Category Archives: Loan Servicing

“Totality of the Circumstances” Standard Used in New York to Sanction Mortgagee for Lack of “Good Faith” Negotiation in Foreclosure Matter

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By: Jill E. Alward and Timothy W. Salter

New York’s Appellate Division, Second Department, recently ruled that a mortgagee’s conduct in evaluating a borrower’s loan modification application should be judged using the “totality of the circumstances” standard to determine whether the mortgagee negotiated in good faith during mandatory foreclosure settlement conferences. Applying that standard in US Bank N.A. v. Sarmiento, 2014 NY Slip Op 05533 (2d Dep’t July 30, 2014), the Appellate Division affirmed a lower court’s holding that a foreclosing plaintiff failed to negotiate in good faith.

In Sarmiento, the plaintiff, over the course of a series of settlement conferences, offered the borrower an in-house loan modification but denied the borrower’s HAMP application four times. The borrower, after refusing to accept the in-house modification, moved for sanctions, which sought to bar the plaintiff from collecting any interest, costs, or attorneys’ fees from the date of the first settlement conference (December 1, 2009). In addition, the borrower asked the court to direct the plaintiff to review the borrower’s loan for HAMP “using correct information and without regard to interest or fees that have accrued on the subject loan since December 1, 2009.” The lower court granted the borrower’s motion in its entirety.
On appeal, the plaintiff argued that the lower court lacked the authority to impose sanctions for violating the good faith requirement of CPLR 3408(f) and further applied the wrong standard in support of its holding. The Second Department rejected both arguments.

In summarizing the offending conduct, the Second Department held that “[w]here a plaintiff fails to expeditiously review submitted financial information, sends inconsistent and contradictory communications, and denies requests for a loan modification without adequate grounds…such conduct could constitute the failure to negotiate in good faith to reach a mutually agreeable resolution.” The court further held that while “any one of the plaintiff’s various delays and miscommunications, considered in isolation, [did] not rise to the level of lack of good faith,” the plaintiff’s conduct, when reviewed using the “totality of the circumstances” standard, “evidenced a disregard for the settlement negotiation[,]” regardless of whether the borrower ultimately qualified for a HAMP modification.

While the court warned that its holding should be construed as a deviation from the principal limiting a court’s role in a foreclosure action “to interpretation and enforcement of the terms agreed to by the parties,” it ultimately alters and expands the standard of review for determining a mortgagee’s “good faith” during the foreclosure settlement process. The court’s holding has already been cited by at least one court, and does not appear to be an isolated ruling.

Maryland Court Rejects Borrowers’ Attempt to Expand FCRA Requirements on Mortgage Servicers

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By Joe Patry

Recently, in Bartlett v. Bank of Am., NA, CIV.A. MJG-13-975, 2014 WL 3773711 (D. Md. July 29, 2014), a Maryland federal court rejected borrowers’ argument that their mortgage servicer violated the FCRA by accessing their credit reports without notifying them that it had done so in connection with a loan modification application.  Id. at *1.

The Fair Credit Reporting Act (the “FCRA”), 15 U.S.C. 1681 et seq. requires that credit reporting agencies make a number of disclosures when financial institutions access a borrower’s credit report.  See, e.g., 15 U.S.C. § 1681g.  The FCRA also imposes certain requirements directly on mortgage lenders.  15 U.S.C. §1681g(g)(1).  In particular, when a consumer applies for a new mortgage loan on a residential property, the mortgage lender must notify the consumer “as soon as reasonably practicable” that the lender accessed that consumer’s credit report.  See Id.

The borrowers argued that because an application for a loan modification is an application for credit under the Equal Credit Opportunity Act (“ECOA”), 15 U.S.C. 1691 et seq., Bartlett, 2014 WL 3773711 at *4, an application for a loan modification requires that lenders must provide borrowers with the disclosures that mortgage lenders must provide under the FCRA.  Id.  Notably, ECOA is silent regarding notifying borrowers that lenders have accessed borrowers’ credit report in connection with a modification review.  However, ECOA requires that a creditor must inform a borrower of its action on a borrower’s application for a loan modification within thirty days of the receipt of a completed loan modification application. See Piotrowski v. Wells Fargo Bank, N.A., CIV.A. DKC 11-3758, 2013 WL 247549, *6 (D. Md. Jan. 22, 2013).

The Bartlett court rejected borrowers’ argument, noting that ECOA and FCRA have different requirements, and holding that an application for a loan modification is not an application for a new loan.  Bartlett, 2014 WL 3773711 at *4.  Thus, when the mortgage servicer in Bartlett accessed the borrowers’ credit reports while it was reviewing them for a loan modification, the mortgage servicer was not required to notify the borrowers that it had done so.  Id.

The Bartlett decision clarifies the interplay between ECOA and the FCRA and provides some guidance to lenders and consumers regarding what disclosures a lender must make when consumers apply for loan modifications.   

CFPB Bulletin Offers Guidance on Mortgage Servicing Transfers

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By: Michael J. Meehan

On August 19, 2014, the Consumer Financial Protection Bureau (CFPB) issued a fifteen-page bulletin addressing mortgage servicing transfers, and specifically, the potential risks to consumers that arise in connection with transferring loans that are the subject of loss mitigation efforts. This bulletin replaces the bulletin that was released in February 2013.

Under the new CFPB servicing rules (specifically, 12 C.F.R. § 1034.38(b)(4)), servicers are required to maintain policies and procedures that are reasonably designed to facilitate the transfer of information and documentation during servicing transfers. According to the bulletin, the CFPB expects that contracts governing servicing transfers will require the transferor to provide all necessary documents and information upon transfer. Further, the bulletin indicates that to facilitate the transfer, the transferor and transferee servicer should have compatible technology and data mapping systems to allow the transferee servicer to identify, among other things, applicable loan terms, relevant document indexing, and “specific regulatory or settlement requirements applicable to some or all of the transferred loans.”

The bulletin stresses these requirements in the context of loans approved for, or under review for, a loss mitigation option. It discusses the “heightened risk inherent in transferring loans in loss mitigation” and emphasizes the need to prevent loss mitigation documentation and information from being lost or insufficiently reviewed upon transfer. In addition, the bulletin indicates that the CFPB expects transferor servicers to flag loans with pending and approved loss mitigation applications (including trial modifications) and to send the information and documentation through a system that ensures the transferee can process the loss mitigation data upon transfer. In particular, the bulletin highlights that a transferee servicer should have policies and procedures requiring the transferor servicer to provide a detailed list of all loans with pending loss mitigation applications or approved plans.

Among its notable loss mitigation directions, the bulletin requires a transferee servicer to have policies allowing it to distinguish partial loan payments from payments made pursuant to a trial or permanent loan modification. It is advisable for a transferee servicer to seek missing loss mitigation information or documentation directly from the transferor servicer prior to requesting the information from borrower; the bulletin adds, “A transferee that requires a borrower to resubmit loss mitigation application materials is unlikely to have policies and procedures that comply with 12 C.F.R. 1024.38(b)(4).” Moreover, the bulletin states that a transferee servicer is also expected to adhere to the early intervention requirements under amended Regulation X and should contact the borrower on the 36th and 45th day of delinquency regardless of whether the delinquency commenced during the transferor’s servicing. Generally speaking, the bulletin anticipates that the CFPB will “carefully scrutinize” any instance where a loss mitigation evaluation takes longer than 30 days from when the transferor servicer receives the application, particularly where a borrower suffers negative consequences because of the delay.

Servicers transferring or acquiring servicing rights to consumer mortgage loans should review their policies for compliance with the recent CFPB guidance.

Texas Court of Appeals for the First District Court Holds Mortgagors Have Standing to Challenge “Void” Assignment

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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).

New York Bankruptcy Court Rules that Borrower Can Proceed with a Claim for Non-Economic Damages Resulting from a RESPA Violation

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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.

CIT announces purchase of OneWest Bank

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By: Daniel A. Cozzi

On July 22, 2014 CIT Group Inc announced that it would purchase OneWest Bank NA for $3.4 billion in cash and stock.

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.

Third Circuit Holds Debtors Need Not Dispute Debt Before Filing Suit Under FDCPA

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By: Louise Bowes Marencik

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.

State and Federal Regulatory Agencies Issue New Guidelines on Home Equity Lines of Credit

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By: Thomas P. Cialino

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.

 

 

Eleventh Circuit Defines “Called Party” for Purposes of the TCPA

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By: Manuel S. Hiraldo

In recent opinions, the United States Court of Appeal for the Eleventh Circuit addressed an issue of first impression in Osorio v. State Farm Bank, F.S.B., 746 F.3d 1242 (11th Cir. 2014) (issued on March 28, 2014) and Breslow v. Wells Fargo Bank, N.A., Case No. 1:11-cv-22681 (11th Cir. 2014) (issued on June 9, 2014). In both cases, the Eleventh Circuit held that the term “called party” as used in the Telephone Consumer Protection Act, 47 U.S.C. § 227, refers to the subscriber of a cellular telephone number, and not the individual whom the caller intended to call. Prior to these opinions, the only federal appellate court that had ruled on the issue was the Seventh Circuit. See Soppet v. Enhanced Recovery Co., LLC, 679 F.3d 637, 640 (7th Cir. 2012). In Osorio and Breslow, the Eleventh Circuit followed the Seventh Circuit’s reasoning that the TCPA consistently uses the term “called party” to mean the subscriber of the telephone number.

In part, the TCPA makes it unlawful for any person

(A) to make any call…using any automatic telephone dialing system or an artificial or prerecorded voice—
. . .
(iii) to any telephone number assigned to a paging service, cellular telephone service, specialized mobile radio service, or other radio common carrier service, or any service for which the called party is charged for the call . . . .

47 U.S.C. § 227(b)(1) (emphasis supplied).

In Osorio, Clara Betancourt provided the cellular telephone number of Fredy Osorio in connection with auto insurance and credit card applications. 746 F.3d at 1242. Betancourt subsequently defaulted on her credit card payments, which caused State Farm to attempt to contact her on the cell number provided by Betancourt. Osorio, the subscriber of the number provided by Betancourt to State Farm, sued State Farm for violating the TCPA as a result of State Farm’s use of an autodialer to contact Osorio’s cellular telephone without his consent. On summary judgment, State Farm argued that the “called party” should be interpreted to be the “intended recipient” (Betancourt) under the TCPA. “This would mean that Betancourt, as the intended recipient of State Farm’s calls, could consent to Osorio receiving the calls…” Id. at 1250. In rejecting Wells Fargo’s argument, the Eleventh Circuit held that the “called party” referred to under section 227(b)(1)(A) is not the “intended recipient.” Id.

In Breslow, Wells Fargo made calls to a cellular phone assigned to Lynn Breslow using an autodialer. Case No. 1:11-cv-22681. Breslow did not consent to Wells Fargo’s calls and she sued for alleged violations of the TCPA. Wells Fargo believed it was contacting a customer who had previously provided the number as contact number. In an affidavit filed in support of a motion for summary judgment, Wells Fargo stated that it “was unaware that the cell phone number was no longer assigned to the former customer and that the former customer never revoked his consent. . . .” Wells Fargo argued that the intended recipient of the calls (the former customer) was the “called party,” and it had therefore not violated the TCPA, because it had consent from the former customer. In rejecting this argument, and consistent with its ruling in Osorio, the Eleventh Circuit held that the “called party” for purposes of the TCPA “means the subscriber to the cell phone service.”

In all, these cases are consistent with prior interpretations of the TCPA by the Eleventh Circuit as a strict-liability statute that imposes a $500.00 per call penalty for violations, and places the burden on callers to ensure that they do not violate the TCPA. Financial institutions that utilize autodialers to contact their customers should be aware of these recent cases and this developing area of the law. Pursuant to Osorio and Breslow, an error attributable to the customer may not be a defense.

Supreme Court of Texas Holds Modified Home Equity Loans Not Subject to “80% Rule”

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By:   Joshua A. Huber

In 1997, Texas became the last state in the nation to permit home equity loans. Because of Texas’ strong, historic protection of the homestead, home equity loans are regulated, not by statute as one might suppose, but by the “elaborate, detailed provisions” of Article XVI, Section 50 of the Texas Constitution.[1]  As previously noted in this blog, the Texas Constitution “prescribe[s] a Draconian consequence of noncompliance, whether intentional or inadvertent: not merely the loss of the right of forced sale of the homestead, but forfeiture of all principal and interest.”[2]  One of the detailed provisions, colloquially known as the “80% Rule,” provides that a loan-to-value ratio cannot exceed 80%.[3]

In Sims v. Carrington Mortg. Servs., LLC, 57 Tex. Sup. J. 588, 2014 Tex. LEXIS 396 (Tex. 2014), the Supreme Court of Texas addressed the following question certified by the Fifth Circuit:  “After an initial extension of credit, if a home equity lender enters into a new agreement with the borrower that capitalizes past-due interest, fees, property taxes, or insurance premiums into the principal of the loan but neither satisfies nor replaces the original note, is the transaction a modification or a refinance for purposes of Section 50 of Article XVI of the Texas Constitution?”[4]

The Sims obtained a home equity loan from Carrington Mortgage in 2003 and there was no dispute that the loan, when originated, satisfied the requirements of § 50(a)(6). After falling behind on their payments the Sims were given a loan modification in 2009, and again in 2011.[5]  Each time, past-due payments, interest and other charges, including fees and unpaid property taxes and insurance premiums, were capitalized into the modified loan, resulting in a higher principal balance. The Sims, personifying the maxim “no good deed goes unpunished,” commenced a class action against Carrington four months after the 2011 modification. The Sims alleged, among other things, that the modified balance of their home equity loan exceeded 80% of the value of their property, and that the loan was therefore void pursuant to the Texas Constitution’s 80% Rule.

The Sims argued that the modification was, in fact, a refinance or new extension of credit because the lender advanced new funds to cover past due amounts. Carrington contended that the modification did not satisfy or replace the original loan, and that the amounts capitalized were all part of and due under the terms of the original loan agreement.  In siding with Carrington, the Court stated “[t]he test should be whether the secured obligations are those incurred under the terms of the original loan.”[6] Based on this test and the clear language of the Sims’ loan modification agreements, the Court answered the certified question as follows:

“To the first certified question, we answer: the restructuring of a home equity loan that . . . involves capitalization of past-due amounts owed under the terms of the initial loan and a lowering of the interest rate and the amount of installment payments, but does not involve the satisfaction or replacement of the original note, an advancement of new funds, or an increase in the obligations created by the original note, is not a new extension of credit that must meet the requirements of Section 50.”

The Court’s decision is a win for both borrowers and lenders. As noted in the opinion, the approach advanced by the Sims would encourage lenders to foreclose rather than seek alternatives to keep borrowers in their homes. That potential became a reality as many servicers in Texas halted or reduced home equity loan modifications during the pendency of this case. Now that the uncertainty has been lifted, borrowers will likely be afforded more modification options, and lenders can proceed with modifications without fear of invalidating their loans.

[1]     Fin. Comm’n of Tex. v. Norwood, 418 S.W.3d 566, 571 (Tex. 2013); LaSalle Bank Nat’l Ass’n v. White, 246 S.W.3d 616, 618 (Tex. 2007) (per curiam).

[2]     Norwood, 418 S.W.3d at 571.

[3]     Tex. Const art. XVI, §50(a)(6)(B).

[4]     Sims v. Carrington Mortg. Servs., LLC, 538 Fed. Appx. 537, 547 (5th Cir. 2013).

[5]     Id. at *2-3.

[6]     Id. at *17.