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CFPB’S New Final Rules: Periodic Statements during Bankruptcy

Posted By USFN, Monday, November 7, 2016
Updated: Wednesday, October 26, 2016

November 7, 2016

by Alan S. Wolf
The Wolf Firm
USFN Member (California)

On December 15, 2014, the Consumer Financial Protection Bureau (CFPB or Bureau) published its proposed rules amending and clarifying the 2013 Mortgage Servicing Rules and allowed the industry until March 16, 2015 to comment (2014 Proposed Rules). The CFPB received an onslaught of comments from the mortgage industry that were highly critical of the proposed rules. Then, on April 26, 2016, the CFPB released the results of its consumer testing of periodic statement forms which, it claimed, could safely be used during a pending bankruptcy. The Bureau reopened the comment period until May 26, 2016 to seek comment specifically on the report summarizing that consumer testing; the industry provided numerous comments as to why the sample forms were problematic.

On August 4, 2016, well after the expected release date of early summer, the final CFPB mortgage servicing rules were released (2016 Mortgage Servicing Rules or 2016 Rules). While the mortgage servicing industry dodged some bullets contained in the 2014 Proposed Rules and the April 2016 proposals, the 901 pages of 2016 Mortgage Servicing Rules are still dire.

This article covers the most onerous of the new rules: when and what types of periodic statements must be sent during and after bankruptcy.

Most of the 2016 Rules will be effective 12 months after publication of the rules in the Federal Register. However, because they are so complex and require systemic changes within the servicing industry, the rules pertaining to successors in interest and periodic statements in bankruptcy will not be effective until 18 months after that same publication date. At this writing, the Federal Register publication is to occur on October 19. Accordingly, the rules pertaining to successors in interest and periodic statements would be effective April 19, 2018. There is much that the mortgage servicing industry must do to prepare.

Background
The history of the Bureau’s treatment of periodic statements in bankruptcy is an important factor in understanding the requirements of the 2016 Mortgage Servicing Rules. It all starts with the Dodd-Frank Act, which in 2010 established Truth in Lending Act (TILA) section 128(f) requiring periodic statements for mortgage loans. Until Dodd-Frank there was no real federal requirement to provide periodic mortgage statements. Then, on January 17, 2013, the CFPB issued the 2013 TILA Servicing Final Rule implementing the periodic statement requirements and exemptions in § 1026.41.

In the preamble to the 2013 TILA Servicing Final Rule, the CFPB acknowledged that the Bankruptcy Code might prevent attempts to collect a debt from a consumer in bankruptcy but, nevertheless, stated that it did not believe the Bankruptcy Code would prevent a servicer from sending a consumer a statement on the status of the mortgage loan, and that servicers could make changes to the periodic statement to ensure compliance. Since most servicers do not send periodic statements during bankruptcy precisely because it is nearly impossible to send statements that comply with the Bankruptcy Code, this proposed rule caused great concern in the mortgage industry and a scramble to develop periodic statement formatting that would be acceptable to the constraints of individual bankruptcy judges.

After an outcry from the mortgage industry (including USFN and other industry leaders, as well as support of the mortgage industry’s position from the National Association of Chapter Thirteen Trustees) the CFPB changed course. In its interim final rule published October 23, 2013, the Bureau added new § 1026.41(e)(5) exempting a servicer from the periodic statement requirements in § 1026.41 for a mortgage loan while the consumer is a debtor in bankruptcy. Hence, under the currently effective CFPB Rules, a periodic statement does not need to be sent to a borrower when the borrower is in bankruptcy (Comment 41(e)(5)-1 to § 1026.41(e)(5)). Moreover, if there are multiple obligors on the mortgage loan, the exemption applies if any of the obligors is in bankruptcy (Comment 41(e)(5)-3).

Finally, there is no obligation to resume providing periodic statements with respect to any portion of the mortgage debt that is discharged in bankruptcy (Comment 41(e)(5)-2.ii). That was the good news and the industry rejoiced, passing over the CFPB’s comments that it was still studying the bankruptcy issues and would likely issue new rules regarding periodic statements during bankruptcy. True to its word, the CFPB issued proposed new rules on December 15, 2014 directly addressing — and limiting the exemption applicable to — periodic statements and bankruptcy. Those proposed rules were, to say the least, not good news. [See the accompanying text box below for the CFPB’s explanation of that portion of the 2014 Proposed Rules.]

 

Exactly what did the 2014 Proposed Rules pertaining to periodic statements in bankruptcy mean? No one quite knew. What was clear is that they were convoluted; the mortgage industry had no ability to make the nuanced decisions demanded by the rules nor the technology to implement the various requirements of the rules; and, even if the rules could somehow be followed, there was no protection from automatic stay or discharge injunction violations. As expected, the mortgage industry was very vocal in pointing out the numerous problems with the 2014 Proposed Rules and shared its comments with the Bureau.

 

 Excerpted from CFPB’s 2014 Proposed Rules
“Specifically, proposed § 1026.41(e)(5)(i) limits the exemption to when two conditions are satisfied. First, the consumer must be a debtor in a bankruptcy case, must have discharged personal liability for the mortgage loan through bankruptcy, or must be a primary obligor on a mortgage loan for which another primary obligor is a debtor in a Chapter 12 or Chapter 13 bankruptcy case. Second, one of the following circumstances must apply: (1) The consumer requests in writing that the servicer cease providing periodic statements or coupon books; (2) the consumer’s confirmed plan of reorganization provides that the consumer will surrender the property securing the mortgage loan, provides for the avoidance of the lien securing the mortgage loan, or otherwise does not provide for, as applicable, the payment of pre-bankruptcy arrearages or the maintenance of payments due under the mortgage loan; (3) a court enters an order in the consumer’s bankruptcy case providing for the avoidance of the lien securing the mortgage loan, lifting the automatic stay pursuant to 11 U.S.C. 362 with respect to the property securing the mortgage loan, or requiring the servicer to cease providing periodic statements or coupon books; or (4) the consumer files with the bankruptcy court a Statement of Intention pursuant to 11 U.S.C. 521(a) identifying an intent to surrender the property securing the mortgage loan. The proposal also provides that the exemption terminates and a servicer must resume providing periodic statements or coupon books in two general circumstances. First, notwithstanding meeting the above conditions for an exemption, the proposal requires servicers to provide periodic statements or coupon books if the consumer requests them in writing (unless a court has entered an order requiring otherwise). Second, with respect to any portion of the mortgage debt that is not discharged through bankruptcy, a servicer must resume providing periodic statements or coupon books within a reasonably prompt time after the next payment due date that follows the earliest of the following outcomes in either the consumer’s or the joint obligor’s bankruptcy case, as applicable: the case is dismissed, the case is closed, the consumer reaffirms the mortgage loan under 11 U.S.C. 524, or the consumer receives a discharge under 11 U.S.C. 727, 1141, 1228, or 1328.”

 

CFPB: August 2016
Based upon its review of the comments received, and its study of the intersection of the periodic statement requirements and bankruptcy law, the Bureau once more changed the rules. [See the accompanying text box below for the relevant excerpt of the CFPB’s August 4, 2016 Final Rules release (New Rule).]

 

The New Rule removes some, but not all, of the troubling provisions of the 2014 Proposed Rules. For example, the 2014 version required a borrower-level, as well as a bankruptcy chapter-level, analysis. If one borrower was involved in a bankruptcy proceeding and a second was not, each was independently analyzed as to whether or not a periodic statement should be sent. Further, depending on the chapter, it could be required that each of the borrowers receives a periodic statement, with each statement needing a unique format.

How would a servicer do that? Fortunately, the New Rule employs loan-level and all-bankruptcy-chapters analyses — making it much easier to implement. The 2014 Proposed Rules also mandated certain provisions in a confirmed bankruptcy plan to prove that the borrower did not intend to keep the property before exempting the requirement of sending a periodic statement. The New Rule only insists that a proposed plan contain those provisions.

However, the New Rule also makes things more difficult by limiting the exemption in ways not restrained by the 2014 Proposed Rules. For example, despite the filing of a Statement of Intention to surrender the property (which alone was sufficient to invoke the exemption under the 2014 Proposed Rules) if the borrower makes any payments, the exemption no longer applies and periodic statements must be sent under the New Rule.

 Excerpted from CFPB’s 2016 Final Rules (New Rule)
“Except as provided in paragraph (e)(5)(ii) of this section [the consumer’s reaffirmation of the loan or a consumer’s written request to get periodic statements during bankruptcy], a servicer is exempt from the requirements of this section [sending periodic statements to borrowers involved in a bankruptcy] with regard to a mortgage loan if:
(A) Any consumer on the mortgage loan is a debtor in bankruptcy under title 11 of the United States Code or has discharged personal liability for the mortgage loan pursuant to 11 U.S.C. 727, 1141, 1228, or 1328; and
(B) With regard to any consumer on the mortgage loan: (1) The consumer requests in writing that the servicer cease providing a periodic statement or coupon book; (2) The consumer’s bankruptcy plan provides that the consumer will surrender the dwelling securing the mortgage loan, provides for the avoidance of the lien securing the mortgage loan, or otherwise does not provide for, as applicable, the payment of pre-bankruptcy arrearage or the maintenance of payments due under the mortgage loan; (3) A court enters an order in the bankruptcy case providing for the avoidance of the lien securing the mortgage loan, lifting the automatic stay pursuant to 11 U.S.C. 362 with regard to the dwelling securing the mortgage loan, or requiring the servicer to cease providing a periodic statement or coupon book; or (4) The consumer files with the court overseeing the bankruptcy case a statement of intention pursuant to 11 U.S.C. 521(a) identifying an intent to surrender the dwelling securing the mortgage loan and a consumer has not made any partial or periodic payment on the mortgage loan after the commencement of the consumer’s bankruptcy case.
* * *
(ii) Reaffirmation or consumer request to receive statement or coupon book. A servicer ceases to qualify for an exemption pursuant to paragraph (e)(5)(i) of this section with respect to a mortgage loan if the consumer reaffirms personal liability for the loan or any consumer on the loan requests in writing that the servicer provide a periodic statement or coupon book, unless a court enters an order in the bankruptcy case requiring the servicer to cease providing a periodic statement or coupon book.”


The best way to make sense of this is by understanding that the CFPB believes that there is no stay violation, and no violation of the discharge injunction, if statements are sent during a bankruptcy, or after a discharge, where either the bankruptcy court or the debtor evidences an intent that the property and loan be kept. The CFPB reasons that since the debtor wants to keep the property and loan, sending properly fashioned informational statements simply aids the debtor and does not violate the stay or discharge injunction. In other words, the Bureau believes that the benefit of sending a properly drafted statement to the debtor outweighs the risk of violating the stay. Of course, it’s not the CFPB at risk here — it’s the loan servicer.

Conversely, if the bankruptcy court or the debtor evidences that the property or loan will not be kept, the CFPB reasons that there is no point in providing information to the debtor and risking a stay or discharge violation. Accordingly, in these limited cases a servicer is exempt from sending a periodic statement during a bankruptcy.

How to determine that the property or loan will not be kept? A bankruptcy court typically evidences its intent that the property or loan will not be kept by the debtor through an order lifting the stay or an order avoiding the lien.

Turning to the debtor, a borrower in bankruptcy normally evidences that he does not intend to keep the property or the loan by any of the following: (1) requesting in writing that the servicer cease providing periodic statements or coupon books; (2) filing a bankruptcy plan (or filing a Chapter 7 Statement of Intention) that provides for the surrender of the property; (3) providing for the avoidance of the lien in the plan; or (4) not providing for the loan in the plan.

Furthermore, any indicia that the borrower does not intend to keep the property or the loan can be overturned by later actions. For example, if the borrower files a notice of intent to surrender the property, but then makes payments, the payments indicate that the debtor intends to keep the property. Consequently, the exemption no longer applies and statements must be sent. Similarly, if the debtor reaffirms a debt subject to discharge, this evidences the debtor’s intent to keep the property; the exemption is not applicable and statements must be sent. And, of course, if the debtor simply requests that statements be sent, this evidences that the debtor intends to keep the property and statements must be sent.

Final Words
It is important to remember that any debtor action can be preempted by the bankruptcy court. In other words, a court order trumps the intent of the debtor. For example, even if a debtor states clearly that he wants periodic statements, a court order that provides that no periodic statements be sent is superior and must be followed.

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Chapter 13 Trustee Pay-All/Conduit Jurisdictions: Some Issues, Challenges, and Pointers

Posted By USFN, Monday, November 7, 2016
Updated: Wednesday, October 26, 2016

November 7, 2016

by Craig Rule
and Heather McGivern
Orlans Associates, P.C.
USFN Member (Michigan)

Chapter 13 trustees who permit or require post-petition mortgage payments to be disbursed through their offices constitute a small — but growing — majority and present a number of unique challenges to mortgage servicers. Based on the authors’ analysis of the most recent disbursement numbers set forth on the webpage of the Executive Office for the U.S. Trustee, it is estimated that ninety-three Chapter 13 trustees are conduit trustees, while eighty-four are not. See https://www.justice.gov/ust/file/ch13ar15-aarpt.xlsx/download.

These “conduit” jurisdictions and trustees impact the way a mortgage servicer should handle many of the fundamental actions that secured creditors take to protect their interests during a Chapter 13 case. This article discusses how conduit claims affect decisions to file a proof of claim or a motion for relief from the automatic stay, change how to approach loan modifications, and amplify the adverse consequences of failing to file a transfer of claim.

Readers should note that not all secured claims in conduit jurisdictions must be wholly paid through the Chapter 13 trustee under all circumstances. For example, Local Rule 3070-1 (Bankr. E.D. Mich. 2016) creates a presumption of trustee payment that must be rebutted if a claim is to be paid directly. In practice, this means that a debtor must be contractually current on the petition date to continue to make post-petition payments directly to a mortgage creditor.

No Proof of Claim = No Payment?
Although the Bankruptcy Code and Federal Rules of Bankruptcy Procedure (FRBP) do not presently require secured creditors to file a proof of claim (POC), there are several possible adverse results of failing to do so on conduit claims. See 11 U.S.C. § 501(a) and FRBP Rule 3002(a). Even if there is little or no pre-petition arrearage, the lack of a filed proof of claim can prevent a mortgage servicer from receiving any payments during the course of a Chapter 13 plan. Though the absence of a filed POC on an unmodified mortgage claim may not result in a full (or even partial) discharge of the obligation, the loss of a potential stream of payments for up to five years makes filing a proof of claim highly advisable. See Matteson v. Bank of America, 535 B.R. 156 (6th Cir. B.A.P. 2015).

While a trustee or debtor is permitted to file a POC on behalf of a creditor, it is by no means certain that either party will do so — or, if filed, that the claim will be accurate in terms of the arrears and ongoing post-petition payments. See 11 U.S.C. § 501(c) and FRBP Rule 3004. Furthermore, if the incorrect servicer is identified or the wrong payment address is noted in the debtor- or trustee-filed POC, it could create an administrative quagmire that causes the trustee to object to, or stop payment on, the proof of claim. If an objection is granted, there is a risk that some or all of the expected payments during the pendency of the bankruptcy case could be subject to discharge at plan completion.

No Post-Petition Payments? MFR Considerations
For mortgage servicers, perhaps the most significant difference between conduit and non-conduit claims is the determination of whether a referral should be made to local bankruptcy counsel to bring a motion for relief from the automatic stay (MFR). This divergence begins when the bankruptcy case is filed. If the proposed Chapter 13 plan intends to have the trustee disburse the post-petition payments, the trustee will generally not begin to make those payments until the plan is confirmed unless directed otherwise by a local rule or court order. As a result, mortgage servicers and their attorneys should carefully examine the proposed plan treatment before filing what could be an impractical MFR. Even if a debtor initially intends to pay a mortgage claim directly, a MFR at the pre-confirmation stage can be a costly alternative to filing an objection to plan confirmation since, in many instances, the debtor may amend the plan to convert the claim to a trustee-paid one.

The discrepancies between conduit and non-conduit claims continue at the post-confirmation stage. Due to other claims that may have priority in distribution under the confirmed plan (such as debtor attorneys’ fees and equal monthly payment secured claims), it is often the case that a debtor is fully performing under a plan even though the post-petition mortgage payments are not current. To avoid filing unfeasible MFRs on conduit claims, servicers and their attorneys should always examine the trustee’s payment histories, which are available online and without cost to creditors. There are several different platforms that Chapter 13 trustees around the country use to provide access to their records. The most frequently-used platform is the 13 Network, which can be accessed at www.13network.com.

Loan Modification Pitfalls
While effective and timely communication among a servicer’s bankruptcy department, loss mitigation department, and local counsel is always of the utmost importance, the failure to do so has even more negative implications for all parties to a Chapter 13 case if post-petition payments are made through the trustee’s office. The troubles often begin at the trial loan modification stage because the disbursements from the trustee must be modified to match the monthly trial payments.

Prompt action by a servicer once the trial modification is offered is necessary to ensure that the Chapter 13 trustee will make the correct payments in the right time frame. In some jurisdictions this simply means that the servicer must notify the trustee (either through direct contact or a filed payment change notice) to adjust the post-petition payment amount for a fixed period. In other courts, which put the entire loan modification burden on the debtor, the debtor’s attorney should be promptly notified so that he or she can take the required action to cause the trustee to effectuate the correct trial payments. In still additional jurisdictions, however, servicers may be held to account if they do not ensure that a trial loan modification receives court approval. In this instance, it is crucial that local counsel be alerted of the trial modification in enough time to obtain bankruptcy court approval either through a motion or through a stipulated order.

Once a debtor is approved for a permanent loan modification, there are a number of pitfalls to avoid. The consequences to all parties in a Chapter 13 case for failing to have permanent loan modifications quickly and accurately effectuated are even more heightened for conduit loans. In conduit jurisdictions, if a permanent loan modification is not approved by the court or brought to the trustee’s attention, not only will the trustee continue to pay any pre-petition arrearage but he or she will also pay the post-petition monthly payments at the pre-modification amount. In many instances, this could result in a significant overpayment to the mortgage creditor, to the detriment of other creditors; the mortgage servicer could face sanctions or a U.S. Trustee investigation. Regardless of whether the post-petition payments are made through the trustee or directly by the debtor, servicers should contact their local bankruptcy counsel to determine whether the bankruptcy court must approve the permanent loan modification before it is tendered to a debtor for signature.

File Transfers of Claim
The consequences of the failure to file a timely transfer of claim are even more pronounced if the post-petition mortgage payments are being disbursed through the Chapter 13 trustee. FRBP Rule 3001(e)(2) requires a transferee to file a transfer of claim when the transfer takes place after the proof of claim is filed. On a non-conduit claim, a delay in filing a transfer of claim will only affect disbursements on the pre-petition arrearage; however, the impact on conduit claims is amplified since the post-petition payments from the trustee will also not make it to the new servicer. In some instances, after the return of checks from the previous servicer, the trustee may seek to disallow the claim in its entirety if a transfer of claim is not filed. Not surprisingly, based on the authors’ experience, the failure of creditors to file transfers of claim and payment address changes constitute one of the biggest frustrations for Chapter 13 trustees and their staff. In order to prevent a potentially significant delay and/or financial loss, mortgage servicers should promptly file a transfer of claim after acquiring servicing rights.

Conclusion
Although not exhaustive, the issues peculiar to conduit jurisdictions discussed in this article represent some of the most common and costly obstacles facing mortgage servicers. As always, mortgage servicers should reach out to their local counsel to discuss other potential pitfalls that may be unique to each jurisdiction.

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RESPA Servicing Rules and the CFPB Partial Removal of BK Exemptions for Early Intervention: It Could Have Been Worse!

Posted By USFN, Monday, November 7, 2016
Updated: Wednesday, October 26, 2016

November 7, 2016

by Wendy Walter
McCarthy & Holthus, LLP
USFN Member (Washington)

In a clarifying amendment to the mortgage servicing rules, contained within the Real Estate Settlement Procedures Act (RESPA), the Consumer Financial Protection Bureau (CFPB or Bureau) recently peeled back certain exemptions that shielded servicers from having to comply with early intervention requirements if the borrower was in an active bankruptcy. After a long deliberative process (18 months), the Bureau announced on August 4, 2016 that the early intervention requirements would partially apply to borrowers in bankruptcy.

Taking a step back, it is important to note that the original mortgage servicing rules published in February 2013 to be effective January 10, 2014 didn’t exempt bankruptcy loans from their provisions. In October 2013, after many comments and concerns were made to the newly announced rules, the Bureau issued an interim final rule providing bankruptcy exemptions to the early intervention requirements and announcing that the rules would be revised to address the concerns in contacting a borrower (who is in bankruptcy) with any communication that could be determined to potentially be in violation of the automatic stay.

This article will address the recent bankruptcy-related revisions to the live contact and written notice requirements contained within RESPA regulation 12 CFR 1024.39.

Live Contact — Bankruptcy Exemption Remains
RESPA requires that within the 36th day of delinquency the servicer will make good faith efforts to contact the borrower in order to discuss the availability of loss mitigation options. The definition of delinquency has been added to the rules in 12 CFR 1024.31 and states: “Delinquency means a period of time during which a borrower and a borrower’s mortgage loan obligation are delinquent. A borrower and a borrower’s mortgage loan obligation are delinquent beginning on the date a periodic payment sufficient to cover principal, interest, and if applicable, escrow, becomes due and unpaid, until such time as no periodic payment is due and unpaid.”

Examples of live contact are speaking on the telephone or conducting an in-person meeting and may include contact established on the borrower’s initiative. In the updated rules, the Bureau has colored in the picture of what it thinks might constitute a good faith effort to make live contact and mentioned items in its official interpretation, such as making telephone calls on multiple occasions and sending written and electronic messages.

In the amendments to the live contact requirements, the Bureau cleaned up its original proposal to create a different rule depending on the applicable bankruptcy chapter and whether the consumer in bankruptcy was a borrower or co-borrower. After soliciting feedback and recognizing the limitations in loan servicing systems, it came back with a much cleaner rule and establishes a permanent exemption from the live contact requirements for borrowers in bankruptcy. In the new section 12 CFR 1024.39(c), the Bureau will provide an exemption to the live contact requirements if the borrower is in any chapter of bankruptcy. The duty to resume compliance will come into effect after the next payment due date that is the earliest of dismissal, closure, or reaffirmation. There is no duty to resume live contact requirements if the borrower obtains a discharge.

The Bureau has taken this approach because the live contact might be more intrusive and add less value when a borrower is in bankruptcy. Bankruptcy is used as a method to protect borrowers from overwhelming creditor calls and communications; requiring live contact would disturb the purpose of many consumer bankruptcies.

Written Notice — Partial Exemption for Borrowers in Bankruptcy
Under 12 CFR 1024.36(c), the servicer must send a borrower a written notice no later than the 45th day after the borrower’s delinquency. The written notice must include: a statement encouraging the borrower to contact the servicer, the telephone number and mailing address for the loss mitigation/continuity of contact team, a brief statement of available loss mitigation options, application instructions or a statement advising on how the borrower can find out more about loss mitigation, and a list of HUD counselors or the website with the list of counselors. The rule also contains some model clauses and states that the requirement shouldn’t force the servicer to violate another law when communicating with the borrower in this manner.

The original regulation and interim final rule from October 2013 contained an exemption for borrowers in bankruptcy. The recent amendment to the rule adjusts and now describes it as a “partial exemption.” The exemption for borrowers in bankruptcy doesn’t apply if there are no loss mitigation options available or if the borrower has requested that the servicer cease communication under the FDCPA section 805(c). If those exemptions do not apply, the servicer must send a written notice no later than the 45th day after the borrower files bankruptcy if the borrower was delinquent when the case was filed. If the borrow becomes delinquent after the filing, the normal 45-day rule applies and the notice must be sent within the 45th day of delinquency. For the notice sent while the borrower is in bankruptcy, it “may not contain a request for payment.” The 180-day rule doesn’t apply in that the notice doesn’t have to be sent more than once in a bankruptcy setting. The official interpretation also allows the servicer to comply with this section by sending the notice to the borrower’s attorney as a representative. This rule also applies if the borrower revives a bankruptcy case; however, if the servicer already sent a notice once during that case, it will be deemed to have complied for the life of that case.

Effective Date
The rule changes related to early intervention are effective 12 months after the date that the final rules are published in the Federal Register. As of the date of this article, the final rule is to be published in the register on October 19. The amendments would then be effective October 19, 2017.

Servicers should be relieved that the Bureau opted to simplify the rule, to not differentiate between bankruptcy chapters or borrowers, to not distinguish those cases where a borrower was intending to surrender or avoid the lien, and to only require notices where the borrower was proposing to repay through a Chapter 13 plan. While it might be a challenge determining whether loss mitigation is available, and tailoring the notice to outline options for the specific bankruptcy scenario might not be possible (rendering the exemption for borrowers in bankruptcy, if no loss mitigation, unusable in many cases), when comparing the final rule to the proposed rules of late 2014, one thing is clear: it could have been worse.

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Bankruptcy Anti-Modification Provision and Mortgages Secured by Principal Residences

Posted By USFN, Monday, November 7, 2016
Updated: Wednesday, October 26, 2016

November 7, 2016

by Graham Kidner
Hutchens Law Firm
USFN Member (North Carolina, South Carolina)

The Fourth Circuit Court of Appeals recently reasserted the integrity of the anti-modification provision of the Bankruptcy Code with respect to mortgages secured by a borrower’s principal residence. [Anderson v. Hancock, 2016 WL 1660178 (4th Cir. Apr. 27, 2016)].

In Anderson, the seller (Hancock) of a residential property took back a note and deed of trust from the purchaser (Anderson). Following default, the seller invoked a clause in the note increasing the interest rate from five percent to seven percent, and commenced foreclosure. The purchaser-borrower filed for Chapter 13 bankruptcy protection, followed by a plan proposing to pay arrears over 60 months and post-petition payments at a five percent interest rate.

Bankruptcy Court: Sustained Seller’s Plan Objections
The bankruptcy court found that the proposed five percent interest rate violated the Bankruptcy Code’s anti-modification provision applicable to principal residences. [11 U.S.C § 1322(b)(2)]. Further, the bankruptcy court rejected the purchaser-borrower’s contention that the increased rate was a consequence of default that bankruptcy could “cure,” consistent with § 1322(b)(3) and (b)(5). The bankruptcy court also determined that arrears on the loan should be calculated using a seven percent rate of interest for a specified period, and then it entered an order confirming the plan as modified. The purchaser-borrower appealed to the district court.

District Court: Affirmed Except in One Respect
The district court disagreed with the bankruptcy court’s interpretation of the note. Specifically, the district court: “[H]eld that acceleration and foreclosure was a ‘disjunctive alternative remedy’ to the default rate of interest, and that once the Hancocks accelerated the loan, the rate of interest reverted back to five percent. J.A. 71. It held that this period of acceleration (and thus only five percent interest) lasted from September 16, 2013 [the petition filing date] until December 2013 (the effective date of the plan), after which the seven percent rate of interest reactivated due to the bankruptcy plan’s deceleration of the loan. In the district court’s view, the rate of interest thus see-sawed depending on whether the loan was in accelerated or decelerated status.” Anderson, at *2.

Court of Appeals: Affirmed in Part; Reversed in Part; and Remanded
The Fourth Circuit “agree[d] with the courts below on the basic question, namely that the cure lies in decelerating the loan and allowing the debtors to avoid foreclosure by continuing to make payments under the contractually stipulated rate of interest.” The Court of Appeals held that the proposed change to the interest rate was an impermissible modification rather than a permissible cure because otherwise the rate reduction would modify the bargained-for rights, enforceable under state law, expressed in the security agreement, citing Nobelman v. American Savings Bank, 508 U.S. 324, 329, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993). “Courts have accordingly ‘interpreted the no-modification provision of § 1322(b)(2) to prohibit any fundamental alteration in a debtor’s obligations, e.g., lowering monthly payments, converting a variable interest rate to a fixed interest rate, or extending the repayment term of a note.’ In re Litton, 330 F.3d 636, 643 (4th Cir. 2003).” The court found that “[t]he meaning of ‘cure’ thus focuses on the ability of a debtor to decelerate and continue paying a loan, thereby avoiding foreclosure.” Anderson, at *3.

Rejecting the purchaser’s contention that this result was unfair and denied a “fresh start,” the Fourth Circuit observed that the fresh start was the opportunity to escape foreclosure and resume the opportunity to make payments. The ability to impose a default interest rate in this case was a “risk premium” contracted for between the parties and to provide a measure of protection to the lender when the debtor demonstrates behavior that reveals an increased likelihood of loss.

Rejecting the district court’s disjunctive alternative remedy theory, the Court of Appeals observed that “[n]othing in the contract indicates that the parties intended for [the] invocation [of the remedy of acceleration and foreclosure] to unravel the earlier, less-severe remedy.”

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PHH Corporation v. CFPB

Posted By USFN, Monday, November 7, 2016
Updated: Wednesday, October 26, 2016

November 7, 2016

by Joshua Schaer
RCO Legal, P.S.
USFN Member (Oregon, Washington)

On October 11, 2016, the D.C. Circuit Court of Appeals issued an opinion in PHH Corporation v. Consumer Financial Protection Bureau that is a significant victory for lenders.

Background — HUD had long interpreted Section 8(c) of the Real Estate Settlement Procedures Act (RESPA) to read that only an insurer who pays above market value for reinsurance can be presumed to have engaged in a disguised payment for the referral, which is disallowed under Section 8(a). But, in 2014, the Consumer Financial Protection Bureau (CFPB) suddenly declared that all captive reinsurance arrangements are barred under RESPA and ordered PHH to pay $109 million, plus stop reinsurance referrals to their subsidiary.

The Decision — On appeal, the D.C. Circuit found that:
• The CFPB’s single-director structure is unconstitutional because its director enjoys unchecked unilateral power unlike any other federal agency. Rather than preventing the CFPB’s continued operation, however, the court severed the provision of Dodd-Frank which allowed for a single director and held that the agency can continue to function in the executive branch, unless Congress enacts legislation changing its structure.
• On the merits of the CFPB’s action, Section 8 of RESPA allows captive reinsurance arrangements if the amount paid by the insurer is not above market value of the reinsurance.
• The CFPB acted improperly to retroactively apply its own interpretation of Section 8 to punish PHH.
• Any enforcement action concerning whether insurers paid more than market value for reinsurance must be subject to a three-year statute of limitations.

The 101-page majority opinion (along with concurring and partial dissenting opinions) can be found at: https://www.cadc.uscourts.gov/internet/opinions.nsf/AAC6BFFC4C42614C852580490053C38B/$file/15-1177-1640101.pdf.

Editor’s Note: As this USFN Report was going to press, the decision in PHH Corporation v. CFPB (D.C. Cir. Oct. 11, 2016) discussed above was released. Look for more on this case in future USFN publications.

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Overview of the CFPB’s Supervisory Highlights Mortgage Servicing Special Edition (June 2016)

Posted By USFN, Tuesday, October 11, 2016
Updated: Monday, October 3, 2016

October 11, 2016

by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

In June the Consumer Finance Protection Bureau (CFPB or Bureau) published its Supervisory Highlights Mortgage Servicing Special Edition summarizing its recent supervisory examination observations that focus on compliance with the Mortgage Servicing Rules (MSRs) and on unfair, deceptive or abusive acts or practices by loan servicers. As noted in the Highlights, the Bureau recently updated its Supervision and Examination Manual and enhanced the section related to consumer complaints, in particular, to review whether servicers have adequate processes in place to expedite the evaluation of complaints or notices of error where borrowers face foreclosure. Additionally, the CFPB is increasing its focus on compliance with the Equal Credit Opportunity Act (ECOA). For the latter half of 2016, the Bureau will be conducting a more targeted review of ECOA compliance.

The issues most extensively addressed in the Supervisory Highlights based on recent supervisory observations are in the following areas: loss mitigation acknowledgment; loss mitigation offers and related communications; loan modification denial notices; policies and procedures; and servicing transfers. The Highlights provide numerous anecdotal examples of specific violations, the alleged harm to borrowers as a result, and the remedies required by the Bureau, without identifying the at-fault servicers.

Loss Mitigation Acknowledgment Notices
Bureau examiners found numerous violations relating to the requirement that a servicer must acknowledge in writing within 5 days the receipt of a loss mitigation application received 45 days or more before foreclosure sale. If the application is incomplete, the acknowledgment must inform the borrower of the additional documents and information needed, and a date by which they must be provided. In addition to process defects, the CFPB reported that it had found some statements contained in acknowledgment notices to be deceptive, such as when servicers informed borrowers that their homes would not be foreclosed on before the deadline to submit additional loss mitigation materials, but the foreclosure sales proceeded anyway.

The Bureau found other errors, including the failure to timely send the acknowledgment notices, failing to inform the borrowers about additional material needed, requesting documents not relevant to loss mitigation review, and denying loss mitigation before the deadline had passed for the borrower to submit additional materials.

Loss Mitigation Offers
The CFPB found fault with the way in which some servicers handled proprietary loan modifications, including misleading or deceiving borrowers about whether and when outstanding charges would be deferred or assessed. Some servicers were found to have made the language in their offers impossible for many borrowers to comprehend, exposing borrowers to risks that they did not understand. Other servicers sent loss mitigation option letters that did not match the terms approved by their underwriting software, thus misrepresenting the actual terms being offered.

Additionally, the Bureau observed numerous situations where servicers had sought to require borrowers to waive their legal rights to bring claims in court in return for the receipt of a loss mitigation option, in violation of Regulation Z. Servicers should already be aware of the well-publicized administrative proceeding from July 2015, In re Residential Credit Solutions, in which the servicer paid a hefty penalty for engaging in similar behavior.

Loan Modification Denial Notices
Further, the Bureau found that some servicers failed to provide a reason for the denial of a loss mitigation application, or provided an incorrect reason. The MSRs require that such an explanation be provided in a denial notice so that the borrower knows whether to appeal. If the servicer receives a complete loss mitigation application 90 days or more before foreclosure sale or during the pre-foreclosure review period, the borrower has a right to appeal the denial but is deprived of that right if the servicer fails to inform the borrower of the right to appeal, the amount of time available to appeal, or the reasons for denial.

Servicing Policies, Procedures, and Requirements
The CFPB reports a miscellany of errors as the result of servicers failing to have necessary policies and procedures in place to deal with a wide range of borrower inquiries or requests. These range from the failure to provide borrowers with loss mitigation application forms to identifying which loss mitigation options were available for the particular borrowers who sought relief. Some of these failings were the result of inadequate communications among servicer personnel, or the failure of servicer employees to understand the loss mitigation options allowed by their loan investors.

Servicing Transfers
While improvements have been observed by the Bureau, there continue to be problems in honoring already-agreed-upon loss mitigation resolutions following servicing transfers, as well as the loss of documents and information provided to the transferor servicers by the borrowers.

Conclusion
The Highlights were positive in many respects, with the CFPB noting considerable improvements made by many servicers to properly staff effective compliance management programs, improve employee training, better utilize technology systems, and actively review borrower complaints for allegations of legal violations. Nonetheless, servicers would be wise to study the Highlights and continually strive to improve their loss mitigation policies, procedures, and processes so as to better serve their customers and avoid adverse action by the Bureau.

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Filing Proof of Claim on Unextinguished Time-Barred Debt Not a Violation of FDCPA

Posted By USFN, Tuesday, October 11, 2016
Updated: Monday, October 3, 2016

October 11, 2016

by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

In a published opinion, the U.S. Court of Appeals for the Fourth Circuit has held that filing a proof of claim in a Chapter 13 bankruptcy based on a debt that is time-barred does not violate the Fair Debt Collection Practices Act (FDCPA) when the statute of limitations does not extinguish the debt. [Dubois v. Atlas Acquisitions LLC (In re Eric Dubois), No. 15-1945 (4th Cir. Aug. 25, 2016)].

Background
Atlas purchased the defaulted debts of two debtors and filed proofs of claim in both Chapter 13 bankruptcy cases. Each debtor filed an adversary action against Atlas, alleging that because all of the debts were beyond Maryland’s statute of limitations when Atlas purchased them and filed its proofs of claim, Atlas violated 15 U.S.C. §§ 1692e (using “any false, deceptive, or misleading representation or means in connection with the collection of any debt”) and 1692f (using “unfair or unconscionable means to collect or attempt to collect any debt”). The debtors had not listed the Atlas debts in their bankruptcy schedules and did not give notice to Atlas of their bankruptcy filings. The bankruptcy court consolidated the cases and dismissed both complaints for failure to state a claim for which relief may be granted pursuant to Fed. R. Civ. P. 12(b)(6). The debtors appealed, and the Fourth Circuit permitted the appeal directly to the appellate court.

Appellate Review
The court first provided a brief overview of the purpose of bankruptcy and the reasons behind enactment of the FDCPA, setting up the justification for its holding. It then observed that “[f]ederal courts have consistently held that a debt collector violates the FDCPA by filing a lawsuit or threatening to file a lawsuit to collect a time-barred debt,” citing Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1259-60 (11th Cir. 2014) (collecting cases), cert. denied, 135 S. Ct. 1844 (2015). Dubois at 8. Surprisingly, however, the court did not reference the holding in Crawford, which opined that the filing of a proof of claim to collect stale debt in a Chapter 13 bankruptcy case violates 15 U.S.C. §§ 1692e and 1692f.

Addressing the competing arguments of Atlas and the debtors, the court first held that filing a proof of claim is debt collection activity. The “animating purpose” behind filing a proof of claim is to seek a share of the distribution of a debtor’s estate. Dubois at 10, citing Grden v. Leikin Ingber & Winters PC, 643 F.3d 169, 173 (6th Cir. 2011). “This fits squarely within the Supreme Court’s understanding of debt collection for purposes of the FDCPA.” Dubois at 10.

The court then considered whether a “claim” could include a time-barred debt. The court noted that “[t]he Bankruptcy Code defines the term ‘claim’ broadly to mean a ‘right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.’ 11 U.S.C. § 101(5)(A).” Id. at 14. The Code is designed to deal with all of the debtor’s legal obligations regardless how remote, providing the debtor with the “broadest possible remedy”. Id., citing H.R. Rep. No. 95–595, p. 309 (1977); S. Rep. No. 95–989, p. 22 (1978). Maryland’s statute of limitations does not extinguish the debt, rather it bars the remedy of a civil action to collect it — a remedy that may be revived if the debtor sufficiently acknowledges the debt’s existence. Id. at 15, citing Potterton v. Ryland Group, Inc., 424 A.2d 761, 764 (Md. 1981). Hence, because a time-barred debt still constitutes a right to payment under Maryland law, it is a “claim” for bankruptcy purposes. Dubois at 15.

In the court’s opinion “when a time-barred debt is not scheduled the optimal scenario is for a claim to be filed and for the Bankruptcy Code to operate as written.” The Code’s claim objection and disallowal procedures will stop a creditor from engaging in further collection activity, which is preferable to allowing the debt to continue to exist (if unscheduled and no proof of claim is filed), because “[t]his is detrimental to the debtor and undermines the bankruptcy system’s interest in ‘the collective treatment of all of a debtor’s creditors at one time.’ 1 Norton Bankr. L. & Prac. 3d § 3:9.” Id., at 19.

The court offered several other considerations in support of its decision, including that the Bankruptcy Rules require claims such as these to state the last transaction and charge-off dates, allowing for easy identification of time-barred debt. Therefore, “the reasons why it is ‘unfair’ and ‘misleading’ to sue on a time-barred debt are considerably diminished in the bankruptcy context, where the debtor has additional protections and potentially benefits from having the debt treated in the bankruptcy process.” Id. at 22.

Split of Authority among the Circuits
Servicer and attorney debt collectors should be aware that whether the filing of a proof of claim on time-barred debt violates the FDCPA is an area of developing law. A few other federal courts have held such action does not violate the FDCPA; e.g., Simmons v. Roundup Funding, LLP, 622 F.3d 93 (2d Cir. 2010) — while some have arrived at the opposite conclusion; e.g., Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014). Debt collectors must familiarize themselves with the law applicable to the jurisdiction in which they intend to file proofs of claim.

Editor’s Note: Recent USFN Reports have also addressed this subject. See the articles “FDCPA Trumps Bankruptcy Rules?” (Summer 2016 Ed.) and “Don’t Drink Expired milk and be Wary of Stale Claims” (Winter 2016 Ed.). Articles are archived in the Article Library at www.usfn.org.

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Minnesota: Supreme Court Says “No” regarding Borrowers Claiming Equitable Estoppel in Oral Credit Agreements

Posted By USFN, Tuesday, October 11, 2016
Updated: Monday, October 3, 2016

October 11, 2016

by Paul A. Weingarden and Kevin Dobie
Usset, Weingarden & Liebo, PLLP – USFN Member (Minnesota)

In the law, there is an old saying regarding oral contracts that goes something like this: “An oral agreement isn’t worth the paper it’s not printed upon.” That adage was driven home recently by a Minnesota Supreme Court decision, ending a nagging defense in state and federal courts on a single limited, but vexatious, issue.

The Minnesota Statute of Frauds codified as Minn. Stat. § 513.33 sub. 2 states, in pertinent part: “A debtor may not maintain an action on a credit agreement unless the agreement is in writing, expresses consideration, sets forth the relevant terms and conditions, and is signed by the creditor and the debtor.”

Promissory Estoppel
Both state and federal courts in Minnesota have routinely rejected the formation of oral agreements in credit contracts under what is referred to as a promissory estoppel argument that an oral agreement to refinance was breached. State appellate court decisions such as Greuling v. Wells Fargo Home Mortgage, Inc., 690 N.W.2d 757 (Minn. Ct. App. 2005); Bank Cherokee v. Insignia Development, LLC, 779 N.W.2d 896 (Minn. Ct. App. 2010); and Rural American Bank of Greenwald v. Herickhoff, 473 N.W.2d 361 (Minn. Ct. App. 1991) have all considered and rejected the doctrine.

Similarly, promissory estoppel to prevent oral formation of mortgage modifications has been consistently denied by federal courts as well. See Brisbin v. Aurora Loan Services, LLC, 679 F.3d 748 (8th Cir. 2012); LaBrant v. Mortgage Electronic Registration Systems, Inc., 870 F. Supp. 2d 671 (2012); Bracewell v. U.S. Bank, N.A., 748 F.3d 793 (8th Cir. 2014); and St. Jude Medical S.C., Inc. v. Tormey, 779 F.3d 894 (8th Cir. 2015).

Equitable Estoppel
Disturbingly, however, the concept of “equitable estoppel” has remained viable in both the state and federal courts. The doctrine (based on the concept of detrimental reliance) has been recognized in state appellate court decisions such as Norwest Bank Minnesota, N.A. v. Midwestern Machinery Co., 481 N.W.2d 875 (Minn. Ct. App. 1992); Highland Bank v. Dayab, unpublished, (Minn. Ct. App. 2011); and Bank Cherokee v. Insignia Development, LLC, 779 N.W.2d 896 (Minn. Ct. App. 2010). Federal cases recognizing the doctrine have been equally challenging for mortgagees, including Bracewell v. U.S. Bank, N.A., 748 F.3d 793 (8th Cir. 2014) and Stumm v. BAC Home Loan Servicing, LP, 914 F. Supp. 2d 1009 (D. Minn. 2012). United States District Court judges accepting the concept of equitable estoppel include Judge Magnussen in Racutt v. U.S. Bank, N.A., No. 11-2948, 2012 WL 12423210, at *3 (D. Minn. 2012), and Judge Ann Montgomery in Laurent v. Mortgage Electronic Registration Systems, Inc., No. 11-2585, 2011 WL 6888800, at *4 (D. Minn. 2011).

In cases raising the equitable estoppel argument, the debtor alleges that the creditor acted in bad faith or that the debtor refrained from finding alternate credit, believing the creditor was bound by an oral promise, which was ultimately rejected, resulting in detrimental reliance.

Thankfully the Minnesota Supreme Court has now provided what is hoped to be the definitive answer. [Figgins v. Wilcox, A14-1358 (Minn. June 1, 2016)]. In Figgins, the debtor alleged that the creditor orally told him not to make the balloon payment and that the creditor would refinance the loan. When the debtor checked on terms with a different bank, the creditor gave a poor credit response, resulting in a rejection and an ultimately higher interest rate on refinancing, all to the debtor’s detriment.

In raising the argument to enforce an alleged oral credit agreement, the Supreme Court noted:
“To support his position, appellant cites Norwest Bank Minnesota, N.A. v. Midwestern Machinery Co., 481 N.W.2d 875 (Minn. App. 1992) … which exempted a claim of promissory estoppel from section 513.33 because ‘[a]n agreement may be taken outside the statute of frauds by equitable or promissory estoppel.’ Id. at 880. Norwest Bank, a court of appeals decision, has never been explicitly overruled, but other court of appeal decisions have declined to follow its holding and have refused to exempt claims of promissory estoppel from section 513.33.”

In denying relief, the Supreme Court expressly ruled in Figgins that “the text of section 513.33 is plain, clear, and unambiguous — no action on a credit agreement may be maintained unless the writing requirement is satisfied.” Presumably, as BOTH equitable and promissory estoppel concepts were noted in the opinion, it is anticipated that because the Minnesota Supreme Court is the ultimate arbiter in state law matters, both state and federal courts will refuse to consider equitable estoppel claims pertaining to alleged oral credit agreements in the future.

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North Carolina: Appellate Review of Trustee as Fiduciary & Affidavit of Indebtedness Admissibility

Posted By USFN, Tuesday, October 11, 2016
Updated: Monday, October 3, 2016

October 11, 2016

by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

Opinions issued by the North Carolina Court of Appeals have raised concerns among foreclosure trustees and their attorneys about the extent to which North Carolina’s Rules of Civil Procedure apply to power-of-sale foreclosure proceedings. For example, in Lifestore Bank v. Mingo Tribal Pres. Trust, 235 N.C. App. 573, 577, 763 S.E.2d 6, 9 (2014), review denied, __ N.C. __, 771 S.E.2d 306 (2015), in upholding the application of N.C. R. Civ. P. Rule 41(a) (the voluntary dismissal rule) the court held that “[a] foreclosure under power of sale is a type of special proceeding, to which our Rules of Civil Procedure apply.”

Recent Decision: In re the Foreclosure by Goddard & Peterson, PLLC
Practitioners see mixed blessings in the recent decision of In Re: the Foreclosure by Goddard & Peterson, PLLC, 2016 WL3585841 (N.C. App. July 5, 2016).

Background — In Goddard & Peterson, the note holder-petitioner (Beal Bank) in the foreclosure proceeding substituted in Rogers, Townsend & Thomas (RTT) (a law firm) as trustee to the deed of trust executed by Lillian Cain. RTT later sent a foreclosure notice to Cain, followed by a letter informing her that it had been retained to foreclose the property and including the debt validation notice required by 15 U.S.C. § 1692g. Following an unexplained, lengthy delay in the foreclosure proceedings, Cain served RTT with a request to petitioner Beal Bank for admissions pursuant to N.C. R. Civ. P. Rule 36. The Request for Admissions to Beal Bank (seeking an admission that it was not the note holder) went unanswered beyond the time period to respond contained in N.C. R. Civ. P. Rule 36. Shortly thereafter, Beal Bank substituted the law firm Goddard & Peterson for RTT as trustee, and RTT commenced representation of Beal Bank in the contested foreclosure proceedings before the superior court.

At the hearing before the superior court following the appeal de novo of the clerk’s order authorizing RTT to proceed with foreclosure sale, Cain served an unfiled motion to dismiss the petition supported by the petitioner’s purported failure to answer the Request for Admissions. The judge orally denied the motion; a written order was not entered. The judge also overruled Cain’s objection to the petitioner’s introduction of an affidavit of indebtedness executed by a bank employee.

Appellate Court Procedurally Dispenses with Borrower’s Failed Motion to Dismiss — On appeal, the Court of Appeals could have taken the opportunity to narrow the holding in Mingo by ruling that discovery is not permissible in a power-of-sale foreclosure special proceeding, or at least to find that service of discovery on attorneys employed by the trustee does not constitute service on the petitioner. It did neither. Instead, it held that because the superior court had not entered a written order denying the motion to dismiss, then no appeal could be taken from it. An order is enforceable only when written, signed by the court, and entered by the clerk. West .v. Marko, 130 N.C. App. 751, 756, 504 S.E.2d 571, 574 (1998), N.C. Gen. Stat. §1A-1, Rule 58. While undoubtedly correct from a procedural standpoint, the court could have stricken the Request for Admissions on the grounds that it was served only on two RTT attorneys at a time when RTT was acting solely as substitute trustee. Surely service of legal documents on RTT (a neutral and a fiduciary, see discussion below) of materials intended for the petitioner, and with potentially dispositive effect, cannot be permissible.

Appellate Court Reviews Trustee as Fiduciary — On the positive side, the court upheld the superior court’s decision overruling Cain’s objection to RTT appearing as counsel for petitioner in the de novo hearing. Cain contended that RTT owed her a fiduciary duty when the case was in front of the superior court, and violated that duty by advocating for Beal Bank. The court acknowledged the fiduciary nature of a trustee’s role in the context of the enforcement of a deed of trust:

‘“In deed of trust relationships, the trustee is a disinterested third party acting as the agent of both [parties].’ In re Proposed Foreclosure of McDuffie, 114 N.C. App. 86, 88, 440 S.E.2d 865, 866 (1994). As such, in a typical foreclosure proceeding, trustees have a long-recognized fiduciary duty to both the debtor and the creditor. In re Foreclosure of Vogler Realty, Inc., 365 N.C. 389, 397, 722 S.E.2d 459, 465 (2012). ‘Upon default [a trustee’s] duties are rendered responsible, critical and active and he is required to act discreetly, as well as judiciously, in making the best use of the security for the protection of the beneficiaries.’ Id. (quoting Mills v. Mut. Bldg. Loan Ass’n, 216 N.C. 664, 669, 6 S.E.2d 549, 552 (1940)). More specifically, ‘the trustee is required to discharge his duties with the strictest impartiality as well as fidelity, and according to his best ability.’ Hinton v. Pritchard, 120 N.C. 1, 3, 26 S.E. 627, 627 (1897).” In re Goddard & Peterson, at *5.

The court disagreed with Cain’s contention, however, finding that RTT was removed as substitute trustee well before the superior court hearing, and noted that Cain had not explained how RTT’s representation of petitioner at the hearing either violated a legal obligation or was done in bad faith. Moreover, Cain had not alleged any injury proximately caused by RTT’s actions, observing that “‘[t]his Court has held that breach of fiduciary duty is a species of negligence or professional malpractice. Consequently, [such] claims require[ ] proof of an injury proximately caused by the breach of duty.’ Farndale Co., LLC v. Gibellini, 176 N.C. App. 60, 68, 628 S.E.2d 15, 20 (2006) (citations and internal quotation marks omitted).” In re Goddard & Peterson, at *4.

Invoking the authority of the North Carolina State Bar’s ethics opinions, the court remarked that this matter had been addressed in N.C. CPR 220 (1979), when the State Bar opined “that if a lawyer who is acting as a trustee for a deed of trust resigns his position as trustee, the lawyer may represent the petitioner bringing the foreclosure claim ‘as long as no prior conflict of interest existed because of some prior obligation to the opposing party.’” In re Goddard & Peterson, at *5.

In 1990, the Bar found that “former service as a trustee does not disqualify a lawyer from assuming a partisan role in regard to foreclosure under a deed of trust.” Id. quoting N.C. RPC 82 (1990). “N.C. RPC 90 (1990) ties it all together, and provides that: ‘[i]t has long been recognized that former service as a trustee does not disqualify a lawyer from assuming a partisan role in regard to foreclosure under a deed of trust. CPR 220, RPC 82. This is true whether the attorney resigns as trustee prior to the initiation of foreclosure proceedings or after the initiation of such proceedings when it becomes apparent that the foreclosure will be contested.’” Id. at *6.

The court went on to cite the most recent ethical opinion “which more specifically defined RPC 90, by stating: ‘[A] lawyer/trustee must explain his role in a foreclosure proceeding to any unrepresented party that is an unsophisticated consumer of legal services; if he fails to do so and that party discloses material confidential information, the lawyer may not represent the other party in a subsequent, related adversarial proceeding unless there is informed consent. N.C. Formal Opinion 5 (2013).’” Id. at 6.

Given that Cain was represented by counsel in proceedings lasting more than three years, and that she had failed to assert that she had disclosed any material confidential information to RTT when it was acting as trustee, the court found nothing in the record indicating that the superior court had erred in overruling Cain’s objection to RTT acting as counsel for petitioner.

Appellate Court Reviews Affidavit of Indebtedness Admissibility — The opinion provides further support for the use of affidavits to satisfy the superior court in a de novo hearing with respect to the enumerated findings that the court must make under N.C.G.S. § 45-21.16(d) in order to authorize the trustee to sell the secured property. Records that meet the definition of the business records exception to the hearsay rule [N.C. R. Evid. Rule 801(c)] may be introduced by a witness when the proper foundation has been laid to qualify that witness.

Petitioner Beal Bank produced an affidavit from a bank employee in support of the introduction of loan account records. In the affidavit the employee “specifically stated that her averments were ‘based upon [her] review of [petitioner’s] records relating to [respondent’s] loan and from [her] own personal knowledge of how they are kept and maintained.’ As a result, [the employee] was a qualified witness under Rule 803(6) and petitioner’s records regarding respondent’s default on her loan account were properly introduced through [the employee’s] affidavit.” Id. at 8.

The court also rejected Cain’s argument that the affiant’s statement that Beal Bank “is the holder of the loan” was inadmissible hearsay. Firstly, the foreclosure statute explicitly requires the clerk to consider the evidence of the parties and may consider affidavits and certified copies of documents. N.C. Gen. Stat. § 45–21.16(d). Id, at *8. The court had extended that requirement to de novo hearings in In re Foreclosure of Brown, 156 N.C. App. 477, 486-87, 577 S.E.2d 398, 404 (2003). On the basis that because “[a] power of sale provision in a deed of trust is a means of avoiding lengthy and costly foreclosures by action[,] this Court held that the ‘necessity for expeditious procedure’ substantially outweigh[ed] any concerns about the efficacy of allowing [the secretary] to testify by affidavit, and the trial court properly admitted her affidavit into evidence. Id. at 486, 577 S.E.2d at 404-05 (citation omitted).” In re Goddard & Peterson, at *8. The court acknowledged that whether Beal Bank was the holder was ultimately a question of law for the superior court to decide, and the fact that the affiant purported to make such a legal conclusion did not result in the affidavit being admitted in error. Id. at *9.

Lessons Learned — Trustees, their counsel, and loan servicers should be aware of the Rules of Civil Procedure and should not disregard papers served on them by borrowers and others connected to the foreclosure proceeding. Strenuous objection should be made to attempts to conduct discovery and to force other procedural and substantive activity contradictory or ill-suited to the power-of-sale foreclosure process.

Legal counsel acting as substitute trustees, or representing substitute trustees, who wish to advocate for the petitioner or note holder should refrain from soliciting or receiving confidential information or materials from the borrower, and should relieve themselves of the trustee’s duties as soon as possible.

Servicers should be mindful of the rules of evidence concerning the use of business records and the qualification of witnesses in court hearings. The vast majority of foreclosure proceedings in North Carolina involve the use of servicer employee affidavits and of business records entered into the servicer’s computerized filing systems by someone other than the person signing the foreclosure debt affidavit. Accordingly, selecting the right person to execute the affidavit and working closely with counsel to ensure that the affidavit will pass court muster are essential.

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Connecticut: Appellate Court Doesn’t Resolve Jurisdictional Split as to Whether EMAP Notice is a Condition Precedent to Suit

Posted By USFN, Tuesday, October 11, 2016
Updated: Tuesday, October 4, 2016

October 11, 2016

by James Pocklington
Hunt Leibert – USFN Member (Connecticut)

For the last eighteen months, trial courts in Connecticut have been divided over the notice requirements of Conn. Gen. Stat. §§ 8-265dd(b) and 8-265ee(a) and whether it creates a statutory condition precedent to initiating suit. Beginning with the unprecedented People’s United Bank v. Wright, 2015 Conn. Super. LEXIS 694 (Conn. Super. Ct. Mar. 30, 2015) decision, courts have been divided on the issue, with the majority adopting the reasoning of Wright in the southwest of the state. See “A Failure to Establish Compliance Leads to More than a Dismissal,” published in the USFN e-Update (Sept. 2015 Ed.).

In its recently released opinion in Washington Mutual Bank v. Coughlin, AC 37645 (Sept. 13, 2016), the Appellate Court had the opportunity to settle this interpretative dispute and resolve whether compliance with the Emergency Mortgage Assistance Program (EMAP) statute was or was not jurisdictional. Ultimately (and apparently knowingly), the court elected to avoid the question, stating: “Having thoroughly reviewed the record, we agree with the plaintiff that the defendants were not entitled to notice pursuant to § 8-265ee, and, thus, we do not decide whether, in a case in which § 8-265ee is applicable, failure to comply with its notice requirement implicates the court’s subject matter jurisdiction.”

In Coughlin, the plaintiff-bank was faced with a jurisdictional motion to dismiss for failure to comply with the notice provisions filed on the eve of trial. The plaintiff-bank elected to attempt to proceed to trial and requested a summary hearing on the jurisdictional allegations. At the hearing it asserted both that, in an abundance of caution, it had complied with the statute and (even were the court to determine otherwise) that it did not need to — mooting the non-compliance issue.

By its wording, the EMAP statute only applies to a “principal residence.” Through deposition testimony and the defendants’ allegations in their motion to dismiss, the plaintiff-bank was able to demonstrate that the subject property was not the defendants’ principal residence — removing the applicability of the statute and a need to comply with it. Rather than base its decision on the factual eligibility argument, the trial court denied the motion with a finding that “[C]ompliance with [EMAP] is not a jurisdictional matter.”

On appeal, relying on Rafalko v. University of New Haven, 129 Conn. App 44, 51 n.3 (2011) (“[w]e may affirm a proper result of the trial court for a different reason”), the Appellate Court avoided the legal issue and found that based on the facts established at trial that the subject property was not a primary residence, and thus not eligible for EMAP, the denial of the motion to dismiss was proper, declaring: “[I]t is irrelevant for purposes of this appeal … whether failure to give such notice, if applicable, implicates the subject matter jurisdiction of the court.”

As part of its holding, the Appellate Court acknowledged that the term “principal residence” was undefined at law and corrected that issue, defining it as “the person’s chief or primary home, as distinguished from a secondary residence or a vacation home. We also take note of the fact that the statute refers to the principal residence, suggesting that a person can have only one principal residence at any given time for purposes of this statute.”

Unresolved Outcome
The issue of whether EMAP compliance is subject matter jurisdictional in general therefore remains unresolved, though it is inapplicable to properties that are not the principal residence at the time suit is initiated.

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California: Successor in Interest Legislation (SB1150) Effective 1/1/2017

Posted By USFN, Tuesday, October 11, 2016
Updated: Tuesday, October 4, 2016

October 11, 2016

by Caren Jacobs Castle
The Wolf Firm – USFN Member (California)

The California Legislature has passed a bill (signed by the governor on September 29, 2016), which creates additional requirements as well as potential liability for servicers when dealing with “successors in interest” to a deceased borrower. The purpose of SB1150 is to allow successors in interest to step into the shoes of the deceased borrower with respect to home retention and loss mitigation opportunities. The bill will be effective January 1, 2017. Highlights of the new legislation are discussed below.

Definitions
SB1150 applies to first lien mortgages or deeds of trust that are secured by owner-occupied residential property containing no more than four dwelling units. “Owner-occupied” is defined as the principal residence of the borrower at the time of the borrower’s death. The definition of successor in interest has been greatly limited through the legislative process. “Successor in interest” is defined in the bill as a natural person, who notifies the servicer of the death of the mortgagor, and can provide documentation that the person is the spouse, domestic partner, parent, grandparent, adult child, adult grandchild, adult sibling, or joint tenant of the deceased borrower. Additionally the successor in interest must have occupied the subject property as his/her principal residence at the time of the borrower’s death and continuously for the six months prior to the borrower’s death.

Successor in Interest Determination: Timing & Process
There are several time frames built into the SB1150 process. Upon notification to the servicer (from a person claiming to be a successor in interest) that the borrower has died, the servicer may not proceed with the recordation of a notice of default. The bill specifically requires that the foreclosure not commence and/or proceed in any fashion until the successor in interest process is completed. The cumulative review/delay time frame stated within the legislation is a minimum period of 120 days.

Upon notification of death, the servicer shall request in writing that the party provide evidence of the death of the borrower. The bill allows 30 days to provide this documentation. The evidence may be a death certificate or “other written evidence.” Once the evidence of death is validated, the servicer must request in writing that the party provide written proof that he/she is a successor in interest as defined above. SB1150 deems 90 days as a reasonable time frame for the party to provide “reasonable documentation.”

Once the documentation is received, the servicer must evaluate whether the party qualifies as a successor in interest; in other words, determine that the original borrower is deceased, the party has an ownership interest in the property, and that the party has occupied the home for six continuous months prior to the borrower’s death as his/her principal residence. While SB1150 recognizes that there may be multiple successors in interest, it only provides a statement that the servicer shall apply the provisions of the loan documents as well as federal and state law when there are multiple parties.

Successor in Interest Entitlements
Within 10 days of determining that there is a successor in interest, the servicer shall provide to the party, at a minimum, the following loan information: loan balance, interest rate and any reset dates/amounts, balloon payments, pre-payment penalties, default information, delinquency status, monthly payment amount, and payoff amount.

The servicer shall further allow the successor in interest to apply to assume the loan and may evaluate the creditworthiness of the successor subject to applicable investor guidelines. If the loan is assumable, and the successor requests a foreclosure prevention alternative simultaneously with the assumption process, the party shall be allowed to apply for an alternative that would have been available to the deceased borrower. If the successor qualifies for an alternative, the servicer shall also allow the party to assume the loan.

Successors in interest will have the same rights and remedies as the borrower under the California Homeowner’s Bill of Rights (HBOR), which allows a private right of action. This includes the right to seek an injunction preventing the foreclosure sale from going forward — as well as the right to seek economic damages, and potentially punitive damages for intentional or reckless violations equal to the greater of $50,000 or treble damages, if a sale occurred in violation of SB1150. The successor in interest is also entitled to attorney’s fees if it is the prevailing party. Unfortunately, there is no attorney fee provision should the servicer be the prevailing party. The servicer will not be liable under SB1150 if violations are remediated prior to the recordation of the trustee’s deed upon sale.

SB1150 provides that compliance with the Consumer Financial Protection Bureau (CFPB) regulations regarding successors in interest will be deemed compliance with California law, albeit we now know that the new CFPB rules regarding successors in interest will not take effect for over 18 months. The California bill will sunset January 1, 2020, unless extended.

Issue Areas
There are several issues that remain problematic with SB1150:

1. Delays in foreclosure. Upon notification of a borrower’s death by a potential successor in interest, there is built into the process a minimum of a 120-day delay (30 days for evidence of death, and 90 days for reasonable documentation to prove successor in interest).

2. Determination of a successor in interest. The bill puts the servicer in the position of having to make a legal conclusion that a party is in fact a successor in interest. This may include having to review last wills and testaments, trusts, deeds, etc. It also may require that the servicer file a court action to determine if the party is in fact a successor in interest.

3. Conflicting successors in interest. Although the bill acknowledges that there may be more than one successor in interest, it does not deal with the issue of adverse successors. Again, this may require that the servicer file a court action to resolve any and all conflicts. Note, however, that the requirements under SB1150 will not apply if the potential successor is involved in a legal dispute over the rights to the subject property.

4. Privacy/Fair Debt Collection Practices Act (FDCPA) issues. SB1150 requires that the servicer, upon determination that a party is a successor in interest, provide specified loan information without written authorization of the borrower or court order, which may violate federal privacy laws and FDCPA. The California legislature has thus far been unwilling to address these conflict of statutes/preemption issues.

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Key Foreclosure Provisions of the CFPB-Promulgated Changes to Servicing Rules

Posted By USFN, Tuesday, September 13, 2016
Updated: Tuesday, August 23, 2016

September 13, 2016

by Wendy Walter
McCarthy Holthus, LLP – USFN Member (Washington)

The Consumer Financial Protection Bureau (CFPB or Bureau) announced its long-awaited changes to the mortgage servicing rules on August 4, 2016. The Bureau fulfilled its commitment to revisiting the exemptions given for borrowers in bankruptcies, it promulgated protections for successors in interest, and it amended loss mitigation rules to further address borrowers facing foreclosure. Adding icing to this regulatory cake, the Bureau also issued an interpretive rule under the FDCPA and provided an anticipated safe harbor for servicer communication that is required to comply with the mortgage servicing rules. This article focuses on the foreclosure-related provisions of these amendments, summarizing the general servicing policies and the loss mitigation application changes. To view CFPB’s Executive Summary, please visit: http://www.consumerfinance.gov/documents/805/08042016_cfpb_Mortgage_Servicing_Executive_Summary.pdf.

Default servicers and law firms should take note that these rules will not be the sea change of the 2014 rules but, in reviewing feedback, the Bureau took care to further clarify the intersection of loss mitigation and foreclosure. The relevant foreclosure-related rules are effective 12 months from the date they are published on the Federal Register; rules relating to successors in interest and periodic statements for borrowers in bankruptcy are effective 18 months from the date of publication in the Federal Register.

General Servicing Procedures affecting Foreclosure Counsel Communication
The Bureau amended the official interpretation to section 12 CFR 1024.38 to require that servicer policies and procedures “promptly inform servicer provider personnel handling foreclosure proceedings that the servicer has received a complete loss mitigation application and promptly instruct foreclosure counsel to take any step required by 12 CFR 1024.41(g).” The purpose of this amendment is to make it clear that counsel might need time to assist the servicer to comply with the rule prohibiting moving for judgment or order of sale or conducting a foreclosure sale when a complete loss mitigation application has been received. The Bureau’s modification on this piece is far less draconian than the original proposal, and it is here that the work of the USFN’s task force handling comments to the proposed rule should be commended. Earlier versions would have required dismissal of a case as a consequence of failing to properly stop entry of a judgment or order of sale.

Notice of Complete Loss Mitigation Application
To provide clarity and more certainty as to when a servicer determines a loss mitigation application to be complete, the amended rules require that the servicer provide a written notice to the borrower no later than five days after receiving a complete loss mitigation application. The notice must contain the receipt date of the completed application, the list of foreclosure protections to which the borrower is entitled, and whether there might be additional protections under state law. As counsel, it is worth consideration to request a copy of this letter in order to show the court that a case needs to be continued pending the completion of the loss mitigation review and compliance with the federal loss mitigation rules. The CFPB stopped short of requiring that the servicers provide this to counsel but, clearly, it might be good information to have. Notably, the Bureau did not require in the final rule that this notice contain the foreclosure sale date. The original proposal had this data point on the proposed notice, and the USFN task force worked with the CFPB to explain how difficult it would be to get this right and to not create unnecessary confusion to the borrower.

More than One Bite at the Loss Mitigation Apple
Servicers are now required to consider more than one loss mitigation application for the life of the loan. In other words, a borrower’s foreclosure must be stopped for every single complete loss mitigation submission, if prior to the 37 days preceding a foreclosure sale. There is no more exception to the loss mitigation rule for a borrower on his or her second or third loss mitigation application. The ability to obtain a second set of loss mitigation rights only applies, however, to those borrowers who become current on payments anytime between their prior complete loss mitigation application and a subsequent loss mitigation application.

In the winter 2017 edition of the USFN Report, I will further elaborate on the foreclosure- and loss mitigation-related provisions of these rule amendments. Stay tuned to the USFN publications for more details.

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Connecticut: Tree on REO Falls on Adjoining Property; Bank not Liable

Posted By USFN, Tuesday, September 13, 2016
Updated: Tuesday, August 23, 2016

September 13, 2016

by Kristen E. Boyle
Hunt Leibert – USFN Member (Connecticut)

In a recent Connecticut Superior Court decision, the court found that a homeowner, even one with a name like HSBC Bank USA, is not negligent when a tree falls from one property to another and causes damage. [Corbin v. HSBC Bank USA, NA, No. WWM-CV-156009704S (Conn. Super. Ct. June 3, 2016)].

In Corbin, the court upheld the long-accepted standard that homeowners are not liable to one another for damages caused by natural conditions on the land. In the winter of 2015, the plaintiffs (homeowners whose property is located next to a foreclosed, bank-owned property) contacted the real estate agent tasked with selling the neighboring property, explaining that a tree on the bank’s property appeared to be damaged and decaying. The agent went to the property to inspect and take pictures of the tree — but a month to the day later, and before anything could be done, the tree fell onto the plaintiffs’ property. The falling tree destroyed a work shed filled with tools and personal belongings. The plaintiffs then brought suit for negligence and nuisance.

While the Connecticut Legislature has been discussing this very issue, no laws have been put into effect, and the court relied on the well-established use of the Restatement (Second) of Torts § 363 (1965). That section states that “neither a possessor of land, nor a vendor, lessor or other transferor, is liable for physical harm caused to others outside of the land by a natural condition of the land.” The court found that the plaintiffs failed to allege that the tree was anything other than a natural condition on the land; and, as a result, the defendant’s motion to strike both the negligence and nuisance counts was granted, as well as the defendant’s subsequent motion for judgment in its favor.

The plaintiffs had asserted that the damage to their shed and its contents caused by the tree present a basis for liability under 1 Am. Jur. 2d, § 21, given that the defendant had actual or constructive knowledge of the defective condition. The court was not persuaded by this argument and cited several Connecticut cases that continued to apply the common law rule under the Restatement in lieu of the plaintiffs’ theory. While the American Jurisprudence interpretation may be relied on in other states, Connecticut remains an exception for now.

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Tennessee: Foreclosure of Superior Deed of Trust Extinguishes Subsequent Easement

Posted By USFN, Tuesday, September 13, 2016
Updated: Wednesday, August 24, 2016

September 13, 2016

by Courtney McGahhey Miller
Wilson & Associates, P.L.L.C. – USFN Member (Arkansas, Mississippi, Tennessee)

The general rule in Tennessee regarding the foreclosure of a superior deed of trust is that the purchaser at a foreclosure sale takes title divested of all encumbrances made subsequent to the foreclosed deed of trust. The Court of Appeals of Tennessee recently confirmed that this rule applies when the subsequent encumbrance is an easement. Helmboldt v. Jugan, Tenn. App. LEXIS 523 (July 25, 2016).

Towering Oaks owned 13.4 acres of undeveloped land in Tennessee. Towering Oaks executed a deed of trust with TNBank to secure a mortgage taken on the 13.4 acres. The property was adjacent to property owned by the Jugans. Several years after executing the deed of trust, Towering Oaks began negotiating with TNBank to release 2.1 acres of the encumbered property. Simultaneously, Towering Oaks was negotiating with the Jugans to create a buffer easement across a portion of Towering Oaks’ property, adjacent to the Jugan’s property. TNBank ultimately agreed to a partial release of the 2.1 acres. Immediately thereafter, Towering Oaks sold the released 2.1 acres to the Jugans, and restrictions were executed and recorded between Towering Oaks and the Jugans. The restrictions created a buffer easement over a portion of the property still owned by Towering Oaks. The buffer easement forbade the construction of improvements, prohibited the clearance and trimming of brush and vegetation (with specific exceptions), and required a landscaping fence to be erected and maintained so as to substantially block the view between the properties. The easement’s terms and conditions were to be binding upon Towering Oaks and “its successor and assigns,” and it was to “run with the land for a period of fifty (50) years.”

A couple of years after the execution of the restrictions, Towering Oaks defaulted on its deed of trust with TNBank. TNBank foreclosed upon the 11.3 acres of property still encumbered, and acquired the property at foreclosure sale. TNBank did not learn about the restrictions until after the foreclosure sale. The foreclosed property was ultimately sold by TNBank to the Helmboldts, who promptly filed suit seeking a declaratory judgment to determine the validity of the restrictions.

In its review, the court recited the general rule that the purchaser at a regular foreclosure sale takes the mortgagor’s title divested of all encumbrances made since the creation of the power. The court clarified that the same rule applies when the post-mortgage encumbrance is an easement. The court’s discussion focused on the fact that TNBank never released the impacted area of property, never subordinated its interest, nor even knew about the existence of a buffer easement prior to the foreclosure. The court recited testimony from the record evidencing that TNBank was never informed that the Jugans were requesting a buffer area in exchange for their purchase of the 2.1 acres. The buffer easement did not exist at the time that the deed of trust was executed.

Subsequent to the execution and recording of the deed of trust, Towering Oaks lacked authority to encumber the interest of TNBank. The court determined that while the bank released 2.1 acres of property so that Towering Oaks could sell those acres to the Jugans, the record did not show that the bank was ever aware there would also be a buffer easement granted that would impact the bank’s remaining security interest.

In affirming the trial court’s grant of summary judgment in favor of the Helmboldts, the court stated that, “Easements like other encumbrances generally diminish the fair market value of a property rather than increase its value. To grant the buffer easement against the deed of trust would be to effectively foist an uncontemplated, unwanted easement onto a property where the holder of the security instrument executed it prior to any clouds on title.” Thus, the court found that the restrictions at issue were extinguished as an operation of law when TNBank foreclosed on its superior deed of trust.

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North Carolina: Collateral Estoppel Doctrine Bars Re-Litigation of Issues Already Decided

Posted By USFN, Tuesday, September 13, 2016
Updated: Wednesday, August 24, 2016

September 13, 2016

by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

Earlier this year, the North Carolina Court of Appeals affirmed the dismissal of an action brought by a former borrower seeking to enjoin the sale of the foreclosed property. [Thompson v. Nationstar Mortgage, 785 S.E.2d 186, at *2 (Table) (N.C. Ct. App. Apr. 5, 2016)].

In Thompson, the plaintiff had sought to challenge whether Nationstar held a valid debt and had the right to foreclose under the deed of trust — two findings that the clerk must make in order to authorize the foreclosure sale pursuant to N.C.G.S. § 45-21.16(d). Because the plaintiff did not appeal the clerk’s order within the 10 days required by § 45-21.16(d1), the clerk’s findings were final. Moreover, the plaintiff’s opportunity to raise any equitable claims, or any legal claims outside the findings required by § 45-21.16(d), was lost because he failed to file a separate action and to obtain an injunction under § 45-21.34 before the rights of the parties became fixed.

While not breaking any new legal ground, the Thompson opinion is a reminder of the following legal principles:

1. Once the rights of the parties to the foreclosure proceeding are fixed, after the expiration of the upset-bid period following the foreclosure sale, the doctrine of collateral estoppel “bars all claims in the present appeal based on issues already decided by the clerk in the previous foreclosure proceeding, and ‘our analysis begins with the premise that [the] plaintiff [ ] [was] in default and the foreclosure [ ] [was] proper.’ Funderburk, __ N.C. App. at __, 775 S.E.2d at 5-6.” Thompson, at *3.

2. The Court of Appeals also overruled the plaintiff’s assignment of error that the trial court failed to make findings of fact when it dismissed the case pursuant to N.C. R. Civ. P. 12(b)(6). While an action “tried upon the facts” requires the court to “find the facts specially” (N.C. R. Civ. P. 52), “the requirements of Rule 52 are inapplicable to summary dispositions under Rules 12 and 56, as the resolution by the trial court of contested evidentiary matters is not contemplated under either Rule. G & S Bus. Servs., Inc. v. Fast Fare, Inc., 94 N.C. App. 483, 489-90, 380 S.E.2d 792, 796 (1989).” Thompson, at *3.

3. Finally, the court rejected the plaintiff’s contention that the alleged joint representation of the defendants (Nationstar Mortgage and the foreclosure trustee) by the same attorneys could form the basis for civil liability. Thompson, at *3, citing McGee v. Eubanks, 77 N.C. App. 369, 374, 335 S.E.2d 178, 181-82 (1985). And even if the alleged dual representation was prohibited by the State Bar’s ethics rules (which the court did not decide) (see Rev. R. Prof. Conduct N.C. St. B. 1.7(a)), “we hold that the trial court did not err in failing to conclude that such a dual representation prevented it from ruling in favor of Defendants on their motions to dismiss.” Thompson, at *4.

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North Carolina: Procedural Requirements must be followed to Challenge Foreclosure

Posted By USFN, Tuesday, September 13, 2016
Updated: Wednesday, August 24, 2016

September 13, 2016

by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

A recent unpublished opinion issued by the North Carolina Court of Appeals confirms that a borrower who seeks to successfully challenge the clerk’s order authorizing foreclosure sale must comply with the procedural steps set out in the foreclosure statute. [In re Reeb, No. COA 15-927 (N.C. Ct. App. May 17, 2016)]. In Reeb, the appellate court held that by failing to post a bond when the borrower appealed the clerk’s order, or to file a separate action seeking injunctive relief to stop the foreclosure sale, the challenge to the sale was rendered moot.

In this case the clerk of superior court entered an order authorizing the foreclosure sale, which requires the clerk to make several findings, one of which is that the party seeking foreclosure is entitled to the relief it seeks. N.C.G.S. § 45-21.16(d). Reeb timely appealed to superior court pursuant to § 45-21.16(d1), which triggers a de novo review by the court, meaning that the court has to consider afresh whether the party seeking to foreclose the subject property is entitled to do so under the requirements set forth in § 45-21.16(d). However, upon taking an appeal the appellant “shall post a bond with sufficient surety as the clerk deems adequate to protect the opposing party from any probable loss by reason of appeal.” Reeb failed to do this.

Alternatively, after the sale but prior to “the rights of the parties to the sale or resale becoming fixed pursuant to G.S. 45-21.29A” — in other words, before the post-sale upset period expired — the borrower could have filed an action in superior court pursuant to § 45-21.34 and sought an injunction. She did not do this either. The sale went ahead and the trustee’s deed was recorded, concluding the foreclosure. Thereafter, the superior court dismissed the appeal due to mootness, meaning that when a case has already been resolved, the court lacks jurisdiction to consider further argument on the merits of the case. Reeb appealed the dismissal.

The Court of Appeals affirmed the order relying on well-established precedent: ‘“[W]hen the trustee’s deed has been recorded after a foreclosure sale, and the sale was not stayed, the parties’ rights to the real property become fixed, and any attempt to disturb the foreclosure sale is moot.’ In re Cornblum, 220 N.C. App. 100, 106, 727 S.E.2d 338, 342 (2012).” Reeb, at 3. Noting that mootness applies to the same extent in the appellate courts as it does in the trial courts, the court found that it therefore lacked jurisdiction to review the borrower’s arguments. Reeb, at 4, citing Simeon v. Hardin, 339 N.C. 358, 370, 451 S.E.2d 858, 866 (1994).

North Carolina is quite generous in providing the borrower or property owner with opportunities to challenge a foreclosure sale. The clerk’s order may be appealed to superior court, and then to the appellate courts. Further, “[a]ny owner of real estate, or other person, firm or corporation having a legal or equitable interest therein” may apply to enjoin the sale based upon any legal or equitable grounds, including that the bid price is inadequate and inequitable and will result in irreparable damage. § 45-21.34. However, as the appellate court makes clear in Reeb, failure to employ the proper procedures to invoke these opportunities will doom the challenge to failure.

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Connecticut Superior Court Reverses Vesting Due to Court’s Clerical Error

Posted By USFN, Tuesday, September 13, 2016
Updated: Wednesday, August 24, 2016

September 13, 2016

by James Pocklington
Hunt Leibert – USFN Member (Connecticut)

In a recent case, the Connecticut trial court was challenged by a vesting that occurred years prior when it implicated the Judicial Branch’s stated mission of “serv[ing] the interests of justice and the public by resolving matters brought before it in a fair, timely, efficient and open manner.” Ultimately, the court ruled to open the nearly two-year-old vesting, citing the facts of the case as a “rare case in which there is a significant failure in the judicial process.” [US Bank NA v. Tulloch, FBT-CV-09-5023011-S].

Precedent
Connecticut has long had a statutory bar on opening judgment by a mortgagor after the vesting of title. Codified currently in Conn. Gen. Stat. 49-15, this ban has served to provide foreclosing mortgagees with assurances regarding the finality of title and ensure proper reliance on the absolute title to a property taken through a foreclosure action. While often challenged unsuccessfully, the prohibition on opening judgments post-vesting was substantially weakened by Wells Fargo Bank v. Melahn, 148 Conn. App. 1 (2014). There, the appellate court determined that certain rare instances (in that case, blatant misrepresentations by the plaintiff’s foreclosure counsel) could warrant deviation from § 49-15.

There have been efforts, mostly in vain, to expand Melahn to other forms of alleged error. In Bank of New York Mellon v. Caruso, NNH-CV-12-6031454-S (Aug. 21, 2015), the trial court ruled that an error by a court-appointed attorney (in that matter, the trustee for the defendant’s disciplinarily-suspended attorney) was sufficient to revert a vesting. While part of a prior memorandum and not the motion, the Caruso court’s final holding was undoubtedly influenced by its determination that the trustee was an agent of the court and that “a dereliction of duty by that agent … must be subject to remediation by the court.”

Subject Case
In Tulloch, the factual errors were determined after an evidentiary hearing to have been committed by the court’s own clerks. Several days prior to the vesting, the defendant filed a motion to open along with a request to waive fees for same. At that time, the clerk was well aware of the time-sensitive nature of both motions and affirmatively promised to notify the defendant by phone. When no phone call was received prior to the law day, the defendant made a series of calls to the clerk’s office, culminating in a number of voicemails and a clerk finally advising the defendant to again wait for a phone call, which never came. The defendant relied on that advice to her apparent detriment and title vested. It came out in the subsequent evidentiary hearings that the motions had been lost by the clerk and found some thirteen days later.

Ultimately, Tulloch presents an extraordinarily slippery slope where vesting was rewound based on court error. By expanding the possibility of failure of process to clerical error, the trial court’s decision in Tulloch threatens the finality of title through a foreclosure action.

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Connecticut: Predatory Lending is Upheld as a Defense to Foreclosure

Posted By USFN, Tuesday, September 13, 2016
Updated: Wednesday, August 24, 2016

September 13, 2016

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

According to a recent decision of the Connecticut Appellate Court, predatory lending can be a special defense to a foreclosure. Moreover, for the first time in Connecticut appellate jurisprudence, the defense of predatory lending has been defined. [Bank of America, N.A. v. Aubut, 167 Conn. App 347 (Aug. 2, 2016)].

Trial Court
In May 2012, an action to foreclose a mortgage was instituted by the plaintiff. After court-annexed mediation and a stay of the case due to a bankruptcy filing, a new plaintiff was substituted into the action. Following the substitution, the defendants filed an answer and raised defenses claiming, inter alia, predatory lending. The defendants claimed that the loan originator knew or should have known that the loan was unaffordable, and that the defendants were insolvent at the time of origination. The defendants also alleged that the loan was destined to fail from its inception.

The plaintiff filed a motion for summary judgment to summarily resolve the defendants’ claims. In response, the defendants provided an affidavit and financial documents, evidencing that the monthly loan payment was in excess of 70 percent of their take-home income. The trial court granted summary judgment to the plaintiff, and the bank proceeded to final judgment shortly thereafter.

Appellate Court
On appeal, the defendants contended that predatory lending is a valid defense to a foreclosure action. In the alternative, the defendants asserted that a defense sounding in predatory lending should fall within the ambit of other recognized defenses to foreclosure actions (such as fraud, unclean hands, unconscionability, and equitable estoppel). In response, the plaintiff maintained that the defendants’ reliance on predatory lending was legally unsound and that the defendants’ allegations were legally insufficient to withstand summary judgment. The appellate court ruled in favor of the defendants on this issue and, in doing so, referenced the particularized detail that the defendants provided in their allegations and proof in opposition to summary judgment.

The appellate decision confirms the defense of predatory lending in mortgage foreclosures in Connecticut, noting that, although some trial courts have done so, there has been no legal authority defining that defense. As defined by this decision, predatory lending can be validly raised in defense to a foreclosure where a defendant’s allegations assert that the facts known to the plaintiff concerning the financial situation of the defendant at the time the subject loan was entered were such that the plaintiff knew, or should have known, that the loan would fail. Significantly, the court points out that in prosecuting the motion for summary judgment, the plaintiff did not counter the defendants’ evidence by affidavit or other documentary evidence. As such, the appellate court held that, at the time of summary judgment, there existed a genuine issue of material fact regarding the affordability of the loan and the defendants’ ability to repay.

Conclusion
This case is important to general foreclosure actions in Connecticut. Aubut supports by appellate authority — for the first time in this state — a defense of predatory lending to a foreclosure action. This would seem to indicate that allegations of predatory lending can be anticipated to be raised more often as a defense in future foreclosure actions.

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Connecticut: Lender Liable Relating to Loan Modification Processing?

Posted By USFN, Tuesday, September 13, 2016
Updated: Monday, August 29, 2016

September 13, 2016

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

In a recent superior court case, a mortgagor filed a two-count complaint against his lender alleging a violation of the Connecticut Unfair Trade Practices Act (CUTPA) and a claim for common-law negligence. [Blanco v. Bank of America, 2016 WL 2729319, 62 Conn. L. Rptr. 190 (Conn. Super. Ct. Apr. 19, 2016)].

The basis for the CUTPA count of the complaint is alleged conduct arising out of the lender’s review and processing of the plaintiff’s application to modify his mortgage. In support of the negligence count of the complaint the plaintiff relied, in part, on provisions in the National Mortgage Settlement (NMS) and the 2011 Office of the Comptroller of Currency Consent Order with Bank of America (Consent Order) to assert that the Bank owed the borrower a duty of care.

Background: In an attempt to cure the delinquency on his loan, the plaintiff-borrower submitted a number of loan modification applications to the Bank. The application process began in April 2012 and concluded in May 2014, resulting in a permanent modification of the plaintiff-borrower’s loan. The plaintiff-borrower alleged that during this process the Bank was negligent and unscrupulous in reviewing the loan modification applications — citing examples of being told to resubmit documents as well as the misapplication of trial payments. The borrower’s lawsuit against the Bank followed. The Bank challenged the complaint as legally insufficient, and the court granted the Bank’s motion to strike both counts. [The Bank subsequently moved for judgment against the plaintiff-borrower for failing to file a substituted complaint pursuant to the Connecticut Rules of Practice. That motion, too, was granted; and the plaintiff-borrower took an appeal. The appeal is currently pending with the Connecticut Appellate Court.]

Superior Court’s Review of the CUTPA Count — This first count alleged that the Bank violated CUTPA by initiating a foreclosure action while the loan modification applications were under consideration by the Bank. In granting the Bank’s motion to strike, the trial court referred to a long history of decisions where Connecticut courts have held that refusing to negotiate a loan modification prior to proceeding to foreclosure does not rise to a violation of CUTPA.

Superior Court’s Review of the Common-Law Negligence Count — The second count related to the handling of the loan modification applications. The plaintiff-borrower cited to the NMS and the Consent Order, which detail certain actions and guidelines that a mortgage servicer must take when reviewing a loss mitigation request. The borrower contended that these guidelines imposed a duty on the Bank, and that the Bank breached its alleged duty by not reviewing the plaintiff-borrower’s loss mitigation request in accordance with them. The Bank countered that no duty of care exists between a lender and a borrower, specifically that lenders have no obligation to negotiate a loan modification with a borrower. Moreover, the Bank maintained that the borrower lacked standing to bring claims based on the NMS or the Consent Order. (The court did not address the standing argument. See Blanco, footnote 2.)

In striking the common-law negligence count, the court reasoned that to impose a duty on a lender or loan servicer in this context would ultimately frustrate the loan modification process and would likely lead to increased litigation. Entities in the defendant’s position would be less inclined to even entertain loan modification applications, which principally benefit mortgagors, if there is a chance that such entities would be exposed to civil liability.

As it stands, this Blanco decision is favorable to the loan servicing industry because the court refused to recognize a new cause of action for borrowers against their lender or mortgage servicer. However, as referenced above, the decision is currently under appellate review.

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South Carolina: Bankruptcy Court Moves to Conduit Mortgage Payments, Operating Orders Effective October 1, 2016.

Posted By USFN, Tuesday, September 13, 2016
Updated: Wednesday, September 7, 2016

September 13, 2016

by John B. Kelchner and John S. Kay
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

South Carolina has been one of the few states still requiring bankruptcy debtors to make post-petition mortgage payments directly to the mortgage lender or servicer. This will change on October 1, 2016 pursuant to operating orders issued by the three U.S. Bankruptcy Judges in South Carolina. The requirements for mortgage conduit payments for Judge Burris are contained in Operating Order 16-03, and the requirements for Judge Waites and Judge Duncan are contained in Operating Order 16-02.

Operating Order 16-03 (Judge Burris) — While the requirements are listed in two separate operating orders, the essential difference between the two orders is that under Judge Burris the conduit mortgage payments are not mandatory. [Footnote 3 of Operating Order 16-03 states, “This Operating Order is substantially consistent with Operating Order 16-02 Conduit Mortgage Payments in Cases Assigned to Judge Waites and Judge Duncan except paragraph I was altered to allow rather than require Conduit Mortgage Payments and paragraph II was omitted.”]

Operating Order 16-02 (Judge Waites and Judge Duncan) — This order requires the use of conduit mortgage payments under the following conditions: (a) When, as of the petition date, the debtor is delinquent six months or more in payments owed to a mortgage creditor, or (b) As part of a Section 362 Settlement Order involving a mortgage payment delinquency that proposes a cure of a post-petition default in mortgage payments that were delinquent for four months, or more, on the day the motion for stay relief was filed; or (c) If requested by the debtor and without objection from, or with the agreement of, the mortgage creditor and trustee; or (d) As otherwise ordered by the court.

Both Operating Orders — Pursuant to each operating order, there are several other important issues raised by the new procedure:

• If the mortgage creditor has not filed a “Compliant” proof of claim in the case, the Chapter 13 trustee may file a Request for a Mortgage Creditor Report and a request for a formal hearing on the matter. The information sought will be the amount of pre-petition arrearage, escrow status, and ongoing payment amount. If this is not provided (to the trustee’s satisfaction) by the creditor prior to the hearing, counsel for the creditor and a representative of the creditor must appear at the trustee’s hearing. [Footnote 9 of Operating Order 16-03 states, “‘Compliant POC’ is defined as a Proof of Claim filed in full compliance with the Official Forms and Bankruptcy Rules 3002 or 3004, and including: (a) all relevant Loan Documents; and (b) a detailed breakdown of any escrow, mortgage insurance, or other monthly obligation as provided for in the terms of the Loan Documents.”]

• If the trustee has commenced disbursements to the creditor prior to the filing of a proof of claim, the payment amount disbursed by the trustee will be deemed the correct amount.

• No Payment Change Notice filed by the creditor will be effective until the creditor has filed a proof of claim.

Conclusion — The new conduit payment procedure places even more emphasis on making absolutely sure that the creditor files an accurate proof of claim as quickly as possible to avoid payments by the trustee that are at an amount less than what is called for by the loan terms, or having to have a representative appear at a hearing on the matter.

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Michigan: Appellate Court Applies Saurman in Judicial Foreclosure Case

Posted By USFN, Tuesday, September 13, 2016
Updated: Wednesday, September 7, 2016

September 13, 2016

by Regina M. Slowey
Orlans Associates, P.C. – USFN Member (Michigan)

The decision in Residential Funding Co, LLV v. Saurman, 490 Mich. 909, 805 N.W.2d 183 (2011), verified that whether or not the mortgagee of record also owned the underlying note was immaterial to the right of that mortgagee to foreclose. Recently, the Michigan Court of Appeals expressly reaffirmed this right in a judicial foreclosure case.

In Select Commercial Assets, LLC v. Carrothers, the Court of Appeals (in an unpublished opinion) confirmed that the Saurman analysis applies to judicial foreclosures as well. [Select Commercial Assets, LLC v. Carrothers, No. 326968 (June 21, 2016)]. In particular, the appellate court ruled in a judicial foreclosure case that a mortgagee of record has the standing and capability to foreclose where there is undisputed evidence that the mortgage-secured debt is in default, regardless of the ownership of the note. The court ruled that the defendant-borrower’s arguments that the plaintiff must be the owner of the debt secured by the mortgage to bring a judicial action to foreclose were without merit.

This eases the burden for foreclosing entities that must use judicial action for a particular mortgage. The evidence must show that the underlying loan is in default, but similar to a foreclosure by advertisement, the foreclosing entity need only be the mortgagee of record, not the holder/owner of the note.

Editor’s Note: The author’s firm represented the plaintiff-appellee before the Michigan Court of Appeals in Select Commercial Assets, LLC v. Carrothers.

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Proposed Change to FRBP Rule 3015 and New FRBP Rule 3015.1: Public Commentary Period through 10/3/2016

Posted By USFN, Tuesday, August 2, 2016
Updated: Tuesday, July 19, 2016

August 2, 2016

by Michael McCormick
McCalla Raymer Pierce, LLC – USFN Member (Florida, Georgia, Illinois)

On July 1, 2016 the Judicial Conference Committee on Rules of Practice and Procedure approved publication of proposed amendments to Bankruptcy Rule 3015 and proposed new Rule 3015.1. Publication is open for a comment period from July 1, 2016 through October 3, 2016. You can read the text of the proposed amendments and supporting materials at the following webpage: http://www.uscourts.gov/rules-policies/proposed-amendments-published-public-comment.

Please note that this is a shortened public commentary period.

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Virginia Federal District Court Reviews SCRA and the Effect of Military Re-Entry by Borrower who Originated Loan during a Previous Active Duty Period

Posted By USFN, Tuesday, August 2, 2016
Updated: Tuesday, July 19, 2016

August 2, 2016

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

In Sibert v. Wells Fargo Bank, N.A., No. 3:14CV737 (E.D. Va. May 4, 2016) the U.S. District Court for the Eastern District of Virginia grappled with the question as to what effect a borrower’s discharge from, and later re-entry into, military service might have regarding application of § 533 of the Servicemembers Civil Relief Act (SCRA). Specifically, § 533(a) grants protected status to an active duty servicemember with an obligation secured by a mortgage or deed of trust that “originated before the period of the servicemember’s military service and for which the servicemember is still obligated.” § 533(c) states that a foreclosure sale against a protected borrower without court approval is not valid. In considering cross-motions for summary judgment, the court framed its ruling as turning on “interpretation of the phrase ‘originated before the period of the servicemember’s military service.’” Id. at *8.

The borrower first served in the United States Navy from July 9, 2004 to July 8, 2008. It was during this first period of service that he originated the mortgage loan. Subsequent to being honorably discharged, the borrower re-entered the military by enlisting in the United States Army in April 2009. On May 13, 2009 during this second active duty period, his home was foreclosed.

The borrower contended that the foreclosure was void under the SCRA because he originated the mortgage loan in May 2008, prior to his current service period beginning in April 2009. Under his interpretation of the statute, the only relevant military service in relation to the loan’s origination was his current active duty period, upon which he based his claim for protection. Accordingly, the borrower asserted that he was protected because his loan originated prior to his most recent active duty period. The lender, by contrast, argued that the proper interpretation of the statute was that a borrower is not protected where the loan originated during “any” active duty period. Because the borrower originated the loan at a time that he was in the military, the lender reasoned, no protection from foreclosure was applicable under the statute.

The court held that the correct interpretation of the statute is that a subsequent active duty period is not germane where the loan was originated during a prior active duty period. The court, applying standard canons of statutory construction and considering the statute as a whole, opined that the statute is concerned with the “material affect” of entering the military for the first time after previously obtaining the mortgage loan:

“For a person entering military service for the first time, the resulting change in income and lifestyle relative to when they incurred the obligation could materially affect their ability to maintain payments . . . The same is not true for someone like Sibert, who incurred an obligation while already in the military, became a civilian, and then re-joined the military. Rather than being disadvantaged by re-entering the service, someone like Sibert has the same ability to comply with the obligation as when it was first negotiated and incurred.” Id. at *11.

The court also noted that this interpretation was consistent with other state and federal cases construing application of § 527 (mortgage interest rate limitation) and § 532 (protection for installment contracts for lease or purchase) of the SCRA, where the requirement for protection turns on whether the obligation originated while the borrower was in military service.

The foreclosed borrower has noted an appeal to the U.S. Fourth Circuit Court of Appeals, so there may be more forthcoming on this interpretation of the SCRA.


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Connecticut: U.S. District Court Reviews Ownership of Note & Standing

Posted By USFN, Tuesday, August 2, 2016
Updated: Tuesday, July 19, 2016

August 2, 2016

by Lindsey Goergen
Hunt Leibert – USFN Member (Connecticut)

Recently the U.S. District Court for the District of Connecticut denied a defendant-borrower’s motion for summary judgment and granted the plaintiff’s cross-motion for summary judgment. [Santander Bank v. Harrison, Civil No. 3:15cv1730 (D. Conn. July 1, 2016)].

The borrower asserted that the plaintiff lacked standing. The borrower’s motion for summary judgment had initially been filed as a motion to dismiss, which the court converted under Federal Rule 12(d) to a motion for summary judgment and permitted the plaintiff to file a cross-motion for summary judgment prior to any other responsive pleading or answer being filed.

The borrower claimed that Santander Bank lacked standing to bring the foreclosure action based upon her receipt of two letters from the plaintiff dated October 22, 2014 and February 9, 2015. The 2014 letter indicated that the plaintiff was unable to locate her loan in their computer system based upon the address and loan number that the borrower provided. The 2015 letter stated (erroneously) that the plaintiff had sold the loan on November 1, 2009. In fact, the plaintiff had owned the loan since 2007, as had been testified to by a vice president of Santander Bank in the course of a prior state court deposition.

In finding that the plaintiff owned the loan despite the letters, the court relied upon an affidavit from the plaintiff, which explained how the misstatements in the letters were made. The court noted that Santander Bank also presented undisputed evidence of its current ownership of the note. The court therefore found that the letters failed to create a sufficient issue of fact with respect to ownership.

In granting the plaintiff’s cross-motion for summary judgment, the court applied the standard as set forth in the case of GMAC Mortgage, LLC v. Ford, 144 Conn. App. 165, 176 (2013), that stated: “In order to establish a prima facie case in a mortgage foreclosure action, the plaintiff must prove by a preponderance of the evidence that it is the owner of the note and mortgage, that the defendant mortgagor has defaulted on the note and that any conditions precedent to foreclosure, as established by the note and mortgage, have been satisfied.”

Having found ownership of the note in denying the borrower-defendant’s motion, the court went on to find that the defendant had defaulted on the note and that the plaintiff had complied with all conditions precedent to foreclosure as set forth in the note and mortgage.

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

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Connecticut: State Supreme Court Ruling regarding Foreclosures Filed by Condominium Associations

Posted By USFN, Tuesday, August 2, 2016
Updated: Tuesday, July 19, 2016

August 2, 2016

by Jennifer M. McGrath
Hunt Leibert – USFN Member (Connecticut)

Under the Common Interest Ownership Act (CIOA), C.G.S. §§ 47-200, et seq., condominium associations have a statutory lien on every unit for common charges and fines with a nine-month priority over recorded security interests. While an association is required to give mortgagees notice prior to commencing a foreclosure on a unit, it may rely on the land records to determine the identity of mortgagees and, in cases where assignments are not timely recorded, a secured party may not have notice and could miss its law day in the event that the foreclosure goes to judgment. Consequently, liens for common charges have long been a concern for mortgagees and loan servicers, but a recent decision by the Connecticut Supreme Court has provided new grounds to challenge an association’s foreclosure action that can result in dismissal of the case.

Under CIOA, a foreclosure of common charges cannot be commenced without certain conditions precedent, including a vote by the executive board to commence the foreclosure or (in accordance with an amendment to the statute effective July 1, 2010) the option to adopt a standard foreclosure policy. C.G.S. § 47-258(m). This prerequisite was at issue in The Neighborhood Association, Inc. v. Limberger, 321 Conn. 29 (Apr. 26, 2016).

In Limberger, the plaintiff commenced a foreclosure for unpaid common charges; the defendant moved to dismiss, contending that the court lacked subject matter jurisdiction because the plaintiff failed to either vote at executive session to commence the foreclosure, or to adopt a standard foreclosure policy in accordance with CIOA procedures. In opposition, the plaintiff asserted that its executive board had in fact adopted a “standard collection policy” pursuant to CIOA. The association categorized the policy as an “internal business operating procedure,” claiming that it is not subject to the stringent requirements of notice and opportunity to comment that attach to rules adopted by an association.

CIOA does not define an internal business operating procedure. This prompted the Court to examine statutory construction rules, extra textual sources, and the legislative intent to determine whether the foreclosure policy constituted a rule. The Court reasoned that “internal business operating procedures” connotes daily business activities and not policies that impact unit owners’ rights and obligations. Accordingly, the Court held that “[g]iven the real and substantial effect that such matters could have on the circumstances under which unit owners will incur financial obligations and potentially lose their residence, we cannot reasonably construe the policy as anything but a rule.” Id. at 42. The association was, therefore, required to provide notice of the proposed foreclosure policy to all unit owners and an opportunity to comment before the rule was adopted. Having failed to comply with CIOA procedure, the plaintiff could not prove a condition precedent to commencing its foreclosure, and the Supreme Court remanded the matter with instructions to dismiss the case.

Counsel for lenders and servicers should be mindful that liens for delinquent common charges are creatures of statute. Similar to a mechanic’s lien foreclosure, an association’s failure to comply with CIOA’s statutory requirements is a jurisdictional defect that gives defendants grounds to seek dismissal for lack of subject matter jurisdiction. The ruling in Limberger also poses the question of what the decision means for cases filed since the 2010 amendment to C.G.S. § 47-258(m) where plaintiffs have made the same error in adopting foreclosure policies.

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