copy of the full text of the Act can be found here: http://www.cga.ct.gov/2014/act/pa/pdf/2014PA-00089-R00HB-05353-PA.pdf.

Mortgage Servicing Licensing and Regulation

Section 4 of the Act requires, as of January 1, 2015, any entity that services mortgages in Connecticut that is not a federally-insured bank, out-of-state bank, credit union or federal credit union (or any wholly owned subsidiary), or that is not licensed as a mortgage lender or mortgage correspondent lender in Connecticut to obtain a license to continue to service mortgages in Connecticut.

Section 5 sets forth licensing prerequisites. To obtain a license, an entity needs to have a “qualified person” at its main office and each branch office. A qualified person is required to have supervisory authority at the office location and to have had at least three years’ experience in the mortgage servicing business within the five years immediately preceding the application. Experience in the mortgage servicing business is defined as paid experience in the: (1) servicing of mortgage loans; (2) accounting, receipt, and processing of payments on behalf of mortgagees or creditors; (3) supervision of such activities or (4) any other experience as determined by the Connecticut Commissioner of Banking (Commissioner). No person with any supervisory authority at the office for which the license is sought can have been convicted of, or pled guilty or no contest to, in a domestic, foreign or military court: (1) a felony within the seven years prior to the application; or (2) a felony involving fraud, dishonesty, breach of trust, or money laundering at any time. An applicant shall demonstrate the financial responsibility, character, and general fitness of any person who shall have supervisory authority at the office for which the license is sought. The applicant will need to provide a statement specifying the duties and responsibilities of the person’s employment including dates of employment and contact information of a supervisor, and an employer or business reference (if self-employed). The Act also allows the Commissioner to conduct criminal and background checks and requires fingerprints be submitted. There is an application fee of $1,000, which is required to be submitted with the application. (All fees required by the Act are non-refundable.) The Act also provides for automatic license suspension after notice from the Commissioner.

Section 6 contains filing requirements. The Act institutes an annual filing requirement for mortgage loan servicers. At least annually, the servicer shall file with the Commissioner a schedule of the ranges of costs and fees it charges mortgagors for its servicing-related activities and a report detailing a mortgage servicer’s activities in the state including the following: (1) the number of residential loans serviced; (2) the type and characteristics of the loans; (3) the number of serviced loans in default with a breakdown of 30-, 60-, and 90-day delinquencies; (4) information on loss mitigation activities, with details on workout arraignments undertaken; and (5) information on foreclosures commenced in the state.

Additionally, the servicer must notify the Commissioner at least 30 days prior to the servicer changing its name and provide an endorsement, amendment, or rider to the bond, and evidence of errors & omissions insurance. Also, the servicer must notify the Commissioner within five business days of any of the following: (1) Files for bankruptcy or consummates a corporate restructuring; (2) Is criminally indicted, or receives notice that any of its officers, directors, members, partners, or shareholders owning 10 percent or more of its outstanding stock is indicted for, or convicted of, a felony; (3) Receives notice of the institution against it of license denial, cease and desist, suspension or revocation procedures, or other formal or informal regulatory action by any governmental agency and the reasons for the action; (4) Receives notice that the attorney general of this or any other state has initiated an action, presumably against the licensee, and the reasons for it; (5) Knows that its status as an approved seller or servicer has been suspended or terminated by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation or Government National Mortgage Association; (6) Receives notice that certain of its servicing rights will be rescinded or cancelled, and the reasons why; (7) Receives notice that any of its officers, directors, members, partners, or shareholders owning 10 percent or more of its outstanding stock has filed for bankruptcy; or (8) Receives notice of a consumer class action lawsuit against it that is related to the operation of the licensed business.

Section 7 contains license terms and fees and provides that each license will expire on December 31 of the year that it is issued, unless renewed. If the license is approved on or after November 1, the license will expire December 31 of the following year. The Act specifies that an application for license renewal must be filed between November 1 and December 31 of the year in which the license expires.

Section 8, effective October 1, 2014, requires every mortgage servicer applicant or licensee and specified mortgage lending licensee to file with the Commissioner, a surety bond, a fidelity bond and evidence of errors and omissions coverage. The surety bond must be in the amount of $100,000 per office location and run concurrently with the term of the mortgage servicing license. The surety bond must be conditioned on the applicant faithfully performing any and all written agreements with or for the benefit of mortgagors and mortgagees; faithfully accounting for all funds received in connection with mortgage servicing operations and complying with the law.

The fidelity bond and errors and omissions coverage must include the Commissioner as an additional loss payee. The amount of the bond and coverage is based on the servicer’s volume of servicing as reported to the Commissioner.

Section 9, effective October 1, 2014, requires every mortgage servicer licensee and specified mortgage lending licensee maintain adequate records of each loan, or make such records available at the request of the Commissioner and requires that such records be maintained for at least two years after the loan has been service released or paid off. The records can be presented to the Commissioner at his office, or mailed registered or certified or sent via any express delivery carrier that provides a dated delivery receipt, within five days of such request by the Commissioner. The records shall include: (1) an itemized loan history; (2) the original or an exact copy of the note, mortgage, or other evidence of the debt; (3) the name and address of the mortgage lender, mortgage correspondent lender, and mortgage broker, if any; (4) copies of any state- or federally-required disclosures or notifications; (5) a copy of any approved bankruptcy plan, (6) a communications log, and (7) a copy of any notices sent to the mortgagor related to any foreclosure proceeding.

Section 10, effective January 1, 2015, provides that, upon assignment of servicing rights of a residential mortgage loan, the mortgage servicer must disclose to the mortgagor any required RESPA or TILA notice, together with a schedule of the ranges and categories of its costs and fees for its servicing-related activities.

Section 11, also effective January 1, 2015, obligates mortgage servicers to comply with all applicable federal laws and regulations relating to mortgage loan servicing, in addition to any other remedies; failure to do so may be grounds for the Commissioner to take enforcement action under Section 15 of the Act (see below).

Section 12 institutes a requirement that a mortgage servicer shall maintain a schedule of fees and costs that it charges mortgagors for servicing-related activities. In instances where there is no set fee, the schedule shall contain a range of fees. Section 12 also imposes a restriction on mortgage servicers from imposing a late fee or delinquency charge when the only delinquency is attributable to a late fee or delinquency charge on an earlier payment when such payment would have been a full payment but for such charges. Section 12 is effective on January 1, 2015.

Section 13, effective January 1, 2015, establishes a code of conduct for mortgage servicers. (See the discussion of section 17 below and the statutory ambiguity as to which entities are exempted from provisions of section 13.) Section 13 sets forth a list of 19 categories of prohibited conduct by mortgage servicers, including:

  1. Misleading mortgagors directly or indirectly or defrauding any person;
  2. Engaging in unfair or deceptive practices either through action, omission, or misrepresentation;
  3. Obtaining property by fraud or misrepresentation;
  4. Knowingly or recklessly misapplying payments to the outstanding balance;
  5. Knowingly or recklessly misapplying payments to an escrow account;
  6. Placing insurance on the mortgaged property when the servicer knows or has reason to know the mortgagor has an effective policy for such insurance;
  7. Failing to timely comply with a request for payoff or reinstatement;
  8. Knowingly or recklessly misreporting to a credit bureau;
  9. Failing to report payment history to a credit bureau at least annually;
  10. Collecting PMI beyond the date that PMI is required;
  11. Failing to properly or timely release a mortgage;
  12. Failing to notify a mortgagor of force-placed insurance;
  13. Placing force-placed insurance in an amount that exceeds the replacement cost of the improvements;
  14. Failing to provide to the mortgagor a refund of force-placed insurance if the mortgagor provides reasonable proof that the force-placed policy is not required;
  15. Requiring remittance of funds in a method more costly than a bank or certified check;
  16. Refusing to communicate with a mortgagor’s authorized representative;
  17. If required to hold a mortgage servicing license, conducting any business as a mortgage servicer without a license;
  18. Negligently or wilfully making a false statement to a government agency; and
  19. Attempting to charge or collect a fee that is prohibited.


Sections 14, 15, and16, effective October 1, 2014, grant to the Commissioner the authority and power to conduct broad investigations and examinations, including the ability to view and inspect records and documents and compel the presentation of records and attendance of individuals whose testimony may be required about residential loans. The Commissioner may suspend, revoke, or refuse to renew any mortgage servicer license after investigation and a finding that the mortgage servicer: (1) made a material misstatement on the application; (2) committed any fraud, misrepresentation, or misappropriation of funds; (3) violated any provision of the banking laws; or (4) failed to perform any agreement with a mortgagee or mortgagor.

Section 17 clearly provides, from its effective date of October 1, 2014, an exemption from sections 5 through 13 of the Act for: (1) mortgage and correspondent lenders servicing their own loans; (2) any entity servicing five or fewer loans in any 12 consecutive months; and (3) any agency of the federal, state, or municipal government. There is, however, complete ambiguity as to whether an exemption is also granted to any entity exempted from licensure under Section 4(b)(1), (2), and(3) of the Act, which includes federally insured banks, out-of-state banks, state and federal credit unions, and wholly-owned subsidiaries of such banks or credit unions. Section 17 of the Act states that such entities are exempted from sections 5 to 13, inclusive, of the Act; however, Section 4(c) expressly provides that sections 10 through 13, inclusive, applies to any entity acting as a mortgage servicer in Connecticut on or after January 1, 2015, even those exempted from licensure under section 4(b).

Mediation and Reverse Mortgages
Sections 38 and 46 extend the Connecticut Court-Annexed mediation program until 2016. Under the current statute, the program was set to expire in 2014. Also, effective as of October 1, 2014, the Act, section 37, institutes a “premediation review protocol” where the judicial foreclosure mediator can re-request any documents that are incomplete or otherwise likely to be rejected by a foreclosing plaintiff, which potentially may increase the number of productive first or second mediation sessions. Section 51 creates a task force for the purpose of examining the reverse mortgage industry in Connecticut.

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Summer 2014 USFN Report

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Connecticut: New Form of Foreclosure

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

by Adam Bendett
Bendett & McHugh, P.C.
USFN Member (Connecticut, Maine, Vermont)

By virtue of Connecticut Public Act 14-84, An Act Concerning an Optional Method of Foreclosure (Act), Connecticut foreclosure procedure will change in a significant way. The two most practical effects of the Act are that it requires a new 60-day foreclosure notice as well as another affidavit that must be filed as a condition of “first legal.” The effective date is January 1, 2015, so this will provide additional time for mortgage servicers to prepare any necessary templates and processes. In short, the Act will create an optional method of foreclosure: a foreclosure by market sale, which is summarized below.

Required 60-Day Notice
— Effective January 1, 2015, a mortgagee (defined as the owner or servicer of the debt secured by the mortgage) who elects to foreclose on a residential first mortgage loan will be required to give a pre-foreclosure notice to a “mortgagor.” A “mortgagor” is defined as a borrower who occupies the subject residential property as a principal residence, the appraised value of which property, less any prior liens, is less than the subject mortgage debt. Such notice may be combined and delivered at the same time as any other notice, including the correct notice under the Emergency Mortgage Assistance Program (EMAP notice).

Similar to the EMAP notice, the notice must be sent by certified or registered mail to the property address. In addition, the notice must advise the mortgagor of the right to contact the mortgagee to discuss whether the property may be marketed for sale by a listing agreement under the Act by mutual consent of the mortgagor and mortgagee. The notice must also advise the mortgagor as follows:

(1) of the mailing address, telephone number, facsimile number, and electronic mail address that should be used to contact the mortgagee;
(2) of a date not less than 60 days after the date of such notice by which the mortgagor must initiate such contact, with contemporaneous confirmation in writing of the election to pursue such option sent to the designated mailing address or electronic mail address of the mortgagee;
(3) that the mortgagor should contact a real estate agent licensed under the Connecticut General Statutes to discuss the feasibility of listing the property for sale pursuant to the foreclosure by market sale process;
(4) that, if the mortgagor and mortgagee both agree to proceed with further discussions concerning an acceptable listing agreement, the mortgagor must first permit an appraisal to be obtained in accordance with the Act for purposes of verifying eligibility for foreclosure by market sale;
(5) that the appraisal will require both an interior and exterior inspection of the property;
(6) that the terms and conditions of the listing agreement, including the duration and listing price, must be acceptable to both the mortgagee and mortgagor;
(7) that the terms and conditions of any offer to purchase, including the purchase price and any contingencies, must be acceptable to both the mortgagor and mortgagee;
(8) that, if an acceptable offer is received, the mortgagor will sign an agreement to sell the property through a foreclosure by market sale; and
(9) in bold print and at least ten-point font, that, if the mortgagor consents to a foreclosure by market sale, the mortgagor will not be eligible for foreclosure mediation in any type of foreclosure action that is commenced following the giving of such consent.

Note that due to the manner in which “mortgagor” is defined in the Act, the notice only seems to be required in situations where there is no equity in the subject property above the mortgagee’s lien. However, it may be difficult to determine the equity position prior to sending the notice, and it appears an appraisal would be required as well, so it may be more practical to send the notice to all borrowers of residential first mortgages who occupy the property as their principal residence and combine it with the current EMAP notice or combined demand letter/EMAP notice.

The Affidavit Requirement — After expiration of the notice period provided in the required notice, the foreclosure may proceed only if the mortgagee files an affidavit stating that the notice provisions of the Act have been complied with and either the mortgagor failed to confirm an election to participate in the foreclosure by market sale by the deadline set forth in the notice, or that discussions were initiated but —

(1) the mortgagee and mortgagor were unable to reach a mutually acceptable agreement to proceed;
(2) based on the appraisal obtained pursuant to the Act, the property does not appear to be subject to a mortgage that is eligible for foreclosure by market sale;
(3) the mortgagor did not grant reasonable interior access for the appraisal required by the Act;
(4) the mortgagee and mortgagor were unable to reach an agreement as to a mutually acceptable listing agreement pursuant to the Act;
(5) a listing agreement was executed, but no offers to purchase were received;
(6) an offer or offers were received, but were unacceptable to either or both the mortgagee and mortgagor; or
(7) other circumstances exist that would allow the mortgagee or mortgagor to elect not to proceed with a foreclosure by market sale pursuant to the Act and other sections of the Connecticut General Statutes.

Importantly, it should be noted that the Act does state that nothing shall be interpreted as requiring the mortgagor or mortgagee to participate in further discussions.

The Appraisal Requirement, Listing Agreement, and the Contract
— If discussions are pursued regarding a foreclosure by market sale, the mortgagee shall have an appraisal performed by a licensed Connecticut appraiser, and the mortgagor shall promptly provide both interior and exterior access to the property. If the appraisal indicates the mortgage is eligible for a foreclosure by market sale (there is no equity in the property after the mortgagee’s lien), the mortgagor and mortgagee may reach an agreement concerning the listing of the property. The listing agreement will require that all offers be communicated to the mortgagor and mortgagee as soon as practicable. The mortgagee must provide a name, mailing address, telephone number, fax number, and email address to be used to report offers to the mortgagee. The mortgagee may not require a particular licensee or group of licensees as a condition of approving a listing agreement. Please note that the Act provides that nothing requires any party to reach an agreement on an acceptable listing agreement.

If a listing agreement is executed pursuant to the Act, and an offer is received that is acceptable to both the mortgagor and mortgagee, the mortgagor shall execute a contract for sale with the purchaser on those terms, which will include that the offer is contingent upon the completion of the foreclosure by market sale in accordance with the Act. If the offer is acceptable to the mortgagor but is not acceptable to the mortgagee, the mortgagee shall issue a written notice of its decision, which shall include the general reason for the decision. After execution of the contract, the mortgagor will provide the same to the mortgagee within five days along with written consent to the foreclosure by market sale. The Act specifically imposes no duty on either party to accept any offer made.

Procedure for Foreclosure by Market Sale
— Not later than 30 days after the receipt of the contract and consent, or the satisfaction of all contingencies in the contract, whichever is later, the foreclosure may be commenced. The foreclosure complaint shall contain a copy of the contract and the appraisal acquired pursuant to the Act.

Ten days following the return date, the mortgagee may move for foreclosure by market sale. Thereafter, the court, with consent of the mortgagor, may order a foreclosure by market sale. The only issues at the hearing are to be the finding of the fair market value of the property and of any priority liens, a determination of the fees and costs of the sale (including any broker’s commission), the person appointed by the court to make the sale, the costs and expenses of the purchaser of the property, and the mortgagee’s debt, as well as whether the debt and priority liens exceed the fair market value of the property.

Note that it is unclear how the court would determine the purchaser’s costs and expenses, which is a required finding. Also, it is assumed that the person appointed to sell the property would be similar to a committee of sale that is presently ordered in a foreclosure by sale in Connecticut, who is typically a local attorney. This will be an extra expense to, presumably, be deducted from the sale proceeds.

After the sale takes place, the procedure will be similar to the current foreclosure by sale process in Connecticut. The sale proceeds will be deposited in the court and the plaintiff will have to file a motion for supplemental judgment, have the motion granted by the court at a hearing calendar, and await expiration of the 20-day appeal period before the court will be able to disperse the sale proceeds, after netting out the approved costs of sale.

If the mortgagor consents to a foreclosure by market sale, the mortgagor is not eligible for foreclosure mediation. However, if the court denies the motion for a foreclosure by market sale, or circumstances develop that make it reasonably likely that a sale will not be consummated under the Act, the mortgagor may, if otherwise eligible, apply for foreclosure mediation, provided the mortgagor did not substantially contribute to the court’s denial. In determining whether foreclosure mediation will be allowed, the court shall consider whether the petition for mediation is motivated primarily by a desire to delay entry of a judgment of foreclosure and if it is highly probable the parties will be able to reach an agreement through mediation. Also, in such a situation, the mortgagee will have the right to request another form of foreclosure judgment.

If a foreclosure by market sale is granted, the court will schedule not later than 30 days from the date of judgment, right of first refusal law days for defendants that hold subsequent encumbrances in the inverse order of priority, at which time they can tender the purchase price to the person appointed to make the sale to preserve their lien and acquire the property. If a subordinate lienholder takes no action, its lien will be extinguished. If a lienholder purchases the property as aforesaid, the purchaser in the contract will be entitled to reimbursement, from the proceeds of the market sale, of the fees and costs associated with the contract that have been determined by the court.

Please note that there appears to be a technical error in the Act in this regard, as it seems to give subsequent defendant lienholders a superior right to prior lienholders who are also defendants, as it does not state the subsequent lienholder that takes title in this manner would take such title to the property subject to the rights of defendants in the action (other than the plaintiff), with prior liens, who did not have an opportunity to exercise a right of first refusal under this statutory scheme. This may cause the Act to be constitutionally suspect. Another issue with the Act is that it states that the purchaser takes title to the property free and clear of all parties to the action. It does not state that the purchaser takes the property free and clear of any liens filed after the lis pendens. Therefore, such a post lis pendens-filed lien could have the effect of disrupting the closing of transfer of title to the purchaser, like it would in a typical real estate transaction.

It should also be noted that property transferred by this method will not be subject to state conveyance taxes. Additionally, the provision of the current statute that provides a reduction in the deficiency judgment for any party filing a motion for foreclosure by sale does not apply to this type of foreclosure.

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CFPB Mortgage Servicing Rules — Loss Mitigation Procedures upon Receipt of a CLMP

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

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

The mortgage servicing rules that went into effect in January 2014 established new rules and restrictions with respect to loss mitigation procedures during the foreclosure process. Discussed here are the procedures by which a mortgage servicer should operate upon receipt of a complete loss mitigation package (CLMP).

What is a CLMP?
The new rules do not specifically define what constitutes a CLMP. Instead, a CLMP means that the servicer has received all information requested from the borrower that is within the borrower’s control. If documents are requested from the borrower that are not in the borrower’s control, the application should be considered complete even if these documents are omitted. While the servicer is not required to supplement the loss mitigation package sent by the borrower, the servicer should exercise reasonable diligence in obtaining documents and information to complete a loss mitigation application.

What to do with a CLMP?
If a servicer receives a CLMP 45 days or more prior to the scheduled foreclosure sale, the servicer must notify the borrower in writing within five business days after receiving the CLMP that the loss mitigation package is complete. The notice must also contain a statement that the borrower should consider contacting servicers of any other mortgage loans secured by the same property to discuss available loss mitigation options.

If the CLMP is received more than 37 days prior to the scheduled foreclosure sale, the servicer must evaluate the borrower for all loss mitigation options available to the borrower, and provide the borrower with notice in writing stating the servicer’s determination of which loss mitigation options, if any, it will offer to the borrower. This evaluation and response must be completed within 30 days of receiving a borrower’s CLMP. If a CLMP is received less than 37 days prior to the scheduled foreclosure sale, the servicer is not required to comply with the loss mitigation rules.

What to not do once a CLMP is received?
If a borrower submits a CLMP prior to the first notice or filing required by applicable law, the servicer must not commence the foreclosure process unless: (1) the servicer notifies the borrower that the borrower is not eligible for any loss mitigation option and the appeal process has been exhausted. [The appeals process can be exhausted if the appeals process is not applicable, the borrower has not timely requested an appeal, or the borrower’s appeal has been denied.]; (2) a borrower rejects all loss mitigation options; or (3) a borrower fails to comply with the terms of a loss mitigation option. If the borrower submits a CLMP after the first notice or the first filing required by law but more than 37 days prior to the scheduled foreclosure sale, a servicer may not move for foreclosure judgment or order of sale, or conduct a foreclosure sale unless one of the above-referenced exceptions is satisfied.

Where foreclosure procedure requires a court action or proceeding, a document is considered the first notice or filing if it is the earliest document required to be filed with a court or other judicial body to commence the action or proceeding. Where foreclosure procedure does not require an action or court proceeding (such as under a power of sale), a document is considered the first notice or filing if it is the earliest document required to be recorded or published to initiate the foreclosure process. The comments to the rule indicate that nothing in the rules prohibit a servicer from proceeding with the foreclosure process, including any publication, arbitration, or mediation requirements when the first notice or filing for a foreclosure proceeding occurred before a servicer receives a CLMP so long as any such steps do not cause or directly result in the issuance of a foreclosure judgment or order of sale, or the conducting of a foreclosure sale.

The comments to the rule also state “[t]he prohibition on a servicer moving for judgment or order of sale includes making dispositive motion for foreclosure judgment, such as a motion for default, judgment on the pleadings, or summary judgment, which may directly result in a judgment of foreclosure or order of sale. A servicer that has made any such motion before receiving a CLMP has not moved for a foreclosure judgment or order of sale if the servicer takes reasonable steps to avoid a ruling on such motion or issuance of such order prior to completing the procedures required by Section 1024.41, notwithstanding whether any such action successfully avoids a ruling on a dispositive motion or issuance of an order of sale.”

What if borrower is offered a loss mitigation option?
The rules set forth specific timing requirements with respect to how long borrowers have to accept loss mitigation options. If a CLMP is received 90 days or more prior to the scheduled foreclosure sale, a servicer must allow the borrower at least 14 days to accept or reject the offer. If a CLMP is received less than 90 days but more than 37 days prior to the scheduled foreclosure sale, a servicer must allow the borrower at least seven days to accept or reject the offer. Except as discussed in the paragraph below, if the borrower doesn’t respond within the deadline, the servicer may deem the borrower’s non-responsiveness as a rejection of the offer.

If the borrower does not timely respond to a loss mitigation offer or fails to satisfy the servicer’s requirements for accepting a modification offer, but submits payments required by the modification offer within the deadline, the servicer must give the borrower a reasonable period of time to fulfill any remaining requirements. In addition, if an appeal is available and the borrower timely appeals the decision, the servicer must extend the deadline for accepting a loss mitigation option until 14 days after the servicer provides notice regarding how the appeal was resolved.

What if borrower is denied loss mitigation options?
The servicer must send a notice to the borrower outlining the reasons why each loss mitigation option was denied. For instance, if the servicer reviews a borrower for three loss mitigation options and two of those options are denied, the notice must contain specific reasons as to why the borrower was denied the two options. If the borrower has a right to appeal the decision, the notice must also state that the borrower may appeal the servicer’s determination for any denial, the deadline for the borrower to make an appeal, and any requirements for making an appeal. If a denial is based on a net present value calculation, the notice must include specific inputs used in the net present value calculation. Note also that, in most cases, if a denial is based upon a requirement of an owner or assignee of the loan, the notice must identify the owner or assignee of the loan and the requirement upon which the denial is based.

Borrower’s Appeal Rights
If a CLMP is received 90 days or more prior to the scheduled foreclosure sale or before a foreclosure sale is scheduled, a borrower is permitted to make an appeal within 14 days after the servicer provides notification of any loss mitigation decisions. The appeal must be reviewed by different personnel than those who reviewed the borrower’s initial CLMP. Supervisors who are responsible for oversight of the personnel that conduct the initial review are permitted to review an appeal so long as they were not directly involved with the initial evaluation of the borrower’s CLMP.

The servicer must notify the borrower, stating the servicer’s determination of whether the servicer will offer the borrower a loss mitigation option based upon the appeal, within 30 days of the borrower making the appeal. The servicer may require the borrower to accept or reject an offer after an appeal no earlier than 14 days after the servicer provides notice to the borrower. A servicer’s determination of an appeal is not subject to any further appeal.

What about a loan service transfer?
The new servicer must obtain documents and information related to the CLMP from the prior servicer and must continue the loss mitigation process to the extent possible. For purposes of compliance with loss mitigation timing requirements, the new servicer must consider the CLMP to have been submitted by the date when the prior servicer received the CLMP. The borrower must not lose the protection of the timing requirements due to a service transfer of a loan.

Private Right of Action
Borrowers have a private right of action to enforce compliance with the loss mitigation procedures. Borrowers may seek any actual damages as well as any additional damages in a case of a pattern or practice of noncompliance in an amount not to exceed $2,000. Damages awarded in class actions may not exceed the lesser of $1,000,000 or 1 percent of the net worth of the servicer. Borrowers may recover reasonable attorneys’ fees.

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BANKRUPTCY UPDATE Official Ch. 13 Form Plan and Rule Changes Delayed Until December 2016

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

by Michael J. McCormick
McCalla Raymer, LLC
USFN Member (Georgia)

The Advisory Committee on Bankruptcy Rules of Procedure (Advisory Committee) met April 22-23 at the University of Texas, School of Law, in Austin, Texas. This was the first meeting of the Advisory Committee since more than 150 comments were submitted about the Official Chapter 13 Form Plan (and accompanying Rule changes) during the public comment period, which ended February 15, 2014. Several observers were in attendance at the meeting, including servicers, Chapter 13 trustees, and USFN Bankruptcy Committee members Dan West (South & Associates, P.C.) and this author.

It was anticipated that what would come out of this meeting would more than likely be the final version of the official form plan scheduled to go into effect on December 1, 2015. Instead, the Advisory Committee took note of the amount of opposition to the official form plan from the comments submitted. In addition, the Advisory Committee noted the importance of having the rule changes and the official form plan go into effect at the same time. Accordingly, both will be re-published for comment in August 2014, but the earliest possible effective date is now December 1, 2016. Thus the changes (both the rules and official form plan) will be delayed at least a year.

Nevertheless, the proposed changes to the Model Proof of Claim Attachment are still scheduled to go into effect in December 2015.

It was clear from the meeting in Austin that at least a few of the Advisory Committee members were unimpressed by the number of comments submitted, even though 150 is more than usual. The feeling was that with 360 judges, thousands of trustees and lawyers, if only 150 people took the time to write in, that must mean that not too many people have an issue with the proposed changes. This is incorrect and ignores the fact that many “collective” comments were submitted by various organizations and groups of judges or trustees.

Under the proposed rule changes, the most significant change coming for servicers is the reduction in the bar date for filing a proof of claim from approximately 120 days to 60 days. This change received less than two minutes of discussion at the meeting. Although servicers have been granted a reprieve to get ready for this change, it’s very important that the servicers and law firms submit comments, individually, when the plan and rules are published again for public comment.

Editor’s Note: The Proof of Claim Form 410 and Mortgage Proof of Claim Attachment (Form 410A) — as drafted on January 17, 2014, and currently scheduled to go into effect in December 2015 — can be found here.

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Summer 2014 USFN Report

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A State’s Legislature Overrules Key Anti-Deficiency Case

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

by David W. Cowles
Tiffany & Bosco, P.A.
USFN Member (Arizona, Nevada)

Arizona’s post-foreclosure anti-deficiency protection has enjoyed quite a bit of attention recently from the Arizona Court of Appeals and the Arizona legislature. To understand where Arizona now stands, some context is in order. Until late in 2011, Arizona’s anti-deficiency protection was relatively clear and stable. The anti-deficiency statute only applied to property of 2.5 acres or less that is “limited to and utilized for either a single one-family or a single two-family dwelling.” A.R.S. § 33-814(G). As a consequence, if a borrower did not actually use the property as a dwelling, the protection did not apply. That there was some clarity and stability did not mean that there were not Herculean efforts made by borrowers who wanted anti-deficiency protection. For example, borrowers would camp inside a barely framed, under-construction dwelling, while holding a copy of the newspaper to indicate the date, thus hoping to demonstrate that the property was “utilized for a ... dwelling.”

This all changed when, in late 2011, the court of appeals issued its opinion in M&I Marshall & Ilsley Bank v. Mueller, 228 Ariz. 478 (Ct. App. 2011) (pet. rev. denied). The Mueller court held that if the borrower intended to use the property as a single one-family or a single two-family dwelling, that intention is dispositive. There was no need for borrowers to camp out in their under-construction homes to fall within the scope of anti-deficiency protection. What was a fairly easily applied bright-line rule was eliminated in favor of the elusive notion of intent.

Earlier this year, the court of appeals carved vacant land out of the Mueller rule in BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC, 234 Ariz. 100 (Ct. App. 2014). In Wildwood, the court of appeals held that anti-deficiency protection does not apply where, as in Wildwood, the property was vacant and construction had not begun. Wildwood thus seems to restore some clarity, at least in cases where construction has unambiguously not begun. But the special concurrence in Wildwood notes that the “new” rule is not as clear as it might look. If construction has begun, when does the Mueller rule of intent come into play? When does construction begin — is it when the plans are drawn or when the grading begins or when else? Will borrowers now go to their vacant lots as soon as possible to put a two-by-four in the ground or to move some dirt?

In April, the Arizona legislature and the governor seem to have answered many of these questions by enacting House Bill 2018, which the governor signed on April 22, 2014. House Bill 2018 essentially overrules Mueller for deeds of trust originated after December 31, 2014. (Mueller’s rule still applies to deeds of trust originated earlier, subject to Wildwood’s carve-out.) Specifically, HB 2018 exempts from anti-deficiency protection trust property “that contains a dwelling that was never substantially completed,” and trust property “that contains a dwelling that is intended to be utilized as a dwelling but that is never actually utilized as a dwelling.” The phrase “substantially completed” is defined disjunctively: either the final inspection, if required by the body that issued the building permit, has taken place, or, if no such final inspection is required, “the dwelling has been completed in all material respects as prescribed in the applicable ordinances and regulations of the governmental body that issued the building permit.”

House Bill 2018 also exempts from anti-deficiency protection trust property owned by one who constructs and sells dwellings, if acquired in the course of that business and is subject to a deed of trust securing a construction loan for sale to another.

These developments — Wildwood and House Bill 2018 — provide some much-needed clarity to Arizona’s anti-deficiency protection. They do not seem to clear everything up, though, and we can expect further development in the case law and perhaps even more from the Arizona legislature in the months and years to come.

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Summer 2014 USFN Report

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Tennessee: Dismissal of Borrower Litigation Now More Difficult?

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by J. Skipper Ray
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

The Tennessee Court of Appeals issued an opinion late last year that will make it harder for mortgage lenders/servicers to win dismissal of borrower litigation alleging MERS related irregularities. Although the case, Berry v. Mortgage Electronic Registration Systems, Inc., 2013 Tenn. App. LEXIS 682, 2013 WL 5634472 (Tenn. Ct. App. Oct. 15, 2013), should not affect the ultimate outcome of lawsuits against lenders and servicers, it has given the debtors’ bar boilerplate language that guarantees survival of a motion to dismiss in Tennessee state courts.1 Lenders will still win the lawsuits that they would have won before, but litigation fees and costs incurred by mortgage lenders will be substantially higher.

In Berry, a borrower filed a complaint in Chancery Court to stop the foreclosure of her home. Her complaint alleged that she had attempted to negotiate a loan modification and/or refinancing and that the servicer wrongfully failed to modify/restructure her loan in violation of the Tennessee Consumer Protection Act (TCPA), the Home Affordable Modification Program (HAMP), and the duty of good faith and fair dealing.

The complaint also alleged various fraud claims relating to MERS’s involvement with the loan. Ms. Berry alleged that the lender and servicer had intentionally misrepresented MERS as a beneficiary of the deed of trust; that they had intentionally recorded documents in which employees of companies other than MERS falsely identified themselves as officers of MERS; and that they (MERS and the loan servicer) had engaged in a pattern and practice of fraudulent conduct. According to the court, these allegations implied that the servicer did not have the authority to foreclose due to the falsely identified MERS officers being involved with the transfer of the mortgage and, as a consequence, no legal/beneficial interest was transferred.

The servicer and MERS filed a motion for judgment on the pleadings, which the chancellor granted after hearing. The order stated that “many of the allegations ... [are] overly generalized and non-specific, while in other areas, the Amended Complaint is simply devoid of facts which could entitle Plaintiff to relief.” The Tennessee Court of Appeals, for the most part, agreed with the Chancery Court, but not entirely.

On appeal, the court affirmed the trial court’s ruling as to Ms. Berry’s TCPA, HAMP, and breach of duty of good faith and fair dealing claims. The court also addressed the issue of the alleged breach of the implied covenant of good faith and fair dealing and affirmed the trial court’s ruling on that issue as well. The court, however, reversed the trial court’s dismissal of the fraud claims.

In Tennessee, the plaintiff must demonstrate six elements for a cause of action for fraudulent or intentional misrepresentation. These six elements include: (1) the defendant made a representation of an existing or past fact; (2) the representation was false when made; (3) the representation was in regard to a material fact; (4) the false representation was made knowingly, recklessly, or without belief in its truth; (5) it was reasonable for the plaintiff to have relied on the misrepresented fact; and (6) the misrepresentation resulted in harm to the plaintiff.

The mechanism in place to prevent litigants from merely reciting these six elements in their complaint is Rule 9.02 of the Tennessee Rules of Civil Procedure. Rule 9.02 requires that when alleging fraud, the circumstances constituting the fraud must be stated with particularity. This is a heightened requirement when alleging fraud (as opposed to other causes of action), which is common in many states and that requires specific facts be alleged to support the fraud allegation.

In its decision, the appellate court re-printed the allegations from Ms. Berry’s amended complaint that it considered to be related to the claimed fraud. These allegations are included at the conclusion of this article, labeled Exhibit A.

Surprisingly, the court found that the allegations were “pled with sufficient particularity to survive a motion for judgment on the pleadings.”2 The court pointed to paragraphs six and seven of the amended complaint. According to the court, Ms. Berry alleged that the lender recorded her deed of trust knowing that it contained falsely-represented signatures.3 Regardless of the reasoning, the court of appeals held that her allegations regarding fraud were sufficiently pled.

The court’s ruling is very unfortunate for the mortgage servicing industry. As most who are familiar with the industry will be aware, the allegations from the amended complaint cited by the court are so broad that they could arguably be attributed to any mortgage loan wherein MERS was involved in the process. It’s not that they could be made as to any loan because they are always true, but because of how generic and non-specific they actually are. The allegations weren’t actually claim-specific to her loan, as they were the same old attacks on MERS’s involvement with the mortgage industry in general that have been made at length. Furthermore, neither Ms. Berry’s complaint nor her amended complaint specifically identified the documents that she was alleging had been “robo-signed.” Moreover, the complaint and amended complaint failed to attach any exhibits.

Regardless of whether one shares the opinion that Ms. Berry’s allegations rise to the level of particularity required by Rule 9.02, the fact is that the Tennessee Court of Appeals has ruled specifically that they do. Accordingly, there is direct precedent on the issue for the debtors’ bar to rely upon. In fact, it could arguably be malpractice for a borrower’s attorney to not include the language (or language substantially similar) in a complaint being filed for the purpose of setting aside or stopping a foreclosure of a loan in which MERS was involved.

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July/August e-Update

1 In Tennessee this would be a motion to dismiss pursuant to Rule 12.02 of the Tennessee Rules of Civil Procedure, which would be referred to as a 12(b)(6) motion to dismiss in many other jurisdictions. Even though the Berry case involves a motion for judgment on the pleadings, the logical assumption is that its holding would also allow survival of a motion to dismiss, since, in Tennessee, it is more difficult for a defendant to obtain dismissal via a 12.02 [12(b)(6)] motion than by a motion for judgment on the pleadings.
2 Again, if the allegations, according to the court of appeals, are sufficient to survive a motion for judgment on the pleadings, it is a logical assumption that they would survive a motion to dismiss. In Tennessee, a defendant has a higher burden to meet to obtain dismissal via a motion to dismiss, as opposed to prevailing on a motion for judgment on the pleadings. In other words, if the court finds that allegations are of such sufficiency that they will survive a motion for judgment on the pleadings, it is difficult to envision a scenario where the same pleadings would be dismissed via a motion to dismiss.
3 The court’s reference here is confusing. The only specific document referenced in paragraphs six and seven of the amended complaint was in fact a deed of trust. However, it apparently worked in Ms. Berry’s favor to not attach any exhibits to her complaint or amended complaint. A review of the actual deed of trust recorded in the Shelby County property records has revealed that it only contained signatures of Ms. Berry and the notary who acknowledged her signature. It did not contain any signatures of individuals purporting to be MERS employees or officers.


Exhibit A


2. Defendants . . . claim to be holders of the deed of trust on this property and have started foreclosure proceedings against the Plaintiff [].

3. MERS acted as nominee on behalf of Mortgage Lenders Network USA.

4. Defendants through the actions of MERS purported to hold title to the property.

5. Defendants intentionally recorded, and continue to record documents wherein employees of companies other than MERS falsely identify themselves as being “officers and/or vice presidents” of MERS, or in some instances, of the Federal Deposit Insurance Corporation or other entity which has no knowledge of the actions of these supposed authorized signatories or certifying officers. These so-called certifying “officers and/or vice presidents” have no employment relationship with MERS and are not, in fact, officers or vice presidents of MERS.

6. The designation of MERS as a beneficiary or nominee of the lender on a deed of trust was an intentional and knowing false designation by MERS in numerous ways, namely: 1) neither MERS nor the “lender” so designated was the true lender; 2) MERS was not the nominee of the true lender of the funds for which the promissory note was executed; 3) MERS did not collect or distribute payments, pay escrow items, hold client funds on deposit, pay insurance for clients or borrowers, or pay taxes; 4) MERS had no right to collect money on the note or to receive any proceeds or value from any foreclosure.

7. Plaintiff further alleges that Defendants engaged in a pattern and practice of fraudulent conduct including but not limited to: (a) underwriting fraudulent mortgages; (b) shuffling mortgages and deeds of trust through the mortgage securitization chain without following proper legal procedures like the simple act of passing along paperwork; (c) concealing or doctoring basic facts when securitizing the mortgages and selling them to investors, large lenders and their partners on Wall Street causing them to lose billions of dollars in losses by being forced to buy back faulty mortgages, some of which have already defaulted; (d) misleading investors who purchased mortgage-linked securities with the promise that the underlying mortgages conformed to basic underwriting standards, and that proper procedures were followed in the chain of securitization and a tax-exempt status.

8. Plaintiff submits that robo signers are illegal because fraud cannot be the basis of clear title, and foreclosures following robo signed deeds of trust purporting to transfer the mortgage and note are void as a matter of law. Clear title may not arise from a fraud (including a bona fide purchaser for value). In the case of a fraudulent transaction the law is well settled. It is well established that an instrument wholly void, such as an undelivered deed, a forged instrument, or a deed in blank, cannot serve as the basis for good title, even under the equitable doctrine of bona fide purchase. Consequently, the fact that purchaser acted in good faith in dealing with persons who apparently held legal title, is not in itself sufficient basis for relief. As a general rule that courts have power to vacate a foreclosure sale where there has been fraud in the procurement of the foreclosure decree or where the sale has been improperly, unfairly or unlawfully conducted, or is tainted by fraud, or where there has been such a mistake that to allow it to stand would be inequitable to purchaser and parties.

9. Plaintiff submits that robo signed documents are void — without any legal effect.

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Tennessee: A Claim for Wrongful Acceleration of Note in Default Not Recognized

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by Gerald Morgan
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

The Court of Appeals of Tennessee has ruled that Tennessee does not recognize a claim for “wrongful acceleration of a note in default.”

In Snyder v. First Tennessee Bank, N.A., No. E2013-01524-COA-R3 (June 24, 2014), Janet Snyder was a beneficiary of a trust (Trust) from her deceased father. She was entitled to certain income from the Trust. First Tennessee Bank (Bank) was appointed the trustee of the Trust. Snyder signed a note and deed of trust with the Bank secured by her home. When she got into financial trouble, she asked the Bank to help with her payments by using funds from the Trust. The Bank declined. She then asked that the Trust be terminated and the proceeds paid out to the beneficiaries, which included her. The Bank announced that it would resign as trustee, but did not join the beneficiaries in dissolving the Trust.

Later, Snyder asked the Bank for a hardship advance pending the Trust’s dissolution so that she could make her mortgage payments. The Bank declined to do that. Snyder hired counsel to seek dissolution of the Trust. The Bank filed a petition seeking the appointment of a successor trustee, and Snyder filed a counterclaim. Then the Bank threatened foreclosure and served a notice of acceleration on Snyder. Thereafter, the Trust was dissolved by agreed order. The Bank, which up to that point had been trustee, wrote itself a check from the Trust to cover the default.

Snyder filed an action seeking compensatory and punitive damages for breach of contract. She alleged that the Bank acted in bad faith and forced her to incur needless attorneys’ fees in dissolving the Trust. The Bank filed a motion to dismiss for failure to state a claim, and Snyder filed a reply, clarifying that her complaint was based on breach of the deed of trust. The trial court granted the Bank’s motion to dismiss, holding that no foreclosure occurred and any wrongful foreclosure claim therefore failed, and there was no breach of contract claim (because it was time barred and the Bank did not breach the contract).

The sole issue for the court of appeals was the dismissal of the claim for breach of contract. Snyder relied on the acceleration clause, which was a standard clause found in most deeds of trust. She asserted that the Bank “abused its discretion” in accelerating the debt. Primarily, the plaintiff alleged that the Bank was well aware of the fact that the Trust had sufficient funds to cover the default, and thus accelerating the debt was an “unconscionable enforcement” of the acceleration clause in the deed of trust. A further allegation was that such an unconscionable enforcement was a “clear abuse of discretion;” she was asking the court to recognize a claim of wrongful acceleration of a note in default.
The court of appeals declined to recognize such a claim. It stated that in the absence of mistake or fraud, the courts will not create or rewrite a contract simply because its terms are harsh or because one of the parties was unwise in agreeing to them. Snyder had clearly defaulted, a fact that was undisputed. The court stated: “The Bank was under no obligation, contractual or otherwise, to forbear on its right to accelerate. In accelerating Snyder’s debt, the Bank did no more than what it was allowed to do under the contract. Whether the Bank knew it held other of Snyder’s funds in the Trust that could cover the debt eventually is irrelevant to the terms of the contract. Performance of a contract according to its terms cannot be characterized as bad faith.”

This case provides strong indications that Tennessee courts will not hesitate to dismiss claims where the lender simply acts upon a contract according to its terms.

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South Carolina: Bidding Issues in Deficiency Judgment Cases

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by Ron Scott & Reggie Corley
Scott Law Firm, P.A. – USFN Member (South Carolina)

Over the last year, several issues with bidding instructions have been observed for cases where deficiency judgment is demanded.

Background — In South Carolina, a demand for deficiency judgment must be affirmatively pleaded in the complaint (e.g., “first legal”). If a deficiency judgment is demanded, the first sale date is not the final sale date, and the bidding must remain open for an additional thirty (30) days for additional, upset bidding. On the thirtieth (30th) day, the final sale is reopened at 11:00 AM EST for additional bidding until the property is ultimately sold to the highest bidder.

The plaintiff/mortgage company may bid competitively at a non-deficiency sale, but if a deficiency judgment is demanded, the plaintiff/mortgage company must enter one bid only — at least the appraised value of the property — at the initial sale.

Recently, these authors have been receiving a large number of bidding instructions for sales where deficiency judgment is demanded that state either: (1) enter a bid of total debt plus fees and costs; or (2) begin bidding at 80 percent of total debt plus fees and costs; and in the event of competitive bidding, bid up to total debt plus fees and costs.

The problem is that the plaintiff/mortgage company is only entitled to one bid in a case where a deficiency judgment was demanded in the original summons and complaint. Accordingly, and in order to fully comply with the bidding instructions, the one bid entered at the foreclosure sale is entered for total debt plus fees and costs. Bidding total debt plus fees and costs as the one and only bid in a deficiency judgment-demanded case causes several unintended issues: (1) It eliminates any deficiency judgment as a result of the foreclosure sale; (2) If no third-party outbids the one total debt plus fees and costs bid, it ensures that the plaintiff/mortgage company is the successful purchaser for significantly more than the original judgment amount; and (3) It requires that a higher commission on sale be paid to the court. Pursuant to South Carolina statute, when a deficiency judgment is demanded, the successful purchaser at the foreclosure sale must pay to the court a 1 percent commission of the final sale price with the minimum amount being twenty-five dollars ($25) and the maximum amount being two thousand five hundred dollars ($2,500; e.g., the property is sold for $250,000 or more).

If Item 2 occurs, many courts have recently ordered that the overage (e.g., the difference between the judgment and final bid amounts) be paid into the court by the plaintiff/mortgage company. In order to attempt to recover this overage, the plaintiff/mortgage company must then file a claim for surplus funds with the court pursuant to Rule 71(c) of the South Carolina Rules of Civil Procedure and attend the surplus funds hearing before the court. If the plaintiff/mortgage company can adequately support in itemized detail the reason for the overage, the court may award it the surplus funds. Otherwise, the court will order the surplus funds to be disbursed to the other defendants/lienholders according to their lien priority.

Lastly, if there is a case where a deficiency judgment is demanded and these authors’ law firm receives bidding instructions that contemplate a bid of total debt plus fees and costs, we may waive the deficiency judgment to allow the plaintiff/mortgage company to begin bidding at a nominal amount and bid up to total debt plus fees and costs, if competitive bidding occurs. However, the bidding instructions must be received in a timely manner so that they can be reviewed and the court notified (in writing) of the waiver of deficiency judgment. Most judges require that the deficiency judgment be waived (in writing) at least ten (10) days prior to the date of the foreclosure sale.

© Copyright 2014 USFN and Scott Law Firm, P.A. All rights reserved.
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South Carolina Supreme Court Upholds Mortgage’s Jury Trial Waiver Language

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by Ron Scott & Reggie Corley
Scott Law Firm, P.A. – USFN Member (South Carolina)

As a judicial foreclosure state, mortgage foreclosure actions in South Carolina are matters in equity and neither the mortgagor nor the mortgagee is entitled, as a matter of right, to a trial by jury. However, counterclaims — including those raised in foreclosure actions — may at times be entitled to a jury trial.

In the South Carolina Supreme Court’s February 26, 2014, decision in Wachovia Bank v. Blackburn, the court reaffirmed a framework for determining which counterclaims by mortgagors are entitled to a jury trial.

The court held as follows: “To the extent any of [the mortgagors’] counterclaims were equitable in nature, they did not have a right to a jury trial on those claims. To the extent any of [the mortgagors’] counterclaims were legal — regardless of whether the claims were permissive or compulsory — [the mortgagors] waived their right to a jury trial, either through the waiver provisions or because they raised their permissive claims in an equitable action. [The mortgagors] may only avoid this result if the contractual jury trial waivers executed in connection with the loan documents are invalid and unenforceable.”

Specifically, in the present case, the Supreme Court upheld the jury trial waiver language in the loan documents as being enforceable because the loan documents were knowingly and voluntarily executed by the mortgagors. The court held that if the mortgagors waive their right to a jury trial within the loan documents, no jury trial can be compelled for counterclaims that are legal and compulsory.

© Copyright 2014 USFN and Scott Law Firm, P.A. All rights reserved.
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Missouri: Effects of H.B. 1410 on Landlord-Tenant Actions

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by Danielle E. Marler
South & Associates, P.C. – USFN Member (Kansas, Missouri)

On July 9, 2014, the Missouri governor signed House Bill 1410 into law. The most significant change the new law will bring is removing the right to a trial de novo in unlawful detainer and landlord-tenant actions. H.B. 1410’s proponents advocated that the bill would reduce court costs and end a “wasteful process” of forestalling the eviction process.

Currently, after judgment has been entered against the defendant, the defendant has 10 days in which to file an application for a trial de novo. Essentially, a trial de novo is a new trial giving the losing party another bite at the apple. After the trial de novo hearing is held in circuit court, either party may appeal the judgment of the circuit court to the Missouri Court of Appeals. Mo. Rev. Stat. §§ 512, et seq. The defendant must post a bond in the full amount of the judgment to stay the execution of the judgment for restitution and proceed with the trial de novo. If the application is not filed and the bond is not posted within that time frame, the plaintiff can proceed to lockout by filing a writ of execution with the court.

Once H.B. 1410 goes into effect on August 28, 2014, parties will no longer be able to file an application for a trial de novo. Instead, the losing party must file a notice of appeal with the clerk of the trial court. As with the trial de novo, to stay execution of judgment for restitution, the filing party must also post a bond in the full amount of the judgment. The notice of appeal must be filed within 10 days of final judgment. Id.

Unlike a trial de novo, however, the appeal will not be a re-trial of the issues. Rather, the appellate court will affirm the trial court’s judgment “unless there is no substantial evidence to support it, it is against the manifest weight of the evidence, it erroneously declares the law, or it erroneously applies the law.” Colt Investments, L.L.C. v. Boyd, 419 S.W.3d 194, 196 (Mo. App. E.D. 2013). The deference given to the prevailing party could dissuade defendants from appealing. Although the filing fee for a notice of appeal is only nominally higher than the filing fee for a trial de novo in most jurisdictions, the increased formality of the Court of Appeals could in and of itself be a deterrent. Regardless, eliminating the right to a trial de novo should be effective at reducing court costs and facilitating the eviction process.

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Florida: Subordinate Mortgage Lienors’ and Foreclosure Sale Surplus

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

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

Florida is a judicial foreclosure state. A first mortgage holder must name as defendants in the complaint all subordinate lienholders including subordinate mortgagees. When a foreclosure judgment is entered on the first mortgage, Florida Statute 45.031(1)(a) requires that the final judgment shall contain the following statement in conspicuous type:

IF THIS PROPERTY IS SOLD AT PUBLIC AUCTION, THERE MAY BE ADDITIONAL MONEY FROM THE SALE AFTER PAYMENT OF PERSONS WHO ARE ENTITLED TO BE PAID FROM THE SALE PROCEEDS PURSUANT TO THIS FINAL JUDGMENT.
IF YOU ARE A SUBORDINATE LIENHOLDER CLAIMING A RIGHT TO FUNDS REMAINING AFTER THE SALE, YOU MUST FILE A CLAIM WITH THE CLERK NO LATER THAN 60 DAYS AFTER THE SALE. IF YOU FAIL TO FILE A CLAIM, YOU WILL NOT BE ENTITLED TO ANY REMAINING FUNDS.

After the foreclosure sale is held, the clerk of the court is required to file a certificate of disbursements, which must contain this statement:

IF YOU ARE A PERSON CLAIMING A RIGHT TO FUNDS REMAINING AFTER THE SALE, YOU MUST FILE A CLAIM WITH THE CLERK NO LATER THAN 60 DAYS AFTER THE SALE. IF YOU FAIL TO FILE A CLAIM, YOU WILL NOT BE ENTITLED TO ANY REMAINING FUNDS. AFTER 60 DAYS, ONLY THE OWNER OF RECORD AS OF THE DATE OF THE LIS PENDENS MAY CLAIM THE SURPLUS.

In the recent Florida appellate decision of Mathews v. Branch Banking & Trust Co., 2014 WL 2536831 (June 6, 2014), the court was called upon to resolve competing claims to surplus funds resulting from a mortgage foreclosure sale held after entry of a foreclosure judgment on a first mortgage. At the foreclosure sale the second mortgagee was the high bidder for over $135,000 in excess of the amount due under the foreclosure judgment. Although it promptly obtained a certificate of title to the property, it waited over 10 months to file a claim to the surplus. In the interim, the mortgagor also filed a claim to the surplus.

The trial court awarded the surplus funds to the second mortgagee, but this was reversed by the appellate court. The appellate court found that the second mortgagee’s assertion of a claim to surplus funds in its answer and affirmative defenses to the first mortgagee’s foreclosure complaint did not satisfy the statutory requirement that a party file a claim with the clerk of court within 60 days after the foreclosure sale of property. Since the second mortgagee failed to file a claim to the surplus within 60 days of the foreclosure sale, it was not entitled to the surplus.

The Mathews case makes it clear that subordinate lienors such as second mortgagees must file a claim to foreclosure sale surplus within 60 days after the foreclosure sale of property. Failure to do so will prevent them from receiving any of the surplus.

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Does Your Company Have an Information Security Program? Is Up to Date?

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by John E. Ottaviani
Partridge Snow & Hahn, LLP – USFN Member (Massachusetts)

The data breaches that Target, Michael’s, Neiman Marcus, and other large companies have suffered gained a great deal of attention in the media. These public and costly embarrassments serve as reminders that all businesses should have a comprehensive information security policy and should closely monitor their servers and third-party data interfaces for potential breaches.

Since 2010, Massachusetts has had one of the country’s strictest data security laws. What many companies fail to realize, however, is that the Massachusetts rules apply to businesses located outside of Massachusetts. Any business (wherever located) that has one or more employees or customers who live in Massachusetts is most likely subject to the Massachusetts data security requirements and must have an information security program. If pending federal legislation is passed, even more businesses will be required to adopt similar information security programs.

Currently, any person or business that owns, stores, or maintains personal information about a Massachusetts resident is required to: (a) develop, implement, and maintain a comprehensive, written information security program; (b) implement physical, administrative, and extensive technical security controls, including the use of encryption; and (c) verify that any third-party service providers that have access to this personal information can protect the information. “Personal information” can be as little as a first name, last name, and the last four digits of a social security number, credit card number, or bank account number of a Massachusetts resident.

There are several reasons why it is important that all businesses — even those not specifically covered by the Massachusetts data security requirements — prepare and update an information security policy:

• Information security policies help to reduce the risk of liability and adverse publicity should a data breach occur. The Massachusetts attorney general has pursued and obtained six-figure civil judgments for violations of the requirements.

• As mentioned above, any federal legislation that is passed is likely to be modeled after the Massachusetts requirements. Businesses not covered presently by the Massachusetts requirements should get a jump on their compliance obligations.

• Information security programs subject to the Massachusetts requirements must be reviewed at least annually — a reminder to companies that initially prepared information security policies but have not reviewed or updated those policies since 2010.

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Colorado Passes House Bill 1130

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by Caren Castle
The Castle Law Group, LLC – USFN Member (Colorado, Wyoming)

Colorado passed House Bill 1130 “Concerning the Disposition of Moneys Charged to Borrowers for Costs to be Paid in Connection with Foreclosure” effective for all foreclosures filed on or after May 9, 2014. Colorado law now requires that the cure statement from the public trustee must include the statutory specific language notifying the requesting party that they are entitled to receive copies of receipts or other credible evidence to support the costs claimed on the cure statement. The request may be sent only after payment to the public trustee of the amount shown on the cure statement.

If an “inaccuracy” in the cure statement is identified by the servicer for the holder, the holder or the attorney must immediately give notice to the public trustee, identifying the inaccuracy and providing an updated cure statement. The updated cure statement must be provided at least ten days prior to the effective date of the cure statement (good-thru date); the public trustee may postpone the sale for one week. Estimates continue to be allowed under Colorado law and must be identified as such on the cure statement to the public trustee. Estimates do not constitute an “inaccurate” statement in accordance with HB 1130.

Within seven business days after the public trustee notifies the firm that cure funds have been received, the firm must provide to the public trustee a “final cure statement” reconciling all estimated amounts so that the cure statement only includes actual amounts incurred to the date that the funds were received. The firm must also include receipts or invoices for all Rule 120 docket costs and all statutorily mandated posting costs claimed on the cure statement. The public trustee will only remit the amount to the holder as set forth in the final cure statement; any remaining balance will be refunded to the party that paid the cure amount. The funds will not be released by the public trustee until the final cure statement and required receipts/invoices have been received by the public trustee.

The servicer/holder/attorney are responsible for retaining receipts or other credible evidence to support all costs claimed. The person paying the cure will be entitled to copies of the evidence if requested within 90 days of the cure. The firm or servicer will have 30 days from the date of the request to provide evidence in support of such costs. The supporting evidence may be provided by electronic means or otherwise.

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July/August e-Update

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California: Another Appellate Ruling re Challenging Authority to Foreclose

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by Kathy Shakibi
Northwest Trustee Services, Inc. – USFN Member (California)

California courts sound weary of meritless challenges to transfers of notes. Not long ago, in Yvanova v. New Century Mortgage Corp., WL 2149797, an appellate court held that a borrower lacks standing to challenge a transfer of the note and deed of trust; i.e., a transfer pursuant to a pooling and servicing agreement. On June 9, 2014, another division of the appellate court held, additionally, that there is no pre-foreclosure cause of action to challenge the authority of the person initiating foreclosure. Keshtgar v. U.S. Bank, N.A., 2014 WL 2567927.

Challenges Have Morphed

The theory underlying challenges to note transfers has morphed over the years, but the common thread remains: an allegation of lack of authority to foreclose in connection with a transfer of a note or an assignment of a deed of trust. In the 2008 to 2010 years, the rampant theory was lack of authority to foreclose absent possession of the original note. California courts ruled that possession of the note is not a prerequisite to a nonjudicial foreclosure. Then came MERS challenges, alleging that MERS lacks authority to initiate foreclosures. The Gomes ruling in 2011 put that theory to rest by holding that there is no judicial action to determine whether the person initiating the foreclosure process is authorized, and MERS is authorized to initiate a foreclosure pursuant to the deed of trust. Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149 (2011).

Next, there were challenges to transfers pursuant to securitization or pooling and servicing agreements. Plaintiffs alleged the trustee of a securitized trust has no authority to initiate a foreclosure either because the note was not transferred with a complete chain of endorsements or transfer occurred in contravention of the securitized trust documents. The former theory was decided in Jenkins v. JP Morgan Chase Bank, N.A., 216 Cal. App. 4th 497 (2013), holding that a borrower lacks standing to enforce an agreement relating to note transfer. The latter was ruled upon in Glaski v. Bank of America, 218 Cal. App. 4th 1079 (2013), deciding that a borrower may challenge an assignment of a deed of trust, if the defect would void the assignment. In its ruling, the Glaski court relied on New York trust formation laws.

Now, the 2014 decisions signal an unequivocal disagreement with Glaski. Challenges to note transfers in reliance on Glaski have resulted in the two recent rulings referenced in this article — Yvanova and Keshtgar.

Keshtgar Ruling
The Keshtgar ruling is short and to the point. There is no pre-foreclosure cause of action to challenge the authority of the person initiating foreclosure. And even if there were a pre-foreclosure cause of action, a borrower would lack standing to challenge a transfer and assignment. The court does not enter into an extensive analysis of the note transfer issue. Instead, the court points to its rulings in Gomes, Jenkins, and Yvanova, and seems to say, we have ruled on this issue before, why is it before us again? One can almost hear the court sigh when it ponders: “One would think, indeed hope, that Gomes would put an end to cases like the instant one.” Keshtgar, * 1. One can hope so, indeed.

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Arkansas: Foreclosing Lenders Responsible for Unpaid Condo Association Dues

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by J. Skipper Ray
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

The Arkansas Supreme Court considered an issue of first impression in the case of First State Bank v. Metro District Condominiums Property Owners’ Association, Inc., 2014 Ark. 48 (Feb. 6, 2014), interpreting a section of the Arkansas Horizontal Property Act (Act). The issue being reviewed dealt with the responsibility for unpaid assessments due a property owners’ association after foreclosure of a first mortgage. The court, in interpreting A.C.A. § 18-13-116, held that the purchaser of the condominium at the foreclosure sale of the first mortgage, was personally liable for previously unpaid assessments of the Metro District Condominiums Property Owners’ Association (Metro).

First State Bank (Bank) was relying on subsection (c) of A.C.A. § 18-13-116, which provides for an exception to the Act’s requirement that when a condo unit subject to the Act is sold, unpaid assessments receive priority when distributing the funds for the purchase price. The exception in subsection (c) states that this priority does not apply to payments due under duly recorded prior mortgage instruments. The Bank asserted that this exception gave priority to its mortgage, over any lien of the association for unpaid assessments.1 Despite this language, the court relied solely on the plain language of subsection (d), which reads: “[t]he purchaser of an apartment shall be jointly and severally liable with the seller for the amounts owing by the latter under subsection (a) of this section up to the time of the conveyance ...” Thus, the court held that the purchaser of a condo via a foreclosure sale will be liable for previous assessments that the individual who was foreclosed upon did not pay.

This ruling is a departure from what has been custom in the vast majority of the state. Normally, a foreclosure sale purchaser (which is often the lender/loan servicer) is only expected to pay for dues/assessments from the foreclosure sale date forward. This is usually the situation, whether the property be part of a traditional homeowners’/property owners’ association (HOA/POA), or a condo owners’ association (COA), as in the Metro case. This is due, in large part, to most owners’ associations’ governing documents2 containing a provision that provides for the association’s lien to be subordinate to that of a prior first mortgage. The associations normally include this provision because of their awareness that many, if not most, lenders will not be willing to loan money for the purchase of a house or condo if the lender’s lien will not have priority over a lien for the dues/assessments of a property owners’ association.

In fact, Metro’s master deed contained just such a provision3, which is what makes the decision so potentially troubling for lenders and loan servicers. The question is whether the Metro ruling will only be applied to condominium owners’ associations going forward. The judicial opinion seems to clearly be confined to interpreting the Act, and the Act deals specifically with condominiums (the Act uses the term “apartments”). However, as previously mentioned, Metro’s master deed contained language that is similar to, if not exactly like, language often found in most bills of assurance and CCRs in Arkansas, which provides for priority of a first mortgage over the lien for assessments of a POA/HOA.

It does not seem beyond the realm of possibility that a traditional POA/HOA would seek to use the Metro case as the starting point for attempting to begin collecting unpaid dues/assessments, which became due prior to the foreclosure sale. Even if the state legislature were to address the issue, it would be a year or longer before a law could be enacted. If a lender is concerned with being responsible for months of unpaid dues/assessments pre-dating a foreclosure sale, it needs to be mindful on the front end of how an owners’ association’s BOA/CCR/master deed addresses priority of its lien for unpaid dues, in relation to that of a first mortgage lien.

Even if Metro will only affect condo units going forward, fallout from the decision is already being seen. At least one major title insurance underwriter has decided to no longer issue the ALTA 4.06 Endorsement in Arkansas. The 4.06 is an endorsement to a loan policy of title insurance, which provides lenders with additional coverage when the insured mortgagee’s collateral is a condominium unit. That an endorsement previously offered on nearly all condo units is no longer available will no doubt raise a red flag with originators. The likely result: at best, it will slow down the process for a buyer to obtain a loan for a condo purchase and, at worst, lead to some lenders being unwilling to make a loan on a condo unit at all.

While the COA won its battle with the Bank in this case, the next time one of its individual owners attempts to sell his or her unit, that homeowner may not be as supportive of this court ruling. In fact, if traditional POA/HOAs attempt to rely on this judicial decision as well, the seller of any residential property that is part of an owners’ association may end up being negatively affected by the holding in Metro.

© Copyright 2014 USFN. All rights reserved.
July/August e-Update

1 Although not discussed in the court’s opinion, the actual bylaws contained in Metro’s master deed provided that the unpaid assessments become a lien on the unit upon recording a Notice of Delinquent Assessment. As of the filing of the Bank’s judicial foreclosure action, Metro had not filed such a notice. It is unclear whether the Bank raised this point at trial; i.e. the lack of Metro having recorded the Notice of Delinquent Assessment in order to perfect its lien.
2 In Arkansas, these governing documents are often referred to as the association’s Bill of Assurance (BOA) for traditional homes, which is the same as what are often referred to in other jurisdictions as Covenants, Conditions, & Restrictions (CCRs), etc.; or a master deed or horizontal property regime for condominiums.
3 The pertinent language in Metro’s bylaws reads, “[t]he liens created hereunder upon any Unit shall be subject and subordinate to, and shall not affect the rights of the holder of the indebtedness secured by any recorded prior mortgage or similar encumbrance . . .” Perhaps the fact that Metro did not record a lien prior to the Bank’s foreclosure action being filed led the Bank’s counsel and the trial court to find this language inapplicable to the fact scenario involved in Metro.

 

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Answering Audits

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014

 

by Shawn J. Burke, Director, LoanSphere Sales Engineering
ServiceLink, A Black Knight Financial Services Company – USFN Associate Member
Chair, USFN Technology Committee

The USFN Technology Committee has repeatedly discussed the subject of answering audits. The goal: just make it easier. From our perspective, we look at whether or not everyone is having the same issues; do we need larger industry action or standardization? Let me start with three challenges — consistency, volume, and submission.

Consistency comes up in the wording of the questions. First, consider the year-to-year recurrence of an audit. Questions worded differently from one year to the next reduce efficient validation of last year’s response. Consistent wording would permit review and pasting into the new spreadsheet, after making appropriate revisions of course. Another manifestation of the “consistency” challenge is repetition of a question within one audit. While one may assert that this gives the opportunity to confirm an answer, the patterns of repetition do not indicate that that is the intent. It seems, instead, that someone else is writing this year’s questionnaire without leveraging (or possibly not even being aware of) last year’s version.

Beyond consistency, there is a volume issue. The steadily increasing audit volume literally creates the need for a full-time job position. In fact, consistency joins volume here. That is, if there were more consistency between audits from different parties, answering the volume would be more manageable. As it stands right now, answering questions about “how security is ensured” across five audits probably yields 25 distinct answers.

Finally, there is the problem with audit response submission. Again, consistency applies. Many responses are completed in a spreadsheet format and submitted by email. Some are entered using online portals. Those formats where one has to “leave it open while answering” without the ability to save and return later can be problematic. Days of work must be re-entered whenever a power outage or computer glitch occurs while in the “leave it open” mode. In addition, some audits may offer “offline” functionality, such as via spreadsheet. Here, though, the frustration can come when the spreadsheet is locked down. That is, features like color coding, adding a column of comments, or other methods to share and coordinate with one’s team are not possible.

Certainly these aren’t challenges that can be solved overnight. However, it is hoped that discussion and agreement on the issues is a first step in moving forward to some type of solution. The USFN Technology Committee is interested in your thoughts and experiences; send them to shawn.burke@bkfs.com.

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Maine: New Law to Expedite the Foreclosure Process

Posted By USFN, Thursday, June 5, 2014
Updated: Tuesday, October 13, 2015

June 5, 2014

 

by Shannon Merrill
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

On April 5, 2014, the governor of Maine signed into law L.D. 1389, “An Act to Expedite the Foreclosure Process.” There are several parts of the Act, some of which have nothing to do with expediting the foreclosure process. The effective date of the Act is August 1, 2014.

Part A – Conveyance Taxes

Under Part A, Section A-2, Maine transfer taxes will now be due on assignments of bid and assignments of judgment in addition to the transfer tax that is already due on foreclosure deeds. The person assigning the bid or assigning the judgment shall report the assignment to the register of deeds within 30 days of the assignment. A form affidavit will be furnished by the state tax assessor for this purpose. The return must be signed by both the transferor and transferee and be accompanied by payment of the tax due.

Section A-3 further clarifies the transfer tax liability associated with foreclosure deeds and deeds-in-lieu of foreclosure (DIL). In a DIL conveyance, only the mortgagor is exempt from the tax, which results in half the tax remaining due by the DIL grantee. In a foreclosure sale where a third party is the successful bidder, the grantor’s (this is usually the foreclosing plaintiff) portion of the tax on the foreclosure deed is calculated on the portion of the proceeds of the sale that exceeds the sum required to satisfy the mortgage and all other junior claimants secured by the property. The grantor’s portion of the tax must be deducted from these excess proceeds, if any. The grantee would still pay its full share of the conveyance taxes based on the purchase price. In the event of a foreclosure deed or an assignment of judgment or bid from the mortgagee or its servicer to the mortgagee or its servicer or to the owner of the mortgage debt, the mortgagee or servicer (if the servicer is the selling entity) is considered to be both the grantor and grantee for conveyance tax purposes. Therefore, under the circumstances where the conveyance is to the investor, the investor is no longer required to sign the return.

Part B – Foreclosure of Abandoned Properties

Part B of the Act concerns expediting the foreclosure of residential properties through an order of abandonment.


(I) Uncontested Foreclosure. Only an uncontested foreclosure action or an uncontested foreclosure judgment is eligible. An action or judgment is uncontested if all of the following are true: (1) The mortgagor has not appeared in the action to defend against foreclosure; (2) There has been no communication from or on behalf of mortgagor to the plaintiff for at least 90 days showing any intent of the mortgagor to continue to occupy the premises, or there is a document of conveyance or other written statement signed by the mortgagor that indicates a clear intent to abandon the premises; and (3) Either all mortgagees with interests that are junior to the interests of the plaintiff have waived any right of redemption or the plaintiff has obtained or has moved for default judgment against such junior mortgagees.

(II) Proof of Abandonment. After a foreclosure case is determined to be uncontested, abandonment still needs to be proven by clear and convincing evidence. The statute lists some items that may constitute abandonment. For example, evidence of broken or boarded-up doors and windows; rubbish, trash or debris accumulations; the lack of furnishings and personal property at the mortgaged premises; excessive deterioration so as to constitute a threat to public health or safety; and reports of vandalism or other illegal acts being committed on the mortgaged premises have been made to local law enforcement authority. Once the evidence of abandonment has been gathered, the plaintiff may at any time after the commencement of the foreclosure action file a motion with the court to determine that the mortgaged premises have been abandoned. If the court finds by clear and convincing evidence based on testimony or reliable hearsay (such as affidavits) that the mortgaged premises have been abandoned, the court may issue an order granting the motion and determining that the premises have been abandoned.

(III) Effect of Abandonment. If the court determines that the property is abandoned, the foreclosure proceedings will be affected as follows: (1) The foreclosure action may be advanced on the docket so judgment may enter more quickly; (2) The post judgment- presale redemption period may be shortened from 90 days to 45 days from the later of the issuance of the judgment of foreclosure and the order of abandonment; (3) If the mortgaged premises include dwelling units occupied by tenants as their primary residence, then the plaintiff assumes the duties of landlord upon the later of the issuance of the judgment of foreclosure and the order of abandonment; and (4) The plaintiff must notify the municipality of the abandonment and must also record the order of abandonment in the appropriate registry of deeds within 30 days from the later of the issuance of the judgment of foreclosure and the order of abandonment.

Part C – Sale Postponements and Abandoned Properties

Currently, under Maine law, a sale can be postponed for any time not exceeding seven days and from time to time until the sale is eventually made. However, if a property has been determined by the court to be abandoned, the public sale may only be adjourned once for any time not exceeding seven days, except that the court may permit one additional adjournment for good cause shown. Notwithstanding the foregoing, additional adjournments may be made as required by Dodd-Frank.

Part D – Statute of Limitations for Challenging Tax Takings
The Act now limits the time allowed to commence an action challenging a governmental taking of real estate for nonpayment of property taxes to a five-year period following the expiration of the period of redemption for those tax liens recorded after October 13, 2014. The Act also amends the time limit for tax liens recorded prior to October 13, 2014.

Part E – Repossession Companies and Property Preservation Providers Now Considered Debt Collectors under Maine Law
Repossession companies and residential real estate property preservation providers are now considered debt collectors under Maine law. The Act defines a residential real estate property preservation provider as a person who regularly provides residential real estate property preservation services, but the definition does not include a supervised financial organization, a supervised lender, or other persons licensed by certain Maine examining boards. Residential real property preservation services are defined under the Act as those undertaken at the direction of a person holding or enforcing a mortgage on residential real estate that is in default or in which the property is presumed abandoned in entering or arranging for entry into the building to perform services of winterizing the residence, changing the door locks, or removing unsecured items from the residence.

The Act also allows a residential real estate property preservation provider to enter a dwelling only if authorized by the terms of the note, contract, or mortgage. The provider may not use force or create a breach of the peace against any person. The provider shall inventory any unsecured items removed from the dwelling and immediately notify the appropriate consumer that the unsecured items will be made available in a manner convenient to the consumer. The provider shall make a permanent record of all steps taken to preserve and secure the dwelling and shall make that record and the inventory of removed unsecured items available to the consumer upon written request.

Because residential real estate property preservation providers are debt collectors, they will now have to also comply with the Maine Fair Debt Collection Practices Act and will be required to be licensed and regulated by the Maine Department of Professional and Financial Regulation, Bureau of Consumer Credit Protection.

Part F – Miscellaneous Foreclosure Mediator Requirements

The last part of the Act applies more stringent requirements on the qualifications to be a foreclosure mediator. It also requires additional information to be included in mediator’s reports.

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