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Connecticut: Intervention by Mortgagee Allowed in Fire Insurance Lawsuit

Posted By USFN, Wednesday, January 8, 2014
Updated: Monday, October 12, 2015

January 8, 2014

 

by Geoffrey K. Milne
Hunt Leibert – USFN Member (Connecticut)

In a case of first impression, the Connecticut Supreme Court allowed intervention by the note holder and mortgagee in a lawsuit pertaining to a fire insurance claim (Austin-Casares v. Safeco Insurance Company of America).

BSI Financial Services, Inc., as note holder and mortgagee, filed an appeal to reverse a trial court’s refusal to allow intervention in a claim for an insured loss brought by Austin-Casares against Safeco. The subject fire insurance policy contained a one-year contractual limitation of action. The trial court concluded that BSI could not intervene as a matter of right; there was no evaluation by the trial court as to whether a basis for permissive intervention existed.

The fire occurred on October 26, 2008. Plaintiff Austin-Casares’s complaint was filed on October 12, 2009 — within Safeco’s one-year contractual limitation. Safeco denied coverage, claiming the plaintiff concealed material facts or circumstances. BSI, as holder of the note and mortgage, filed a motion to intervene on March 22, 2011. The trial court denied BSI’s intervention as untimely for not having been filed within one year of the fire loss.

A four-part test assesses a party’s capacity to intervene: (1) intervention must be timely; (2) the intervenor must have a direct and substantial interest in the subject matter; (3) the intervenor’s interest must be impaired without intervention; and (4) the intervenor must not be represented adequately by any other party to the litigation.

The Connecticut Supreme Court determined that the timeliness of BMI’s intervention more than two years after the fire loss was not a topic subject to plenary review, but would be evaluated as to whether or not the trial court abused its discretion. The Supreme Court emphasized that the trial record did not reflect any consideration of BSI’s argument that its motion to intervene should be viewed as relating back to the plaintiff’s original complaint or any assessment of potential prejudice to either party that might stem from a decision to grant or deny the motion to intervene.

The specific limiting language in Safeco’s policy precluded “action” unless brought within one year. BSI contended that the threshold question, which the trial court failed to address, was whether the motion to intervene constituted an “action” or was merely tantamount to amending the plaintiff’s complaint. The Supreme Court concluded that “as a matter of law, the motion to intervene relate[d] back to the original complaint and [wa]s not a separate action for purposes of intervention.”

The Supreme Court accepted BSI’s contention that it was seeking the precise relief sought in the plaintiff’s original complaint, which was payment for fire-damaged property, and did not involve any new or different facts, theories, or claims. BSI merely wanted to be paid first from any payment under the policy. The case was remanded to the trial court to enable a proper exercise of legal discretion based upon permissive intervention.

Editor’s Note: The author’s firm represented BSI in the proceedings summarized in this article.

© Copyright 2014 USFN. All rights reserved.
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Arkansas: State Supreme Court Reviews Predatory Lending Case

Posted By USFN, Wednesday, January 8, 2014
Updated: Monday, October 12, 2015

January 8, 2014

 

by Courtney McGahhey Miller
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

The Arkansas Home Loan Protection Act prohibits predatory lending in the home mortgage market and bars certain practices regarding high-cost home loans. A.C.A. §§ 23-53-101, et seq. The Arkansas Supreme Court recently relied upon a portion of the Act in evaluating a Columbia County circuit court’s determination that a lender’s actions were unconscionable and predatory. In Gulfco of Louisiana, Inc., D/B/A Tower Loan of Springhill, Louisiana v. Brantley, 2013 Ark. 367 (2013), the court reviewed the denial of Gulfco’s request to foreclose on the Brantleys’ home.

The Brantleys, who reside in Arkansas, obtained four loans from Gulfco in its Louisiana location over a two-year period, all with very high finance charges and annual interest rates ranging from 24.09 to 40.20 percent. The first loan was obtained to pay household bills that were about to become delinquent. The second loan was used to pay the first loan, a hospital bill, delinquent property taxes, and to purchase a logging truck. To secure the second note, the Brantleys executed a mortgage on their home. The third loan was used to pay arrears on the second loan and to pay household bills. The final loan was used to pay off the third loan and pay an arrearage on the mortgage.

Gulfco filed a notice of default and intention to sell in the circuit court, and planned to foreclose upon the Brantleys’ home. The Brantleys filed a petition for preliminary injunction, asserting that the notes were unconscionable, as Gulfco took advantage of their lack of sophistication and induced them to mortgage their home with knowledge that they did not have stable, full-time employment.

On appeal, the Arkansas Supreme Court reviewed the standards regarding unconscionability. An act is unconscionable if it affronts the sense of justice, decency, and reasonableness. The court relied upon the totality of the circumstances surrounding the negotiation and execution of the mortgage. Consideration was given to the gross inequality of bargaining power between the parties, whether the Brantleys were aware of and comprehended the provisions at issue, and whether there was a belief by Gulfco that there was no reasonable probability the Brantleys would fully perform the contract.

Gulfco was aware that Mr. Brantley worked part-time for a moving company and Mrs. Brantley only earned $120 per week. Gulfco was also aware that the Brantleys fell behind on the first loan because work was slow and Mrs. Brantley became ill. Gulfco’s loan agent called the Brantleys about the delinquency on the first loan and suggested that they take out a second loan.

The court then turned to the Arkansas Home Loan Protection Act. The Act prohibits lending without due regard to repayment. A creditor cannot make a high-cost home loan unless the creditor reasonably believes the obligors will be able to make the scheduled payments based upon a consideration of their current and expected income, current obligations, employment status, and financial resources other than the borrower’s equity in the house that secures repayment. A.C.A. § 23-53-104(l). Any violation of the Act is an unconscionable or deceptive act or practice under the Arkansas Deceptive Trade Practices Act. A.C.A. § 23-53-106(a).

The Supreme Court determined that the evidence showed the Brantleys were not capable of making payments from the beginning. Subsequent loans were made to pay off prior notes or bring payments current. Despite their demonstrated inability to pay, Gulfco continued to loan the Brantleys money. Each loan, with high fees and interest rates, placed the Brantleys further in debt, to the point where default was practically inevitable. The court held that the circuit court did not err in refusing to enforce the mortgage, as doing so would contravene the public policy of Arkansas.

© Copyright 2014 USFN. All rights reserved.
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HOA Talk -Oregon: Beware “Jumping” Priority of COA Liens

Posted By USFN, Monday, December 9, 2013
Updated: Tuesday, October 13, 2015

December 9, 2013

 

by David C. Boyer
RCO Legal, PC
USFN Member (Alaska, Oregon, Washington)

In Oregon, condominium association (COA) liens can obtain priority — or “jump” priority — over a first trust deed of record. Accordingly, any loan in default within a planned community should be carefully and promptly assessed.

Under Oregon’s Condominium Association Trust Act (ORS 100.105, et seq.), any assessments or fees due under a condominium declaration has the ability to jump priority. To do so, the COA must provide notice to the lender of record (the “Notice to Lender”). If a foreclosure of the trust deed is not initiated within 90 days from the date of the Notice to Lender, the COA lien jumps priority. In judicial foreclosures, which have recently been the predominant form of foreclosure in Oregon, a foreclosure has been generally perceived as being initiated upon the first legal filing.

Requirements to Jump Priority

A COA lien can establish priority ahead of a trust deed by recording and providing a Notice to Lender that includes: the name of the borrower, date and recording number of the trust deed, name of the condominium, unit number, and the amount of unpaid assessments (ORS 100.450(7)). Further, the notice must contain the following in 10-point font: “NOTICE: The lien of the association may become prior to that of the servicer pursuant to ORS 100.450 (Association lien against individual unit).”

The notice must be accompanied with an affidavit providing the date and person to whom notice was served (ORS 100.450(f)). If the borrower is in default under the terms of the trust deed, then the COA lien notice can establish priority if the servicer fails to initiate a foreclosure or complete a deed-in-lieu of foreclosure within 90 days. The COA lien includes all associated attorneys’ fees and interest.

SB 558: Opening the Door to COA Lien Priority?
The recent passage of Senate Bill 558 (SB 558) has failed to clarify when foreclosure of a trust deed is “initiated,” an important term because such initiation prevents a COA lien from jumping priority.

SB 558 requires a beneficiary under a residential trust deed to request a resolution conference with a borrower for purposes of negotiating foreclosure avoidance measures prior to bringing a judicial foreclosure suit, unless the beneficiary is eligible to claim exemption from the requirement. [SB 558, Section 2(1)(a)].

The requirement to request or participate in a resolution conference does not apply to a beneficiary if the beneficiary submits a sworn affidavit to the attorney general, stating that during the preceding calendar year the beneficiary did not commence or cause an affiliate, subsidiary, or agent of the beneficiary to commence more than a total of 175 actions to foreclose a residential trust deed, either by judicial foreclosure or by nonjudicial foreclosure. [SB 558, Section 2, 1(b)(A)].

SB 558 permits either a beneficiary or grantor to request a resolution conference. Whether a resolution conference is initiated by a borrower or a servicer, several steps must be completed before a servicer is able to retain the certificate of compliance that must be attached to the first legal filing in a judicial foreclosure suit.

Since proper notice of a COA lien provides the COA the ability to jump the priority of a trust deed if a foreclosure is not initiated within 90 days of the notice, the question becomes: When is a judicial foreclosure initiated in terms of the new requirements under SB 558? Instances can certainly be anticipated where a COA provides a servicer with notice of a lien pursuant to ORS 100.105, and the requirements of SB 558 obstruct a servicer’s ability to file a judicial foreclosure suit prior to the expiration of 90 days. There is no clear guidance in SB 558 indicating whether or not the servicer in such a situation has initiated a foreclosure by requesting a resolution conference.

Arguably, the request for a resolution conference is the initiation of a foreclosure under the new requirements to foreclose in Oregon. However, no rules or case law provide a clear answer. While recent case law may help servicers return to more nonjudicial foreclosures, mediation requirements cannot be avoided (mediation is required under Senate Bill 1552 for nonjudicial foreclosures). (Editor’s Note: For further insight into the most recent changes to Oregon foreclosures, see the Oregon segment of Mediation: Foreclosure Updates from Four States, USFN Report (Summer 2013 ed.).)

Is it a COA or an HOA?

One of the first steps in any new foreclosure case in a single family or multi-unit development is assessing whether a COA or Homeowners Association (HOA) runs with the property. HOAs are governed under the Planned Community Act (ORS 94.550 to 94.783). If an HOA covers the property, then there is no risk of assessments, fees, or a lien taking priority over the trust deed. HOA liens are subordinate to first and second trust deeds and are generally acknowledged as junior by the subject HOA.

The organizing documents of an HOA typically provide covenants that give the association authority to lien for unpaid dues and any subsequent attorneys’ fees connected with collection (ORS 94.709). However, as against third parties, a claim of lien is not perfected until it is recorded (F.N. Realty Services v. Oregon Shore Rec. Club, 133 Or. App. 339 (1995)). Thus, HOA liens have priority according to their respective recording date, and do not relate back to when organizing documents (bylaws, declarations of incorporation, etc.) or amendments were recorded.

Lenders and servicers should quickly take action on any Notice to Lender. Correspondingly, when assessing a foreclosure within a COA, counsel should carefully review any COA letters, declarations, or liens recorded in the real property records. If a COA lien notice is discovered, counsel should be promptly notified so that an assessment can be made as to whether ORS 100.105 requirements have been satisfied. If all notice requirements have been met, swift steps must be taken to initiate a foreclosure within 90 days to avoid losing priority to the COA lien.

Conclusion
A COA’s ability to jump priority continues to plague servicers. However, with proper oversight, foreclosures can be managed to provide servicers with the ability to maintain priority and save on the growing costs of Oregon foreclosures. While the full effects of SB 558 are still unknown, servicers and their outside counsel need to pay particular attention to any COA notice so that they may act timely to maintain lien priority.

©Copyright 2013 USFN. All rights reserved.
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Texas: Important New Law re Expedited Foreclosure Application

Posted By USFN, Monday, November 25, 2013
Updated: Wednesday, October 14, 2015

November 25, 2013

 

by G. Tommy Bastian
Barrett Daffin Frappier Turner & Engel, LLP – USFN Member (Texas)

Due to new Texas lawmaking, mediation may be compelled when a borrower files a response to a Texas Rule of Civil Procedure § 736 expedited foreclosure application that seeks the mandatory court order required by the Texas Constitution to foreclose a home equity, reverse mortgage, or home equity line of credit loan. [See House Bill 2978, effective June 14, 2013.] In addition, this new legislation allows Rule 736 applications to be personally served by a sheriff, constable, or qualified process server. Previously, only the clerk of the court served each respondent with the citation for expedited foreclosure and a Rule 736 application by mail.

Personal service will probably lessen many judges’ reluctance, and often refusal, to sign a Rule 736 default order that allows a foreclosure to proceed. From a servicer’s perspective, and apparently because of a quirk in the new rule, the convergence of the mediation and the personal service rule means that servicers should consider serving respondents by personal service because it eliminates court-ordered mediation. The cost of service remains the same (whether the clerk serves each citation or each citation is personally served by the sheriff, constable, or authorized process server).

How the mediation rule will work in practice will likely evolve through trial and error. As a condition precedent to mediation, the borrower must file a timely response to the Rule 736 application. If a response is not filed, there is no mediation. When a response is filed, the court must set a hearing to determine whether mediation should commence — unless, as indicated above, the borrower was personally served with the Rule 736 application.

Once the borrower files a response, the court on its own motion, or at the request of a respondent or servicer, must set a hearing on whether mediation is necessary. If mediation is ordered, it can be conducted by telephone with the court coordinating the logistics of a telephone hearing. Further, the parties can agree on a mediator or, if the parties cannot agree, the court will appoint a mediator. Mediation costs are to be divided equally between the parties.

In addition, effective on or before March 1, 2014, new legislation requires the Texas Supreme Court to adopt mandatory foreclosure forms as part of the Texas Rules of Civil Procedure loans requiring a court order to foreclose, which include home equity, HELOCs, and reverse mortgages. At a minimum, the promulgated forms will include a Rule 736 application form and its supporting affidavit form, which must be executed by the servicer and must meet Texas motion for summary judgment standards, and a new citation form if the clerk of the court serves the respondent. As long as a mortgage servicer uses the Texas Supreme Court’s affidavit form, the judges’ current propensity to refuse a servicer’s standard form of affidavit as competent evidence in a Rule 736 proceeding should be significantly curtailed.

© Copyright 2013 USFN. All rights reserved.
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Rhode Island’s Innovative Foreclosure Law: Navigating the Path Forward

Posted By USFN, Monday, November 25, 2013
Updated: Wednesday, October 14, 2015

November 25, 2013

 

by Rebecca L. Washington

Brennan, Recupero, Cascione, Scungio & McAllister, LLP – USFN Member (Rhode Island)

R.I.G.L. 34-27-3.2 and the Opportunity to Mediate
A new and progressive law, R.I.G.L. 34-27-3.2, has really shaken things up in the Rhode Island foreclosure arena. This law mandates that certain borrowers in Rhode Island be given the opportunity to participate in mediation, also known as conciliation, in an attempt to obtain a workout or other alternative to foreclosure with their lender. This law went into effect September 13, 2013.

The law is modeled after the five local ordinances already put in place by Providence, Cranston, Warwick, East Providence, and Warren. Like the local ordinances, the law only applies to 1-4 unit owner-occupied residential properties. It is important to note, though, that mortgagees headquartered in Rhode Island who service their mortgages in the state and provide full mortgage service functions, including loss mitigation, in Rhode Island, are exempt from this law.

The statewide law supersedes the five local ordinances and shall apply to all new foreclosure files moving forward, in lieu of the local ordinances. R.I.G.L. 34-27-3.2 applies a strict deadline that all lenders must comply with: mortgagees are required to notify owners of their right to a mediation conference BEFORE the mortgage is 120 days delinquent by mailing “3.2 Notices” to not just borrowers, but also to any owners on title. These 3.2 Notices have been promulgated by the Rhode Island Department of Business Regulation and they must be mailed, in triplicate, to the borrowers and owners in English, Portuguese, and Spanish. Simultaneously, the mediation coordinator at Rhode Island Housing, Archie Martins, must be notified and a $150 fee must be made payable to Rhode Island Housing for the mediation service (regardless of whether the borrower/owner actually requests a mediation). It is important to note that this $150 is a cost to the mortgagee that cannot be passed on to the mortgagor. And, Rhode Island Housing has been certified by the Department of Business Regulation to provide these mediation services.

A key difference exists between the statewide foreclosure law and the five local ordinances that have been in existence for a few years: If and when a foreclosure was conducted improperly under the local ordinances, the clerk at the registry of deeds had the option of rejecting the foreclosure deed and accompanying affidavits. If this were to happen, the mortgagee had the ability to start again — a second chance if you will — to get it right. However, because the new statewide law has imposed a 120-day delinquency deadline in an attempt to alert borrowers early on of their right to mediate, if a mortgagee now misses that deadline and fails to conduct the foreclosure process properly, its only recourse is to move forward with a judicial foreclosure. As a mortgagee can never again go back in time and ensure that the borrower receives timely notice of his or her right to mediate, mortgagees must seek court action to foreclose on the secured property.

3.2 Notices, then 3.1 Notices

Once the 3.2 Notices have been mailed to all borrowers and owners on title, a 60-day timeline begins to run within which the borrower or owner must take action and request mediation with the lender through Rhode Island Housing. If within the 60-day time frame, the borrower and lender are able to work out an agreement (which is defined as a trial period, a loan modification, forbearance, or any sort of workout whatsoever), that agreement must be reduced to writing. If the borrower defaults again on that written agreement within 12 months from the date of the agreement, then no further mediation is necessary and the lender may move forward with the foreclosure process.

However, if the borrower defaults on this written agreement more than 12 months after the agreement became effective, then the lender must abide by RIGL 34-27-3.2 all over again and the mediation process must once again be offered to the borrowers and any owners on title.

Now, if this 60-day period passes and no workout is achieved, the mortgagee must state, in writing, why a workout was not feasible. Mortgagees must then mail out a separate notice, the 3.1 Notice, which is mandated by R.I.G.L. 34-27-3.1. It may seem awkward to send 3.2 Notices prior to sending 3.1 Notices; however, there is a method to the madness. The 3.2 Notices that go out to all borrowers and owners on title are mediation notices, designed to inform borrowers and owners of their right to mediate with their lender. The 3.1 Notices, however, are sent after this mediation period has expired and advise borrowers of their right to further foreclosure counseling (akin to a last-resort attempt to help the borrowers avoid foreclosure).

A key difference is that although the 3.2 Notices must be mailed to both borrowers and owners on title, the 3.1 Notices are only required to be mailed to borrowers. Now, R.I.G.L. 34-27-3.1 requires that after these 3.1 Notices are mailed, borrowers be given an additional 45 days before the mortgagee initiates the foreclosure process and the notice of foreclosure sale letters are mailed. Thus, on the 46th day after the 3.1 Notices are mailed, the notice of foreclosure sale can be mailed to the borrowers. This letter informs them as to when the foreclosure auction will take place and when news of the sale will be published in a local newspaper.

Exemption from R.I.G.L. 34-27-3.2

There are some foreclosure properties that are exempt from the new Rhode Island foreclosure law, R.I.G.L. 34-27-3.2: If any foreclosure involves a borrower that was delinquent for 120 days or more before 9/13/13, then this new law DOES NOT APPLY and 3.2 Notices do not have to be sent to the borrowers and owners on title. However, if a foreclosure involves a borrower that was delinquent for less than 120 days before 9/13/13, then the new foreclosure law does apply and the new 3.2 Notices must be mailed.

Recording the Foreclosure Deed
In order to record a foreclosure deed, the mortgagee will have to provide the appropriate certification to show that it has complied with the requirements of the new law. If the foreclosure in question is exempt from R.I.G.L. 34-27-3.2, then a 3.2 exemption affidavit must be recorded to explain why this particular property is exempt.

Conclusion
This new foreclosure mandate has a significant effect on lenders, as they must now decipher which of their files are exempt from the new law versus those files that must comply with the new law. Rhode Island foreclosure attorneys are fielding numerous inquiries from their lender clients and servicers. The Department of Business Regulation has proven instrumental in assisting both firms and lenders through this period of adjustment. Although it is anticipated that these next few months might endure some bumps along the way, the Department of Business Regulation and Rhode Island Housing are both pillars of information to guide the way until lenders are completely comfortable implementing the new law.

© Copyright 2013 USFN. All rights reserved.
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North Carolina: Evolving Title Curative Legislation

Posted By USFN, Monday, November 25, 2013
Updated: Wednesday, October 14, 2015

November 25, 2013

 

by John Madulak
Hutchens Law Firm – USFN Member (North Carolina)

If you mention the number .410 to a hunter, memories of their first shotgun and firearms safety courses come to mind. It’s only fitting that House Bill 410 is North Carolina’s shotgun approach to solving manufactured home title issues, a field that’s been largely untouched since 2002. However, opinions differ as to whether the legislature hit its target or if they need to reload and re-aim.

The manufactured housing statutes enacted in 2002 provided a measure to permanently affix a home to land pursuant to N.C. Gen. Stat. § 47-20.6 and N.C. Gen. Stat. § 47-20.7. They allow the owner of both the home and land to file a document with the register of deeds that permanently affixed the home to the land on recordation.

However, if you flushed out a certificate of title during your title hunt, you faced two unpalatable options for resolution, the first of which involved stalking the cooperation of the listed parties. Filing a civil suit also got the job done but, like a fox hunt, it expended a great amount of time and energy. Filing repossession affidavits under the UCC remained a viable option in certain cases, but its season was short and it gave rise to poachers who filed such repossession forms far beyond their intended scope.

Enter House Bill 410, which alters the provisions of N.C. Gen. Stat. § 20-109.2. Section (a)(1) is a new part of this law, which allows an owner of real property to file an affidavit with the North Carolina Division of Motor Vehicles to cancel a manufactured home title. Under this section, it is assumed that the title is surrendered when it cannot be located, so the affiant does not have to be the listed owner on the certificate of title, but must submit a copy of the tax card confirming the home is taxed as real property in lieu of the title.

At first blush, this appears to be a magic bullet, but the gun jams under section (b)(3), which if read literally still requires the affiant to assert he owns both the land and the manufactured home. Others reach an opinion that the wording of section (b)(3) is a typographical error, and that the statute is a dog that will hunt as drafted.

One thing is clear — any lienholder must release its interest prior to cancellation, meaning that the old cancellation methods apply if you encounter a stubborn or dissolute lienholder. Calling your title insurance carrier before canceling a certificate of title under this provision is wise, and should keep you from shooting yourself in the foot.

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The UCC and Lien Priority: The Answers Lie Within

Posted By USFN, Monday, November 25, 2013
Updated: Wednesday, October 14, 2015

November 25, 2013

 

by Charles Pullium
Millsap & Singer, LLC – USFN Member (Missouri)

“In the past few years, the courts have been witness to many abuses in the mortgage industry: forged paperwork, inflated claims, “robo-signers,” etc.” Knigge v. SunTrust Mortg., Inc., 472 B.R. 808, 811, 2012 Bankr. LEXIS 1895, 77 U.C.C. Rep. Serv. 2d (Callaghan) 432, 2012 WL 1536343 (Bankr. W.D. Mo. 2012). “While it is incumbent on the Court to be vigilant for these abuses and to protect debtors from overreaching creditors, the Court must also be wary of debtors trying to ride the wave of anti-creditor sentiment to evade liability on valid claims, based on insignificant, technical irregularities, notwithstanding admissions that they borrowed money, secured the loan with a deed of trust, mortgage, etc., and have suffered no abuse by the lender whatsoever (i.e., no improper foreclosure, no excessive fees, no nonfeasance or malfeasance). Notably, these debtors don’t usually allege that they owe the money to a different entity or that a different entity has the standing to enforce a mortgage; rather, they seek to shed the lien and loan altogether — despite the fact they’ve suffered no harm other than the reality that they have to repay the loan to keep their property.” Id. at 812.

Describing all of the various and creative claims mortgagors have used to attack foreclosures would likely prove an impossible task, but a trend has developed around the nation and in Missouri to analyze many borrower claims and the corresponding lender rights or claims of standing in the context of the Uniform Commercial Code (UCC).

Missouri has adopted the UCC, and the UCC as adopted by Missouri governs the enforceability of negotiable notes. Application of the UCC “is straightforward regarding this question of who may enforce the Note.” United States Bank Nat’l Ass’n v. Burns, 406 S.W.3d 495, 497, 2013 Mo. App. LEXIS 990, 2013 WL 4520014 (Mo. Ct. App. 2013). Applying the UCC, the court in Burns held that since U.S. Bank was the holder of the note, which had been endorsed in “blank,” U.S. Bank was therefore also entitled to enforce the deed of trust. Id. at 499. In the case, the Court of Appeals for the Eastern District of Missouri rejected the borrower’s primary argument that a recorded assignment from MERS to U.S. Bank demonstrated a lack of right to enforce the deed of trust. In doing so, the court not only explicitly held that the question of a proper assignment was “irrelevant” in light of U.S. Bank holding the actual note, but also refused to find any significance to the borrower’s claim that an entity described as “MERS, as nominee” presented an infirmity in U.S. Bank’s right to enforce the note.

The UCC is certainly not a new body of law in Missouri nor is its application to the enforcement or transfer of notes a recent concept. To the contrary, the law was written and adopted specifically to address these issues. But the Burns case is significant precisely because it is the clearest and most recent application in Missouri law of the UCC in the context of lien priority of a deed of trust. Both the state and federal courts in Missouri have increasingly looked to the UCC to determine cases, and their legal analysis will prove to be applicable in a broad array of suits involving lien priority, standing, lender liability, right to enforce, and a host of other issues related to mortgage litigation.

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Connecticut: Court Finds Jurisdiction Despite Stationery Header

Posted By USFN, Monday, November 25, 2013
Updated: Wednesday, October 14, 2015

November 25, 2013

 

by Jeffrey M. Knickerbocker
Hunt Leibert – USFN Member (Connecticut)

On October 30, 2013, in a case captioned U.S. Bank, National Association successor-in-interest to Wachovia Bank, N.A. as Trustee of JP MORGAN 2004-A3 v. Bailey, docket number FST-CV-10-6003100-S, the court found that the plaintiff had standing. The defendants filed a confusing motion to dismiss, alleging nine separate reasons for dismissing the action. The court did not find in favor of defendants on any of the alleged jurisdictional deficiencies.

The court held an evidentiary hearing to consider the defendants’ motion to dismiss. The plaintiff’s witness was employed by PHH Mortgage. At the hearing, the plaintiff’s witness introduced the note. Testimony established that the defendants had executed the note in favor of Merrill Lynch Credit Corporation. The note contained endorsements, which according to the witness, were all placed on the note in 2004. The court found this testimony credible because the trust was formed in 2004, as evidenced by the name of the plaintiff. The witness also introduced into evidence the mortgage and the mortgage assignment to the plaintiff. Defendants’ counsel did not elicit anything of note in cross-examination.

The defendants’ only evidence was hundreds of pages of correspondence from the servicer (Cendant Mortgage and, later, PHH Mortgage). Each page of correspondence had either of those names on the right corner. In the left corner, each page contained the name “Merrill Lynch Credit Corporation.” The defendants’ theory of the case was that Merrill Lynch Credit Corporation was the only entity entitled to enforce the mortgage, despite the endorsements, testimony, and assignment of mortgage. The court found that the letters established that PHH was, in fact, the servicer for this loan.

The plaintiff’s witness rebutted the defendants’ exhibit by explaining that the loan number on the correspondence showed who the investor was for the note and mortgage. Plaintiff’s witness further testified that the loan number established that the plaintiff, not Merrill Lynch Credit Corporation, was the proper plaintiff.

The court ruled that the plaintiff’s evidence sufficiently established standing, and found that the defendants failed to prove that any other party had standing. The defendants failed to provide any evidence regarding the authority of the persons who endorsed the note. The court also found that the defendants failed to offer any evidence regarding the endorsements, despite having raised the argument in the written motion to dismiss. The defendants’ motion pointed out that two of the endorsements had been signed by the same person for two separate entities. However, the endorsements clearly showed that he was an agent for one of the entities, and the defendants failed to produce any evidence that the endorser did not have authority to execute the allonge.

While the plaintiff was successful in this matter, the case underscores the importance of correspondence being correct. Had the letters not had the name “Merrill Lynch Credit Corporation” on them, the defendants would have been deprived of any evidence whatsoever. All correspondence to borrowers should be clear and accurate, and there should not be any extraneous information, such as the name of the original lender in the letterhead.

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

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Attachment of Foreign Judgments in Arkansas

Posted By USFN, Monday, November 25, 2013
Updated: Wednesday, October 14, 2015

November 25, 2013

 

by Angela Boyd
Wilson & Associates, P.L.L.C. – USFN Member (Arkansas, Tennessee)

Judgments entered against a defendant in one jurisdiction can be registered in another jurisdiction. These are referred to as foreign judgments and, once registered, have the same force and effect as a judgment rendered in the new jurisdiction. The process for registering foreign judgments is found in the Uniform Enforcement of Foreign Judgments Act, which was codified as Arkansas Code Annotated §§ 16-66-601, et seq.

In a recent appellate court decision, Harris v. Temple, 2013 Ark. App. 605 (3rd Div. Oct. 23, 2013), the Arkansas Court of Appeals took a closer look at the time frames for the attachment of foreign judgments to real property in Arkansas. In that case, Harris obtained a judgment against Temple in Louisiana. Two years later, Harris filed a petition with an Arkansas Circuit Court to register the judgment in that jurisdiction. Temple owned property with his wife as tenants by the entirety in that jurisdiction. An order was entered by the circuit court to register the judgment. One month later, Temple filed a motion with the Arkansas circuit court to set aside the judgment. Temple subsequently died, which resulted in title transferring immediately to his wife. A second motion to set aside the judgment was filed with the circuit court by Temple’s son. Neither the original motion filed by Temple, nor the subsequent motion filed by his son, was decided until after Temple’s death, when both motions were ultimately denied.

Temple’s wife filed a declaratory judgment to deem the judgment unenforceable on the basis that the judgment did not attach to the subject property because she became the sole owner at the time of Temple’s death, and the judgment was not final until after Temple’s death when the motions to set aside were denied. On the other hand, Harris argued that the judgment was final as of the date that the judgment was registered and that the pending motion to set aside did not prevent the attachment of the lien. The court agreed with Harris and held that the foreign judgment was final and enforceable as of the date the order was entered to register the judgment. The motion to set aside the judgment did not affect the enforceability of the judgment and did not prevent the lien from attaching to the property. Therefore, the lien attached to the property prior to Temple’s death, and Temple’s wife obtained title subject to the judgment.

The ruling clarifies that, in Arkansas, foreign judgments attach to real property in a jurisdiction at the time the order is entered to register the judgment in that district, regardless of any pending motions to set aside that judgment. Therefore, any registered foreign judgments must be reviewed and analyzed when conducting title searches, especially when determining lien priority in the context of foreclosure or other mortgage servicing activities.

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Successfully Navigating the Logistical Challenges of Commercial Foreclosure

Posted By USFN, Monday, November 25, 2013
Updated: Wednesday, October 14, 2015

November 25, 2013

 

by Charles L. Hahn & Steven A. Jacobs
Trott & Trott, P.C. – USFN Member (Michigan)

The foreclosure-related challenges of property management, maintenance, and security are significant for commercial mortgage lenders: from managing rental income and tenancy rates, to preventing vandalism, navigating potentially contentious landowner disputes, and maintaining property value through regular maintenance. It takes little time for even a thriving property to become a costly liability.

As a result, it is essential to work closely with a legal expert who has demonstrated expertise in dealing with these challenging circumstances, and knows how to protect lender investments. What follows is a review of the most effective mechanisms available to lenders looking to preserve their properties.

Documentation
Promptly assembling the correct loan documentation is critical to protecting both collateral and continued cash flow. Commercial loan documentation provides the legal tools needed to safeguard the collateral, whereas important addenda and clauses provide the lender the power to act decisively through the assignment of rents and appointment of receivers. Efficiently preparing and enforcing loan documents depends on the preparedness of the lender/servicer, as well as its property management and legal teams.

Rental Income Control
An agreement for assignment of rents can be an important tool in re-directing cash flow from the tenants’ lease agreements to the lender, allowing that income to be applied to the loan balance after payment of expenses. In some cases, this rental income can be collected concurrently with a foreclosure action and continue through the redemption period, making the assignment of rents a mechanism that allows cash flow to be obtained while bypassing the defaulted borrower.

Maintenance

The drawback of acting upon an assignment of rents is that it can potentially decrease motivation for borrowers to continue maintaining the premises, as operating expenses will not be reimbursed through the rental receipts. Lenders/servicers should be prepared to take over responsibility for the premises in its entirety, and have a detailed maintenance plan in place to maintain asset value.

Management Expertise

With cooperative borrowers/mortgagors, a negotiated property management transfer may be possible after executing the assignment of rents. It is essential to hire a property management company with a professional skill set that is well suited to the property in question — it makes little sense to hire a property management company specializing in multi-family operations to manage a mixed-use commercial property. If a management resolution cannot be reached, a judicial action may be filed to insert a receiver to manage the collateral.

Receivership
Most commercial loan documentation includes powers for lenders to take control of the property through a receivership. Even when loan agreements lack such powers, existing laws frequently fill in the gaps. Lenders/servicers should have compelling reasons to request a receiver appointment. Items such as unpaid taxes or insurance, current property use and condition, management capabilities of the mortgagor, or difficulties collecting rent are all important considerations for a court when deciding whether to displace a mortgagor of its interest. Receivership can be a temporary damage control tool or part of a comprehensive foreclosure procedure when a complete takeover and liquidation are needed. In either situation, swift acquisition of asset control is important, as property conditions can deteriorate rapidly. The primary drawback to a receivership is the overall expense, and a cost-benefit analysis is warranted before proceeding.

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The CFPB steps into the FDCPA: More Alphabet Soup or Meaningful Structure and Guidance?

Posted By USFN, Monday, November 25, 2013
Updated: Wednesday, October 14, 2015

November 25, 2013

 

by Wendy Walter
RCO Legal, P.S. – USFN Member (Arkansas, Oregon, Washington)

On November 6, the Consumer Financial Protection Bureau (CFPB or Bureau) published its advanced notice of proposed rulemaking covering the Bureau’s intention to begin rulemaking in the area of the Fair Debt Collection Practices Act (FDCPA). For firms and clients with compliance systems and policies tailored to the current state of the law in debt collection, this announcement signals the beginning of a change to the law as we currently know it.

The CFPB issued 162 questions covering six major topics, including transfer of information from original creditor to the debt collector; validation notices, disputes and verifications; communication with third parties; unfair, deceptive, and abusive acts or practices and questions about how the Bureau should define “unfair;” collection of time-barred debts; and debt collection in the litigation process and procedures in suits collecting debts. The Bureau’s goal is to clean up some areas in the law that might not be clear to consumers, areas that create impossible situations for the industry, and to overall help create a standard of conduct in the collection of debts.

For transfers of information, the Bureau wants to know if debt buyers are aware of pending or prior disputes, cease-communication requests, or whether the consumer was represented by counsel. In the advance notice of proposed rulemaking (ANPR), the Bureau also discusses the extent to which consumers should have the right to obtain more information about the debt, whether there should be a requirement for the debt collector to provide a regular statement, and the extent to which a consumer should get notice when the debt is sold.

On the subject of the validation process, the Bureau is asking questions that seem to indicate a new standard validation form may be on its way. The form might rephrase the way borrower rights are described to make them easier for the consumer to understand; it might explain all consumer rights under the FDCPA including the right to request that communication cease, the right to have collection efforts stopped during the investigation and validation of the debt, the right to have communication go through an attorney if the consumer is represented; and the new form might clarify the total amount owed provision and possibly require that debt collectors break out the fees from the “principal,” explain the principal concept, and possibly disclose the charge-off date and charges and fees incurred since that date. The Bureau thinks the statements might need more information in order to properly identify the loan or account that is being collected including, but not limited to: identification of joint borrowers, partial disclosure of the social security number, account number of the original creditor, name of the original creditor, name of brand associated with the debt, and the type of debt being collected. Another topic the Bureau explores is the fact that the majority of non-English speaking consumers in the U.S. are Spanish-speaking, and it asks whether the notices should be in English and Spanish to be clearer and understandable.

The Bureau has more questions about the dispute process. If a debt is disputed, should a debt collector have a deadline by which to respond and validate a debt? Should there be a form for responding and validating a debt? Another question, one that is well-taken in our industry given the volume of frivolous disputes seen in mortgage servicing: should there be a standard for a consumer when disputing a debt? In other words, the Bureau wants to know if it makes sense to require a consumer to submit basic information or documentation to support a dispute under the FDCPA.

The Bureau is also focused on technology, social media, cell phones, and text messages as methods of communicating with consumers and the extent to which debt collection communication is occurring in these contexts.

As an industry, we could add to the discussion, highlight the overlap between the new national servicing rules in RESPA and TILA, and work towards a carve-out of the foreclosure process and keeping it distinct from debt collection. Now that the questions the Bureau is asking are known, it might be time to start the discussion. The comment period ends February 10, 2014 — and what else do we have to do between now and then? Wait a minute, aren’t there some new servicing rules to worry about?

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Federal Court Decision Requires Changes to Reverse Mortgage Program

Posted By USFN, Monday, November 25, 2013
Updated: Wednesday, October 14, 2015

November 25, 2013

 

by Ginny Rutledge & Elizabeth Loefgren
Sirote & Permutt, P.C. – USFN Member (Alabama)

A recent opinion by the U.S. District Court, District of Columbia, ruled that regulations promulgated by the Secretary of the Department of Housing and Urban Development (HUD) conflict with federal law. This holding may lead to more protections against foreclosure for surviving spouses of mortgagors who took out reverse mortgages under HUD’s Home Equity Conversion Mortgage (HECM) program.

In Bennett v. Donovan, __ F. Supp. 2d __, 2013 WL 5424708 (D.D.C. Sept. 30, 2013), widowed spouses of mortgagors with HECM reverse mortgages (plaintiffs) filed suit and claimed protection from foreclosure, even though they themselves were not obligors of the notes secured by the mortgages and were not listed on the deeds of their homes. Based on the language of the uniform HECM reverse mortgages and 24 C.F.R. § 206.27, the lender can demand full payment of the loan if the mortgagor “dies and the property is not the principal residence of at least one surviving [mortgagor.]” Since the surviving spouses were not mortgagors or borrowers who executed the notes, the lenders initiated foreclosure.

The surviving spouses filed suit and claimed that § 206.27 violated 12 U.S.C. § 1715z-20(j), a HECM provision that prohibits HUD from insuring a HECM reverse mortgage unless the mortgage provides that the homeowner’s obligation is deferred until, among other events, the homeowner’s death. Subsection (j) also states that “homeowner” includes the spouse of the homeowner. Accordingly, the plaintiffs asserted that § 206.27 violated the statute and the lender should not be able to foreclose if the deceased mortgagor is survived by a spouse. The district court first dismissed the case due to lack of standing, but the Court of Appeals reversed and remanded it back to the district court. Bennett v. Donovan, 797 F. Supp. 2d 69 (D.D.C. 2011) reversed in Bennett v. Donovan, 703 F.3d 582 (D.C.Cir. 2013).

In its 2013 opinion, the district court held that HUD violated § 1715z-20(j) when it insured the reverse mortgages of the plaintiffs’ spouses pursuant to agency regulation, which permitted their loan obligations to come due upon their death regardless of whether their spouses (plaintiffs) were still alive. The court performed a Chevron analysis and ruled that the statute was clear on its face and Congress likely intended to include the death of the homeowner’s “spouse” as a condition-precedent of the deferral of the loan obligation, regardless of whether the spouse was a mortgagor or borrower. Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S. Ct. 2778 (1984) (outlining a two-step process courts must follow in determining whether to defer to an agency’s interpretation of a statute).

Interpreting the statute otherwise would render the definition of a “homeowner” in subsection (j) meaningless. The court also noted that Congress’s use of the word “spouse” was specific to that subsection, confirming that “Congress drafted the statute with an understanding that spouses could be distinct from homeowners, and that scenarios might arise where reverse mortgages would be entered into by only one of two spouses but still affect the non-mortgagor spouse.” Although the court was unable to require HUD to follow a precise set of steps to remedy the legal error, it did remand the case to HUD for further proceedings consistent with its opinion. HUD has been given the direction to protect the surviving spouse of a reverse mortgage borrower and has the discretion to determine how to accomplish that task.

The Federal Housing Authority’s (FHA) HECM program provides reverse mortgages to those who are 62 years or older and allows elderly homeowners to obtain additional income by borrowing against the equity in their homes. At loan origination, the mortgagor’s spouse may not sign the note for multiple reasons: one spouse may have taken out the reverse mortgage before the marriage, one spouse may be under the age of 62 and thus ineligible for an HECM, or the younger spouse may not be named in order to qualify for a larger loan amount. In order to prevent the foreclosure challenges involved with reverse mortgages, a lender should identify all parties with an interest in the property at loan origination, including not only the spouse but also parties who have a title interest in the property. The lender should also consider requiring all parties with such an interest to execute the note. Otherwise, lenders will continue to face challenges when foreclosing reverse mortgages when the reason for default is due to the death of the borrower who signed the note and the property is still occupied by the non-obligated surviving spouse or the non-obligated party with a title interest in the property.

© Copyright 2013 USFN and Sirote & Permutt, P.C. All rights reserved.
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Proposed National Chapter 13 Plan Plus Proposed Amendments to the Federal Rules of Bankruptcy Procedure

Posted By USFN, Thursday, November 14, 2013
Updated: Tuesday, October 13, 2015

November 14, 2013

 

by Edward J. Boll III
Lerner, Sampson & Rothfuss
USFN Member (Kentucky & Ohio)

“There is nothing wrong with change, if it is in the right direction.” Winston Churchill

The committee that advises the U.S. Supreme Court on bankruptcy rules and forms has a plan for what a Chapter 13 bankruptcy debtor’s blueprint should look like in each case. Literally.

In all Chapter 13 bankruptcy cases, the debtor must file a repayment plan with the bankruptcy petition or within fourteen days after the petition is filed (Fed. R. Bankr. P. § 3015). A plan must be submitted for court approval and must provide for fixed payments to the trustee on a regular basis. The Chapter 13 trustee then distributes the funds to creditors according to the terms of the plan; which may offer creditors less than full payment on their claims, depending upon classification of the claim.

For the past two years, the Advisory Committee on Bankruptcy Rules, chaired by U.S. Bankruptcy Judge Wedoff (N.D. Ill.), has studied the creation of a national form plan for Chapter 13 cases. The examination has been driven with the primary purposes of bringing more uniformity to Chapter 13 practice, lowering costs, making bankruptcy education easier, and simplifying the review of Chapter 13 plans by debtors, courts, trustees, and creditors. Despite the Constitutional mandate that bankruptcy law is to be uniform, Chapter 13 plans are inconsistent and vary throughout the nation, although many local jurisdictions have created and implemented form Chapter 13 plans for years through localized general orders, rules, and practice.

Federal rules of procedure are adopted by the Supreme Court, subject to contrary Congressional legislation. In exercising its rulemaking authority, the Supreme Court acts through the Judicial Conference of the Unites States. In turn, the Judicial Conference delegates the responsibility for rules proposals to its Committee on Rules of Practice and Procedure, otherwise known as the Standing Committee. The Standing Committee is advised by five advisory committees. Each one deals with a particular set of federal rules: civil, criminal, evidence, appeals, and bankruptcy. Bankruptcy is governed under the United States Constitution, which authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.” U.S. Const., art. I, § 8, cl. 4.

On August 15, 2013, new bankruptcy rules and forms were unveiled that would mandate a form Chapter 13 plan to be used nationally. Bankruptcy rules, and the forms that implement them, begin in the Advisory Committee on Bankruptcy Rules. Rule amendments generally require at least three years from initial drafting to becoming effective, and forms require at least two years.

The latest proposals seek to press creditors with aggressive timelines and potential penalties and are in line with the sweeping bankruptcy rules and forms changes that were implemented in 2011. (Fed. R. Bankr. P. § 3002.1, effective December 1, 2011, requires mortgage creditors to file notices of payment changes; file notices of post-petition fees, expenses and charges; and to affirmatively respond to notices of final cure within 21 days, under the threat of being ordered to pay expenses and attorneys’ fees and being precluded from presenting any omitted information as evidence in any contested matter or adversary proceeding in the case for failing to comply.)

Why Now?
Historically, creditors, creditors’ counsel, and trustees have carried the burden of poring over scores of Chapter 13 plans — many as unique as a snowflake in content and structure — to determine how the creditor was to be treated. The lurking risk was always that something would be overlooked or that a creditor’s rights would be violated by ambush with illegal plan provisions that were deeply hidden.

Creditors often suggested that uniformity when it came to plan format would be useful and afford appropriate notice of treatment. However, the need for a national form plan became an urgent priority when the U.S. Supreme Court, in 2010, held that an order confirming a Chapter 13 plan, even which included illegal plan provisions, was nevertheless binding. United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367 (2010). The Supreme Court went on to hold that bankruptcy judges must independently review Chapter 13 plans for conformity with applicable law. It was this reminder to bankruptcy judges by the Supreme Court that shifted thinking to what many creditors have said all along: there has to be an easier and more uniform way to do this.

The proposed national Chapter 13 plan is the product of more than two years of study and consultation by the advisory committee. The form includes ten parts and two exhibits.

• Part 1: Check-the-box notices intended to highlight to interested parties when the plan includes nonstandard provisions, seeks to limit the amount of a secured claim, and/or requests the avoidance of a lien or security interest.
• Part 2: Amount, source, and duration of the debtor’s plan payments
• Part 3: Treatment of secured claims
• Part 4: Treatment of the trustee’s fees, administrative claims, and other priority claims
• Part 5: Treatment of unsecured claims not entitled to priority
• Part 6: Treatment of executory contracts and unexpired leases
• Part 7: Order of distribution of payments by the trustee under the plan
• Part 8: Defines when property of the estate will revest in the debtor. One choice must be selected: upon plan confirmation, upon closing the case, or upon some other specified event.
• Part 9: Gives the debtor the opportunity to propose provisions that are not in the form plan
• Part 10: Signature box, including certification by the debtor’s counsel that the plan is identical to the national form plan
• Exhibit A: Calculation of Lien Avoidance Exhibit
• Exhibit B: Estimated Amounts of Trustee Payments Exhibit

The ten-part plan, along with the proposed rule changes suggested to implement the national Chapter 13 plan, contains a number of significant changes impacting creditors. Most of them will require creditors and their counsel to sprint out of the gate whenever a bankruptcy is filed to meet the accelerated timeframes, mandatory participation, and higher stakes.

Secured Creditors Would Have to File POCs
According to the advisory committee, when they surveyed bankruptcy judges and trustees regarding Chapter 13 practice, dissatisfaction with the current proof of claim (POC) filing rules was frequently expressed. The existing Fed. R. Bankr. P. § 3002(a) provides: “Necessity for Filing. An unsecured creditor or an equity security holder must file a proof of claim or interest for the claim or interest to be allowed, except as provided in Rules 1019(3), 3003, 3004, and 3005.” This has caused debate about whether and when secured creditors must file proofs of claim in Chapter 13 cases. And for those that believe a secured creditor must file a POC, the 90-day deadline from the meeting of creditors has been viewed as far too much time, despite the increased complexity and itemization required by the current rules and forms governing proofs of claims. Fed. R. Bankr. P. § 3002(c) provides, in part: “Time for Filing. In a ... Chapter 13 individual’s debt adjustment case, a proof of claim is timely filed if it is filed not later than 90 days after the first date set for the meeting of creditors called under § 341(a) of the Code ... .”

The proposed amended Rule § 3002(a) would require a secured creditor to file a POC in order to have an allowed claim. However, the amendment also makes clear that the failure of a secured creditor to file a proof of claim does not render the creditor’s lien void.

Proposed POC Bar Date — According to the advisory committee, the consensus of the bench, debtors’ Bar, and trustees is that the Chapter 13 process would benefit from creditors filing POCs before plan confirmation. Accordingly, setting the claims bar date so that it is likely to fall before confirmation is a cornerstone of the suggested changes to the rules governing the claims bar deadline. The proposed rule change would amend the calculation of the claims bar date. Rather than 90 days from the meeting of creditors under Bankruptcy Code § 341, the bar date would be 60 days after the petition is filed in a Chapter 13 case.

Creditors could file a motion, if filed before the claims bar date, to extend the time to file a POC by up to 60 days from the date the motion is granted. Creditors would be afforded this safe harbor when the debtor fails to timely file the list of creditors’ names and addresses, if the notice was insufficient under the circumstances to give the creditor a reasonable time to file a POC, or notice of the time to file a proof of claim was mailed to the creditor at a foreign address.

Proposed POC Bar Date for Claims Secured by Debtor’s Principal Residence: A Two-Step Process — Early concerns to the new proposed rules were expressed by mortgage servicers regarding the difficulty of filing timely POCs within the proposed bar date of 60 days after the filing of the Chapter 13 petition. While 60 days might be sufficient time to determine certain information, such as the amount of the arrearage on a mortgage, it would not be sufficient time to produce all necessary supporting documents, such as a copy of the recorded mortgage.

In reaction to those concerns, the latest proposed rules carve out a concession where the claim is secured by the debtor’s principal residence. The current draft bifurcates the bar date in these circumstances. The proposed Rule § 3002(c)(2) provides that a POC is timely filed if it is filed within 60 days of the petition date and includes the mortgage proof of claim attachment form, which details the principal and interest due, a statement and itemization of prepetition fees, expenses, and charges, and a statement of the amount necessary to cure the default.

A creditor has 120 days after the petition date to file a copy of the writing upon which the claim is based and evidence that the creditor’s security interest has been perfected as a supplement supporting the POC. Simply put, creditors have 60 days to file the POC with the figures and 120 days to file the loan documents. Unfortunately, the 120-day limit does not apply to much more than the loan documents. If an escrow account has been established in connection with the claim, the deadline to file the required escrow account statement prepared as of the date the bankruptcy was filed, with the POC, will be 60 days from the bankruptcy filing.

Does the Plan or Proof of Claim Control?

Despite early versions of the proposed rule changes that allowed a debtor to establish the amount of a creditor’s claim with the figures listed in the plan, the current draft of the national Chapter 13 plan provides that the amounts listed on a POC as to the current payment amount and arrearage for secured claims will control over contrary amounts listed in the plan. The debtor will estimate the amounts of such claims, with proofs of claim controlling over the plan as to those amounts. The debtor will therefore have to object to the claim to contest those amounts if there is a dispute.

Plan Objections and Confirmation Hearings — The proposed amendments to the rules require a creditor to file objections to confirmation of a Chapter 13 plan at least seven days before the confirmation hearing [proposed Fed. R. Bankr. P. § 3015(f)]. The clerk is required to send out notices to creditors giving creditors at least 21 days’ notice by mail of the time fixed for filing objections to confirmation of a Chapter 13 plan and notices giving creditors at least 28 days’ notice by mail of the confirmation hearing date and time.

Cramdowns and Strip-offs
The current rules provide for the valuation of a secured claim by motion only, and do not address the determination of the amount of a priority claim [Fed. R. Bankr. P. § 3012]. The proposed rules allow for the determination of the amount of secured claims in a proposed plan, subject to objection and resolution at the confirmation hearing. Further, the proposed rules provide an exception to the need to file a POC objection if a determination with respect to that claim is made in connection with plan confirmation, which is necessary to make parts of the form plan operational. Because the proposed rule will permit the value of certain secured claims to be determined through a plan, the language of the proposed rules addresses the determination of the “amount” of a claim rather than its “allowance.” The proposed amendment to Fed. R. Bankr. P. § 4003(d) provides, in keeping with proposed amended Fed. R. Bankr. P. § 3012, that chapter 12 and Chapter 13 plans may seek the avoidance of liens encumbering exempt property pursuant to § 522(f) of the Bankruptcy Code.

Where a debtor proposes to avoid a lien in a Chapter 13 plan, the debtor must take prescribed steps to make sure certain creditors receive a copy of the plan. For example, unless the court has ordered otherwise, if the debtor proposes a plan seeking to avoid a lien held by an “insured depository institution,” the debtor must serve a copy of the plan by certified mail addressed to an officer of the institution unless the institution has appeared by its attorney, in which case the attorney shall be served by first-class mail. The committee note to proposed Fed. R. Bankr. P. § 4003 provides: “A plan that proposes lien avoidance in accordance with this rule must be served as provided under Rule 7004 for service of a summons and complaint. Lien avoidance not governed by this rule requires an adversary proceeding.”

Order Declaring Lien Satisfied — The new rules provide for a procedure for the debtor to obtain an order confirming that a secured claim has been satisfied [proposed Fed. R. Bankr. P. § 5009]. This may be particularly important to debtors who need, for title purposes, documentation showing that an unsecured second mortgage or other lien has been eliminated.

Adversary Rules Changes — The adversary rules list a number of disputes that are required to be conducted by adversary proceeding, including a proceeding “to determine the validity, priority, or extent of a lien or other interest in property.” Fed. R. Bankr. P. § 7001. The proposed rules exclude certain proceedings already handled at the plan confirmation stage, such as determinations of the amount of a secured claim through confirmation of a chapter 12 or Chapter 13 plan.

Conclusion
Comments concerning the proposed amendments are due by February 15, 2014. After the public comment period, the advisory committee will decide whether to submit the proposed amendments to the Committee on Rules of Practice and Procedure and will likely publish a new version of the plan and rules with a new comment period ending August 15, 2014. The proposed amendments would then become effective on December 1, 2015, if they are approved, and if Congress does not act to defer, modify, or reject them.

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The 1111(b) Election A Powerful Tool for an Undersecured Ch. 11 Creditor

Posted By USFN, Thursday, November 14, 2013
Updated: Tuesday, October 13, 2015

November 14, 2013

 

Pite Duncan, LLP
USFN Member (California)

With the increase in real property values in recent months, undersecured creditors should consider the benefits of Bankruptcy Code § 1111(b) as an effective tool in defending against a “cramdown” of a claim in a Chapter 11 plan of reorganization. In general, an 1111(b) election prohibits a debtor from bifurcating a claim into secured and unsecured portions under § 506(a) and permits a creditor to retain its fully secured claim, including post-petition attorneys’ fees, escrow advances, and other costs recoverable under the applicable loan agreement, less any post-petition interest. In re SNTL Corp., 571 F.3d 826 (9th Cir. 2009).

When to Make an 1111(b) Election
A creditor must make its election prior to the conclusion of the hearing on the disclosure statement or within such later time as the court may fix. Fed. R. Bankr. P. 3014. A secured creditor should consider making an 1111(b) election when the collateral securing its claim has substantially depreciated in value (50 percent is a suitable benchmark) and a debtor’s Chapter 11 plan proposes to cramdown the claim to the value of the property. An 1111(b) election protects a creditor against a quick sale of the property after a cramdown when the amount of the secured claim is determined at a time when the value of the property is temporarily depressed. By making the election, a creditor blocks the cramdown and guards against such an opportunistic sale because it retains a lien on the collateral equal to the full amount of its claim. In re Weinstein, 227 B.R. 284, 295 n. 12 (9th Cir. BAP 1998).

Treatment of an Electing Creditor
After a creditor has made the 1111(b) election, it must receive: (1) deferred payments equal to at least the full amount of its allowed claim; and (2) with a present value equal to at least the value of the subject property. § 1129(b)(2)(A)(i)(II); In re Brice Road Developments, LLC, 392 B.R. 274, 284-85 (6th Cir. BAP 2008). To more fully illustrate these requirements here’s an example:

  

 Assumptions     
 Present Property Value  $100,000
 Total Claim Amount  $160,000
 Fair and Equitable Discount Rate of Interest  5%
 Fair and Equitable Loan Term  30 Years

 

Based on the example, an electing creditor would be entitled to deferred payments that: (1) equal the total amount of its allowed claim of $160,000; and (2) when discounted, based on a fair market rate of interest (5%), equal at least the present value of the property ($100,000).

A total secured claim of $160,000 paid over 30 years at 0.00% interest results in 360 payments of approximately $444.45 and satisfies the first prong as the sum of the payments total the creditor’s secured claim of $160,000. However, this claim treatment fails to satisfy the second prong as the deferred payments have a present value of only $82,791.00 (based on a 30-year term and a discount rate of 5%), which is less than the present value of the property ($100,000).

Accordingly, the loan could be re-structured to provide the creditor with a nominal amount of interest on its secured claim such as an allowed claim of $160,000 amortized over 30 years at 1.30% interest per annum. This treatment results in 360 payments of $536.97 for a total payout of approximately $193,309.20 and satisfies the 1111(b) election because the sum of the payments totals at least the amount of the creditor’s $160,000 allowed claim and have a present value of $100,027.64 (approximately the value of the property). Put another way, a loan with a principal amount of $100,027.64 amortized over 30 years at 5% interest results in a monthly payment of $536.97, which provides this creditor with the present value of its collateral ($100,000). In light of the creditor’s 1111(b) election, the loan must be re-structured to provide it with a lien equal to the $160,000 secured claim amount while also providing for payments, when discounted, which provide the creditor with the present value of its collateral ($100,000). As explained, these requirements are met by re-structuring the loan with a face amount of $160,000 amortized over 30 years at 1.30% per annum.

Risks Associated with an 1111(b) Election
Notwithstanding the benefits of an 1111(b) election as discussed above, a creditor must consider the risks associated with the election. For instance, once an election is made, it is common for a debtor to surrender the collateral if the property fails to generate sufficient cash flow. If a creditor makes an election and the debtor surrenders the property, a creditor may realize less than its loan balance at a subsequent foreclosure sale. Additionally, a debtor may seek to satisfy a creditor’s 1111(b) election by proposing an extended loan term beyond 30 years or a balloon payment due at maturity. Accordingly, prior to making an election, a creditor should consider whether it would be amenable to those terms or, alternatively, whether it is willing to incur the litigation costs of disputing such terms. Finally, once an election is made, the creditor no longer has an unsecured claim. Consequently, it loses its right to vote on the debtor’s Chapter 11 plan on account of its unsecured claim as well as any defenses to confirmation available to an unsecured creditor, such as the absolute priority rule.

Conclusion
As the real estate market continues to recover, creditors should consider the benefits of the 1111(b) election when defending against Chapter 11 cramdowns. It can be an effective tool to limit principal reduction and even prevent confirmation of a plan. Additionally, the 1111(b) election may provide a creditor with significant leverage in negotiating the treatment of a claim in a plan. In many instances, once a creditor has timely made an election, a debtor may submit an amended proposal providing for a greater valuation or interest rate in an effort to persuade a creditor to withdraw its election. Accordingly, undersecured creditors should consult with their local bankruptcy attorney to determine whether an 1111(b) election is advisable in a specific case.

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BANKRUPTCY UPDATE: NACTT Annual Conference 2013

Posted By USFN, Thursday, November 14, 2013
Updated: Tuesday, October 13, 2015

November 14, 2013

 

by Joel W. Giddens
Wilson & Associates, P.L.L.C.
USFN Member (Arkansas, Tennessee)

The National Association of Chapter Thirteen Trustees (NACTT) held its annual conference in New York City this past August. There continued to be focus on mortgage issues at the conference with an emphasis on implementing and maintaining best practices in mortgage servicing in chapter 13 cases, supervision of bankruptcy case administration by the Office of the U.S. Trustee, and enforcement of the national consent judgments by the Office of Mortgage Settlement Oversight.

NACTT Presentations and Panels
The Director of the Administrative Office of the U.S. Trustee program, Cliff White, provided opening remarks for the conference. The Office of the U.S. Trustee (UST) falls under the Department of Justice and is responsible for overseeing the administration of bankruptcy cases and private trustees. In this the 25th year of the UST program, Director White reported that chapter 13 bankruptcies are in a three-year decline with 310,000 filings in 2012 and a total of 970,000 open cases. Major initiatives of the UST continue to be mortgage servicer enforcement under the national mortgage servicing settlement programs (NMSS) by the settlement monitor, as well as enforcement apart from the NMSS, chapter 11 issues, and review of unsecured creditor practices, and proofs of claim. Director White reported that it appears servicers are making progress, but that some deficiencies had been found by the settlement monitor. Unlike in prior years, Director White’s comments did not focus primarily on enforcement efforts aimed at mortgage servicers.

National Monitor Joseph Smith followed with an update from the Office of Mortgage Settlement Oversight. Monitor Smith explained that since implementation of the NMSS in October 2012, testing of metrics by the five consenting servicers has been phased in with few reported failures (there are 304 servicing standards, 84 relate to bankruptcy; there are 29 metrics, 8 relate to bankruptcy). Any potential violation or failure of a standard must be disclosed to the NMSS committee by the failing servicer, along with a plan for remediation, which is subject to approval by the committee and then is to be implemented. If there is an additional failure, the NMSS committee can seek relief from a court of competent jurisdiction, including monetary damages and injunctive relief.

The conference included a presentation by members of the Committee on Rules of Practice and Procedure of the Judicial Conference of the United States, which published a national form plan and amendments to the Federal Rules of Bankruptcy and Civil Procedure on August 15, 2013. The comment period runs until February 15, 2014, with the earliest effective date of the amendments and national form plan being December 1, 2015. Citing the constitutional mandate for uniformity and the need for plan finality, the panelists reviewed the more important features of the proposed rules and plan, including the prohibition against local modification (proposed amendment to FRBP 9009), a uniform objection to confirmation deadline of at least seven days prior to the confirmation hearing (proposed amendment to FRBP 3015(f)), motions for strip-offs and cramdowns contained within the plan itself (proposed model plan), and shortening the bar date for filing proofs of claim to 60 days from the date of petition filing with an additional 60 days to supplement claims with supporting documentation (proposed amendment to FRBP 3002). The proposed amended rules and national model plan can be found at http://www.uscourts.gov/RulesAndPolicies/rules/proposed-amendments.aspx.

Meeting of Trustees, Servicers, and Attorneys
Apart from the NACTT panels, a meeting of a group of trustees, mortgage servicers and their attorneys was held during the conference to discuss issues relating to mortgage servicing in chapter 13 cases. This meeting was a continuation of an effort by chapter 13 trustees, mortgage servicers, and attorneys to provide open communication on issues affecting mortgages in chapter 13 proceedings. Topics of discussion included implementation of the 2011 Federal Rules of Bankruptcy Procedure (FRBP) amendments, including FRBP 3002 (changing the requirements of proofs of claim) and FRBP 3002.1 (providing a regime for notification by servicers of payment changes and disclosure of post-petition fees, charges, etc., as well as a method to determine the status of residential mortgages at the end of chapter 13 cases), proof of claim issues, and the impending Consumer Financial Protection Bureau (CFPB) rules.

Regarding the implementation of the 2011 FRBP amendments, an issue for servicers was inconsistency in the treatment by chapter 13 trustees of notices filed by servicers as well as the form and procedure for the responses to notices of final cure. FRBP 3002.1(c) requires servicers to file and serve on debtors, debtor’s counsel, and chapter 13 trustees, a notice itemizing any post-petition fee or expense asserted to be recoverable against a debtor. The notice applies only to mortgages secured by a debtor’s principal residence and must be filed within 180 days after the fee is incurred. Although FRBP 3002.1(c) is a nationwide rule, chapter 13 trustees address the notices differently among themselves. Some trustees do not pay the amounts on these notices because they do not believe that they are authorized under a confirmed plan to pay them, while other trustees have local form plan provisions that allow payment of the amounts listed (absent an objection by the debtor). If post-petition amounts listed in the notices aren’t paid, problems may await debtors and servicers at, or after, the time of case completion.

Another area of inconsistency discussed was the lack of a standardized form for the FRBP 3002.1(f) Notice of Final Cure Payment (NOFC). Although the 2011 FRBP amendments provided for national forms for proofs of claim and attachments, notices of payment changes, and notices of fees, expenses and charges, a national form was not provided to file the NOFC at case completion. This notice is to be filed by chapter 13 trustees or debtors after the final payment under the plan is made and is to be responded to by servicers within 21 days to acknowledge if the servicer agrees or disagrees that the account is current. A small committee was formed to explore the drafting of a national form for the NOFC to submit to the larger group and to the Federal Rules Committee.

The group also discussed the impending CFPB final mortgage servicing rules that come into effect on January 10, 2014. Among other CFPB rules, servicers are required to send borrowers periodic disclosures of payment applications. The CFPB rules do not distinguish between borrowers who have filed Chapter 13 bankruptcy and those who have not. Opportunities for the consumer advocate bar could arise when servicers comply with CFPB disclosures and other requirements while their borrowers are protected by a bankruptcy stay and other bankruptcy-imposed restrictions. (Editor’s Note: In an effort to clarify, among other things, treatment of consumers who have filed for bankruptcy, on October 15, 2013, the CFPB issued Bulletin 2013-12 and Amendments to the 2013 Mortgage Rules under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z), (“Interim Final Rule”) as this USFN Report went to press. See pages 26-32 of the Interim Final Rule.)

Conclusion
As in years past, the NACTT conference provided many informative educational panels, including panels on lien stripping, updates on case law around the nation in the past year, and other topics impacting chapter 13 practice. Once again, the conference proved to be a valuable experience for bankruptcy practitioners and mortgage servicers.

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BANKRUPTCY UPDATE: NACTT Annual Conference 2013

Posted By USFN, Thursday, November 14, 2013
Updated: Tuesday, November 24, 2015

October 4, 2013

 

by Joel W. Giddens
Wilson & Associates, P.L.L.C.
USFN Member (Arkansas, Tennessee)

The National Association of Chapter Thirteen Trustees (NACTT) held its annual conference in New York City this past August. There continued to be focus on mortgage issues at the conference with an emphasis on implementing and maintaining best practices in mortgage servicing in chapter 13 cases, supervision of bankruptcy case administration by the Office of the U.S. Trustee, and enforcement of the national consent judgments by the Office of Mortgage Settlement Oversight.

NACTT Presentations and Panels
The Director of the Administrative Office of the U.S. Trustee program, Cliff White, provided opening remarks for the conference. The Office of the U.S. Trustee (UST) falls under the Department of Justice and is responsible for overseeing the administration of bankruptcy cases and private trustees. In this the 25th year of the UST program, Director White reported that chapter 13 bankruptcies are in a three-year decline with 310,000 filings in 2012 and a total of 970,000 open cases. Major initiatives of the UST continue to be mortgage servicer enforcement under the national mortgage servicing settlement programs (NMSS) by the settlement monitor, as well as enforcement apart from the NMSS, chapter 11 issues, and review of unsecured creditor practices, and proofs of claim. Director White reported that it appears servicers are making progress, but that some deficiencies had been found by the settlement monitor. Unlike in prior years, Director White’s comments did not focus primarily on enforcement efforts aimed at mortgage servicers.

National Monitor Joseph Smith followed with an update from the Office of Mortgage Settlement Oversight. Monitor Smith explained that since implementation of the NMSS in October 2012, testing of metrics by the five consenting servicers has been phased in with few reported failures (there are 304 servicing standards, 84 relate to bankruptcy; there are 29 metrics, 8 relate to bankruptcy). Any potential violation or failure of a standard must be disclosed to the NMSS committee by the failing servicer, along with a plan for remediation, which is subject to approval by the committee and then is to be implemented. If there is an additional failure, the NMSS committee can seek relief from a court of competent jurisdiction, including monetary damages and injunctive relief.

The conference included a presentation by members of the Committee on Rules of Practice and Procedure of the Judicial Conference of the United States, which published a national form plan and amendments to the Federal Rules of Bankruptcy and Civil Procedure on August 15, 2013. The comment period runs until February 15, 2014, with the earliest effective date of the amendments and national form plan being December 1, 2015. Citing the constitutional mandate for uniformity and the need for plan finality, the panelists reviewed the more important features of the proposed rules and plan, including the prohibition against local modification (proposed amendment to FRBP 9009), a uniform objection to confirmation deadline of at least seven days prior to the confirmation hearing (proposed amendment to FRBP 3015(f)), motions for strip-offs and cramdowns contained within the plan itself (proposed model plan), and shortening the bar date for filing proofs of claim to 60 days from the date of petition filing with an additional 60 days to supplement claims with supporting documentation (proposed amendment to FRBP 3002). The proposed amended rules and national model plan can be found at http://www.uscourts.gov/RulesAndPolicies/rules/proposed-amendments.aspx.

Meeting of Trustees, Servicers, and Attorneys

Apart from the NACTT panels, a meeting of a group of trustees, mortgage servicers and their attorneys was held during the conference to discuss issues relating to mortgage servicing in chapter 13 cases. This meeting was a continuation of an effort by chapter 13 trustees, mortgage servicers, and attorneys to provide open communication on issues affecting mortgages in chapter 13 proceedings. Topics of discussion included implementation of the 2011 Federal Rules of Bankruptcy Procedure (FRBP) amendments, including FRBP 3002 (changing the requirements of proofs of claim) and FRBP 3002.1 (providing a regime for notification by servicers of payment changes and disclosure of post-petition fees, charges, etc., as well as a method to determine the status of residential mortgages at the end of chapter 13 cases), proof of claim issues, and the impending Consumer Financial Protection Bureau (CFPB) rules.

Regarding the implementation of the 2011 FRBP amendments, an issue for servicers was inconsistency in the treatment by chapter 13 trustees of notices filed by servicers as well as the form and procedure for the responses to notices of final cure. FRBP 3002.1(c) requires servicers to file and serve on debtors, debtor’s counsel, and chapter 13 trustees, a notice itemizing any post-petition fee or expense asserted to be recoverable against a debtor. The notice applies only to mortgages secured by a debtor’s principal residence and must be filed within 180 days after the fee is incurred. Although FRBP 3002.1(c) is a nationwide rule, chapter 13 trustees address the notices differently among themselves. Some trustees do not pay the amounts on these notices because they do not believe that they are authorized under a confirmed plan to pay them, while other trustees have local form plan provisions that allow payment of the amounts listed (absent an objection by the debtor). If post-petition amounts listed in the notices aren’t paid, problems may await debtors and servicers at, or after, the time of case completion.

Another area of inconsistency discussed was the lack of a standardized form for the FRBP 3002.1(f) Notice of Final Cure Payment (NOFC). Although the 2011 FRBP amendments provided for national forms for proofs of claim and attachments, notices of payment changes, and notices of fees, expenses and charges, a national form was not provided to file the NOFC at case completion. This notice is to be filed by chapter 13 trustees or debtors after the final payment under the plan is made and is to be responded to by servicers within 21 days to acknowledge if the servicer agrees or disagrees that the account is current. A small committee was formed to explore the drafting of a national form for the NOFC to submit to the larger group and to the Federal Rules Committee.

The group also discussed the impending CFPB final mortgage servicing rules that come into effect on January 10, 2014. Among other CFPB rules, servicers are required to send borrowers periodic disclosures of payment applications. The CFPB rules do not distinguish between borrowers who have filed Chapter 13 bankruptcy and those who have not. Opportunities for the consumer advocate bar could arise when servicers comply with CFPB disclosures and other requirements while their borrowers are protected by a bankruptcy stay and other bankruptcy-imposed restrictions. (Editor’s Note: In an effort to clarify, among other things, treatment of consumers who have filed for bankruptcy, on October 15, 2013, the CFPB issued Bulletin 2013-12 and Amendments to the 2013 Mortgage Rules under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z), (“Interim Final Rule”) as this USFN Report went to press. See pages 26-32 of the Interim Final Rule.)

Conclusion
As in years past, the NACTT conference provided many informative educational panels, including panels on lien stripping, updates on case law around the nation in the past year, and other topics impacting chapter 13 practice. Once again, the conference proved to be a valuable experience for bankruptcy practitioners and mortgage servicers.

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Maine: Proving Authority to Enforce the Note

Posted By USFN, Friday, October 4, 2013
Updated: Monday, November 23, 2015

October 4, 2013

 

by Katie Hawkins & Lauren Thomas
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

Recently, the Law Court took steps towards settling the widely-discussed and often-litigated question of what proof is required for a plaintiff to prove “ownership” of the mortgage and mortgage note as required by 14 M.R.S.A. § 6321 and Chase Home Finance v. Higgins, 2009 Me. 136, 985 A.2d 508.

The Law Court interprets the requirement that a plaintiff “certify proof of ownership” to require only that a plaintiff identify the “owner or economic beneficiary of the note” and, where the plaintiff is not the owner, to “indicate the basis for the plaintiff’s authority to enforce the note” pursuant to 11 M.R.S.A. § 3-1301. [Bank of America v. Cloutier, 2013 Me. 17, 61 A.3d 1242]. This confirms the standing of a servicer to foreclose, so long as any investor is identified.

The court came to this conclusion by distinguishing two requirements of 14 M.R.S.A. § 6321: (1) the standing requirement found in paragraph one; and (2) the evidence requirement found in paragraph three. Earlier decisions by the Law Court have addressed the paragraph three requirements. Wells Fargo v. deBree, 2012 Me. 34, 38 A.3d 1257; HSBC Bank USA, N.A. v. Gabay, 2011 Me. 101, 28 A.3d 1158; Mortgage Electronic Registration Systems, Inc. v. Saunders, 2010 Me. 79, 2 A.3d 289. Cloutier addresses the paragraph one standing requirement and “harmonizes” it with Article 3-A of the UCC to define who may enforce a promissory note. With this reading, the court found that Bank of America, the servicer of the subject loan, can enforce the note and foreclose as a “holder.” However, the “owner or economic beneficiary” (here, Freddie Mac) must be identified in order to comply with the requirements of Section 6321. 2013 Me. 17, ¶ 13-14.

The Law Court has since applied Cloutier to vacate a judgment in favor of the homeowners in U.S. Bank, National Association as Trustee for the MLMI Surf Trust Series 2006-BC2 v. Thomes, 2013 Me. 60. At trial, the court required the foreclosing bank to establish that it owned the note and mortgage. On the appeal of Thomes, however, the Law Court clarified that under Cloutier, the bank is required to identify the owner or economic beneficiary of the note and demonstrate that it is entitled to enforce the note, not prove that the bank itself owns the note and mortgage. Because the bank provided evidence of a note, which had been specially endorsed to the bank, accompanied by an allonge endorsing the note in blank, an assignment of mortgage to the bank, and testimony that U.S. Bank was the holder of the note and had physical possession of the note, the Law Court determined that the bank had met its burden under Cloutier and vacated the judgment for the homeowners.

Practically speaking, the Cloutier case and the decisions that follow from it establish yet another element that a foreclosing plaintiff must establish before the court will issue a judgment of foreclosure and sale. Whether judgment is sought through a motion for summary judgment or at trial, the foreclosing plaintiff must identify the owner or economic beneficiary of the note and introduce into evidence business records supporting that identification. Frequently, the owner or economic beneficiary identified will be the investor or investors. It is expected that Maine courts will continue to address issues of ownership as the Law Court’s decisions in Cloutier and Thomes are applied and analyzed.

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Colorado Clarifies Notice Requirements After Sender v. Cygan

Posted By USFN, Friday, October 4, 2013
Updated: Monday, November 23, 2015

October 4, 2013

 

by Kimberly L. Martinez
The Castle Law Group, LLC – USFN Member (Colorado, Wyoming)

In June the Colorado Supreme Court issued an advisory opinion in Sender v. Cygan (In re Rivera) (11SA261, 2012 LEXIS 398 (Colo. June 4, 2012)), creating potentially wide-reaching implications for the title insurance industry and real estate practitioners with respect to the recording of real estate documents. The Cygan opinion arose from a request by the U.S. Bankruptcy Court for the District of Colorado to the Colorado Supreme Court to answer the following question: Does a recorded deed of trust provide sufficient notice of a party’s interest in real property if the deed of trust contains no legal description and identifies the property only by a street address?

In response, the Colorado Supreme Court held that a deed of trust recorded without a legal description is defectively recorded, or invalid, and does not provide constructive notice to a subsequent purchaser of another party’s security interest in real property. In its determination, the Colorado Supreme Court reviewed C.R.S. sections 38-35-122 and 38-35-109(1) and reasoned that under C.R.S. § 38-35-122, a validly recorded lien must contain a legal description of the property, and a legal description must be more than a property address for notice purposes. Consequently, the creditor’s deed of trust in Cygan was declared void and, thus, incapable of providing constructive notice of the encumbrance despite the fact that it was recorded in the grantor-grantee indices and contained the correct property address.

The majority opinion in Cygan distinguished prior cases that held a recorded instrument containing an erroneous or incomplete legal description provides sufficient notice of an encumbrance so long as the instrument describes the property with reasonable certainty. For example, in Hill v. Bayview Loan Servicing, LLC (In re Taylor) the Bankruptcy Court for the District of Colorado held that a deed of trust properly recorded in the grantor-grantee indices with a correct street address, but with a legal description identifying the incorrect block number for the parcel placed the bankruptcy trustee on inquiry/constructive notice of an encumbrance on the subject real property. In Cygan, the Colorado Supreme Court declined to extend the general rule set forth in Taylor to a deed of trust that completely omitted the legal description. The Colorado Supreme Court reasoned that the recording of the creditor’s deed of trust without a legal description materially fails to describe the recording party’s interest in the property and cannot be validly recorded. Therefore, the recording of the creditor’s deed of trust without a legal description was void and incapable of providing constructive notice of the encumbrance.

Subsequent to the Cygan opinion, the title industry expressed grave concerns regarding the implications of the decision and the status of recordings of real property documents in the public records of Colorado. Following lobbying efforts by the title industry, the Colorado General Assembly introduced House Bill 13-1307 in order to address the issues created by the Cygan decision. House Bill 13-1307 modifies C.R.S. § 38-35-122 by adding subsections (3.5), (4), and (5). These subsections clarify that notwithstanding the Cygan opinion, a failure to include a legal description on a document does not, by itself and without regard to the totality of the circumstances, necessarily render that document defective or invalid upon its recording.

The new legislation sustains a prior Colorado Court of Appeals unpublished opinion, which held that a deed of trust contained sufficient information to place another on inquiry notice despite the fact that it omitted the legal description and contained several other defects. In EMC Mortgage Corporation v. Getrado, a senior lienholder’s deed of trust was recorded with no legal description, an incorrect property address, a variation in the grantor’s name, and an incorrect name of the public trustee. The Colorado Court of Appeals held that the senior deed of trust contained sufficient information to place a subsequent lienholder on notice of the senior lienholder’s priority interest in the property. The court noted that even though the senior deed of trust did not contain a legal description, it contained the correct assessor’s parcel number, which upon further inquiry would have affirmatively disclosed the senior lienholder’s interest in the property.

Analogous to the holding in Getrado, House Bill 13-1307 clarifies that a deed of trust recorded without a legal description does not render the instrument defective if, under the circumstances, the recorded deed of trust includes other identifying information such as a street address and/or assessor information. Hence, House Bill 13-1307 in essence codified the Getrado holding by specifying that the absence of a legal description neither invalidates the document or its recording, nor determines the validity of the document as against a person obtaining rights in the property. Under the revised statute, for notice purposes, those with an interest in real property must also consider the totality of the circumstances when determining whether the document is defective, valid, or invalid against the person obtaining rights in the real property.

Following the legislation negating the Cygan opinion, on August 19, 2013, the Colorado Supreme Court withdrew its opinion, and denied the certified question. In withdrawing its opinion, the Colorado Supreme Court noted that it “improvidently” granted the certified question. Thus, it appears that the Colorado Supreme Court had not fully contemplated the broad implications of the Cygan decision.

House Bill 13-1307 clarifies and confirms the prior decisions by the Colorado Court of Appeals on this issue, while still leaving a substantial amount of discretion with the courts to look at the totality of the circumstances as it relates to a legal description. Although real estate practitioners may now have less reason for concern when faced with the same situation as in Cygan, additional issues should be anticipated as Colorado courts interpret and apply the new legislation to differing factual scenarios.

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Native American Notice of Claim on Properties in Certain Counties in Utah

Posted By USFN, Friday, October 4, 2013
Updated: Monday, November 23, 2015

October 4, 2013

 

by Scott Lundberg
Lundberg & Associates – USFN Member (Utah)

In January 2013, the Uinta Valley Shoshone Tribe (the Tribe) recorded a "Notice of Claim of Interest Real Property" (the Notice) with the Duchesne County Recorder’s office. In the Notice, the Tribe claims an interest in the real property (including all water, gas, oil, and mineral rights) in the Uinta Valley & Ouray Reservation in Utah.

Title underwriters in Utah have instructed their agents to identify this claim on title reports and policies issued for property within the area claimed — encompassing most of Duchesne and Uintah counties and parts of adjacent counties. Though recorded subsequently to the deeds of trust currently being foreclosed, the underwriters are treating this notice as senior in priority to those deeds of trust. They have advised that post-foreclosure title work will continue to reflect the notice of claim.

For all loans made prior to January 7, 2013, this notice is a post-closing item and is not covered by lenders’ policies of title insurance.

The Notice reflects a long-running legal battle by “Mixed Blood Uintas” against federal and state governments and private landowners based upon their claim that their tribal status and entitlement to the property was unlawfully terminated in the past. Further information can be found on the Tribe’s website: www.undeclaredutes.net.

Servicers with Utah loans secured by properties in the affected counties should make note that foreclosures of those loans will result in title subject to the Notice. Removal of reference to the Notice in post-foreclosure title policies, according to the major title insurance underwriters, will require a court order quieting title on the foreclosure property against the claim evidenced by the Notice. Such litigation, if contested by the Tribe, would be extensive, expensive (likely in excess of $100,000) and lengthy because it would entail litigating the ongoing dispute between the Tribe and the federal and state governments and private landowners.

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Pennsylvania: State Supreme Court Rules on Act 91 Notice

Posted By USFN, Thursday, October 3, 2013
Updated: Wednesday, October 14, 2015

October 3, 2013

 

by Lisa A. Lee and Michael T. McKeever
KML Law Group, P.C. – USFN Member (Pennsylvania)

On September 25, the Supreme Court of Pennsylvania issued its opinion in the case of Beneficial Consumer Discount Company v. Vukman. The concurrence opinion is also provided for convenient reference.

The Superior Court opinion in the Vukman matter, affirming the order of the Court of Common Pleas of Allegheny County, held that the uniform Act 91 Notice prescribed by the Pennsylvania Housing Finance Agency, and in effect prior to September 8, 2008, was deficient and, as a result, the court lacked jurisdiction over the mortgage foreclosure action. This opinion had potentially wide-ranging effects because of the impact of the decision that the provision of the Act 91 Notice was a jurisdictional requirement.

The Pennsylvania Supreme Court has now laid this issue to rest, holding that the Act 91 Notice is not a jurisdictional requirement in a mortgage foreclosure action.

This means that, consistent with the Homeowner Assistance Settlement Act (Pa. Act 70), any challenge to an Act 91 Notice must be raised prior to the delivery of the sheriff’s deed in the foreclosure action. If it is raised, the homeowners must also prove that they were actually harmed by the defect (if any) in the notice. Once the sheriff’s deed is delivered to the lender or recorder of deeds, the right of the homeowners to object to lack of proper notice is theoretically terminated. Pa. Act 70 further provides that the failure of a lender to strictly comply with Act 91 does not necessarily result in the dismissal of the foreclosure action, and the court has jurisdiction over the matter even if the notice contains a defect. Additionally, in any completed cases where the notice was sent that may not have strictly complied with the law, this alone does not create a cloud on title, protecting title insurers who had relied on the state of the law prior to the Vukman decision. Pa. Act 70 covers all notices sent since June 5, 1999.

© Copyright 2013 USFN and KML Law Group, P.C. All rights reserved.
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New Jersey: New Legislation Regarding Eminent Domain

Posted By USFN, Thursday, October 3, 2013
Updated: Wednesday, October 14, 2015

October 3, 2013

 

by Rosemarie Diamond
Phelan Hallinan & Diamond, P.C. – USFN Member (New Jersey, Pennsylvania)

On September 6, 2013, Governor Christie signed into law a bill intended to codify several court opinions relating to eminent domain and to limit the use of eminent domain for municipal redevelopment projects as permitted under New Jersey’s “Local Redevelopment and Housing Law.” It also created an alternative to condemnation by authorizing municipalities to negotiate directly with a property owner without being required to declare an area blighted, which is the constitutional standard in New Jersey for redevelopment condemnations.

The bill reflects the legislature’s recognition of heightened public concern about the use of eminent domain to support municipal redevelopment activities, as expressed by the U.S. Supreme Court in Kelo v. City of New London, 545 U.S. 469 (2005), and the New Jersey Supreme Court’s emphasis in Gallenthin Realty Development, Inc. v. Borough of Paulsboro, 191 N.J. 344 (2007), that the use of eminent domain cannot be justified to acquire property unless the property is truly blighted, rather than in a state where it is not being put to its optimal use. Now, the property must be in an “unproductive condition.” The bill outlines the steps for a planning committee to authorize an investigation for consideration of the use of eminent domain in areas zoned for redevelopment, the publication of the results of the investigation, and the time period to object to any conclusions. The bill also sets forth minimal requirements for an area to be considered for the exercise of eminent domain.

The bill was not a response to recent attempts throughout the country to use eminent domain as a mechanism to address underwater mortgages. Nevertheless, like all parties with an interest in real property, lenders are protected by the tighter restrictions should efforts to exercise eminent domain through municipal redevelopment gain traction at the local level.

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Standing in Mortgage Foreclosures

Posted By USFN, Thursday, October 3, 2013
Updated: Wednesday, October 14, 2015

October 3, 2013

 

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

In the latest in a series of cases recently handed down by Connecticut’s high courts regarding standing in mortgage foreclosures, the Supreme Court (Connecticut’s highest appellate court), in Equity One v. Shivers, 301 Conn. 190, overturned the appellate court’s decision that required an evidentiary hearing be held every time a party attempts to challenge a foreclosing plaintiff’s standing. This author’s firm represented the plaintiff in the appeal.

The appellate court’s decision had wide implications in Connecticut practice, as some trial courts interpreted the case to require a full evidentiary hearing, replete with fact witnesses, anytime a defendant merely uttered the word “standing.” It was the plaintiff’s contention that the appellate court’s opinion also contradicted longstanding decisional law, which stated that the production of the note, endorsed in blank, created a presumption of standing requiring the opposing party to introduce and prove facts that would limit the right to enforce the note.

The plaintiff had obtained judgment previously, at which time the defendant did not object or attempt to challenge the plaintiff’s standing. Prior to the sale being held, the matter was stayed due to the defendant’s bankruptcy filing. The plaintiff moved to reset judgment after obtaining relief from the automatic stay. It was at this hearing that the defendant filed a motion to compel the production of the original documents and an objection to the plaintiff’s motion to re-set judgment, claiming that the plaintiff did not have standing to commence the action. The defendant’s objection was devoid of any documentary evidence. The defendant appealed, inter alia, the entry of judgment absent a hearing to determine whether the plaintiff had standing to commence the action. The appellate court held that the borrower’s oral challenges and written statements were sufficient to require the lower court to hold a “trial-like evidentiary hearing” on the issue of standing. The plaintiff appealed to the Connecticut Supreme Court.

The Supreme Court held that the defendant had failed to demonstrate, either at the time of the entry of judgment or on appeal, that the trial court’s finding that the plaintiff had standing was flawed or that the trial court’s procedure was inadequate. The defendant did not object to the authenticity of the note or mortgage and offered no evidence to the trial court or on appeal that the plaintiff was not in possession of the note when it commenced the action. The court also opined that it was proper for the trial court to rely on the representation of counsel, as an officer of the court, that the note presented to the court in connection with the entry of judgment was the same note that the plaintiff held at the time of commencement of the action.

Also, the Supreme Court looked to the date of execution of the assignment of mortgage and noted that it was executed 20 days prior to the commencement of the action. Although there is no firm requirement that the foreclosing plaintiff be assigned the mortgage prior to commencement, it is interesting to note that the court looked at that date as further proof of the plaintiff’s standing.

The Supreme Court’s opinion reduces the likelihood of meritless and dilatory challenges to a foreclosing plaintiff’s standing, and evidentiary hearings required as a result thereof.

© Copyright 2013 USFN. All rights reserved.
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Connecticut: New Recording Fee Targets MERS

Posted By USFN, Thursday, October 3, 2013
Updated: Wednesday, October 14, 2015

October 3, 2013

 

by Ken Pollock
Hunt Leibert – USFN Member (Connecticut)

Effective July 15, 2013, the state of Connecticut enacted new legislation that has dramatically increased the recording fees charged for documents where MERS (Mortgage Electronic Registering System) is acting in a capacity as nominee for a mortgage lender. Although the new laws do not mention MERS specifically, the charge applies to documents containing a nominee for the actual mortgage lender. Currently, MERS is the only such business entity operating in this fashion.

Presently, to record a mortgage that does not contain language indicating that MERS is acting as the nominee for the lender, the first page of the document costs $53 to record and $5 for each additional page. Under the new plan, if that exact same mortgage refers to MERS as the nominee for the lender, the cost of the first page more than doubles to $116 and there is an added surcharge of $43 per document regardless of the number of pages. The MERS mortgage is still charged the further $5 per additional page; that charge was not modified.

What this means is that any person who buys a home or refinances an existing mortgage runs the risk of paying substantially more in recording fees if MERS has a role in the new loan. A typical mortgage recorded in Connecticut contains anywhere from ten to fourteen pages. A ten-page mortgage without the presence of MERS would cost $98 to record ($53 for the first page and $45 for the nine additional pages). If that same ten-page mortgage were to list MERS as nominee for the lender, however, the recording cost now increases to $204 — more than double.

If the Connecticut legislature intended to derive new revenue directly from MERS, the initiative missed the mark. The recording fee is charged to the borrower as a closing cost on the HUD-1 for the closing. In the overall scheme of things, it is still a relatively small amount when compared to the loan amount, but the cost is borne by the borrower and it is something that is completely out of the borrower’s control. Borrowers do not decide whether or not MERS has a place in their mortgage transaction. That arrangement is made directly by the lender.

Until the passage of this measure, the presence of MERS on a mortgage deed was a benign, invisible presence that meant nothing to the borrower. Now the presence of MERS results in more money coming out of the borrowers’ pocket at closing. Against a typical $150,000 mortgage, the result is almost negligible as a percentage of the money involved. However, for the affected individuals, it does represent one more creative way that the state is reaching into the pocket of the borrower.

The measure has already survived one attack. MERS filed a complaint in the Superior Court of Connecticut, Judicial District of Hartford, challenging the constitutionality of §§ 97 and 98 of Public Act 13-184 and §§ 81 and 82 of Public Act 13-247. On July 11, 2013, MERS was denied a temporary restraining order in its lawsuit. The lawsuit remains pending.

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New Reverse Mortgage Law and Challenges Servicers Face When Foreclosing a Reverse Mortgage

Posted By USFN, Thursday, October 3, 2013
Updated: Wednesday, October 14, 2015

October 3, 2013

 

by Elizabeth Loefgren
Sirote & Permutt, P.C. – USFN Member (Alabama)

On August 9, 2013, President Obama signed the Reverse Mortgage Stabilization Act (HR 2167) in an attempt to revitalize the FHA Home Equity Conversion Mortgage (HECM) Program. This Act amends 12 USCA § 1715z-20 of the National Housing Act (NHA) by giving the Secretary of Housing and Urban Development (HUD) the authority to make administrative and policy changes to the Federal Housing Administration’s (FHA) HECM program without the constraints of a lengthy, formal regulatory process.

Prior to this change, HUD followed a regulatory process, which typically took up to 18 months to make an administrative or policy change. During these 18 months, FHA could continue to lose money. The new bill allows HUD to bypass this time-consuming process and issue a notice or mortgagee letter when a change is “necessary to improve the fiscal safety and soundness of the program.” Any administrative or policy change will be effective upon issuance of the notice or mortgagee letter.

HUD plans to use the new procedures available to them in HR 2167 to add consumer safeguards and improve financial performance of the HECM insurance fund. HUD issued its first mortgagee letter pursuant to the new procedures on September 3, 2013. Effective September 30, 2013, seniors have more options at closing in order to preserve some of the equity in their homes to help pay taxes and insurance. Effective January 13, 2014, lenders must conduct financial assessments of potential HECM borrowers to determine whether a reverse mortgage is appropriate for their financial situation.

FHA’s HECM program provides reverse mortgages to those who are 62 years or older and allows elderly homeowners to obtain additional income by borrowing against the equity in their homes. The loan obligation is deferred until the death of the homeowner, the sale of the home, or the occurrence of other events. Under HUD mortgage insurance guidelines and the NHA, the term “homeowner” includes the spouse of the borrower. This results in displacement safeguards for the spouse of the borrower even if the spouse did not sign the note at the time of loan origination. Because of this, servicers face challenges when attempting to foreclose a reverse mortgage due to the death of the only party who signed the note when the surviving spouse still lives in the home. Servicers face similar challenges when a titleholder who occupies the property executes the mortgage and not the note, yet is defined as a “borrower” under the terms of the mortgage.

In order to prevent these challenges, the lender should identify all parties with an interest in the property at loan origination, including not only the spouse but also parties who have a title interest in the property. The lender should also consider requiring all parties with such an interest to execute the note. Otherwise, servicers will continue to face challenges when foreclosing reverse mortgages when the reason for default is due to the death of the borrower who signed the note and the property is still occupied by the surviving spouse or the party with a title interest in the property.

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Changes to Rhode Island Foreclosure Statute Require Mediation for Certain Foreclosures

Posted By USFN, Monday, September 9, 2013
Updated: Monday, November 30, 2015

September 9, 2013

 

by Patricia Antonelli, Brian P. Gallogly, & David J. Pellegrino
Partridge Snow & Hahn LLP – USFN Member (Massachusetts)

Changes to Rhode Island foreclosure law are set to become effective for certain mortgage foreclosures on September 12, 2013. New Section 34-27-3.2 entitled “Mediation Conference” has been added to Rhode Island General Laws, amending Chapter 34-27 entitled “Mortgage Foreclosure and Sale” (referred to here as the “Mediation Law”). Companion bills (House 5335, Sub B and Senate 0416 Sub A) were signed by the governor on July 15, 2013 and, according to their terms, the changes are effective 60 days after, on September 12, 2013. The Mediation Law will be in effect through July 1, 2018.

To provide guidance and forms for implementation of the Mediation Law, the Division of Banking of the Rhode Island Department of Business Regulation (DBR), has released proposed changes to Banking Regulation 5. The proposed changes were filed as an emergency regulation, which is effective for 120 days starting on August 14, 2013 until December 12, 2013, with the ability to renew Regulation 5 as amended for another 90 days. A hearing scheduled for September 16, 2013 regarding the Banking Regulation 5 changes has been postponed to September 23, 2013. Mortgagees and servicers can rely on the proposed changes and forms found in amended Banking Regulation 5 because those changes were proposed on an emergency basis.

The policy behind the state-wide Mediation Law seeks to address increasing residential mortgage foreclosure problems including the displacement of homeowners who want to live and work in Rhode Island and increasing numbers of unoccupied buildings. The state-wide Mediation Law should resolve the confusion in complying with local mediation ordinances that were previously enacted in Cranston, East Providence, Providence, Warren, and Warwick. The Mediation Law preempts any existing or future foreclosure mediation or conciliation ordinances, and it is expected that the cities and towns with local foreclosure mediation ordinances will not seek to enforce those ordinances once the Mediation Law becomes effective.

Mortgages on Non-Residential Property and Non-Owner-Occupied Residential 1- to 4-Family Property are Not Entitled to Mediation
Before getting into the nuts and bolts of the Mediation Law and the amendments to Banking Regulation 5, it will be helpful to review the mortgages that are NOT affected by the Mediation Law. Section 34-27-3.2(c)(6) defines “Mortgage” as “an individual consumer mortgage on any owner-occupied, 1- to 4-unit residential property that serves as the owner’s primary residence; and Section 34-27-3.2(l) provides that the Mediation Law applies only to foreclosure of owner-occupied, residential property with no more than 4 dwelling units which is the primary dwelling of the owner. Thus, no Mediation Notice (discussed later in this article) is required for a foreclosure where the collateral is purely commercial-purpose, and for those mortgage loans that encumber investment residential property, the mortgagee will have to be able to show that the property is NOT owner-occupied, residential 1- to 4-family property. Neither the Mediation Law, nor Banking Regulation 5, provide for a form of affidavit attesting to the fact that a particular mortgaged property is not eligible for mediation for reasons other than the exemptions stated below.

The Mediation Law provides that no foreclosure deed may be submitted to a land evidence recorder until the provisions of the Mediation Law have been met, and an affidavit of compliance with Section 34-27-3.2 must be provided with the foreclosure deed when submitted for recording. Failure to comply with the requirements of the Mediation Law renders a foreclosure “void.” Of concern is mortgaged property where the purpose of the mortgage loan was purely commercial and/or as investment property. In instances where the mortgage loan is a commercial-purpose or investment loan but where the property is owned by an individual, mortgagees and loan servicers should anticipate push-back from recorders and/or from title insurers who will be looking for compliance with the Mediation Law.

Exemptions from Mediation Law for Mortgages that are 120 Days or More Delinquent on September 12, 2013 or where Mortgagee Qualifies as a “Locally-Based Mortgagee”
The Mediation Law contains two exemptions that remove additional pools of otherwise applicable mortgage loans from the mediation requirement. One exemption provides that mediation is not necessary for mortgages on properties that are already seriously delinquent and that may or may not already be in foreclosure. For mortgage loans that are more than 120 days delinquent on or before September 12, 2013, the mortgage holder is exempt from complying with the Mediation Law. Amended Banking Regulation 5, Section 4, Paragraph C(i) provides that mortgagees may submit the form found in Appendix D 2 when recording the foreclosure deed. The form in Appendix D 2 includes a statement that the mortgage loan is more than 120 days delinquent.

The second exemption exists for entities that qualify as “Locally-based Mortgagees,” which are defined in Banking Regulation 5, Section 3, Paragraph G as “a Rhode Island-based Mortgagee with headquarters in Rhode Island or with a physical office or offices exclusively in Rhode Island from which is carried out full-service mortgage operations including acceptance and processing of mortgage payments and provision of local customer service and loss mitigation and where Rhode Island staff have the authority to approve loan restructuring and loss mitigation strategies.” Appendix D 1 of Banking Regulation 5 contains the form of affidavit for completion by the mortgagee who qualifies as a “Locally-based Mortgagee,” and it should be submitted with the foreclosure deed for recording and may be used as evidence for title insurers.

Mediation Notice and Procedures
The Mediation Law provides that foreclosure may not be initiated unless its provisions have been met. Thus, once a determination is made that a mortgage meets the definition of “Mortgage” in the Mediation Law, and that the two exemptions discussed above do not apply, a mortgagee or its servicer must take steps to comply with the Mediation Law. The Mediation Law provides that written notice of a foreclosure may not go forward without participation in a mediation conference, the notice must be sent by certified and first-class mail to the address of the mortgaged real estate and, if different, to the address designated by the mortgagor in writing. The DBR has released proposed forms of the required notice in Banking Regulation 5, Appendix B in English, Spanish, and Portuguese, which will be collectively referred to as the “Mediation Notice.”

The provisions of the Mediation Law setting forth the timing of when a Mediation Notice must be sent versus the timing requirement in amended Banking Regulation 5 may cause confusion for mortgagees and servicers. The Mediation Law states that the Mediation Notice must be sent out “When a mortgage is not more than 120 days delinquent ... .” On the same point, Banking Regulation 5 states that the Mediation Notice must be provided to all mortgagors and owners (if other than mortgagor) when a mortgage is not more than 90 days delinquent. We surmise that the change in timing for when the Mediation Notice must be sent could benefit both mortgagees and mortgagors because a mortgagor will be more likely to be able to come up with the funds to bring a mortgage current at the 90-day delinquency point as opposed to when the mortgage loan is 120 days delinquent. Nevertheless, the proposed regulation conflicts with the Mediation Law, and it is expected that this issue will be raised at the September 23, 2013 hearing on the proposed regulation.

Another issue raised by the delinquency timing point is this: One could interpret the Mediation Law to mean that if a mortgage loan is more than 120 days delinquent, the mortgagee does not have to send out a Mediation Notice, and no mediation is required. Some mortgagees and servicers may conclude that they can delay commencing foreclosure until the delinquency is more than 120 days, and thus avoid mediation altogether. The authors’ firm does not believe that the General Assembly and the DBR intended to provide for a mechanism to avoid mediation, and it is not advisable to engage in such a delay. We reiterate the fact that the Mediation Law provides that failure of a mortgagee to comply with its provisions renders the foreclosure “void,” and a “void” foreclosure will require the mortgagee to go back and follow the Mediation Law provisions and redo the entire foreclosure; steps which will be very costly for the mortgagee.

Still another issue that is not addressed in the Mediation Law or in the proposed changes to Banking Regulation 5 is what might happen if a mortgagee allows the mortgage to become more than 120 days delinquent and has not sent out a Mediation Notice. Can a Mediation Notice be sent out when a mortgage is 150 days delinquent, and what affect does that have on the validity of the foreclosure?

The Mediation Notice may be sent out by the mortgagee or its agent. This means the Mediation Notice can be sent out by the servicer or even the foreclosure attorney. Any mortgagee subject to regulation and supervision by the DBR must maintain a duplicate of the Mediation Notice, including information regarding delivery of the Mediation Notice, and a mortgagee may put the text of the Mediation Notice on its own letterhead (or on the letterhead of its servicer or foreclosure attorney). It contains a statement advising the mortgagor of his/her right to a free, in-person or telephone mediation conference with an independent mediation coordinator, and the mortgagee may not foreclose unless it provides the mortgagor with the opportunity to participate in mediation. The mediation conference must take place within 60 days of the mailing date of the Mediation Notice.


The Mediation Notice must be completed with the applicable loan number, the correct name of the mortgagee, the address of the mortgage and, importantly, the name of the mortgagee’s authorized representative along with accurate contact information for that person. The Mediation Notice also contains a statement directed at the mortgagor: “You will be contacted by a foreclosure mediation coordinator to schedule that mediation conference.” There is no direction in the Mediation Law or in the amendments to Banking Regulation 5 as to how the mediation coordinator is to be notified; however, it is safe to say that it is the mortgagee’s responsibility to notify the mediation coordinator at the same time that the Mediation Notice is mailed because the 60-day requirement must be met.

No mediation coordinator is named in the Mediation Law; the Law defines “Mediation Coordinator” as a person designated by a Rhode Island-based HUD-approved counseling agency to serve as the unbiased, impartial, and independent coordinator and facilitator of the mediation conference, with no authority to impose a solution or otherwise act as a consumer advocate, provided that such person possesses the experience and qualifications established by the DBR. Because the changes to Banking Regulation 5 were made on an emergency basis in order that the mediation process is ready on the effective date of the Mediation Law, the DBR has named Rhode Island Housing as the qualified mediation coordinator. Rhode Island Housing is well-prepared for the role because it has been in the same role in the cities and towns that have local foreclosure mediation ordinances. The DBR anticipates that there will be a hearing held in the future to establish qualification and experience requirements so that other mediation coordinators can be appointed.

The Mediation Law provides that the mediation conference shall take place in person or by phone. The mortgagor must participate in the mediation and cooperate in such a way so as to provide all necessary financial and employment information and by completing any and all loan resolutions and applications as deemed appropriate by the mediation coordinator. The mortgagee must designate an agent to participate in the mediation conference and respond to all requests from the mediation coordinator or the mortgagor within a reasonable period of time not to exceed 14 days. The mediation will be free to the mortgagor, and the mortgagee must pay Rhode Island Housing as the designated mediation coordinator $500 per engagement.

It is the job of the mediation coordinator (once notified by the mortgagee) to contact the mortgagor and set up a mediation session. After two attempts by the mediation coordinator to contact the mortgagor (where the mortgagor has failed to respond, cooperate, and/or participate), the mortgagee will be deemed to have complied with the Mediation Law upon verification by the mediation coordinator that the Mediation Notice was properly sent. The mediation coordinator shall issue a certificate of compliance, which shall be recorded with the foreclosure deed. Issuance of the certificate means that the mortgagee is free to proceed and foreclose. The form of “Certificate Authorizing Foreclosure Pursuant to R.I. Gen. Laws § 34-27-3.2” is found in Appendix C to amended Banking Regulation 5.

If a mediation conference does take place after a “good faith effort” is made by the mortgagee, and the parties cannot come to an agreement to renegotiate the mortgage loan so that foreclosure is avoided, the mediation coordinator must complete the certificate in Appendix C (including Attachment 1, which sets forth the factors of “good faith”). “Good Faith” is defined in the Mediation Law as the mortgagor and mortgagee dealing honestly and fairly with the mediation coordinator in an effort to determine whether or not an alternative to foreclosure is economically feasible for the mortgagor and the mortgagee. The Mediation Law provides that some or all of the following factors are evidence of good faith: (i) mortgagee provided the Mediation Notice; (ii) mortgagee designated an agent with authority to participate in the mediation conference on the mortgagee’s behalf; (iii) mortgagee made reasonable efforts to respond in a timely manner to requests from the parties; (iv) mortgagee declines to accept the mortgagor’s work-out proposal, if any, and the mortgagee provided a detailed written statement of its reasons for rejecting the proposal; (v) where mortgagee declines to accept the mortgagor’s work-out proposal, the mortgagee offered to enter into an alternative work-out/disposition resolution proposal that would result in net financial benefit to the mortgagor as compared to the terms of the mortgage. It is important to note that the Mediation Law does not require that all five good faith factors must exist to evidence the mortgagee has acted in good faith, but that “some or all” of the five factors may be checked off in Attachment 1 of the certificate to evidence good faith.

Limitation on How Many Times a Mortgagor is Entitled to Mediation
If the mortgagee and mortgagor are able to reach an agreement to renegotiate the terms of the mortgage so that foreclosure is avoided, the agreement must be reduced to writing and signed by both parties. If such a written agreement is entered, and if the mortgagor fails to comply with the terms of the agreement, the Mediation Law shall not apply to any foreclosure initiated within 12 months of the execution date of the written agreement. A foreclosing mortgagee must include these factors in the foreclosure affidavit that will be recorded with the foreclosure deed so that its right to proceed to foreclosure has been established.

Summary

A copy of the Mediation Law can be found here, while the proposed changes to Banking Regulation 5 can be found here. Parties can utilize the guidance and forms in proposed Banking Regulation 5 because it has been released as an “emergency” regulation, but they should be aware that the regulation and forms may change after the September 23, 2013 hearing. The forms that are needed for issuing Mediation Notices and completing the necessary certificates and affidavits of exemption can be found in the linked regulation document. Note that the proposed regulation contains mention of two different effective dates for the Mediation Law (September 12, 2013 and September 14, 2013). It is recommended that mortgagees utilize September 12, 2013 as the effective date until that discrepancy is resolved in the final changes to Banking Regulation 5.

© Copyright 2013 USFN and Partridge Snow & Hahn LLP. All rights reserved.
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