By: Donna Bates and Rachel Packer
As a result of the recent changes in New Jersey law, mortgagees and servicers should review their practices and procedures to ensure timely response to notices of municipal code violations on abandoned or vacant properties in foreclosure in New Jersey. Click here for further discussion of these changes.
By: Joshua A. Huber
On July 24, 2014, the First District Court of Appeals of Texas issued an opinion holding that mortgagors have standing to challenge a void assignment in certain circumstances. In Vazquez v. Deutsche Bank Nat. Trust Co., N.A., —S.W.3d—, 2014 WL 3672892 (Tex. App—Houston [1st Dist.] Jul. 24, 2014, no pet.), the mortgagor filed suit to quiet title contending, among other things, that the assignment of her deed of trust was invalid. The trial court found the mortgagor lacked standing to contest the assignment and granted summary judgment in favor of the mortgagee. [1] The mortgagee’s standing defense was premised on the general Texas rule that “a non-party to a contract cannot enforce the contract unless she is an intended third-party beneficiary.”[2]
On appeal, the Court rejected the mortgagee’s argument, noting that this general rule does not apply when a non-party to a contract alleges that the contract was void from the outset.[3] The Court based its determination on its prior decision, which held that “[t]he law is settled that the obligors of a claim may defend the suit brought thereon on any ground which renders the assignment void, but may not defend on any ground which renders the assignment voidable only . . . .”[4]
Thus, the Court clarified that a mortgagor has standing to contest an assignment of his deed of trust, so long as the petition includes allegations which, if true, would render the assignment void, as opposed to merely voidable.[5] In Vazquez, the borrower alleged that the assignment was invalid because the signature appearing thereon was a forgery. The Court determined that the borrower met the standard of sufficiently alleging that the assignment is void, because a forged deed is void.[6]
As a result of the Court’s decision, it appears that, under certain limited circumstances, borrowers may be able to contest the assignment of their deeds of trust, provided that such allegations, if true, would render the assignment absolutely void. The standing defense should still be an effective tool, however, against allegations which would merely render an assignment voidable by the parties, such as allegations of fraud or lack of authority.[7]
[1] Id. at *1.
[2] Reinagel v. Deutsche Bank Nat. Trust Co., 735 F.3d 220, 224-25 (5th Cir. 2013) (citing S. Tex. Water Auth. v. Lomas, 223 S.W.3d 304, 306 (Tex. 2007).
[3] Vazquez, 2014 WL 3672892, at *3.
[4] Id. at *2 (quoting Tri–Cities Construction, Inc. v. American National Insurance Co., 523 S.W.2d 426 (Tex. Civ. App.-Houston [1st Dist.] 1975, no writ).
[5] Id. at *3.
[6] See Dyson Descendant Corp. v. Sonat Exploration Co., 861 S.W.2d 942, 947 (Tex. App.—Houston [1st Dist.] 1993, no writ).
[7] See, e.g., Nobles v. Marcus, 533 S.W.2d 923 (Tex. 1976) (a contract executed on behalf of a corporation by a person fraudulently purporting to be a corporate officer is, like any other unauthorized contract, not void, but merely voidable at the election of the defrauded principal).
By: Shane M. Biffar
In July, the Consumer Financial Protection Bureau (“CFPB”) filed complaints in the district courts of California, Florida, and Wisconsin, against certain law firms and affiliated entities that market and sell purported mortgage assistance relief services (“MARS”) to borrowers facing foreclosure.
In each of these actions, the complaints allege that the defendants violated 12 CFR 1015 (“Regulation O” of the Consumer Financial Protection Act of 2010), which prohibits MARS providers from receiving fees from a borrower until after the borrower executes a loan modification agreement obtained through the efforts of the provider.
Other Regulation O violations alleged in the CFPB complaints include misrepresentations to Borrowers regarding (1) the provider’s likelihood of success in obtaining a loan modification, (2) the amount of time that will be required to accomplish the service or result, and (3) legal representation that the consumer will receive, where no legal service is being provided.
By: Diana M. Eng
On July 24, 2014, the Bankruptcy Court of the Southern District of New York issued an opinion and order ruling that the majority of a borrower’s claims against GMAC Mortgage LLC (GMAC) were barred by res judicata, but borrower could proceed with his claim for emotional distress for GMAC’s violation of the Real Estate Settlement Procedures Act (RESPA). In re Residential Capital, LLC, et al., Case No. 12-12020 (MG) (Bankr. S.D.N.Y. July 24, 2014). The Bankruptcy Court reasoned that given the remedial purpose of RESPA, the interpretation of “actual damages” under RESPA should be consumer-oriented to allow for emotional distress damages in appropriate cases.
Notably, however, Judge Glenn indicated that borrower “faces an uphill battle in demonstrating causation and damages” with respect to his emotional distress claim; these issues will be resolved in the course of litigating borrower’s claim. The Bankruptcy Court also expressly reserved the ability to revisit the issue of recovery of non-economic harm for a RESPA violation before the borrower’s claim is fully resolved.
The resolution of borrower’s claim will be a decision of interest, as courts are divided on the issue of whether a plaintiff can recover non-economic damages from a loan servicer under RESPA.
By: Daniel A. Cozzi
OneWest Bank NA (formerly OneWest Bank, FSB) was a participant in consumer lending and was formed during the acquisition of certain assets and certain limited liabilities of IndyMac Federal Bank, FSB from the FDIC. IndyMac Bank, FSB. was closed on July 11, 2008 by the Office of Thrift Supervision and the FDIC was named Conservator.
By: Sridavi Ganesan
Connect: Sridavi Ganesan
On June 9, 2014, the Second District of the California Court of Appeal held that, under California’s non-judicial foreclosure scheme, a defaulting borrower cannot state a pre-foreclosure cause of action challenging a foreclosing entity’s right to foreclose on a property pursuant to the power of sale in a deed of trust. In Keshtgar v. U.S. Bank, N.A. as Trustee (2014) 226 Cal.App.4th 1201, the borrower brought a legal action to, among other things, quiet title and cancel and declare void the Assignment of Deed of Trust to U.S. Bank, N.A. Trustee. In support of his claims, the borrower alleged that the assistant secretary of Mortgage Electronic Registration Systems, Inc. (“MERS”), who executed the Assignment of Deed of Trust to U.S. Bank. N.A. on behalf of MERS, was not an employee or agent of MERS, lacked written authorization to convey property on behalf of MERS or the lender for whom MERS acted as a nominee under the Deed of Trust, and that the assignment was not approved by the Board of Directors of MERS or the lender. Id., at 1203. The borrower also alleged that U.S. Bank was not assigned the Note and was not the Note-holder. Id., at 1204. The borrower further challenged the assignment by alleging that the Note and Deed of Trust were transferred into the REMIC securitized trust for which U.S. Bank is Trustee, after the trust’s closing date as set forth in the pooling and servicing agreement governing the trust. Id.
The Court noted that the borrower’s admission that he had been in default since 2011, coupled with the fact that the main thrust of the complaint was simply a challenge to the assignment, which was not contested by MERS and U.S. Bank, N.A., meant that the sole purpose of the action was merely to delay foreclosure. Id., at 1204-1205. The Court reiterated the holdings in Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149 and Jenkins v. JP Morgan Chase Bank, N.A. (2013) 216 Cal.App.4th 497, that California’s non-judicial foreclosure scheme does not allow for preemptive challenges by a defaulting borrower to the right to initiate foreclosure under a deed of trust. Id., at 1205-106. The Court further clarified a common misinterpretation of Gomes, that a cause of action could be stated challenging a foreclosing entity’s right to foreclose, if a specific factual basis is alleged. The Court stated that in referencing a “specific factual basis,” the Gomes court was only distinguishing the complaint before it from the federal cases cited by the plaintiff in that case. Id. at 1205. The Court explained that “a discussion distinguishing cases is not a holding.” Id.
The Court also expressly disagreed with the controversial ruling in Glaski v. Countrywide Home Loans, Inc. (2013) 218 Cal.App.4th 1079, that a borrower has standing to challenge an assignment to a deed of trust. The Court reasoned that while the Glaski Court relied on federal authorities to support its position, California cases hold that a borrower lacks standing to challenge an assignment to deed of trust without a showing of prejudice. Id., at 1207. The Court stated that regardless of whether the borrower were to allege that the loan did not make it into the trust or whether it was void, there was simply no pre-foreclosure cause of action to challenge U.S. Bank, N.A.’s authority to foreclose under the Deed of Trust. Id., at 1207-1208.
By: Daniel A. Cozzi
On June 12, 2014, the Consumer Financial Protection Bureau (“CFPB”) entered a Consent Order with New Jersey company, Stonebridge Title Services Inc. (“Stonebridge”), whereby Stonebridge agreed to pay $30,000 for illegal referrals in violation of Section 8 of the Real Estate Settlement Procedures Act (“RESPA”). Section 8(a) of RESPA prohibits a person from paying or receiving a thing of value pursuant to an agreement or understanding to refer business, “incident to or a part of a real estate settlement service involving a federally related mortgage loan.” 12 U.S.C. § 2607. Section 8(b) of RESPA also prohibits a person from paying or receiving any amount charged for real estate settlement services involving a federally related mortgage loan, “other than for services actually performed.” 12 U.S.C. § 2607. The CFPB charged that Stonebridge paid commissions to independent salespeople for the referral of title insurance business in exchange for commissions of up to 40% of the title insurance premiums charged by Stonebridge. The CFPB further found that Stonebridge, “sought Independent Salespeople who could solicit title insurance business for Stonebridge. These Independent Salespeople had or developed relationships with entities, typically law firms, and referred these entities to Stonebridge for title insurance and related services on behalf of consumers.” The CFPB found that the payments to these independent salespeople violated Sections 8(a) and (b) of RESPA, 12 U.S.C. § § 2607(a), (b). The determination that certain Stonebridge “employees” were actually independent contractors was important to the decision. Section 8 of RESPA permits “[a]n employer’s payment to its own employees for any referral activities.” 12 C.F.R. § 1024.14(g)(1)(vii).
Notably, the CFPB Consent Order states, “the Independent Salespeople received Form W-2s during this period of time, they were not “employees” covered by 12 C.F.R. § 1024.14(g)(1)(vii). Rather, they acted as independent contractors, and Stonebridge did not have the right or power to control the manner and means by which the Independent Salespeople performed their duties.”
This action by the CFPB follows its May 24, 2014 settlement with mortgage brokerage firm RealtySouth. The RealtySouth matter concerned a $500,000 settlement for inadequate ABA disclosure forms and an illegal referral program established with its affiliate, TitleSouth Closing Center. The CFPB continues to use its regulatory authority to govern the conduct of many participants in consumer financial services transactions.
In McLaughlin v. Phelan Hallinan & Schmeig, LLP, the United States Court of Appeals for the Third Circuit recently held that debtors are not required to notify a debt collector in writing regarding a disputed debt as a prerequisite to filing a lawsuit under § 1692g of the Fair Debt Collection Practices Act (“FDCPA”). 2014 U.S. App. LEXIS 12028 (3d. Cir. June 26, 2014).
Section 1692g(b) of the FDCPA provides that if a “consumer notifies the debt collector in writing . . . that the debt, or any portion of the debt, is disputed,” the debt collector must “cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt . . . and a copy of such verification…is mailed to the consumer by the debt collector.”
In McLaughlin, the borrower entered into a mortgage with CitiMortgage in October 2005, and subsequently became delinquent on his payments based on what was deemed to be a lender error. As a result of the default, CitiMortgage referred the account to Phelan Hallinan & Shmieg, LLP (“Phelan”). Phelan sent the borrower a notice dated June 7, 2010, which included information concerning the amount of debt owed as of May 18, 2010, including attorney’s fees and title search fees. In lieu of disputing the debt, McLaughlin filed a purported class action complaint alleging various violations of the FDCPA, including a claim that Phelan had violated § 1692e by misrepresenting that they had performed legal services in connection with the loan prior to May 18, 2010. The District Court dismissed the complaint without prejudice, holding that McLaughlin could not bring suit under the FDCPA without first disputing the debt pursuant to the FDCPA’s debt validation procedure.
On appeal, the Third Circuit reversed the District Court’s order and held that disputing the debt under section 1692g is not a prerequisite to filing suit under the FDCPA. The Court held, “The statute’s text provides no indication that Congress intended to require debtors to dispute their debts under § 1692(g) before filing suit under § 1692e, and in fact, the statutory language suggests the opposite.” The Court emphasized that the FDCPA is a “remedial statute,” which requires application of the “least sophisticated debtor” standard to communications between lenders and debtors. The Court also cautioned that requiring debtors to dispute the debt prior to filing suit under the FDCPA would allow debt collectors to avoid liability for misleading statements on the sole basis that the debtor did not dispute the debt, which would frustrate the FDCPA’s purpose of ensuring that debt collectors act responsibly. Thus, a debtor’s failure to dispute the debt pursuant to § 1692g will not likely be a basis for dismissal of claims brought under § 1692e of the FDCPA in the Third Circuit.
By Joe Patry
In Ingram v. MERS, et al., the borrowers’ mortgage named Mortgage Electronic Registration Systems, Inc. as the mortgagee (“MERS”), as a nominee for the original lender and its successors and assigns. The mortgage indicated that MERS had held legal title to the mortgage and had the authority to foreclose. In 2010, the borrowers stopped paying their mortgage and MERS assigned the mortgage to Deutsche Bank, who then instituted a non-judicial foreclosure sale on the property. MERS is named as the mortgagee of record on millions of mortgages recorded around the country and holds the mortgage as an agent of the owner of the promissory note that is secured by the mortgage.
Subsequently, the borrowers filed a lawsuit seeking to overturn the foreclosure and claimed that MERS did not have the authority to assign the mortgage. The Rhode Island Superior Court dismissed that lawsuit and the borrowers appealed to the Rhode Island Supreme Court, arguing that MERS did not have the authority to execute assignments. The Rhode Island Supreme Court noted that the mortgage in question had language which explicitly gave MERS the authority to foreclose and thus MERS had the authority to assign that right. This decision is in line with several other recent state court opinions, including California and Ohio, which also rejected challenges to MERS assignments.
According to a report issued by The Office of the Comptroller of the Currency, between 2014 and 2017, significant volumes of Home Equity Lines of Credit (“HELOC”) will transition from the “draw period” (during which borrowers typically make interest-only payments)to the “repayment period” (during which a borrower is required to repay the outstanding interest and principal balance).
In light of this impending slew of HELOC transitions, on July 1, 2014, several state and federal regulatory agencies issued interagency guidelines advising financial institutions to be more proactive in “prudently manage exposures in a disciplined manner” and urging them to work with borrowers in order to avoid defaults.
To manage the risk of HELOCs entering the repayment period, the new guidelines encourage financial institutions to adhere to the following ten principles:
1) Develop a clear picture of scheduled end-of-draw period exposures;
2) Ensure a full understanding of end-of-draw contract provisions;
3) Evaluate near-term risks;
4) Contact borrowers through outreach programs;
5) Ensure that refinancing, renewal, workout, and modification programs are consistent with regulatory guidance and expectations, including consumer protection laws and regulations;
6) Establish clear internal guidelines, criteria, and processes for end-of-draw actions and alternatives (e.g. renewals, extensions, and modifications);
7) Provide practical information to higher-risk borrowers;
8) Establish end-of-draw reporting that tracks actions taken by the financial institution and subsequent performance;
9) Document the link between allowance for loan and lease losses (ALLL) methodologies and end-of-draw performance; and
10) Ensure that control systems provide adequate scope and coverage of the full end-of-draw period exposure.
The agencies further note that adherence to these ten principles should assist lenders in developing a more proactive response to borrowers who cannot meet their contractual obligations as their HELOCs transition into the repayment period.