Category Archives: Loan Servicing

Texas Statute Provides Clarity for Unilateral Rescission of Acceleration

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By: Joshua A. Huber

In Texas, lenders must foreclose a deed of trust lien within four (4) years of acceleration,[i] and there is little dispute regarding what actions are required to “accelerate” a loan for purposes of the statute of limitations.[ii] Whether, and how, a lender can unilaterally “decelerate” a loan – that is, rescind a prior acceleration – was far less clear and generated extensive litigation in Texas by borrowers who, as a result of a delay in the foreclosure process, claimed that their lenders were time-barred from enforcing their lien rights.[iii]

Recent legislation now provides clarity on this issue. Texas House Bill 2067, effective September 1, 2015 and codified as Section 16.038 in the Texas Civil Practice and Remedies Code, makes clear that servicers may unilaterally rescind a prior valid acceleration, thereby avoiding the four (4) year statute of limitations. As recently noted by the Fifth Circuit, “[t]he new statute provides a specific mechanism by which a lender can waive its earlier acceleration.”[iv] Section 16.038 allows a lender or loan servicer to unilaterally rescind acceleration of the debt by serving each debtor at their last known address, by first class or certified mail, with notice that the accelerated maturity date is rescinded or waived. The service requirements for such notice tracks that of Tex. Prop. Code § 51.002(e) and is complete when mailed, not received.[v]

Despite the enactment of this Texas statute, borrowers have continued to rely on statute of limitations arguments to attempt to avoid foreclosure. However, the new law provides clear guideposts which, if followed, will afford servicers and lenders a strong defense and assurances that delays resulting from loss mitigation, litigation or other factors will not adversely affect their ability to enforce deeds of trust in Texas.

[i] See Tex. Civ. Prac. & Rem. Code § 16.035(a).

[ii] Boren v. U.S. Nat. Bank Ass’n, 807 F.3d 99, 104 (5th Cir. 2015) (acceleration requires both a notice of intent to accelerate and a notice of acceleration).

[iii] See, e.g., Callan v. Deutsche Bank Truste Co. Ams., 93 F.Supp.2d 725, 734 (S.D. Tex. Mar. 21, 2015) (observing that “there is no Texas case law on the validity of unilateral notices of rescission of acceleration.”).

[iv] Boren, 807 F.3d at 106.

[v] See Tex. Civ. Prac. & Rem. Code § 16.038(c).

Third Circuit Clarifies FDCPA Restrictions on Third-Party Communication

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By: Joshua A. Huber

In Evankavitch v. Green Tree Servicing, LLC, the Third Circuit considered, as a matter of first impression, which party bears the burden with respect to alleged improper third-party communications under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. (“FDCPA”). Evankavitch v. Green Tree Servicing, LLC, —F.3d—, 2015 WL 4174441, at *1 (3d Cir. Jul. 13, 2015). Put differently, the Court was asked to determine whether the debt collector must prove that allegedly improper third-party communications fall within § 1692b’s exception, or whether it is incumbent on the debtor to disprove the applicability of that exception as an element of his claim.   Id.

Under the FDCPA, a debt collector is liable to a consumer for contacting third parties in pursuit of that consumer’s debt unless the communication falls under a statutory exception. One such exception permits communication with a third party “for the purpose of acquiring location information about the consumer” but, even then, prohibits more than one such contact “unless the debt collector reasonably believes that the earlier response of such person is erroneous or incomplete and that such person now has correct or complete location information.” 15 U.S.C. § 1692b.

The Third Circuit ultimately determined that the burden falls on the debt collector. Evankavitch, 2015 WL 4174441, at *10. Noting the “‘longstanding convention’ that a party seeking shelter in an exception . . . has the burden to prove it,” the Court held that Green Tree was required to prove that any alleged third party communications were only for purposes of obtaining location information about Evankavitch and therefore within the narrow exception to the FDCPA’s general prohibition on communications with third parties. Id. at *5.

NJ Appellate Division Decisions Hold that, While Borrowers Do Not Have a Private Right of Action Under HAMP, Borrowers Are Not Precluded from Pursuing Valid State Law Claims

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By: Donna M. Bates

It is well-established that the federal Home Affordable Modification Program (“HAMP”) does not offer borrowers a private right of action to allege a lender or servicer violated HAMP. However, the New Jersey Appellate Division recently held that borrowers may pursue state law claims that a lender or servicer engaged in the modification process in bad faith or otherwise breached the terms of a HAMP Trial Period Plan (“TPP”).

In Arias v. Elite Mortgage Group, Inc., et al.,[1] the first reported New Jersey case on this issue, the Appellate Division held that a written TPP, which allowed the borrowers to make three reduced monthly mortgage payments as a condition of the TPP, constitutes a unilateral offer by the lender to modify a mortgage loan if the borrowers completely and timely comply with their obligations under the TPP.

In Arias, the plaintiff borrowers appealed from an order granting summary judgment to the defendant servicer. On appeal, Plaintiffs claimed that they had a contractual right to a permanent loan modification under the terms of a HAMP TPP, and defendant breached the TPP when it did not give them a loan modification. They also argued that defendant breached the covenant of good faith and fair dealing when it denied them the loan modification.

The Appellate Division upheld the grant of summary judgment to defendant, but it did so for different reasons than the trial court. After acknowledging that there were no reported New Jersey cases on this issue, the Arias Court opined that current case law suggests that an agreement that binds a debtor to make payments while leaving the mortgage company free to give nothing in return may violate the New Jersey Consumer Fraud Act (“CFA”). In its analysis, the Court relied heavily on Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012), which held that, even though there was no private right of action for a borrower under HAMP, a borrower may still assert a common law contract claim for a lender’s failure to honor the terms of a HAMP TPP.

The Arias Court rejected defendant’s arguments that there was no enforceable promise to modify Plaintiffs’ loan because there was no consideration given and that the lender had sole and unbridled discretion whether to give a modification, where the borrower complied with the payment terms and other requirements of the TPP. The Court reviewed the language of the TPP and noted that, even though the TPP notified borrowers that it was not a loan modification, it also contained language stating that ‘if” borrowers complied with the TPP and their representations continued to be true in all material respects, “then” the servicer will provide them with a modification agreement.

Ultimately, the Arias Court affirmed the grant of summary judgment in favor of the defendant because the terms of the TPP in this case constituted “a unilateral offer” to give plaintiffs a loan modification if and only if plaintiffs fully complied with their obligations under the TPP. In this case, the borrowers did not comply with the TPP requirements. The Court held that the summary judgment record clearly established that the plaintiffs failed to comply with the payment schedule set forth in the TPP and, therefore, defendant was justified in refusing to give plaintiffs a loan modification. Therefore, there was no breach of contract or breach of the duty of good faith and fair dealing on these facts.

In Miller v. Bank of America Home Loan Servicing, L.P.,[2] decided just over one month after Arias, the Appellate Division was again faced with deciding whether borrowers could sustain claims against a mortgagee related to a HAMP TPP. In Miller, after defendant declined to modify their mortgage under HAMP, the borrowers filed an action alleging breach of contract, violation of the CFA, promissory estoppel, and breach of the covenant of good faith and fair dealing. Defendant was granted summary judgment after the judge concluded there was no private right of action under HAMP. Plaintiffs moved for reconsideration, and their motion was denied. They then appealed both orders.

After briefly recapping the history of the HAMP program, the Miller Court specifically agreed with the Appellate Division’s holding in Arias that “HAMP’s preclusion of a private right of action does not preempt pursuit of valid state law claims arising between the parties to a TPP.” The Court then reviewed the specific facts in the record regarding plaintiffs’ loan modification efforts. The TPP at issue in Miller contained language similar to the TPP in Arias, requiring  plaintiffs to make three payments of $3,508.17, due on May 1, June 1, and July 1, 2009. Defendant’s records showed that the three TPP payments were instead received on May 14, June 18, and August 18, 2009, and plaintiffs were ultimately denied a modification “because [they] did not make all of the required [TPP] payments by the end of the trial period.” Plaintiffs argued on appeal that summary judgment was inappropriate because there were disputed issues of material facts regarding their payments under the TPP, and they challenged the reliability of defendant’s payment records.

The Miller Court affirmed summary judgment in favor of the defendant. It held that plaintiffs’ self-serving assertions regarding challenges to the payment history, unsupported by any documentary proof, were insufficient to raise a genuine issue of material fact. The Court also held that plaintiffs’ CFA claim, which suggested that the defendant engaged in elusive tactics and failed to fulfill its promise of a loan modification, was properly dismissed. Plaintiffs failed to identify the alleged unlawful conduct, they failed to detail material misrepresentations they reasonably relied upon that resulted in damages, or to proffer facts that demonstrated a business practice to materially conceal information that ultimately induced them to act. Plaintiffs’ unsupported assertions were insufficient to create a material dispute, and therefore summary judgment was appropriate.

These decisions qualify the long-standing and frequently cited principle that a borrower does not have a right to a loan modification, and a lender is not required to offer one. While the Arias and Miller decisions do not hold that a borrower is entitled to a loan modification, they do hold that the language of a TPP or forbearance agreement may require the lender to modify the loan if the borrower complies with its terms. Lenders and servicers frequently engage in loss mitigation efforts with borrowers, including loan modification reviews, whether pursuant to the HAMP program, court mediation programs, or in-house modification programs. In light of these decisions, lenders and servicers should take care when drafting the terms of a written TPP or other forbearance agreement, so that it is clear what requirements a borrower must fulfill to receive a loan modification. Lenders and servicers should also make sure to provide written and timely notification to borrowers when they fail to comply with the terms of a loss mitigation agreement. These recent cases also underscore the importance of maintaining accurate records of payments and communications regarding loss mitigation efforts, which records may be necessary to rebut a borrower’s claims that they complied with all the TPP terms. Following these steps will help provide the support needed to defend against a borrower’s claims that they were improperly denied a loan modification.

[1] Arias v. Elite Mortgage Group, Inc., et al., New Jersey Superior Court, Appellate Division, Case Number A-4599-12T1. The Appellate Division approved Arias for publication on January 23, 2015.

[2] Miller v. Bank of America Home Loan Servicing, L.P., Superior Court of New Jersey, Appellate Division, Case Number A-0169-13T2. The Appellate Division approved Miller for publication on March 5, 2015.

NY AG Fails to Compel Enforcement of National Mortgage Settlement Against Wells Fargo

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By: Louise Bowes Marencik

Last Monday, the United States District Court for the District of Columbia ruled that evidence of Wells Fargo’s noncompliance with the National Mortgage Settlement presented by the New York Attorney General’s Office was insufficient to support its claims to compel enforcement of the settlement. United States v. Bank of Am. Corp., 2015 U.S. Dist. LEXIS 11617 (D.D.C. Feb. 2, 2015). In October 2013, the New York AG’s Office filed a motion to compel enforcement of the National Mortgage Settlement against Wells Fargo, alleging that the bank does not sufficiently adhere to the loan modification review timelines agreed to by the bank in the National Mortgage Settlement. Wells Fargo defended against the claims on the basis that the evidence set forth by the AG’s office related to less than 0.025 percent of its loans.

In February 2012, Wells Fargo and four other mortgage servicers entered into multiple consent judgments, collectively known as the National Mortgage Settlement, with the United States Department of Justice, 49 state attorneys general, and the Department of Housing and Urban Development. The Settlement, which was valued at $25 billion, required the servicers to comply with certain “Servicing Standards,” including the implementation of certain practices related to loan modification reviews. For example, under the National Mortgage Settlement, the servicer must acknowledge receipt of a borrower’s application for a loan modification within 3 business days, and notify the borrower of any missing information necessary to conduct the review within 5 business days.

In its Motion to Enforce the Consent Judgment, the NY AG claimed that Wells Fargo failed to comply with these and other similar requirements in connection with 97 out of the roughly 450,000 loans serviced by Wells Fargo in New York. The Consent Judgment provides that the Servicing Standards required to be implemented by the servicers are to be monitored by a Monitoring Committee, including representatives from the state attorneys general, financial regulators, the Department of Justice, and the Department of Housing and Urban Development. Designated Monitors are responsible for implementing certain “Metric” testing to determine whether the servicers are in compliance with the various requirements of the Consent Judgment. If a certain error rate is exceeded, the Monitor notifies the servicer of a “Potential Violation,” and a remedial procedure is triggered; however, not all of the Servicing Standards can be evaluated using the Metric process.

The issue in this case was whether the NY AG had the authority to bring the Motion to Enforce the Consent Judgment given that the Judgment specifically provides for enforcement by the Monitoring Committee. Wells Fargo argued that state attorneys general can only file such a motion related to uncured Potential Violations; however, the Court opined that Wells Fargo’s argument went “too far.” The Court found that “(1) only the Monitor can enforce Servicing Standards covered by a Metric unless there has been a failure to cure and (2) the parties and the Monitoring Committee can sue to enforce (a) uncured Potential Violations of Servicing Standards covered by a Metric and (b) Servicing Standards that are outside the Metric testing/Potential Violation process.” Id. at *31.

Although the Court found that the NY AG could seek enforcement of the Consent Judgment under these circumstances, because two of the Servicing Standards in question are not monitored by the Metric system, the Court ultimately found that the NY AG failed to allege a breach of the Consent Judgment in its motion because the AG relied on such a small sample of the loans serviced by Wells Fargo in New York to support its claims. The Court noted that the “Consent Judgment does not require absolute perfection in loan servicing” and “the Parties understood this.” Id. at *35.

Supreme Court Rules that Written Notice Is Sufficient to Rescind Under TILA

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By: Daniel A. Cozzi and Diana M. Eng

The Supreme Court of the United States recently held that a borrower can exercise its right to rescind a loan pursuant to the federal Truth in Lending Act (TILA) by providing written notice to the lender within three (3) years of the loan closing date. In doing so, the Supreme Court reversed the Court of Appeals for the Eighth Circuit’s affirmation of the District Court of Minnesota’s decision, which had held that a borrower must file a lawsuit within three (3) years of the consummation of the loan to exercise his/her rescission rights.

In Jesinoski v. Countrywide Home Loans, Inc., the United States Supreme Court considered “whether a borrower exercises this right by providing written notice to his lender, or whether he must also file a lawsuit before the 3-year period elapses.” Jesinoski v. Countrywide Home Loans, Inc., No. 13-684, 574 U.S. _____ (2015).

Under TILA, borrowers have the right to rescind certain consumer mortgage transactions up to three days after the loan closes. Specifically, TILA grants borrowers the right to rescind a loan transaction, “until midnight of the third business day following the consummation of the transaction or the delivery of the [disclosures required by the Act], whichever is later, by notifying the creditor, in accordance with regulations of the [Federal Reserve] Board, of his intention to do so.” 15 U.S.C. 1635(a). However, if the creditor fails to provide requisite TILA disclosures, a borrower may rescind the transaction up to three years from the date the loan closes. 15 U.S.C. 1635(f).

On February 23, 2007, Larry and Cheryle Jesinoski (“Petitioners” or “Jesinoskis”) refinanced their home loan and obtained a mortgage from Countrywide Home Loans, Inc. (“Respondent” or “Lender”) in the amount of $611,000. Exactly three years later, the Jesinoskis mailed a purported rescission notice to Lender. The Lender responded on March 12, 2010 and refused to acknowledge the validity of the rescission. On February 24, 2011 – one year after the Jesinoskis sent their notice of rescission, the Jesinoskis filed suit in the District Court of Minnesota, seeking rescission of the mortgage and damages.

The District Court agreed with the Lender and held that the Petitioners were barred from exercising rescission pursuant to TILA, as they had failed to file a lawsuit within three years of the consummation of the loan. Jesinoski v. Countrywide Home Loans, Inc., 2012 WL 1365751 (D. Minn. Apr. 19, 2012). The District Court found that the Petitioners’ written notice within three years was insufficient to exercise their rescission rights. The Eighth Circuit affirmed. Jesinoski v. Countrywide Home Loans, Inc., 729 F. 3d 1092 (8th Cir. 2013) (per curiam). The Eighth Circuit relied on its prior decision in Keiran v. Home Capital, Inc., 720 F. 3d 721 (8th Cir. 2013), which held that a borrower must file a lawsuit for rescission within three years of the loan’s consummation to exercise rescission rights under TILA.

The Supreme Court disagreed with the District Court and the Eighth Circuit, holding that “Section 1635(a) explains in unequivocal terms how the right to rescind is to be exercised: It provides that a borrower ‘shall have the right to rescind . . . by notifying the creditor’ . . . of his intention to do so’ (emphasis added). The language leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind.” The Supreme Court further declared that the “statute does not also require him to sue within three years.”

Lender raised several additional arguments that the Supreme Court ultimately dismissed. First, Lender argued that TILA rescission only requires written notice (and not legal action) when the parties dispute the adequacy of the TILA disclosures (e.g., whether the borrower is actually entitled to the three-year rescission period rather than the three-day rescission period). The Supreme Court found that Section 1635(a) makes no distinction between disputed and undisputed rescissions. Second, Lender argued that pursuant to the common law, rescission requires that a borrower tender the proceeds received under the transaction prior to rescission. The Supreme Court also dismissed this argument, finding that TILA rescission need not follow the rules and procedures of “its closest common-law analogue.” The Supreme Court further stated, “[t]o the extent §1635(b) alters the traditional process for unwinding such a unilaterally rescinded transaction, this is simply a case in which statutory law modifies common-law practice.”

In light of this decision, lenders should be aware that a written notice provided by the borrower, within three years of the loan consummation is sufficient to exercise his/her right to rescission under TILA. However, the Supreme Court provided no guidance on when a lawsuit must be commenced after written notice of rescission is sent.

New York Adopts More Stringent Debt Collection Regulations

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By:  Diana M. Eng and Jennifer L. Neuner

The New York State Department of Financial Services recently issued new regulations requiring debt collectors to provide additional disclosures to consumers. The new regulations (see 23 NYCRR § 1) are intended to provide protections beyond what is currently required by the Fair Debt Collection Practices Act (“FDCPA”). These new debt collection regulations will become effective in March 2015, except that provisions regarding required disclosures for charged-off debt[1] and substantiation of a charged-off debt[2] will become effective in August 2015.[3]

Required Initial Disclosures

The regulations require enhanced initial disclosures when a new debt collector first contacts an alleged debtor. The newly mandated disclosures include specific notices that are not formally required by the FDCPA. Specifically, pursuant to 23 NYCRR § 1.2, the debt collector must, within 5 days of the initial communication with the consumer, provide “clear and conspicuous written notification” that 1) debt collectors are prohibited from engaging in “abusive, deceptive, and unfair debt collection efforts” under the FDCPA; and 2) a written statement that if a creditor or debt collector receives a money judgment against the consumer in court, state and federal laws may prevent certain types of income from being taken to pay the debt, including, among others, social security, public assistance, unemployment and disability benefits, pensions and veterans’ benefits.

Similarly, with respect to debts that have been charged-off, the debt collector must, within 5 days of the initial communication with the consumer, provide a “clear and conspicuous” written notification about the debt, including 1) the name of the original creditor; and 2) an itemized accounting of the charged-off debt, including the amount owed as of charge-off, total amount paid on the debt since the charge-off and the total post charge-off interest, charges and fees. 23 NYCRR § 1.2(b).

Required Disclosures Regarding Collection of So-called “Zombie Debts”

The regulations also require disclosures regarding the collection of debts for which the statute of limitations has already expired. 23 NYCRR § 1.3. Further, the debt collector must maintain reasonable procedures to determine the applicable statute of limitations of a debt and to determine whether the statute of limitations has expired. The FDCPA does not contain such requirements.

Under the New York regulation, if a debt collector “knows or has reason to know” that the statute of limitations for a debt may have expired, the debt collector must provide a “clear and conspicuous” notification to the consumer that 1) the debt collector believes that the statute of limitations may be expired; 2) suing on a debt for which the statute of limitations has expired is a violation of the FDCPA, and, if the consumer is sued, the consumer may present evidence to the court that the statute of limitations has run; 3) the consumer is not required to provide the debt collector with an admission of any kind that the debt is still owed, or to waive the statute of limitations; and 4) a partial payment of the debt, or other admission that the debt is owed, may restart the statute of limitations. 23 NYCRR § 1.3(a)-(b). Further, the regulation provides specific language that would comply with the notice requirement.

Requirements Regarding “Substantiation” of the Debt

The regulations also contain important changes regarding a debt collector’s obligations when a consumer disputes the validity of a charged-off debt. 23 NYCRR § 1.4. Currently, under the FDCPA, consumers must dispute the debt in writing and request verification of the debt within 30 days of the first collection attempt. See 15 U.S.C. § 1692g. Under the new New York regulations, consumers may request “substantiation” of the debt at any time during the collections process, and may do so orally. Once a request is received, the debt collector must provide the consumer written substantiation of a charged-off debt within 60 days of receiving the request. 23 NYCRR § 1.4(b). The debt collector must also cease collection until written substantiation has been provided to the consumer. The regulation further lists the various forms of documentation required to substantiate the debt.

In addition, the New York regulation includes a document retention requirement related to a request for substantiation of a charged-off debt under 23 NYCRR § 1.4. 23 NYCRR § 1.4(d). Specifically, debt collectors must retain evidence of the consumer’s request for substantiation and all documents provided in response to such request until the charged-off debt is discharged, sold or transferred.[4]

Requirements for Agreements to Settle a Debt

The regulations also include procedures for documenting any agreement between the consumer and the debt collector to satisfy or otherwise settle the debt. 23 NYCRR § 1.5. The FDCPA does not regulate communications from a debt collector regarding settlement. Under the new regulations, a debt collector must, within 5 business days of agreeing to a debt payment schedule or other agreement to settle the debt, provide the consumer with 1) written confirmation of the debt payment schedule or agreement, including all material terms and conditions relating to the agreement; and 2) a notice stating that if a creditor or debt collector receives a money judgment against the consumer in court, state and federal laws prevent certain types of income from being taken to satisfy the debt.[5] The debt collector is also required to provide the consumer with 1) an accounting of the debt on at least a quarterly basis while the consumer is making scheduled payments; and 2) a written confirmation of the satisfaction of the debt, along with the name of the original creditor and the account number, within 20 days of receipt of the final payment.[6] 23 NYCRR § 1.5.

Debt collection companies that operate in New York should review their current policies and take steps to comply with the new regulations in advance of the 2015 effective dates. Specifically, debt collectors should ensure that initial disclosures satisfy the new regulations, that disclosures inform consumers regarding the potential expiration of the statute of limitations and that procedures are in place to substantiate the debt upon a debtor’s request.

[1] 23 NYCRR § 1.2(b).
[2] 23 NYCRR § 1.4.
[3] 23 NYCRR § 1.7.
[4] Debt collectors who transfer a charged-off debt should consult the CFPB rules regarding mortgage servicing transfers to the extent applicable.
[5] This notice provision is identical to the statement required in the initial disclosures (23 NYCRR § 1.2) noted above.
[6] 23 NYCRR § 1.6 provides that, after mailing the initial disclosures required by Section § 1.2, a debt collector and consumer may communicate via email, if the consumer voluntarily provides an email address and consents to receiving email correspondence regarding a specific debt.

CFPB PROPOSES CHANGES TO MORTGAGE SERVICING RULES

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By: Joshua A. Huber

On November 20, 2014, the Consumer Financial Protection Bureau (the “Bureau”) proposed changes to the mortgage servicing rules under Regulation X, which implements the Real Estate Settlement Procedures Act (“RESPA”), and Regulation Z, the implementing regulation for the Truth in Lending Act (“TILA”). The Bureau has proposed, with one exception,[1] that the amendments take effect 280 days after publication of a final rule in the Federal Register.

The proposal encompasses nine broad topics,[2] the most significant of which are summarized below:

Expansion to Successors in Interest. The Bureau is proposing to apply all of the Mortgage Servicing Rules[3] to successors in interest of a borrower once a servicer confirms the successor in interest’s identity and ownership interest in the property. This aspect of the proposal would help ensure that those who inherit or receive property, such as a surviving family member, have the same protections under the Mortgage Servicing Rules as the original borrower.

Requests for Information. The Bureau is proposing amendments that would change how a servicer must respond to requests for information asking for ownership information for loans in trust for which Fannie Mae or Freddie Mac is the trustee, investor, or guarantor. As modified, mortgage servicers for loans for which Fannie Mae or Freddie Mac is the trustee, investor, or guarantor would comply with their obligations under Regulation X[4] when the servicer responds to requests for information asking only for the owner or assignee of the loan by providing only the name and contact information for Fannie Mae or Freddie Mac, as applicable, without also providing the name of the trust.

Loss Mitigation. The most sweeping aspects of the proposed rule changes are those pertaining to loss mitigation. The Bureau is proposing to:

(1) Require servicers to meet the loss mitigation requirements more than   once in the life of a loan for borrowers who become current after a delinquency;

(2) Modify the existing exception to the 120-day prohibition on foreclosure filing to allow a servicer to join the foreclosure action of a senior lienholder;

(3) Clarify that servicers have significant flexibility in setting a reasonable date by which a borrower must return documents and information to complete an application, so long as the date maximizes borrower protections and allows borrowers a reasonable period of time to return documents and information;

(4) Clarify that servicers must take affirmative steps to delay a foreclosure sale, even where the sale is conducted by a third party, including clarification that the servicer has a duty to instruct foreclosure counsel to take steps to comply with the dual-tracking prohibitions and that a servicer who has not taken, or caused counsel to take, all reasonable affirmative steps to delay the sale, is required to dismiss the foreclosure action if necessary to avoid the sale;

(5) Require that servicers who receive a complete loss mitigation application must promptly provide borrowers with written notice stating: (a) a complete application was received, (b) additional information may be requested if needed, (c) the date of completion, (d) whether a foreclosure sale was scheduled as of that date, (e) the date foreclosure protections began, (f) the borrower’s applicable appeal rights, and (g) that the servicer will complete its evaluation within 30 days;

(6) Address and clarify how servicers obtain and evaluate third party information not in the borrower’s control, including: (a) prohibiting servicers from denying modifications based upon delays in receiving such third party information; (b) requiring prompt notice to the borrower of any missing third party information within 30 days after receiving a complete application; and (c) requiring servicers to notify borrowers of their determination in writing promptly upon receipt of the third party information;

(7) Permit servicers to offer a short-term repayment plan based upon an evaluation of an incomplete application;

(8) Clarify that servicers may stop collecting documents and information from a borrower pertaining to a loss mitigation option after receiving information confirming that the borrower is ineligible for that option; and

(9) Address and clarify how loss mitigation procedures and timelines apply to a transferee servicer that receives a mortgage loan for which there is a loss mitigation application pending at the time of a servicing transfer.[5]

The proposed rules, including the proposed effective date, will be open for public comment for 90 days after its publication in the Federal Register.

These proposed rules, particularly as they pertain to loss mitigation, may present operational challenges for mortgage servicers. The revised notice requirements and additional loss mitigation obligations may result in significant increased litigation and compliance costs.

[1] The Bureau has proposed that the amendments applicable to the periodic statement requirement for certain bankrupt borrowers should take effect one year after publication.

[2] In addition to the areas addressed herein, the Proposed Rules include: (1) a definition of the word “delinquency,” (2) new requirements pertaining to force-placed insurance, (3) clarification of the “early intervention” requirements for loss mitigation, (4) guidance regarding payment crediting and application for borrowers under temporary or permanent loan modifications, and (5) changes to the definition of “small servicer.”

[3] The term “Mortgage Servicing Rules” as used herein refers to the Bureau’s January 2013 final rules pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010), as amended in 2013 and 2014. See 78 FR 44685 (July 24, 2013), 78 FR 60381 (Oct. 1, 2013), 15 U.S.C. 1692 et seq, 78 FR 62993 (Oct. 23, 2013).

[4] 12 CFR § 1024.36(d).

[5] The proposed rule would cover the transfer of mortgages between servicers during the loss mitigation process. In a voluntary transfer, the new servicer would be required to observe the date the borrower’s loss mitigation application became complete with the prior servicer. The new servicer would be provided an additional five days to provide the acknowledgment notice. However, for an involuntary transfer, the new servicer would be provided at least 15 days to evaluate the transferred loss mitigation applications.

 

 

New Jersey Bankruptcy Court Holds that Mortgage Was No Longer Enforceable and Borrower Was Entitled to a “Free House”

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By: Daniel A. Cozzi and Donna Bates

The United States Bankruptcy Court for the District of New Jersey recently held in In re Washington, No. 14-14573-TBA, 2014 WL 5714586 (Bankr. D.N.J. Nov. 5, 2014) that the mortgagee and mortgage servicer (“the Creditors”) are time-barred under New Jersey state law from enforcing either the note or the accelerated mortgage against the debtor, essentially entitling a defaulting borrower to a “free house.”[1]

The Court’s analysis focused on the issue of whether the Fair Foreclosure Act (“FFA”), N.J.S.A. § 2A:50-56.1(which governs statutes of limitations relative to foreclosure proceedings), and the Bankruptcy Code, specifically sections 11 U.S.C. §§ 502(b)(1) and 506(d) (which deal with allowable claims), operate to make the mortgage unenforceable because the creditor waited too long to institute a foreclosure after the maturity date of the loan was accelerated because the borrower defaulted.

Borrower Gordon Washington (“Debtor” or “Washington”) purchased a three-family home in Morris County, New Jersey, on February 27, 2007, paying a $130,000 deposit and obtaining a 30-year mortgage and note for $520,000 with the first payment due on April 1, 2007. In re Washington, *2. Debtor failed to make the July 1, 2007 mortgage payment, and the loan went into default and remained in default since that time. Id. On December 14, 2007, the Creditors filed a foreclosure complaint in the Superior Court of New Jersey, Chancery Division. Id. at *3. The Complaint alleged that “[p]laintiff herein, by reason of said default, elected that the whole unpaid principal sum due on the aforesaid obligation and mortgage …. shall be now due.” Id. at *5. On October 28, 2010, the Office of Foreclosure returned the foreclosure judgment package to the creditors for deficiencies, notably, failure to produce an attorney certified copy of the Note and Mortgage. Id. at *6. On July 5, 2013, the Superior Court Clerk’s Office issued an Order dismissing Creditors’ foreclosure complaint for lack of prosecution, without prejudice. Id. The foreclosure was not re-filed, and on March 12, 2014, Debtor filed a petition for Chapter 7 bankruptcy. Id. On March 18, 2014, Debtor filed an adversary complaint to determine the validity of the mortgage lien on the property. Id. at *3.

Each party moved for summary judgment in the adversary proceeding. Id. at *1. Debtor argued that the 6-year statute of limitations applicable to negotiable instruments set forth in New Jersey’s Uniform Commercial Code (“UCC”), N.J.S.A. § 12A:3-118(a), had expired and thus Defendants were out of time to sue on the mortgage note. Id. Debtor also argued that the FFA similarly had a 6-year statute of limitations, because it required that a residential mortgage foreclosure must be commenced within “[s]ix years from the date fixed for the making of the last payment or the maturity date set forth in the mortgage or the note, bond or other obligation secured by the mortgage . . .” N.J.S.A. § 2A:50-56.1(a)In contrast, the Creditors argued that they had “[t]wenty years from the date on which the debtor defaulted . . .”of to file a foreclosure action as set forth in § 2A:50-56.1(c) of the FAA, and since that time had not expired they may still foreclose on the mortgage.

The Court’s opinion focused on the narrow issue of whether “N.J.S.A. § 2A:50-56.1(a) and 11 U.S.C. §§ 502(b)(1) and 506(d) operate to make the mortgage unenforceable, to disallow the Defendants’ claim, and to void the mortgage lien so that the Defendants have no claim against the Debtor, the property or the estate.” Id. In its analysis, the Court reviewed N.J.S.A. § 2A:50-56.1, which states in relevant part the following:

An action to foreclose a residential mortgage shall not be commenced following the earliest of :

  1. Six years from the date fixed for the making of the last payment or the maturity date ….;
  2. Thirty-six years from the date of the recording of the mortgage ….
  3. Twenty years from the date on which the debtor defaulted … as to any of the obligations or covenants contained in the mortgage…

The Court reviewed N.J.S.A. § 2A:50-56.1(a) and determined that, in this case, the maturity date for the subject loan had been accelerated to either July 1, 2007 (the date of default), or December 14, 2007 (the date of the filing of the foreclosure complaint). In re Washington, *12.     Id. The mortgage had an original maturity date of the year 2037. However, the Court found that the maturity date had been accelerated to the year 2007 [2] and held that, because the maturity date was accelerated by the Creditor, the applicable statute of limitations is six years (and not the twenty years set forth in § 2A:50-56.1(c)), which statute of limitation runs from the date of the accelerated maturity date. Since the accelerated maturity date in this case was either July 1, 2007 or December 14, 2007, the foreclosure had to be commenced no later than July 1, 2013 or December 14, 2013, which it was not. In re Washington, *12.    The Court noted that even though the foreclosure complaint was originally filed on December 14, 2007, it was dismissed in 2013, was never reinstated, and neither Debtor nor Creditors took any action under the mortgage instruments or the FFA to de-accelerate the maturity date.[3] The Court held that therefore the Creditors “are time-barred under New Jersey state law from enforcing either the note or the accelerated mortgage.”

The Court went on to determine that, because the Creditors could not foreclose on Debtor’s loan, Creditors’ proof of claim in bankruptcy also was barred because the underlying lien is unenforceable. The Court relied on11 U.S.C. § 502(b)(1), which states in pertinent part that, for disputed claims, the court shall determine the amount of the claim unless, “such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.” The court also relied on 11 U.S.C. § 506(d), which states that if the claim underlying the lien is disallowed, the lien is void. [4]

In light of this decision, lenders should evaluate their loan portfolios for mortgages which have been in default for five (5) or more years. On a case by case basis, lenders may want to ensure that a mortgage foreclosure has been filed on the property, and if one has not been filed, expedite the foreclosure filing process to avoid running afoul of the six-year statute of limitations. Lenders should also exercise caution in dismissing foreclosures without prejudice while the loan is in default. The mortgage and note may be rendered void and unenforceable if the foreclosure is not re-filed prior to the six year statute of limitations.

[1] The Court expressed its distaste for rendering a decision that retreated from the long standing admonition that “No one gets a free house.” Nevertheless, it opined that the current statutes and the facts of the case warranted summary judgment in favor of the Debtor.

[2] In determining that the maturity date had been accelerated, the Court referenced the language in an Assignment of Mortgage, effective November 12, 2007, that listed the accelerated balance as the amount due as of June 1, 2007, as well as the allegations contained in the December 14, 2007 foreclosure complaint, which stated that the Plaintiff has elected that the whole unpaid principal balance and all interest and advances made were now due. In re Washington, *8-9. It was not relevant to the Court’s decision whether the original maturity date was accelerated to the date of default or the date the foreclosure complaint was filed, because in either case, the statute of limitations had clearly expired.

[3] The Court noted that the Creditors argued at the September 30, 2014 hearing that a foreclosure complaint filed now would “relate back” to the original complaint filed on December 14, 2007. The Court did not specifically rule on this issue, but merely noted that Debtor opposed that argument.

[4] Even though this case involves a bankruptcy and denial of a proof of claim, the same New Jersey statutes and analysis would apply to determine if a creditor is precluded from foreclosing on a property because the statute of limitations has expired.

Mortgage Lenders’ and Servicers’ Catch 22 in Connecticut

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By: Jonathan M. Robbin and Adam M. Swanson

Ambiguities in Connecticut Public Act 2013-156, and the courts construing them, have created a Catch-22 for lenders and servicers. Connecticut Public Act 2013-156 and recent Court decisions allow condo associations to pursue serial foreclosures stripping more of the scant equity securing a first mortgage and shifting all of the associations’ losses. As a result, lenders and servicers are left with a difficult decision: Continue to pay associations and their fees and lose more equity in properties – many of which are underwater – or take title and risk affirmative claims by borrowers and/or regulatory scrutiny.

The attached article examines the Connecticut Act and the effect it has recently had on lenders and servicers.

Flagstar Bank Agrees to $37.5 Million Settlement with CFPB

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By:  Joshua A. Huber

On September 28, 2014, Flagstar Bank, FSB (“Flagstar”) agreed to a Consent Order, under which it will pay $37.5 million to resolve allegations that it engaged in unfair acts or practices by impeding borrowers’ access to loss mitigation. Flagstar’s settlement with the Consumer Financial Protections Bureau (CFPB) marks the CFPB’s first major enforcement action under the new Mortgage Servicing Rules, which became effective January 1, 2014.[i]

The CFPB’s allegations encompassed five (5) areas of Flagstar’s default servicing practices. Specifically, the CFPB found that:

  1. Flagstar systematically failed to review loss mitigation applications in a reasonable amount of time which often caused required documents to expire. The CFPB specifically referenced Flagstar’s insufficient staffing, a significant backlog of loss mitigation applications, call wait times exceeding twenty-five (25) minutes and a ninety (90) day timeline to review a single borrower application.
  2. Flagstar withheld information that borrowers needed to complete their loss mitigation applications, such as “missing document letters” which are designed to inform borrowers of deficiencies in pending applications.
  3. Flagstar lacked a systemized, controlled process for calculating borrower income, which led to the improper denial of a large number of modifications.
  4. Flagstar impermissibly extended trial period plans beyond the timeframe permitted by investors, causing borrowers to lose out on permanent modifications.
  5. Flagstar’s ongoing administration of loss mitigation programs does not comply with the Mortgage Servicing Rules.

Flagstar consented to the issuance and enforcement of the Consent Order but neither admitted nor denied the CFPB’s findings of fact or conclusions of law. The remedial aspects of the Consent Order include a damages payment of $27.5 million ($20 million of which will be paid to foreclosed borrowers), a $10 million civil penalty pursuant to 12 U.S.C. § 5565(c) and a temporary prohibition on Flagstar’s ability to acquire servicing rights to any third-party originated loans which are in default.

The Consent Order demonstrates the CFPB’s continued focus on loss mitigation practices during the peak of the financial crisis. In light of this Consent Order, mortgage servicers would be well-served by reviewing and re-evaluating their loss mitigation processes.

[i] See 12 C.F.R. § 1024.41(b), et seq.