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Michigan: Bankruptcy Court Reviews Payment Change Notices & HELOCs

Posted By USFN, Tuesday, May 7, 2013
Updated: Monday, November 30, 2015

May 7, 2013

 

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

Editor's Note: In the USFN e-Update (distributed May 14, 2013), the bankruptcy court decision in Pillow was incorrectly referenced as being a Georgia (rather than a Michigan) one. That headline and the citation have been corrected, and a link to the actual Pillow court decision has been added for convenient reference.

As mortgage servicers are aware, effective December 1, 2011, notice of payment changes during the course of a Chapter 13 case (if the property is the debtor’s principal residence) must be provided to the debtor, the debtor’s attorney, and the trustee at least 21 days before the new payment amount is due. In addition, the notice shall be filed as a supplemental claim using the new official Form B10 (Supplement 1) instead of on the docket. There is no accommodation or exception for home equity lines of credit (HELOCs) or other types of loans where the payment changes on a monthly basis (or otherwise frequently) despite vociferous objection and comments by servicers, attorneys, and scholars during the public comment period for the bankruptcy rules changes that ran between August 2009 and February 2010.

In In re Pillow, Case No. 11-11688 (Bankr. W.D. Mich. 2013), Fifth Third Bank filed a motion to relax the reporting requirements under Rule 3002.1. The bank’s claim arose from a HELOC that was a revolving or “open end” credit arrangement secured by residential real estate. The loan documents provided that the interest rate on the HELOC changed every month, therefore resulting in a change in the debtor’s payment obligation on a monthly basis.

In its motion, the bank cited the “unique burden” that Rule 3002.1 placed on the holder of a HELOC loan with frequent payment adjustments. In lieu of having to file a payment change notice each month, the bank proposed a six-month reporting interval, and asserted that the court had the authority to enlarge deadlines under Rule 9006. The court entered an order granting the bank’s motion without objection and then the U.S. Trustee (UST) filed a motion for reconsideration pursuant to Rule 9024.

In its motion for reconsideration, the UST argued that it did not receive notice of the bank’s motion and, more importantly, that the court did not have the authority to modify the reporting requirements under Rule 3002.1. The bank and the UST stipulated that the bank held a claim falling under Rule 3002.1 because the claim was secured by the debtor’s principal residence and the debtor provided for the claim under 11 USC § 1322(b)(5). Therefore, the parties also agreed that absent the court’s order, the bank would be required to file a notice of payment change every month, no later than 21 days before the payment change takes place. Under the circumstances, that would mean the bank would have a small window of nine days each month to calculate and communicate the payment change in time for counsel to prepare and timely file the payment change notice with the court.

At the time of the hearing on the UST’s motion for reconsideration, the bank had filed two notices of payment change in the case. The first notice showed a payment change of $2.68 and the bank’s counsel stated that in some months the payment had changed by as little as 32 cents. The court agreed that the purpose of Rule 3002.1 (i.e., to permit debtors to “cure and maintain” under 11 USC § 1322(b)(5) and avoid surprises) would not be advanced by requiring the bank to give monthly notice of these small changes.

The court was further swayed by the fact that the clerical and legal expenses associated with the preparation, filing, and serving of monthly payment change notices for “nominal or negative adjustments” supported the bank’s position that the notice requirements imposed a unique burden. Furthermore, although initially concurring in the UST’s motion for reconsideration, counsel for the Chapter 13 trustee stated that the filing of monthly payment change notices by the bank would impose a burden on the trustee.

Interestingly, the court stated that “it seems safe to assume” that the lender will pass on the costs of complying with Rule 3002.1 onto the borrower, resulting in the lender having to file a notice for fees, charges, and expenses under Rule 3002.1. Therefore, over a five-year period, “a debtor could be required to pay substantial additional collection costs to compensate her HELOC lender for giving notice of payment changes in the range of $1.00-$3.00 per month, all in the name of transparency.”

In reaching its decision in favor of the bank, the court noted that Rule 9006 was “inescapably broad and flexible,” containing phrases such as “at any time,” “in its discretion,” “with or without a motion,” and “for cause.” Moreover, Rule 3002.1 was not a rule listed in the exceptions under Rule 9006(b)(2) or Rule 9006(b)(3). Furthermore, the bank had filed its motion and as “cause” had articulated the “unique burden” associated with the twenty-one day deadline given the nature of HELOC loans. Finally, after no objection by the debtor, trustee, or UST, the court entered its order relaxing the reporting requirements, concluding the bank’s motion established cause to modify the 21-day period in this case under Rule 9006(b).

While denying the UST’s motion, to the extent the motion sought relief beyond reconsideration the bankruptcy court did make a few minor changes to its earlier order. To ensure the debtor has ample opportunity to address the impact of minor payment changes before she concludes her Chapter 13 case, the bank will be required to file payment change notices on a quarterly basis during the final year of the debtor’s plan. In addition, if developments arise in the case to persuade either the debtor or trustee that cause exists to revisit the reporting interval, the court indicated it would consider readjusting the period.

© Copyright 2013 USFN and McCalla Raymer, LLC. All rights reserved.
May e-Update

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A Look at Overlapping Servicing Regs: Regulation X vs. WA & CA’s Requirements

Posted By USFN, Friday, May 3, 2013
Updated: Monday, November 30, 2015

May 3, 2013

 

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

by Wendy Walter
Routh Crabtree Olsen, P.S.
USFN Member (Alaska, Oregon, Washington)

The Consumer Financial Protection Bureau’s Regulation X establishes uniform national servicing standards, effective January 10, 2014, but does not routinely preempt state laws. Compliance with national regulations that overlap and intertwine with, as well as veer off from, state obligations presents a challenge for servicers and their vendors.

Comparison with WA and CA
The focus of recently enacted relevant state regulations and laws in Washington and California is on default servicing and foreclosures. Local counsel can help servicers reconcile and prepare for the differences between the national and state level regulations. This article will offer a comparison of Regulation X sections 1024.39 (Early Intervention) and 1024.40 (Continuity of Contact) with Washington and California’s default servicing and foreclosure requirements.

Borrower Contact Requirements
In recent years, servicers have been required to establish contact with delinquent borrowers in Washington and California. The state requirements have been a prerequisite to nonjudicial foreclosure referrals, but have not extended to judicial sales. Regulation X requires borrower contact as a prerequisite to foreclosure referral for both nonjudicial and judicial sales.

Regulation X, Section 1024.39 — The purpose of borrower contact listed in section 1024.39 is to encourage delinquent borrowers to work with their servicer to identify foreclosure prevention alternatives early in the delinquency. Live contact or good faith attempts need to occur no later than the 36th day of delinquency, followed by written contact no later than the 45th day of delinquency. Both the live and written contacts have content requirements although discretion is provided for live contact, while the written contact is scripted.

Washington Law — In this state’s nonjudicial foreclosure statute, a servicer is required to make written contact with the borrower of a loan secured by a principal residence by providing a notice of pre-foreclosure options. For the live contact, a servicer must attempt to call the borrower three times on three different dates to provide the borrower with options for loss mitigation. The nonjudicial foreclosure statute does not specify how far into default the loan must be before these contacts can begin. Servicers of loans secured by property in Washington have approached these requirements differently.

Some have sent out the notice of pre-foreclosure options when the loan was in the 15th day of delinquency, and others have waited until running through investor required loss mitigation programs and begin the Washington process before commencing the foreclosure. Furthermore, after this outreach process, the borrower has the opportunity to request a face-to-face meeting with its lender/servicer in Washington. For those servicers that wait until they have completed their investor required loss mitigation programs, this might result in a borrower having two opportunities for live contact. Borrower may be confused at the stream of mailings, phone calls, and outreach attempts, especially in those cases where they are not interested in retaining the property.

In addition to the prerequisites for the nonjudicial foreclosure process in Washington (which apply to all servicers of loans secured by a borrower’s principal residence), the Department of Financial Institutions, the agency that regulates state-licensed mortgage servicers, promulgated a rule, effective April 1, 2013, that applies to both judicial and nonjudicial foreclosures and requires its regulated servicers to have an electronic system that allows borrowers the ability to “check the status of their loan modification, at no cost.” The system must also be accessible to housing counselors and allow communication from them. Finally “the system must be updated every 10 days.” There is an exception to this requirement if the servicer is “using a HAMP or GSE loan modification program.”

Although this requirement, found in Washington Administrative Code (WAC) section 208-620-900(6), does prescribe a specific method in which Washington licensed servicers will need to be communicating with borrowers in loss mitigation, it was not a requirement adopted by the CFPB while promulgating the final Regulation X rules on borrower contact. The bureau states in the preamble to the rules that it needs more time to study the benefits of electronic portals and that despite the fact that the national servicing standards in the Attorney General/Department of Justice settlement agreement impose such a requirement, there are “other reasonable means to track and maintain borrower-submitted loss mitigation documents.”

California Law
— Similar to section 1024.39, California requires the servicer to make borrower contact prior to a nonjudicial foreclosure referral (Civil Code § 2923.55 or § 2923.5). While Regulation X relates the time of contact to the date of delinquency, California counts backwards from the date of first legal action for a nonjudicial foreclosure, which is the notice of default. Live contact needs to be made at least 30 days prior to recording a notice of default. If successful, a servicer need not make written contact, although as a matter of business practice written contact is routine. A certain exchange of information needs to take place if the servicer is successful at making live contact. If unable to make live contact, the servicer needs to perform due diligence, consisting of written contact, followed by three attempted telephone calls, followed by a second written contact, with prescribed timing, content, and method of delivery. Due diligence needs to be completed at least 30 days before recording a notice of default. Once the contact requirement is performed, a compliance declaration is attached to the notice of default.

The national and state level regulations require live and/or written contact with a borrower; both require certain timing and content, and both provide for a private right of action in case of violation. Servicers need to compare the timing, content, sequence and method of delivery to determine whether some contact requirements can be combined or need to be performed in a certain sequence. Keep in mind the restriction in the CFPB rules on foreclosure referral, which provides that a servicer shall not make the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process unless a borrower’s mortgage loan obligation is more than 120 days delinquent.

The “first notice or filing” has been defined in the official commentary to be “any document required to be … provided to a borrower as a requirement for proceeding with a judicial or nonjudicial foreclosure process … including any notice that is required by applicable law in order to pursue acceleration of a mortgage loan obligation or sale of a property securing a mortgage loan obligation.” The timing and sequence of these requirements may turn, in part, on whether the state-required notices would fall within this definition. It is important to note that this is an area where the CFPB has expressly stated that federal regulation will preempt state law.

Continuity of Contact Requirements
Washington and California have also recently enacted point of contact requirements. The state law requirements in California are limited to nonjudicial foreclosures, while Regulation X and Washington requirements extend to judicial sales as well. Rather than calling it a single point of contact or SPOC, the bureau adopted the phrase “continuity of contact.” The difference in terminology appears to be a non-issue, however, as the divergence lies in the substance of the requirements.

Regulation X, Section 1024.40 — To further assist borrowers with exploring foreclosure prevention alternatives, section 1024.40 requires a servicer to assign personnel to a delinquent borrower with the written notice described in section 1024.39, sent no later than the 45th day of delinquency. The personnel must be available via telephone to assist a borrower with loss mitigation options until the borrower has made two consecutive mortgage payments under a permanent loss mitigation agreement. This section does not require providing a borrower with identifying information about the contact personnel. A telephone number and address for the servicer personnel appears sufficient. The assigned personnel may be single- or multi-purpose, meaning their primary responsibility might not be responding to a delinquent borrower. Nonetheless, the personnel do have enumerated functions. Section 1024.40 does not provide a private right of action.

Washington Law — WAC 208-620-900(5), effective January 1, 2013, requires that a state-licensed servicer must respond to a borrower’s request for information and, at a minimum, provide the telephone number and mailing address of an individual servicer representative with the information and authority to answer questions and resolve disputes and to act as a “single point of contact for the homeowner.” The Washington SPOC must have the authority and ability to: explain loss mitigation options and requirements, track documents provided by the borrower, inform the borrower of the status of his loss mitigation process, and ensure the borrower has been considered for all loss mitigation options, as well as have access to individuals who can delay or stop the foreclosure proceedings. The trigger for these requirements is a borrower’s “request for information.” The servicing rules in Washington do not appear to have a private right of action, but the Department of Financial Institutions can enforce them and will likely audit accordingly when conducting examinations of Washington-licensed servicers.

California Law — California’s SPOC requirement is triggered if and when a borrower requests a “foreclosure prevention alternative” (Civil Code § 2923.7). The SPOC may be an individual or a team of personnel, each of whom needs to have the ability and authority to perform specified functions. There is no requirement that the SPOC be available via telephone, but one or more direct means of communication needs to be provided.

A SPOC shall remain assigned to a borrower until the servicer determines that all loss mitigation options are exhausted, or the borrower’s account becomes current. The difference between assigned personnel versus SPOC seems to be that section 1024.40 does not require providing identifying information about the contact personnel. For practical purposes that difference might be negligible, as a SPOC can be a team of personnel. California law does provide a private right of action.

While, in essence, there is similarity in SPOC or “continuity of contact” functions under the three regulations compared here, the functions are not identical. Servicers need to be aware of the differences in trigger point, means of communication, categorized functions, and borrower’s private right of action.

Conclusion
The borrower contact requirements and single point or continuity of contact rules are significant. However, a greater challenge is presented when one analyzes loss mitigation procedures under state laws and Regulation X. Evaluating borrowers for loss mitigation options is not new for servicers, but the complexities of navigating the multifarious covenants and restrictions — each with different scripts, timelines, and penalties — are unprecedented. Planned for the summer USFN Report is an article comparing the loss mitigation measures of Washington and California with Regulation X, section 1024.41. Look for that in August.

© Copyright 2013 USFN. All rights reserved.
Spring USFN Report

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Revisiting the Mortgage Forgiveness Debt Relief Act of 2007

Posted By USFN, Friday, May 3, 2013
Updated: Monday, November 30, 2015

May 3, 2013

 

by Matthew B. Theunick
Trott & Trott, P.C.
USFN Member (Michigan)

Pursuant to § 61(a) of the Internal Revenue Code (26 U.S.C.S. § 61(a)), for income tax purposes, “gross income” is defined as “all income from whatever source derived.” As noted in IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments: “Generally, if you owe a debt to someone else and they cancel or forgive that debt, you are treated for income tax purposes as having income and may have to pay tax on this income.” Accordingly, gross income consists of canceled debt, unless an applicable exclusion applies.

In the wake of the real estate market readjustment of 2006 and 2007, the federal government enacted such an exclusion in the form of the Mortgage Forgiveness Debt Relief Act of 2007, 110 P.L. 142, the purpose of which was to amend the Internal Revenue Code to exclude discharges of indebtedness on principal residences from gross income, by providing relief to underwater homeowners on foreclosures, short sales, deeds-in-lieu of foreclosure, mortgage refinances, loan modifications, abandoned properties, et cetera.

This relief was provided by amending § 108(a)(1)(E) of the Internal Revenue Code to note that an exclusion from gross income would include “qualified principal residence indebtedness which is discharged before January 1, 2010.” This governmental action allowed distressed homeowners the ability to exclude up to $2 million of certain debt forgiven on a principal residence or $1 million for a married person filing a separate return.

As noted in IRS Publication 4705, Tax Benefits, Credits, and Other Information, qualified principal residence indebtedness is debt “… used to buy, build or substantially improve the taxpayer’s principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.”

For the distressed homeowner, a key provision of the Debt Relief Act is that debt reduced through mortgage restructuring as well as debt forgiven in connection with a foreclosure may qualify. If the homeowner qualifies for this debt relief, the homeowner can claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to his or her tax return for the year in which the qualified debt was forgiven. Additionally, if debt is reduced or eliminated, the homeowner can expect to receive a year-end statement Form 1099-C, Cancellation of Debt, from the mortgage lender.

The Debt Relief Act of 2007 was amended in section 303 of the Emergency Economic Stabilization Act of 2008, P.L. 110-343, by striking “January 1, 2010” and inserting “January 1, 2013” in Subparagraph (E) of section 108(a)(1) of the Internal Revenue Code and was again amended in section 202 of the American Taxpayer Relief Act of 2012, 112 P.L. 240, enacted January 2, 2013, to extend the exclusion to “January 1, 2014.” Whether relief beyond 2013 will be provided will no doubt depend on the state of the economy in relation to the benefit gained, as opposed to the taxable revenue lost by providing this relief.

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Spring USFN Report

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HOA Talk Texas: A Focus on the Newest Law Changes

Posted By USFN, Friday, May 3, 2013
Updated: Monday, November 30, 2015

May 3, 2013

 

by Devin Buckland
Director of Closing Services and Compliance
Barrett Daffin Frappier Turner & Engel, LLP
USFN Member (Texas)

The Texas legislature passed a law that focuses on the homeowners associations’ (HOA) management of communities, as well as provides new payment alternatives for homeowners with delinquent HOA assessments. That new law, which became effective last year on January 1, 2012, focuses its attention on four different sections: payment plans for delinquent homeowners, priority of payments, utilization of third party collections, and new foreclosure requirements under Texas Rule of Civil Procedure 736, if the HOA dedicatory instruments, more commonly known as declarations, contain an express power of sale. The alternative payment plan and foreclosure requirements pose potential risk and priority issues for mortgage servicers.

Payment Plans (Texas Residential Property Owners Protection Act, Sec. 209.0062)

Any HOA with 14 or more lots must adopt alternative payment plan guidelines for every delinquent homeowner. The homeowner is able to make partial payments without accruing any additional monetary interest or penalties, with a minimum term of three months up to a maximum of 18 months from the date of the homeowner’s initial request. The payment plan is filed in the real property records. The issues that exist are determined by the declarations of the HOA.

 

  • If the HOA assessments are subordinate, the lender’s lien will not be in jeopardy.
  • If the declarations state that the assessments are superior, the lender’s lien would be subordinate and have the potential risk of being extinguished. If the homeowner stops paying on the alternative payment plan, judicial foreclosure actions will put the lender at an even more immediate risk.

Priority of Payments (Sec. 209.0063)
Payments received by the HOA from the homeowner must be applied in the following order: delinquent assessments, current assessments, attorneys’ fees or third party collection costs associated with collection of assessments or any other charges relating to the order of foreclosure, fines, and any other amounts owed to the association. If the homeowner has entered into an alternative payment plan and is in default of that agreement, the association is not required to follow the priority rules. In the event that the homeowner defaults, the HOA could then pursue foreclosure action and ultimately take back the property. The funds received from the homeowners could then be applied for any costs incurred by the association in its collection efforts and foreclosure costs.

Third Party Collections (Sec. 209.0064)

The homeowner is not liable for the fees of a collection agency retained by the HOA, unless the HOA has provided written notice to the homeowner by certified mail. The notice must specify all delinquency and total reinstatement amounts, describe options to the homeowner to avoid having the account turned over to a collection agency, and provide at least 30 days for the owner to cure the delinquency before any further collection activity is taken. The HOA is prohibited from selling or transferring any interest in its accounts receivable for a purpose other than as collateral for a loan.

Judicial Foreclosure Required (Sec. 209.0092)

An HOA is unable to foreclose on a property under an assessment lien unless it first obtains a court order under Texas Rule of Civil Procedure 736 if its dedicatory instrument contains a power of sale; otherwise, the HOA must judicially foreclose under Texas Rule of Civil Procedure 309. Expedited foreclosure is not required if the owner of the property that is subject to foreclosure agrees in writing at the time the foreclosure is sought to waive expedited foreclosure. A waiver may not be required as a condition of the transfer of title to real property.

If an HOA with a power of sale seeks to foreclose a superior HOA lien by obtaining a Rule 736 order and then nonjudicially forecloses its assessment lien, the HOA is not required to make any holder of an inferior lien of record a party to a Rule 736 proceeding. However, the HOA must send a notice of the foreclosure sale as required by Tex. Property Code § 51.002(b) to any inferior lienholder at the lienholder’s address contained in the deed records. The inferior lienholder then has 61 days after it receives the foreclosure sale notice to cure the HOA lender default. (Tex. Prop. Code § 209.0091)

If the HOA assessment lien is subordinate to a superior lien that is recorded in the land title records and the HOA forecloses, the lender’s lien will remain intact; however, the borrower would no longer be the owner of the property. That circumstance would constitute a non-monetary default under most Texas deeds of trust. If the mortgage is in default and the HOA is pursuing foreclosure, lenders should be cautious before engaging in loss mitigation activities with the borrower who may no longer be the owner of the property. NOTE: Texas Property Code § 209.010 requires the HOA to provide written notice of the date and time an HOA foreclosure took place to all lienholders of record, who can then redeem the property under Texas Property Code § 209.011.

Conclusion

Over time, the relationship between HOAs and mortgage servicers should improve with the changes through HUD on Clarification Regarding Title Approval at Conveyance, to be issued later this year. If the mortgage servicer is faced with subordinate or superior HOA foreclosure actions, the remedies can vary from monetary losses to costly litigation. Mortgage servicers will continue to be faced with the difficulties inherent in identifying HOAs and their management companies and the lengthy and costly task of protecting their lien priority and ownership interests.

© Copyright 2013 USFN. All rights reserved.
Spring USFN Report

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Vacant Property Ordinances Updates from Four States: Ohio

Posted By USFN, Friday, May 3, 2013
Updated: Monday, November 30, 2015

May 3, 2013

 

by Adam R. Fogelman
Lerner, Sampson & Rothfuss
USFN Member (Kentucky, Ohio)

USFN reported on two new Ohio vacant property ordinances in the Spring 2012 USFN Report. Since then, the popularity of vacant property ordinances has increased in the state. That 2012 article focused on two (then-) new vacant property ordinances in the city of Cleveland (Ordinances 1519-11 and 1520-11). The two ordinances were enacted in November 2011 and targeted foreclosed properties in the city. The ordinances addressed the recoupment of demolition costs and required entities buying, owning, selling, or transferring properties in Cleveland to be registered with the Ohio secretary of state.

Today, many other communities — both large and small — are turning to vacant property ordinances. These locally-enacted pieces of legislation take one of two forms, either a vacant property registration ordinance or a foreclosure filing notice ordinance.

A vacant property registration ordinance oftentimes requires that a first mortgage holder complete a form and tender a fee to the municipality upon receiving notice that the property is abandoned or vacant. The ordinances usually require action within a relatively short period of time after receiving notice (generally between 10 and 90 days after notice) and continued action during the property’s vacant period. These ordinances are often focused on obtaining a point of contact at the mortgagee’s office for local government use if issues arise with the property.

A foreclosure filing notice ordinance requires a foreclosing litigant to file a form with a copy of the complaint and tender a fee to the municipality in which the property under foreclosure is sited. The form and fee are required simultaneously with the filing of the foreclosure complaint or within a very short time period thereafter. These ordinances act to notify local governments that a property within their boundaries is in foreclosure and to provide those local governments with a point of contact for the property.

A survey of Ohio law finds that there are more than 70 local community ordinances. A look at these ordinances shows that slightly less than half are foreclosure filing notice ordinances and slightly more than half are vacant property registration ordinances.

It is important that foreclosing lenders work closely with their legal counsel to comply with local foreclosure filing notice ordinances. Similarly, lenders should work with property preservation companies, local brokers, or a property management company to comply with vacant property registration ordinances. The failure to abide by these local laws can result in substantial penalties that include fines, fees, and liens on the property for work the city does in maintaining the property.

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Spring USFN Report

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Vacant Property Ordinances Updates from Four States: New York

Posted By USFN, Friday, May 3, 2013
Updated: Monday, November 30, 2015

May 3, 2013

 

by Robert H. King
Rosicki, Rosicki & Associates, P.C.
USFN Member (New York)

Towns and villages throughout New York State enacted foreclosure notification ordinances and promulgated regulations in 2012, akin to New York City’s Local Law 4. Mortgagees in New York must now provide notification of new and existing foreclosures to local towns and villages or face fines and penalties.

In January 2012, the New York City Council unanimously passed an amendment to Chapter 2 of Title 27 of the New York City Administrative Code that required specific information from foreclosing mortgagees to be provided to the New York City Department of Housing Preservation and Development (HPD). The mayor signed the law, which went into effect on June 16, 2012. Local Law 4 of 2012, as the law is now known, granted authority to HPD to promulgate rules in accordance with the law.

Without much fanfare, and shortly after New York City enacted its law, the incorporated village of Massapequa Park passed an amendment to Chapter 254 of its Village Code, as did the incorporated village of Hempstead, which passed an amendment to Chapter 78A of its Village Code. Both municipalities require foreclosure notification, and both village codes include monetary penalties — ranging from $1,000 to upwards of $10,000 for each week of noncompliance for severe and repeat offenders.

An important struggle revolves around the consideration of local laws and ordinances by town councils and village boards. Mortgagees and their foreclosure counsel rarely have an opportunity to comment about the proposals or attend hearings prior to the enactment of the laws. The result is that at a most critical, pre-passage stage mortgagees are often left in the dark. An unsurprising consequence is that these laws and ordinances, despite good intentions, are often problematic in both their expectations and application. A prime example is the challenge of developing processes to respond to the laws and ordinances, which is borne exclusively by mortgagees; and, in addition, the relatively short time frames in which these processes must be instituted.

To their credit, the local towns and villages are helpful when asked to provide important information about the laws. In particular, the villages of Hempstead and Massapequa Park are forthcoming as to the intent and implementation of the laws and ordinances. According to the officials, the purpose of the ordinances is to control vacant housing efforts and prevent vacant buildings from becoming hazards to communities and public officials charged with overseeing these properties. The trend continues as other municipalities hear about and attempt to pass similar ordinances.

With New York’s 62 counties and hundreds of local municipalities, and the prospect of fines and surcharges against mortgagees for noncompliance, it remains necessary for servicers and their legal counsel to discover these new laws and ordinances, and perhaps develop a centralized means of foreclosure notification to the smaller municipalities in order to mitigate costs and bring uniformity to the process.

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Spring USFN Report

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Vacant Property Ordinances Updates from Four States: Michigan

Posted By USFN, Friday, May 3, 2013
Updated: Monday, November 30, 2015

May 3, 2013

 

by Jessica Rice
Trott & Trott, P.C.
USFN Member (Michigan)

Michigan was just one of many states that were greatly impacted by the rise in foreclosures over the past few years. With this increase in foreclosures also came the emergence of vacant property ordinances (VPOs). These ordinances have been on the rise and it can be inferred that this is due in large part to the increase in foreclosures and, subsequently, the difficulty in marketing and selling foreclosed properties. Whether this is due to property conditions, title issues, or just a downturn in the marketability of certain properties in a given area, these ordinances put yet another requirement on mortgage servicers that can prove both onerous and costly.

Since my last article in the Autumn 2011 USFN Report, Michigan has seen an increase in the number of VPOs across the state. Traditionally, these ordinances have only impacted mortgage servicers at the time of REO. However, there is a trend in Michigan in which inspection requirements are triggered by the commencement of the foreclosure process and, in some cases, registration of a property is required when a foreclosure is initiated. Given this, it is imperative that mortgage servicers are aware of these ordinances and utilize the knowledge of their asset managers, brokers, and local securing companies to ensure compliance.

Municipalities have implemented VPOs as a means to hold property owners accountable for properties and to impose requirements that function to alert the municipality to properties that need to be monitored. This implementation is in large part due to a municipality’s attempt to limit and combat blight, maintain the integrity of the community, and to stabilize property values. Failure to comply with an ordinance and file the proper registration could result in a lien being placed on the property by the municipality as well as legal action up to and including abatement.

VPOs serve to provide municipalities with the means to contact the property owner or mortgage servicer should issues occur with a property. This is commonly done to make sure that if any issues develop at a particular property (such as suspected misconduct, vandalism, or failure to maintain the property) the city has a point of contact to refer these matters. These ordinances also will oftentimes require a “responsible local agent” to be appointed if the mortgage servicer is located outside of a certain predetermined distance from the property. This further ensures that the city will be able to contact someone who will be able to take immediate action at a property when an issue arises.

Historically, the onus for compliance with a VPO did not shift to the mortgagee until the mortgagee acquired the property by way of foreclosure. However, as previously mentioned, a new trend in Michigan has emerged in which cities are including requirements in their VPOs that are triggered by the commencement of the foreclosure process. In these instances, the mortgagee must adhere to the terms of the applicable ordinance prior to acquiring title through a foreclosure. This changes things a bit from the mortgage servicing standpoint, as this impacts the manner in which property registrations are handled from a time frame perspective and puts the onus for registration and compliance with the ordinance on the mortgage servicer sooner than has generally been the case.

More specifically, ordinances with requirements that are triggered by the initiation of the foreclosure process typically mandate that an inspection of the property is performed upon initiation of the foreclosure. The “initiation of the foreclosure” is most often defined as the filing of a complaint for foreclosure if the foreclosure is proceeding judicially, or the publishing of a notice of foreclosure if a foreclosure is proceeding by advertisement. Subsequent to the inspection, if the property is determined to be vacant or shows evidence of vacancy, then the property must be registered within a certain time frame — mostly ranging from 15-45 days.

Additionally, a few municipalities have recently taken this a step further and have imposed requirements that do not just call for registration once a property is determined to be vacant or abandoned but, rather, upon initiation of a foreclosure. For example, the city of Jackson imposed a “Foreclosed, Vacant and Abandoned Residential Property Ordinance” in March 2012. This ordinance requires an owner of a foreclosed, vacant, or abandoned residential property to register the property within 15 days of the property becoming subject to foreclosure, the property becoming vacant, the property becoming abandoned, or upon notification that the structure has been declared a foreclosed, vacant, or abandoned property, whichever is earlier. For purposes of this ordinance, “owner” is defined as including a financial institution that is foreclosing a mortgage interest. Therefore, in instances where the property becomes subject to foreclosure prior to the property being vacant, abandoned, or notification being sent by the city, the city is requiring the property be registered.

The city of Port Huron has also imposed a requirement for the registration of foreclosed properties. This requirement is predicated by the foreclosure action, but is a bit more simplistic in that it requires that the mortgage servicer initiating the foreclosure merely provide contact information for their office and their designated point of contact within 10 days following a foreclosure filing.

While the number of cities enacting this new category of ordinances with more onerous registration requirements is, at this time, relatively limited, it certainly appears that this is evidence of a new trend by municipalities in Michigan to implement ordinances that hold mortgage servicers accountable for properties much sooner than was previously the case. Whether that takes the form of requiring property inspections until the property is determined to be vacant, or requiring registration upon the property becoming subject to foreclosure, it seems it is now more necessary than ever to be aware of these ordinances and make certain that there are mechanisms in place to ensure compliance.

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Vacant Property Ordinances Updates from Four States: Maryland

Posted By USFN, Friday, May 3, 2013
Updated: Monday, November 30, 2015

May 3, 2013

 

by Ronald S. Deutsch
Cohn, Goldberg & Deutsch, LLC
USFN Member (District of Columbia)

A new expedited foreclosure procedure became effective in Maryland on March 11, 2013 upon the promulgation of a rules change. This procedure represents the legislature’s attempt to clear the thousands of vacant properties and properties unfit for human habitation and thereby reduce blight. In order to proceed under the new law, codified at Md. Code Ann. RP Section 7-105.11, the servicer must obtain from a county (that has established a procedure for doing so), a certificate of vacancy, or of property unfit for human habitation.

A property unfit for human habitation means: (1) in Baltimore City, a certificate of substantial repair; or (2) a certificate for residential property issued by a unit of a county or municipal corporation indicating that the county or municipal corporation has determined that the residential property is unfit for human habitation. Similarly, a certificate of vacancy means a certificate issued by a unit of a county or municipal corporation for residential property, indicating that the residential property is vacant. So, in both cases a government entity makes the determination.

A county or municipal corporation may charge a fee not to exceed $100 to a secured party to issue a certificate of vacancy or a certificate of property unfit for human habitation. When a certificate of vacancy or a certificate of property unfit for human habitation has been filed with the order to docket or complaint to foreclose, the rules delineated in 7-105.1(c) that require a notice of intent and waiting 45 days after same (or 90 days after default, whichever is later) before docketing are no longer applicable. That said, the borrower maintains the right to challenge an expedited filing. A challenge is initiated by filing a motion in the foreclosure action. Upon receipt of a proper challenge, all proceedings in the action shall be automatically stayed until further order of the court. The secured party must file a response within 15 days of being served with a motion to challenge. The court is required to promptly rule. If the secured party does not file a timely response, the action shall be dismissed without prejudice to refile. If the court rejects a challenge, then the stay is lifted and the case proceeds.

Because of possible legislative drafting issues, one reading of the new rule requires all papers to be served by personal delivery or by leaving papers with a resident of suitable age and discretion at the dwelling house or usual place of abode of each person served. If on at least two different days a good faith effort to serve a borrower or record owner is not successful, however, the plaintiff may effect service by: (1) mailing, by certified and first-class mail, a copy of all papers filed to commence the action, accompanied by the documents required, to the last-known address of each borrower and record owner, and, if the person’s last-known address is not the address of the residential property, also to that person at the address of the property; and (2) posting a copy of the papers in a conspicuous place on the residential property. Service under that interpretation is complete when the property has been posted and the mailings have been made. Under an alternative interpretation, personal service may be the only effective method of service and posting would not be allowed. Under both interpretations a notice “to all occupants” must sent.

To date, this author is unaware of any counties having established a procedure for the issuance of the certificate required under the statute. Baltimore City, however, advises that it will issue a certificate of substantial repair, and that it does have an adequate program in place, which suffices under the new rules.

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Hurricane Sandy Impact Lessons Learned from Hurricane Katrina

Posted By USFN, Friday, May 3, 2013
Updated: Monday, November 30, 2015

May 3, 2013

 

by Steve Meyer
Assistant VP, High Risk and Hazard Claims
Safeguard Properties
USFN Associate Member

When Hurricane Sandy hit the Northeast Coast in October 2012, the mortgage servicing industry felt a sense of déjà vu. Less than eight years before Sandy, the U.S. was starting to rebuild from Hurricane Katrina, arguably one of the most devastating natural disasters in the country’s recent history. In 2005, Hurricane Katrina left $81 billion in damage, 1.2 million evacuees, and 1,833 storm-related deaths according to The Weather Channel. Early estimates show that Sandy caused 147 deaths and $50 billion in damage to 650,000 properties.

Because the majority of properties damaged and destroyed by Hurricane Sandy have mortgage loans, the mortgage industry has a vested interest in assisting homeowners to mitigate losses. Applying lessons learned from Hurricane Katrina can help both homeowners and mortgage servicers understand and address insurance and property preservation issues.

Insurance-related Issues
A big challenge servicers face after major disasters like Hurricanes Katrina and Sandy is that most homeowners do not fully understand their insurance policies and often find that they have insufficient policies to cover the damage. They also fall prey to unscrupulous contractors and adjusters.

• Flood vs. Wind-driven Rain Damage — Determining the cause of the damage establishes whether it is covered under a standard homeowner’s policy or under a separate flood policy. Many homeowners do not have flood insurance policies because they are not required unless properties are located near a flood plain. Flood damage typically is not covered under a standard policy, although wind-driven rain damage is covered, and establishing the cause of the damage is usually dependent on the discretion of adjusters.

• Adjuster and contractor fraud
— Predatory practices by insurance adjusters and contractors were so prevalent after Hurricane Katrina that it spawned legislation requiring adjusters to become licensed or obtain temporary catastrophe licenses that are valid for up to 180 days. Even with such legislation, vulnerable homeowners fall prey to unscrupulous insurance adjusters and repair contractors who receive insurance money and then fail to complete repairs or assessments or perform shoddy work. The risk for mortgage servicers is that the value and condition of the property may be negatively impacted as a result.

• Limited coverage — Insurance policies may not fully cover the costs of repairs and clean-up after a storm or hurricane. For example, a policy might cover the cost to remove a downed tree that has fallen onto a home, but it may not cover the cost to remove sticks and limbs from the yard.

• State rulings — After major storms, states make declarations to categorize the event. This is important to servicers because specific insurance policies must be used to cover damage costs depending on what type of storm has been declared. For example, if the storm is declared a hurricane, the amount of money homeowners must pay out of pocket for deductibles differs from what they would pay using a standard homeowner’s policy. Hurricane insurance policies carry “percentage deductibles.” When a homeowner purchases a hurricane policy, the carrier determines the deductible based on a percentage of the total appraised value of the home. As an example, a homeowner with a home appraised at $250,000 and a policy that carries a five percent deductible for hurricane damage would have to pay $12,500 out of pocket.

• Servicers omitted from claim checks — On current loans, insurance carriers issue two-party checks that need to be endorsed by both the servicer and the borrower. In an effort to expedite payment for minor damage or cost-of-living expenses, some insurance companies set up temporary locations and write checks directly to the homeowners. As an additional insured on the policy, the carrier has an obligation to include the servicer on any payment for damage to the dwelling regardless of the amount.

• Recoverable depreciation — Understanding the policy requirements related to recoverable depreciation is important to ensure full reimbursement. Policies will only make full reimbursement for damage once repairs are completed. Until then, reimbursements are made based on the depreciated value of the property. The typical time frame for recoverable depreciation is 180 days after the date of loss. Insurers may extend the timeline to 24 months after major storms or disasters.

Property Preservation Issues
Major storms and disasters present new challenges for servicers and their field service partners in assessing damage and making repairs. Some of those challenges include increased materials costs, accessibility of properties, mitigating further damage, and identifying vacancies.

• Increased cost of materials — Increased demand and short supplies of building materials often cause a spike in costs after major storms. As a result, the cost-estimating software that the industry uses to determine the cost of repairs may not be accurate under the circumstances. It is important to review current material costs and pursue supplemental claims with the insurance carriers when necessary.

• Property accessibility
— Inspectors often have difficulty reaching properties in severely impacted areas, and shortages of fuel may limit the number of properties they can inspect. Inspection delays can hinder damage reporting, property securing, as well as emergency work needed to mitigate the damage.

• Mitigating further damage — Servicers must take action to mitigate existing damage to prevent further damage. It is a requirement of investors and insurance companies. If servicers fail to properly mitigate losses, investors will not reimburse for the additional damage, and insurance companies will not reimburse to remediate resulting mold damage.

• Identifying vacancies — After a severe storm, it is difficult for field servicers’ inspectors to determine vacancy when homeowners are forced to evacuate. Reporting a property as vacant when it is not can result in the denial of a homeowner’s insurance claims if force-placed coverage has been initiated by the servicer. Further, when borrowers evacuate, field service companies must decide whether to secure a property as well as determine other preservation measures that must be taken to protect the servicer’s collateral interests.

Solutions
The aftermath of a storm is a chaotic time for borrowers whose homes have been damaged or destroyed. Servicers must take immediate action to communicate to homeowners and offer assistance through the rebuilding process.

Utilizing field service contractors, servicers can reach out to borrowers and provide contact information when borrowers have questions or need help to address issues. Servicers also should train customer service personnel to assure that borrowers receive accurate and timely responses and information regarding insurance coverage and other storm-related updates.

Additionally, servicers must emphasize to borrowers the importance of documenting all property damage before filing an insurance claim. Homeowners should take multiple photos and videos that are time-stamped. Some homeowners have used the daily newspaper to verify dates in their damage photos and videos.

Often homeowners do not know what to do or where to turn for help after a major storm event. By identifying key issues from previous storms and applying the lessons learned, servicers can better manage issues, reduce potential losses, and offer much-needed relief to homeowners impacted by the devastation.

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BANKRUPTCY UPDATE Post-BAPCPA: The Absolute Priority Rule

Posted By USFN, Friday, May 3, 2013
Updated: Monday, November 30, 2015

May 3, 2013

 

by Christopher M. McDermott
Pite Duncan, LLP
USFN Member (California)

The decline in the national real estate market over the past few years has caused mortgage lenders to suffer significant losses in Chapter 11 bankruptcy proceedings due to a debtor’s ability to reduce the lenders’ secured claims to the current fair market value of real property, which is not secured solely by a debtor’s principal residence (commonly referred to as a “cramdown”). A cramdown of a loan results in bifurcating a creditor’s claim into secured and unsecured claims.

The rise of cramdowns in Chapter 11 bankruptcy cases has naturally led to a substantial increase in the amount of unsecured claimants, which has in turn given these unsecured claimants a louder voice than ever before in individual Chapter 11 bankruptcy cases. One of the most powerful defenses to the cramdown of a Chapter 11 plan that is available to an undersecured creditor is the absolute priority rule, which has been a lightening rod for litigation over the past few years.

The absolute priority rule prohibits a debtor from retaining pre-petition property of the estate if the dissenting class of unsecured creditors is not paid in full. This effectively means an unsecured creditor would have to be paid in full before the debtor could retain pre-petition property (which includes the property related to the cramdown). In 2011, this author’s firm obtained a favorable, published decision in the matter of In re Kamell, 451 B.R. 505 (Bankr. C.D. Cal. 2011), for denial of confirmation of a debtor’s plan that proposed to cramdown a loan by approximately $1,400,000. More specifically, as the unsecured class rejected the plan and the debtor did not propose to pay the unsecured creditors in full, the court concluded that the plan violated the absolute priority rule.

Courts across the country are divided on the rule’s continued application to individual debtors after the 2005 BAPCPA amendments and have come to adopt one of two opposing viewpoints, commonly known as the “broad view” and the “narrow view.” Advocates of the “broad view” assert that the 2005 BAPCA amendments eliminated the absolute priority rule’s application to individual debtors. Contrastingly, “narrow view” supporters assert that the 2005 amendments simply established that post-petition property is exempt from the absolute priority rule, whereas the absolute priority rule remains applicable to pre-petition property.

In January, in the matter of In re Stephens, 704 F.3d 1279 (10th Cir. 2013), the U.S. Court of Appeals for the Tenth Circuit adopted the “narrow view” and provided a current tally of published decisions on this issue indicating that, as of the date the Stephens opinion was published, only the Bankruptcy Appellate Panel for the Ninth Circuit and five bankruptcy courts (one of which was affirmed by a district court) have adopted the “broad view,” whereas the U.S. Court of Appeals for the Fourth Circuit and seventeen bankruptcy courts (and now the Tenth Circuit) have adopted the “narrow view.”

The clear majority adopting the “narrow view” suggests courts are finding it increasingly difficult to hold that Congress intended to abrogate this rule that is such a fundamental protection for creditors in Chapter 11 bankruptcy cases. It appears inevitable that there will soon be a circuit split on the absolute priority rule and, given the rule’s significance in Chapter 11 bankruptcy cases and the current lack of uniformity in its application, it is reasonable to assume the matter will be ruled on by the U.S. Supreme Court within the next few years. Until then, mortgage lenders should consult with their local bankruptcy counsel and determine whether to utilize the absolute priority rule to prevent plan confirmation and as a tool to leverage more favorable treatment of their claims in a debtor’s Chapter 11 plan.

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Georgia: Faulty Execution of a Security Deed Can be Fatal

Posted By USFN, Thursday, April 4, 2013
Updated: Monday, November 30, 2015

April 4, 2013

 

by Teresa L. Bailey
Aldridge Connors LLP – USFN Member (Georgia)

The Georgia Supreme Court has ruled in favor of the bankruptcy trustee in the case Wells Fargo Bank N.A. v. Gordon, S12Q2067 (Feb. 18, 2013), which was discussed prior to the entry of the ruling in the article “Lien Avoidance Issues, with a Look to Colorado and Georgia,” published in the Winter 2013 USFN Report. This new case may have significant negative impact on lenders’ enforcement rights in certain circumstances in Georgia.

In order for a security deed to be in recordable form under Georgia law, it must either be attested by a notary and an unofficial witness, or acknowledged before a notary and before two witnesses. In Gordon, the trustee in bankruptcy court sought to avoid a Wells Fargo security deed because the attestation lacked the signature of an unofficial witness. Because of the missing signature, the trustee asserted that the security deed was not “duly recorded,” and did not provide constructive notice to subsequent bona fide purchasers, rendering the security deed avoidable. Wells Fargo argued that the security deed expressly incorporated the terms of a properly executed waiver of borrower’s rights attached to the security deed as a rider and, when read together, proper attestation could be derived and allowed the security deed to be in recordable form.

Summary judgment avoiding the security deed was granted to the trustee by the bankruptcy court and affirmed by the district court. Wells Fargo appealed to the Eleventh Circuit, which certified these questions to the Georgia Supreme Court: (1) whether a security deed that lacks the signature of an unofficial witness but incorporates the provisions of a rider that is properly executed and recorded together with the security deed should be considered “duly recorded,” putting a subsequent hypothetical bona fide purchaser on constructive notice; and, (2) if the answer to the first question is in the negative, whether it would nonetheless provide inquiry notice.

The Georgia Supreme Court answered both questions in the negative. As to the first question, the Supreme Court reasoned that the attestation of the rider cannot be substituted for the proper attestation of the security deed because such a construction would abrogate the purpose of attestation, namely for the witness to verify that the document in question has been executed by the signatories. In so finding, the court stated: “it costs nothing for lenders or their agents to review their paperwork to make sure the proper signatures are in place before submitting documents to the superior court clerk for recording.” As to the second question, the court ruled that since the rider itself did not contain a legal description, and since it only generally references a security deed, it was insufficient as a matter of law and would not place a bona fide purchaser on notice to make further inquiry.

The Gordon case emphasizes the importance of strict compliance with Georgia’s attestation laws. Proactive and prompt correction of execution defects may reduce the risk of loss should a borrower later file for bankruptcy. However, the Gordon case confirms that, once bankruptcy is filed, it is too late to correct errors in execution, and lenders will be left finding themselves in an unsecured position.

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Kansas: Appellate Court Upholds Standing to Enforce Note

Posted By USFN, Thursday, April 4, 2013
Updated: Monday, November 30, 2015

April 4, 2013

 

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

The Kansas Court of Appeals recently handed down a decision that a “holder” of a note had “standing” to enforce a note secured by a mortgage despite the fact that the beneficial interest in the note had been sold to Federal Home Loan Mortgage Corporation (Freddie Mac).

In Bank of America v. Inda, No. 107,999, WL 856468 (Kan. Ct. App. Mar. 8, 2013), the borrower, Inda, challenged Bank of America’s standing to foreclose the mortgage, among other defenses. The district court held in favor of the bank and the borrower appealed. The court of appeals essentially validated the Freddie Mac business model; that is, the beneficial interest in the note was sold to Freddie Mac and the note was endorsed “in blank” and put into possession of the bank to service the loan and to enforce the note. The court found that the bank was the “holder” of the note as defined in the Uniform Commercial Code as adopted by Kansas. The court went on to state that the bank was entitled to enforce the note, as the holder, despite the fact that Freddie Mac was the “owner” of the note and had a beneficial interest therein, because the note was endorsed “in blank” (thus, payable to the bearer) and the note was in possession of the bank, citing K.S.A. § 84-3-301 and In re Martinez, 455 B.R. 755, at 763 (Bankr. D. Kan. 2011).

Furthermore, the court held that the bank was entitled to foreclose the mortgage securing the note because, under Kansas law, the holder of the note is the holder of the mortgage, citing Kurtz v. Sponable, 6 Kan. 395, 397 (the mortgage follows the note) and Federal Land Bank of Wichita v. Krug, 253 Kan. 307, 314; 856 P.2d 111 (a perfected claim to the note is equally perfected as to the mortgage). In addition, the court held that the bank had sufficiently proven that it was the successor to the original mortgagee by virtue of an assignment to it. See K.S.A. § 58-2323 (assignment of mortgage carries with it the secured debt). Therefore, because the record established that the bank was the holder of the note and the successor to the mortgage and that Inda was in default on the note, the court upheld the trial court’s entry of summary judgment in favor of the bank.

Inda also claimed that the bank committed fraud, engaged in deceptive acts and practices, was guilty of unclean hands, and failed to comply with a procedural rule. However, the court rejected each of those claims.

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Minnesota: Bankruptcy Courts Enact Local Rule affecting Lien Stripping

Posted By USFN, Thursday, April 4, 2013
Updated: Monday, November 30, 2015

April 4, 2013

 

by Orin J. Kipp
Wilford, Geske & Cook, P.A. – USFN Member (Minnesota)

In the wake of increased attempts by debtors to strip liens against their principal residence, a new local rule calls attention to the importance of reviewing Chapter 13 plans quickly upon receiving notice of the filing, and determining if an appraisal will be necessary to avoid a lien strip at the time of plan confirmation. Minnesota practitioners were hoping for direction from the Eighth Circuit in a recent lien-stripping case. However, the case (In re Fisette, 695 F.3d 803 (8th Cir. 2012)), was dismissed for lack of jurisdiction. As such, the court did not weigh in on the Bankruptcy Appellate Panel’s (BAP’s) previous decision, which held that a debtor had the ability to strip a “wholly” unsecured lien on the debtor’s principal residence.

Minnesota’s rule committee and the local judges promulgated a new rule that provides the framework for lien stripping and valuation hearings in the future. While this rule, new Local Rule 3012-1 (3012-1), was effective April 1, 2013, the majority of Minnesota’s bankruptcy judges have required compliance with 3012-1 provisions for the past several months.

The objective of 3012-1 is aimed at ensuring that the necessary parties are given appropriate notice of the valuation hearing, along with providing a mechanism by which local title examiners will be able to track the chain and/or validity of encumbrances on real property at the completion of a Chapter 13 plan.

Rule 3012-1 specifically states that “[a] Chapter 13 debtor seeking to modify a claim that is secured by a security interest in real property that is the debtor’s principal residence must provide for that modification in the plan and must bring a motion to determine the value of the secured claim.” Accordingly, 3012-1 requires that a lien strip be accomplished through formal motion practice.

While 3012-1 protects lenders from losing a secured claim without notice, this author’s firm has already encountered complications with the new process. The debtor’s motion must include evidence of the fair market value of the property (typically an independent appraisal). Rule 3012-1 also requires that the valuation hearing be held contemporaneously with the confirmation hearing. As such, creditors are receiving notice of a plan proposing to strip a lien, along with the notice of a motion to value the secured claim, only weeks before the hearing date. At times it is difficult for lenders to coordinate an appraisal within this short time frame in order to determine if the debtor’s proposed valuation is indeed correct, or if the creditor needs to file an objection to the motion. Due to the infancy of 3012-1, there will certainly be further issues appearing as this latest format becomes commonplace.

One positive note is that the majority of debtors attempting to accomplish a lien strip under 3012-1 have failed to strictly comply with the new requirements and have had their motions for valuation denied. This, however, is likely to change as local counsel become more familiar with the process.

In sum, Minnesota’s bankruptcy courts have implemented a mechanism consistent with the BAP’s decision that stripping a wholly unsecured lien is permissible. Rule 3012-1 provides a forum for more and more debtors to actively seek to strip the liens of junior mortgagees — necessitating a heightened focus from Minnesota attorneys representing lenders and servicers.

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National Chapter 13 Plan Form and Significant Rule Changes are Proposed

Posted By USFN, Thursday, April 4, 2013
Updated: Monday, November 30, 2015

April 4, 2013

 

by Linda St. Pierre
Hunt Leibert – USFN Member (Connecticut)

Late last year, the Chapter 13 Form Plan Working Group for the Advisory Committee on Bankruptcy Rules released its proposals for comment. The proposals include a National Chapter 13 Plan form as well as important changes to the rules. If approved, these proposals will add some substantial risks to loan mortgage servicing.

The proposed National Chapter 13 Plan will provide that claim objections, cramdowns, and lien-strips may be completed in the plan confirmation process, rather than through the customary separate objection, motion, or adversary complaint procedures. This can result in a claim being disallowed, a lien stripped, or a claim crammed down without the need for filing a separate pleading. In addition, the proposed rules would allow a debtor to file a motion to obtain an order confirming a secured claim has been satisfied after payment or discharge of the claim. Further proposed amended rules seek a deadline to object to the plan at least seven days prior to the confirmation hearing, unless otherwise ordered by the court. In addition, the proof of claim bar date will be decreased to 60 days from the petition filing, rather than 90 days from the first scheduled Section 341 meeting of creditors — shortening the bar date by more than 90 days. Lastly, the proposed rules would require a lender or servicer to file a proof of claim, instead of relying on its lien for future satisfaction and riding out the Chapter 13 process.

If passed, the proposed National Chapter 13 Plan and rule changes will require lenders and servicers to be more diligent in ensuring that timely plan objections and proofs of claims are filed if they are going to ensure that their rights are protected. Changes are not likely to happen before 2014. Look for continued updates as more information is received.

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The Cloud: Beyond the Buzzword

Posted By USFN, Thursday, April 4, 2013
Updated: Monday, November 30, 2015

April 4, 2013

 

by Shawn J. Burke
ServiceLink, FNF’s National Lender Platform – USFN Associate Member

One of the challenges of working in technology is the never-slowing pace of change. At any moment when you feel you’ve come to understand how to use technology to support your business, it is inevitable … something new will appear challenging the status quo. Without a doubt “The Cloud” has been one of those changes. Not only is there a paradigm shift in the way we think about computing, but there is an overwhelming challenge brought by marketing to simply understand what “The Cloud” is and how it can support your business.

USFN works to promote professionalism and provide education to the real estate finance industry. Among its numerous committees is the technology committee, where we strive to identify industry hot points and deliver relevant information to benefit the membership. The cloud seemed like a perfect topic for early 2013. However, there are so many aspects to the cloud that writing a single informative article just wasn’t possible. Therefore, a “series approach” to looking at the cloud will be taken. In upcoming USFN e-Updates, look for the series to address the following “cloud” topics:

  • Is the Cloud Secure? An examination of what it means to be secure, how nothing is secure (or not in and of itself), and the choices one needs to make to ensure security.
  • What do you need in the Cloud to be audit-compliant? An examination of some of the specific challenges attorney members of the technology committee have observed during audits.
  • Where are the major bottlenecks and risks with the Cloud? An examination of the critical need for Internet access when using the cloud; how major companies overcome with redundancy, and how you can too.

There are virtually endless possibilities regarding what can be discussed regarding “The Cloud.” We could certainly talk about Facebook and LinkedIn; however, there is no shortage of articles already addressing social media in the cloud. The e-Update series will focus more on hosting systems and using cloud-based services to run your business.

When addressing a topic with as many facets as “The Cloud,” we’d like to know if we’re hitting a mark that helps you. Feel free to suggest topic ideas, offer feedback on the articles, or make other comments via Twitter @ShawnJBurke or via email to Shawn.Burke@ServiceLinkFNF.com. As Chair of the USFN Technology Committee, it is my objective to provide content that benefits our readers.

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WI: Inconsistent Challenges to Foreclosure Fail at Trial (and on Appeal)

Posted By USFN, Thursday, April 4, 2013
Updated: Monday, November 30, 2015

April 4, 2013

 

by Steven E. Zablocki
Gray & Associates, L.L.P. – USFN Member (Wisconsin)

Recently, two favorable decisions have been issued by the Wisconsin Court of Appeals. The decisions are unpublished and, therefore, of limited precedential value. However, they do show a decided shift in favor of lenders. Discussed in this article is the case of CitiMortgage v. Hobach, 2012AP1462-FT (Wis. Ct. App. Feb. 13, 2013). The second case (Household Finance v. Kennedy, 2011AP2658 (Wis. Ct. App. Mar. 5, 2013)) will be summarized in the May USFN e–Update.

In Hobach, the Wisconsin Court of Appeals affirmed a judgment in favor of the lender. The defendant appealed the judgment, arguing that summary judgment was improper because the lender failed to establish that it held or was entitled to enforce the note. Additionally, the defendant contended that the court erroneously denied his motion to amend pleadings.

Facts of the Case

The defendant took out a loan from Hartford Financial Services, securing the debt with a mortgage on his residence. The mortgage was thereafter assigned to the plaintiff, CitiMortgage, who filed a foreclosure complaint based upon a default for failing to make payments. A pro se (without legal counsel) answer was filed.

The initial complaint attached various loan documents, including copies of the original note and mortgage in addition to an allonge transferring the note from Hartford to CitiMortgage. Citi filed a motion for summary judgment, along with an affidavit describing the nature of default and the amount due on the loan as well as indicating that Citi held the subject note.

Thereafter, the defendant filed his opposition and a motion for leave to amend pleadings to include counterclaims. The defendant’s motion was premised on a claim that an agreement was made under the Home Affordable Mortgage Program (HAMP). The defendant contended that CitiMortgage agreed to modify the loan and stop the foreclosure if he made a series of timely payments. The defendant’s affidavit stated that he made four timely payments in 2010 and Citi refused his fifth payment without explanation.

The trial court denied the motion to amend the pleadings, indicating that by the defendant’s own admission the HAMP transaction occurred in 2010 and there was an undue delay in waiting until 2012 to amend the pleadings. Further, the court found that the defendant had failed to establish the existence of a loan modification agreement under HAMP, and none of his proposed amendments would serve as a legal defense.

Additionally, the trial court found that the motion was filed partially in bad faith because it asserted “on information and belief” that Citi was not the holder of the note and mortgage and unable to enforce the same. The court found that this was “astounding” since the pleadings of the parties demonstrated that Citi held the note. Besides, the court observed that not only had the defendant signed a previous loan modification agreement explicitly acknowledging CitiMortgage’s status as the note holder, but his own proposed counterclaims asserted that CitiMortgage had treated him unfairly — a near concession that CitiMortgage was the lender.

Summary judgment was granted in favor of CitiMortgage, concluding that CitiMortgage had the right to enforce the note and mortgage through the documents attached to the pleadings and affidavits. The defendant argued that Citi’s affidavit failed to demonstrate adequate personal knowledge that would permit its admission into evidence. Citi established itself as a note holder by affidavit from an employee testifying that she possessed records related to the defendant’s loan and that she had personal knowledge of how the records were kept and maintained. The affidavit confirmed that she had access to these records and that based upon her review, she determined that Citi was the note holder. The affidavit established adequate personal knowledge to permit testimony that Citi held the note at issue, and the defendant provided nothing to rebut the allegations.

Conclusion

On appeal, the judgment was affirmed. The trial court’s findings were supported by the evidence. The defendant failed to provide any evidence to support a second loan modification agreement, and his payments remained delinquent.

The Hobach decision is interesting for two reasons: First, the court specifically reviewed and affirmed the adequacy of the affidavit. Of late, there have been many challenges from defendants over the sufficiency of evidence. (See, for example Palisades Collection v. Kalal, 2010 WI APP 38 (Wis. Ct. App. Feb. 4, 2010)). Next, the court took issue with the inconsistent position taken by the defendant; that is, challenging standing and also alleging a failure to modify the loan. A defendant should either contest standing or allege a failure to modify. Alleging both is inappropriate.

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Connecticut: Proposed Legislation Affects the Foreclosure Process

Posted By USFN, Thursday, April 4, 2013
Updated: Monday, November 30, 2015

April 4, 2013

 

by Kim Hunt and Geoff Milne
Hunt Leibert – USFN Member (Connecticut)

The title of the proposed legislation and the bill number are: “An Act Concerning Homeowner Protection Rights (Governor’s Bill No. 6355) proposed in the 2013 Connecticut General Assembly.”

Re-Altering of Existing Foreclosure Practice

Stripped of histrionics and simply put, the changes within this proposed legislation are sweeping and radically alter existing foreclosure practice. Section 6 of the proposed bill serves vivid illustration. Section 6 authorizes new defenses and counterclaims to foreclosure complaints. Long-established case law has limited those defenses that can be posed to attacking the making, validity, and enforcement of the note and mortgage. This limitation has traditionally barred the assertion of events arising subsequent to the execution of the mortgage. Section 6, by contrast, would permit a borrower to assert as a defense or counterclaim “any other pleading arising out of facts that occurred after the making of the note or mortgage, or after any alleged default on the note or mortgage, that the [borrower] alleges the court should, in law or in equity, consider.”

Issue of Retroactivity

The authorization to plead new defenses and counterclaims to foreclosure complaints permits assertion “from the date of passage.” This immediately raises a question concerning retroactive application. The creation of what are clearly “new substantive rights” would not be permitted under C.G.S. § 55-3.

Expansive Delegation of “Locked on Lender” Discretion to Mediators

The governor’s proposed bill requires a mediator to “file with the court a report indicating the extent to which the parties complied with the requirements set forth in this subdivision, including … whether the mediator recommends that sanctions be imposed on [a lender] due to such party’s conduct in any mediation session.” A mediator, it should be kept in mind, does not have to be a licensed lawyer. A mediator is not required to have passed the bar. A mediator is not required to even have been trained as a lawyer.

The available sanctions that may be recommended by a mediator include “imposing fines payable to the court or aggrieved party, dismissing the foreclosure action, barring interest accrual with regard to the underlying loan, [and] awarding attorney fees.” Due process is an anathema. There is no requirement of a record or a meaningful opportunity to be heard between the submission of a mediator’s recommendation and the response by a judge.
Although there is a section that defines “good faith” there is no requirement that a mediator, in recommending sanctions against a lender, must predicate it upon an articulated breach of the legislatively defined good faith.

The fact that “good faith” is defined does not mean that a lender, accused of failing to exhibit good faith, has any notion of how it may have failed. The definition of good faith “includes but is not limited to (A) complying with the requirements of (i) any applicable guidance or rule issued by the federal government and its agencies or a government- sponsored enterprise, …” [Query: Is anyone out there cognizant of the reach suggested by “any applicable guidance”?] Although emerging case law has recognized, subsequent to Dodd-Frank, that state law enforcement authorities can bring suits against national banks to enforce certain rights as private litigants, this does not empower supervising compliance by national banks with federal law. Cuomo v. Clearing House Association, LLC, 557 U.S. 519 (2009). One cannot help but wonder whether a mediator, not necessarily required to have been legally trained, would competently distinguish between enforcement of, versus supervising compliance with, federal law.

A failure to mediate in good faith “does not require a showing that such party or attorney acted with malice, intent to injure, or an otherwise affirmative showing of bad faith.” Simple mistake, inadvertence, and misunderstanding, are now grist for a finding of bad faith.

Conclusion

Lenders concerned with mounting litigation expenses and the efficacy of the foreclosure process in Connecticut need to become engaged regarding the proposed legislation.

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CA: Appellate Court Interprets HAMP re Borrower’s Right to a Permanent Loan Modification

Posted By USFN, Thursday, April 4, 2013
Updated: Monday, November 30, 2015

April 4, 2013

 

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

The California Court of Appeal has ruled that if a borrower complies with the terms of a trial period plan, and the borrower’s representations remain true, a servicer has to offer a permanent loan modification. Going forward, servicers need to be mindful of California’s interpretation of the HAMP directive when offering trial period plans. [West v. JP Morgan Chase, 2013 Cal. App. LEXIS 207 (Mar. 18, 2013)].

Facts of the Case

The servicer sent the borrower a trial period plan (TPP), stating “If you comply with all the terms of this Agreement, we’ll consider a permanent workout solution for your loan once the Trial Plan has been completed.” This language is usual for a TPP, as no guarantee is provided that the borrower will be offered a permanent loan modification. The borrower completed the TPP and the servicer denied a permanent loan modification, citing the net present value calculation. The borrower asked for a re-evaluation based on updated figures, and for the net present value data calculations; the servicer did not follow through. The property went to sale and the borrower sued. The trial court dismissed the amended complaint and the borrower appealed.

Appellate Review

The appellate court acknowledged that the TPP did not include a provision that the servicer would offer a permanent loan modification upon the borrower complying with the terms. Nevertheless, the court imposed such a provision into a TPP, offering this portion of HAMP Supplemental Directive 09-01 in support: “If the borrower complies with the terms and conditions of the Trial Period Plan, the loan modification will become effective on the first day of the month following the trial period as specified in the Trial Period Plan.” (Directive, p. 18).

Based on the above-referenced language, the West court concluded that: “After the trial period, if the borrower complied with all terms of the TPP Agreement — including making all required payments and providing all required documentation — and if the borrower’s representations remained true and correct, the servicer had to offer a permanent modification.” The appellate court remanded the case, permitting the borrower to pursue claims of breach of contract, fraud, negligent misrepresentation, promissory estoppel, and unfair business practice.

HAMP Interpretation

The HAMP Supplemental Directive 09-01 (Directive) issued on April 6, 2009, covers the topics of eligibility, underwriting, and modification process to help servicers implement HAMP. Pursuant to the Directive, servicers must use a two-step process for HAMP modifications: (1) provide a TPP outlining the terms of the trial period; and (2) provide an agreement that outlines the terms of the final modification (Directive, p. 14). In step one, the servicer should instruct the borrower to return the signed TPP, with a signed hardship affidavit and income verification documents (if not previously obtained), and the first trial period payment (when not using automated drafting arrangements), to the servicer within 30 days. Upon receipt of the TPP from the borrower, the servicer must confirm that the borrower meets the underwriting and eligibility criteria (Directive, p. 15). Once the servicer makes this determination and has received good funds for the first month’s trial payment, the servicer should sign and return an executed copy of the TPP to the borrower. If the servicer determines that the borrower does not meet the underwriting and eligibility standards of HAMP after the borrower has submitted a signed TPP, the servicer should promptly communicate that determination to the borrower in writing (Directive, p. 15).

The language on page 15 of the Directive seems to provide servicers with discretion to determine a borrower’s qualification for a permanent loan modification under the eligibility and underwriting criteria after receiving a signed TPP along with required documents and good funds. The court in West, however, does not examine the language on pages 15 and 17 regarding TTP, and appears to interpret the Directive to require determining a borrower’s eligibility and qualification prior to offering a TPP. Once a borrower completes a TPP, the West court mandates that a servicer offer a permanent loan modification, if the borrower’s representations remain true and correct. This interpretation diminishes or eliminates a servicer’s discretion to determine a borrower’s qualification for a permanent modification during a TPP or after its completion.

When offering a TPP, servicers need to be mindful of the West case’s interpretation of the HAMP Directive.

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Colorado Legislative Update

Posted By USFN, Monday, March 11, 2013
Updated: Monday, November 30, 2015

March 11, 2013

 

by Cynthia Lowery-Graber
The Castle Law Group, LLC – USFN Member (Colorado, Wyoming)

The 2013 Colorado legislative session is underway. There are two bills to watch closely that impact default servicers and the Colorado foreclosure process.

First, HB13-1017 requires a servicer who accepts the transfer of a loan to process and respond to any outstanding loan modification request that was made prior to the transfer. In addition, the bill compels the new servicer to accept and honor any trial and/or permanent loan modification agreements entered into by the prior servicer or accepted by the borrower prior to the servicing transfer. HB13-1017 has passed in both the Colorado House of Representatives and the Senate.

The second bill is the much anticipated “Foreclosure Sale and Loan Modification Document Requirements” legislation. HB13-1249 was introduced on Monday, March 4, 2013 after being granted late bill status. The legislation portends significant impacts upon foreclosure practices in Colorado.

Currently, Colorado statute permits certain “qualified holders” to commence a foreclosure with copies of the original loan documents, in addition to a certification stating that the holder of the note is a “qualified holder” under Colorado statute. The ability of “qualified holders” to submit the foreclosure action with a copy of the note and a certification may be diminished by this new legislation. The proposed legislation requires that the original note or copies of the note include indorsements or assignments. Contrary to current statute or procedure, this new proposed requirement suggests that a full chain of indorsements or assignments may now be required in Colorado. Also, the certification of the qualified holder would have to be signed under penalty of perjury.

Further, the proposed legislation attempts to oversee the loss mitigation process by requiring loan servicers to provide a “single point of contact” to any borrower who requests a foreclosure prevention alternative. The proposed law requires that the “single point of contact” remain assigned to the borrower until all options have been exhausted. The bill also prohibits dual tracking by precluding the initiation of a foreclosure action where a complete application has been submitted for a loan modification or, if the foreclosure was already commenced, that it be held in abeyance until a written denial is provided to the borrower.

Finally, the proposed legislation supplements the motion for order authorizing sale (Rule 120) process to require that the moving party prove that it has standing to bring the foreclosure and that it is the holder of the evidence of debt. The bill prevents the holder from filing a new motion for at least six months following a denial of the order authorizing sale, and only if the holder obtains new or different evidence in support of its motion. Lastly, the bill precludes the moving party from charging attorneys’ fees and costs in a subsequent judicial foreclosure should it be unsuccessful in obtaining a court order pursuant to Rule 120, and grants the prevailing party attorneys’ fees and costs in connection with any successful action for injunctive relief.

At this juncture, the viability of HB13-1249 is unknown. The banking and lending industries are remaining vigilant as this legislation develops.

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Missouri: Mediation in St. Louis County — and in the City of St. Louis?

Posted By USFN, Monday, March 11, 2013
Updated: Monday, November 30, 2015

March 11, 2013

 

by Kip Bilderback
Millsap & Singer, P.C. – USFN Member (Missouri)

Earlier in February, the Board of Alderman for the City of St. Louis passed Bill Number 160CS pertaining to mediation of foreclosure for the City of St. Louis, Missouri. The mayor signed the Board Bill on February 27, 2013, creating St. Louis City Ordinance Number 69428. The ordinance is similar to that previously passed in St. Louis County, and details of the ordinance are listed below (with reference to Board Bill provisions, as the ordinance has not yet been published by the City of St. Louis).

As with the ordinance passed in the County of St. Louis, the city ordinance has been subject to a lawsuit. On Tuesday, March 5, 2013, the Circuit Court of City of St. Louis, in Cause Number 1322-cc00511, entered a Temporary Restraining Order “enjoining the City of St. Louis, Missouri, its agents, servants, employees and attorneys and those in active concert or participation, as well as Francis G. Slay, in his Official capacity as Mayor, from enforcing the provisions of Ordnance 69428 of the Revised City Code of the City of St. Louis; provided that nothing herein shall be construed to prohibit voluntary participation in the program under Ordinance #69428.” The TRO restrains enforcement until March 20, 2013 at 9:00 a.m. — the date of the follow-up hearing. However, the court’s order does provide for voluntary compliance with the ordinance pending resolution of the TRO.

Details of the Board Bill, which has become the ordinance, are as follows:

• The Board Bill applies to all homeowners’ principal residence in St. Louis City. It does not apply to property in St. Louis County as that is a separate municipality. It applies to single-family dwellings, one or more condominium or co-op units or structures containing not more than four residential units. Board Bill No. 160CS Section One, Paragraph 2.
• The Board Bill defines “Notice of Foreclosure” as “a written notice sent to the Homeowner of Lender’s intent to foreclose according to provisions of 443 R. S. Mo.” Board Bill No. 160CS Section One, Paragraph 4. The only notice sent to the homeowner under Chapter 443 RSMo is the statutory notice of the foreclosure sale, which must be issued not less than 20 days prior to the scheduled foreclosure sale. RSMo § 443.390.
• “Mediation Coordinator” is defined in the Board Bill as the person/entity designated by the County Executive to manage the mortgage foreclosure intervention program established by the Board Bill. Board Bill No. 160CS Section One, Paragraph 6. We understand that the mediation coordinator for St. Louis County will be US&M Midwest, Inc., 720 Olive Street, Suite 2300, St. Louis, Missouri 63101.
• The Board Bill provides that the mediation coordinator shall issue a “Certificate of Compliance” to the lender to certify the lender has complied with the mediation Board Bill, which certificate of compliance will be valid for the original foreclosure sale. The Board Bill lacks direct confirmation as to whether the certificate of compliance will be valid for a year, so additional confirmation is being sought from the office of the City Counselor. Board Bill No. 160CS Section Three, Paragraph 1.
• To comply with the Board Bill the homeowner must be provided a “Notice of Right to Request Mediation,” which advises the homeowner of the right to request mediation within 20 days from the date of the notice. A copy must be provided to the mediation coordinator. The notice shall be provided concurrently with the lender’s notice of foreclosure. The notice shall include a form promulgated by the mediation coordinator for the homeowner to make a written request for mediation. The notice to the mediation coordinator shall be accompanied by a $100 fee paid by the lender. Board Bill No. 160CS Section Three, Paragraphs 1 and 2.
• The homeowner has 20 days from the date the notice of mediation is mailed to request mediation. Board Bill No. 160CS Section Three, Paragraph 2.
• The mediation coordinator, within 15 days of receipt of the notice of right to request mediation, will make and document at least three attempts to contact the homeowner to inform the homeowner of the right to participate in a mediation conference. Board Bill No. 160CS Section Three, Paragraph 3.
• If the homeowner does not request mediation within 20 days of the notice of mediation or advises the mediation coordinator that he is not interested in mediation, the lender shall be deemed to have complied with the Board Bill and a certificate of compliance shall be issued to the lender within one business day. Board Bill No. 160CS Section Three, Paragraph 4.
• If the homeowner requests mediation, the mediation coordinator shall schedule a mediation conference within 60 days of the date the notice of mediation was mailed. The lender shall submit an additional $350 fee to the mediation coordinator not less than seven business days prior to the scheduled mediation. Board Bill No. 160CS Section Four, Paragraph 1.
• The written request to participate in the mediation conference by the homeowner shall be deemed consent by the homeowner for a continuance of the foreclosure sale for 42 days as allowed under Section 443.355(2). Board Bill No. 160CS Section Four, Paragraph 2.
• Not less than seven business days prior to mediation, the homeowner shall submit a completed financial statement, a completed housing affordability form, homeowner’s opinion of the condition of the property, and any offers the homeowner made to the lender to resolve the default. Board Bill No. 160CS Section Four, Paragraph 4.
• Not less than seven business days prior to mediation, the lender shall submit an appraisal or BPO completed not more than 90 days prior to the mediation, a written proposal to resolve the foreclosure, the evaluation methodology used to determine the eligibility of the homeowner, an estimate of the short sale value that the lender is willing to consider, and a statement of any offers made to the homeowner to resolve the default. 160CS Section Four, Paragraph 5.
• Not less than seven business days prior to mediation, both the lender and homeowner must provide a written, non-binding proposal for avoiding foreclosure. 160CS Section Four, Paragraph 6.
• Both lender and homeowner, or their authorized representatives, shall appear at the mediation. Any representative appearing must have full authority. A lender representative must have real-time access to the homeowner’s account information, have knowledge of loss mitigation, have the ability to review options based on the homeowner’s type of loan, and understand investor guidelines for the specific loan. If the lender is located outside the St. Louis Metropolitan Area, the lender may participate by electronic communication but, in that event, the lender must have counsel present at the mediation with signing authority. 160CS Section Four, Paragraph 7.
• A request for continuance of a scheduled mediation conference will be granted by the mediation coordinator only upon written request submitted prior to the mediation based on a showing of extraordinary circumstances or written agreement of the lender and the homeowner. 160CS Section Four, Paragraph 8.
• If the mediation results in a settlement, the mediation coordinator shall issue the certificate of compliance within one business day. 160CS Section Four, Paragraph 10.
• If mediation fails, “a good faith effort on behalf of the lender shall be deemed to satisfy the requirements of the ordinance.” The mediation coordinator shall issue the certificate of compliance if the lender has complied with the requirements of the Board Bill. 160CS Section Four, Paragraph 11.
• It is a violation of the Board Bill to file a trustee deed without filing a certificate of compliance with the assessor’s office before or contemporaneously with the recording of the trustee deed. However, the recorder of deeds shall not refuse to record a trustee deed for failure to comply with this Board Bill. 160CS Section Six, Paragraph 1. A person, firm, or entity convicted of violating the Board Bill shall be assessed a fine of up to $500. 160CS Section Seven.
• Nothing in the ordinance shall be construed to create any private right of action for any person or entity or to affect title to any residential property to which this code applies or to interfere with any private right of action not related to mediation requirement of the ordinance. 160CS Section Five, Paragraph 2.

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Illinois Supreme Court Issues New Rules and Forms (M.R. 3140)

Posted By USFN, Monday, March 11, 2013
Updated: Monday, November 30, 2015

March 11, 2013

 

by Lee Perres
Fisher and Shapiro, LLC – USFN Member (Illinois)

The author’s recent article on SB16 and amendments to the Illinois Mortgage Foreclosure Law (IMFL), 735 ILCS 5/15-1101, et seq. can be accessed here.

The Illinois Supreme Court has issued new rules affecting foreclosures in Illinois under an order filed February 22, 2013 (and revised February 28, 2013) and designated M.R. 3140. It is anticipated that these new rules will cause numerous delays in the foreclosure process, especially related to entering judgments. Further information regarding Supreme Court Rules 99.1, 113, and 114 can be found on the Illinois courts’ website here.

Supreme Court Rule 99.1 – Mediation (effective March 1, 2013)
The court allows each judicial district in Illinois to establish a mediation program, provided that the program complies with the following mandatory requirements: “Based on the plan established pursuant to paragraph (c), the local circuit rules shall address

  • the requirements set forth in Rule 99;
  • resources to provide meaningful access to HUD-certified housing counseling services for eligible homeowners;
  • resources to provide meaningful access to pro bono legal representation for eligible homeowners;
  • resources to provide meaningful language access for program participants;
  • any costs charged to any participant in the mortgage foreclosure case;
  • a sustainability plan that includes a long-term funding plan; and
  • training of judges, key court personnel and volunteers on mortgage foreclosure mediation.”

Supreme Court Rule 113 – Practice and Procedure in Mortgage Foreclosure Cases (effective May 1, 2013)
This rule expressly states that it supplements, and does not replace, the IMFL. Rule 113 makes it a requirement that the most current and complete note be attached to the complaint. The rule states, “a copy of the note, as it currently exists, including all indorsements and allonges, shall be attached to the mortgage foreclosure complaint at the time of filing.”

Rule 113 creates a model judgment affidavit that contains specific content requirements. While the court has not specifically stated that use of the affidavit form provided in the rule is a “safe harbor,” defendants will be hard pressed to attack the Supreme Court’s form, and it would be wise to use it as the basis of any new form.

Rule 113 requires that a payment history be attached to each prove-up affidavit “in only those cases where the defendant(s) have filed an appearance or responsive pleading to the complaint for foreclosure.” The affidavits cannot have a stand-alone signature page, consistent with current practice.

When a default order is entered in court, a notice of default and entry of judgment of foreclosure (and appropriate copies) shall be prepared by the attorney for the plaintiff and delivered to the clerk within two business days after the entry of default. The clerk must mail these copies “to the property address or the address on any appearances or other documents filed by any defendant.” The rule designates the form to be used for this notice. Curiously, the failure to send this notice will not affect the validity of the default order, the judgment of foreclosure, or any other orders entered.

A notice of sale is required to be sent to all defendants, whether or not they have been defaulted, no fewer than 10 business days before the sale.

Rule 113 specifically states that the plaintiff may use a private selling officer appointed pursuant to the IMFL. There is a hope that the courts will allow firms to stop using the sheriff in counties where the sheriff is not capable of proceeding promptly, but this will need to be carefully evaluated to avoid “political” pushback from the courts.

If a foreclosure sale results in a surplus, the attorney for the plaintiff must send a special notice to the mortgagors advising them of the surplus, along with the forms necessary for the mortgagors to apply for the surplus funds.

Finally, Rule 113 “codifies” the necessity for the appointment of a special representative in the case of a deceased mortgagor.

Supreme Court Rule 114 – Loss Mitigation Affidavit (effective May 1, 2013)
“Where a mortgagor has filed an appearance, answer, or any other responsive pleading, the plaintiff must, prior to moving for a judgment of foreclosure, comply with any loss mitigation program which applies to the subject mortgage loan.” The footnote to this section suggests that such “loss mitigation programs” include any federal programs (HAMP, the attorney generals’ settlement, and FHA, VA, or USDA programs) and any “in-house” programs the servicer might “regularly provide for mortgage loans of this type.” Prior to or at the time of moving for judgment, the plaintiff must submit an affidavit specifying:

  1. any type of loss mitigation that applies to the subject mortgage;
  2. the steps taken to offer said type of loss mitigation to the mortgagor(s), and
  3. the status of any such loss mitigation efforts.

Rule 114 provides the form of loss mitigation affidavit to comply with the requirements. The court may, upon a motion of a mortgagor or on the court’s own motion, stay the proceedings or deny entry of judgment for failure to comply with Rule 114.

Conclusion

The ramifications of these new rules are still being digested as feedback from judges on how they will handle affidavits currently in the pipeline is received. This author has been advised by a number of judges that because the rule is procedural, the courts will not accept existing, non-compliant affidavits and will require the loss mitigation affidavits effective May 1, 2013.

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CFPB: Mortgage Servicing Final Rules under RESPA (Regulation X)

Posted By USFN, Monday, March 11, 2013
Updated: Tuesday, October 13, 2015

March 11, 2013

 

by Wendy Walter
Routh Crabtree Olsen – USFN Member (Alaska, Oregon, Washington)

This article focuses on some of the possible changes to foreclosure practice under the Mortgage Servicing Final Rules released by the Consumer Financial Protection Bureau (CFPB) in January 2013. The rules will take effect on January 10, 2014.

Loss Mitigation: Additional Defenses to Outcome Challenges?
When crafting the long awaited mortgage servicing rules — portions of which will live within Regulation X, which implements the Real Estate Settlement Procedures Act of 1974 — the CFPB elected to mandate a process for loss mitigation, rather than prescribe the outcome.

In 12 CFR § 1024.41, Loss Mitigation Procedures, the CFPB imposed an application, review, and appeal period, which the CFPB itself has estimated to take approximately 90 days. While homeowner advocates pushed for detailed loss mitigation criteria, specified waterfalls, debt-to-income targets or net present value models or assumptions, they were unsuccessful. What Regulation X does is prescribe deadlines and time frames, enabling borrowers to sue servicers who fail to comply with these time frames when reviewing, evaluating, and deciding loss mitigation applications. Also, § 1024.41(a) prohibits a borrower from enforcing the terms of any agreement between a servicer and the owner or assignee of a mortgage loan. These might be effective arguments for those who have been defending lawsuits and claims that the borrower deserved a loan modification because of a certain net present value calculation presented during foreclosure mediation — assuming a judge is persuaded by the CFPB’s approach to loss mitigation regulation.

Clarity re Foreclosure Cases in Progress
The CFPB also realized that some strategic borrowers might wait until the last minute to submit their loss mitigation applications; and, for these reasons, Regulation X will not allow the late submission of a loss mitigation application to completely kill a foreclosure process. After reviewing the commentary to the proposed rules, the CFPB was persuaded that some borrowers might not be willing to “come to terms with their situations” and would not explore loss mitigation unless a foreclosure was close at hand. The CFPB even admitted that some borrowers might tactically stall foreclosure, factoring this into its rulemaking process.

Therefore, under § 1024.41(g), the submission of a complete loss mitigation application after the first notice or filing required by applicable law will bar the servicer from moving for dispositive judgment or taking any action to cause the foreclosure sale, but will not prohibit the servicer (and presumably its legal counsel) from continuing with mediation, publication, or any other non-dispositive motion that might be necessary to avoid a restart. This, of course, may be easier to accomplish in a nonjudicial state where counsel doesn’t have to deal with a court interested in keeping the docket moving along.

Pre-foreclosure Processes
The CFPB is implementing a 50-state pre-foreclosure review period under § 1024.41(f) by restricting the first notice or filing requirement until after a loan is 120 days delinquent. The CFPB intends to preempt any state law that allows for an earlier first notice or legal filing period. This could raise some interesting legal challenges. Practically speaking, it might also cause a shift in the GSE timelines, since those are calculated based on last payment installment. Foreclosure counsel will undoubtedly be asked to weigh in on what constitutes the first notice or filing requirement; and, for those states that have instituted pre-foreclosure processes, counsel may be asked to advise on the servicer’s ability to move on those processes during this 120-day period.

It is also interesting to note that the CFPB advises servicers to comply with the most restrictive of all loss mitigation processes to which they are subject, acknowledging that the national mortgage settlement and GSE requirements require a fast track review process for loss mitigation applications received 37 days or less before a foreclosure sale, whereas § 1024.41 does not. (For convenient reference, a link to the national mortgage settlement webpage is provided here.)

What’s Upcoming?

This review of some of the new CFPB loss mitigation rules and their potential impact on foreclosure practices will be expanded upon in my articles planned for the spring and summer editions of the USFN Report. Look for those in May and August.

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Connecticut: A Default Judgment Against a Mortgagee Does Not Give Effect to a Plaintiff’s Erroneous Legal Conclusions

Posted By USFN, Monday, March 11, 2013
Updated: Monday, November 30, 2015

March 11, 2013

 

by William R. Dziedzic
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

The Connecticut Appellate Court has ruled that a default judgment does not reify a plaintiff’s erroneous legal conclusions. [Moran v. Morneau, 140 Conn. App. 219 (Jan. 15, 2013)].

In Moran, the plaintiff commenced an action seeking to foreclose on a judgment lien. In addition to naming the property owner as a defendant, the plaintiff named a lender with a recorded mortgage on the property. It was the plaintiff’s position that, although the mortgage was recorded prior to the judgment lien, the judgment lien related back to a previously recorded notice of constructive trust, giving the plaintiff priority over the lender’s mortgage. The lender did not appear in the lien foreclosure action, and a judgment of strict foreclosure in favor of the plaintiff was entered.

The lender timely moved to open the default judgment, contending that, among other things, contrary to the allegations in the plaintiff’s complaint the mortgage had priority over the judgment lien because the notice of constructive trust had no enforceable effect on the priority of the lender’s mortgage. The plaintiff argued that as a result of the default judgment, the lender effectively admitted the priority order alleged in the complaint. The trial court refused to open the default judgment; however, it later issued an order that the lender’s mortgage was prior to the plaintiff’s lien, which the plaintiff appealed.

The plaintiff’s sole claim on appeal was that the default established the lien priorities as alleged in the complaint and that the court had no discretion, after the default, to review the plaintiff’s legal conclusions. The appellate court affirmed the trial court’s order of priority and held that a default does not obligate the court to accept an incorrect legal position in determining the priority order of the parties’ lien interests. Further, the court went on to note that, as a general rule, a default admits the material facts that constitute a cause of action. However, the pleader is only entitled to a grant of relief when the allegations in the filing are sufficient on their face to make out a valid claim for judgment or relief. In the court’s words: “A default may settle many issues, but it does not operate to insulate a mistaken legal proposition from judicial review.”

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CT: Borrowers’ Unsupported Assertions Insufficient to Open a Judgment

Posted By USFN, Monday, March 11, 2013
Updated: Monday, November 30, 2015

March 11, 2013

 

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

The Connecticut Appellate Court has recently ruled that the mortgagors were not entitled to have a judgment of foreclosure opened. Specifically, in PHH Mortgage Corporation v. Jean-Jacques, 139 Conn. App. 683, 57 A.3d 788 (Dec. 18, 2012), the appellate court held that the mortgagors’ failure to file a responsive pleading or appear at the hearing on the mortgagee’s motion for judgment of strict foreclosure was inexcusable, and that the mortgagors were not entitled to an order opening a default judgment of foreclosure.

In Jean-Jacques, the mortgagors alleged in their motion to open that plaintiff’s counsel had purposely confused them. According to the motion, the mortgagors contended that the plaintiff had marked the motion for judgment “ready” and, on the same day, the plaintiff also filed a form with the court to claim the motion for a hearing to be held on a different day. (In Connecticut, to have a motion considered by the court, a party must file a claim form to have the motion placed on the calendar.)

As recited in the appellate court’s decision, the factual background is that: “On November 29, 2010, the plaintiff filed a motion for default for the defendants’ failure to file a responsive pleading, which motion was granted by the trial court clerk on December 15, 2010. The plaintiff then moved for a judgment of strict foreclosure. This motion was claimed by the plaintiff on June 15, 2011, and was placed on the court’s short calendar for argument on July 5, 2011. The plaintiff marked the motion ‘‘ready,’’ and the defendants received notice of the hearing from the court and from the plaintiff. On July 5, 2011, the defendants failed to appear for argument on the motion and a default judgment of foreclosure by sale was entered. The sale date was set for
October 8, 2011. On September 12, 2011, the defendants, then represented by counsel, filed an amended motion to open the judgment. The defendants attributed their failure to appear at the July 5 hearing to a second short calendar reclaim on the same motion, filed by the plaintiff on June 27, 2011. The defendants received notice from the court of a July 18 hearing, which corresponded with the second reclaim, and allegedly assumed that this later hearing indicated the plaintiff’s intention to postpone the July 5 hearing.”

The trial court had a hearing on the motion to open. The hearing occurred on two separate days. However, the mortgagors did not testify on either day, nor did the mortgagors present any evidence to support their allegations. The trial court ruled in the plaintiff’s favor, and did not open the judgment. The mortgagors appealed.

The test that courts use in considering a motion to open a judgment is found in Connecticut General Statutes § 52-212. That statute requires that on a motion to open a judgment the movant must show both a valid reason to excuse his absence and a defense. The defendants had filed a (belated) answer and defense, challenging the plaintiff’s standing. However, the court did reach that defense. While standing had been an issue that could require a trial court to have an evidentiary hearing, the appellate court merely mentioned the standing issue in a footnote. The standing allegation was that the plaintiff did not allege when it came into possession of the note, and that the plaintiff was not licensed to do business in the state. Those allegations did not require the court to open the judgment.

There was evidence that defendants had received actual notice of the hearing from two sources — the court and the plaintiff. The court also concluded that a judgment should not be opened based on the defendants’ negligence. The appellate court found that, “[b]ecause of the defendants’ failure to testify and the unsupported arguments advanced regarding the effect of reclaiming the same motion more than one time, it was not unreasonable for the [trial] court to exercise its discretion and to deny the motion to open.” Id. at 687. Accordingly, it is clear that the court is not obligated to take the bald assertions advanced by borrowers or their counsel. Thus, based on the fact that there was no evidence of a valid reason for the defendants’ failure to appear at the hearing on the judgment, the trial court was correct in denying the motion to open.

Editor’s Note: The author’s firm represented PHH Mortgage Corporation in the case summarized here.

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Proposed Changes to Connecticut’s Foreclosure Mediation Program

Posted By USFN, Monday, March 11, 2013
Updated: Monday, November 30, 2015

March 11, 2013

 

by James A. Pocklington
Hunt Leibert – USFN Member (Connecticut)

On February 7, 2013, Governor’s Bill No. 6355 was referred to the Committee on Banks. Among other things, the bill proposes sweeping changes to how the foreclosure mediation program (FMP) operates, the degree of authority and responsibilities of the court’s mediation specialists, the parties permitted or required to participate, as well as changes to the eight-month litigation bar and good faith mediation requirements.

Under current practice, the court’s mediation specialists file a report after the first and last mediation session. The bill proposes to require a report after each session, which becomes part of the public record. More significantly, it proposes that the court shall conduct hearings after each mediation session beyond the third one, inquiring as to the status of the case and “the reasons for which a resolution has not yet been achieved.” Further, for mediation to extend beyond six months from the return date (irrespective of the number of times the court is able to schedule the parties to meet during that time), “the court shall make particularized findings on the record for granting such an extension.”

Further, the bill proposes a vast increase in the authority of the court’s mediation specialists. Under the proposed legislation, the mediation specialists are empowered to recommend sanctions to the court. The bill also proposes giving the mediation specialists sole discretion as to whether a “reasonably complete package of financial documentation” has been submitted to the mortgagee. Should this determination be made, the bill goes on to mandate that the “mortgagee shall use such information to evaluate the mortgagor and treat such information as current under all applicable rules.”

The bill redefines “mortgagee” for purposes of the FMP in a way inconsistent with other Connecticut statutes by requiring the participation of the “owner of the debt.” The bill proposes only permitting the participation of an agent if that agent has “full settlement authority,” which is defined at length in the bill. That definition includes the ability to act immediately, without requiring the approval of any other person, and does not include settlement authority provided on a pre-established basis.

Additionally, the bill permits the presence of a mortgagor’s spouse in the mediation session, provided that the spouse resides at the subject property, regardless of whether he or she is on the note or mortgage, or is even a party to the action.

Under current Connecticut law, there is a period of up to eight months from the return date during which parties participating in the FMP may make no “motion, request or demand” except those that deal with the FMP. This eight-month bar, however, is considered waived by the mortgagor if he does bring a non-FMP “motion, request or demand.” The bill proposes to specifically exempt the filing of an answer, special defense, or counterclaim from the waiver language, thus permitting a mortgagor to file a counterclaim on a matter in the FMP while preventing the mortgagee from responding to it.

The current Uniform Foreclosure Mediation Standing Orders require that “while in mediation each party and each party’s attorney must make a good faith effort to mediate all issues,” but leave “good faith” undefined. The bill proposes a lengthy definition and also includes a provision that “[d]emonstrating that a party or attorney failed to mediate in good faith does not require a showing that such party or attorney acted with malice, intent to injure or an otherwise affirmative showing of bad faith.” The bill also goes into detail regarding sanctions, codifying as statutorily acceptable: the commonly sought imposition of fines payable to the court or aggrieved party; dismissal of the foreclosure action; a bar of interest accrual; an award of attorneys’ fees; compensation for lost income and expenses; and, forbidding the mortgagee from charging the mortgagor for the mortgagee’s attorneys’ fees.

On February 19, 2013, a public hearing on the bill was held.

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