NINTH CIRCUIT DENIES CLASS CERTIFICATION TO BORROWERS IN LOAN MODIFICATION CASE

By: Louise Bowes

In Hanna Bernard, et al. v. CitiMortgage Inc., the Ninth Circuit held that a purported class of borrowers was not eligible for class certification in an action against CitiMortgage Inc. (“Citi”) because the individual issues related to their loan modification reviews were too numerous to justify certification under Fed. R. Civ. P. 23(b)(3). No. 13-57158 (Ninth Cir. March 2, 2016). The Plaintiffs’ brought claims for breach of contract and breach of good faith and fair dealing, wherein they claimed that Citi failed to provide timely decisions regarding permanent loan modifications to borrowers who had completed three-month trial modifications under the Home Affordable Modification Program, and also failed to honor promises to provide permanent modifications after the trial plans were completed.

The Court affirmed the United States District Court for the Central District of California’s decision that the individual issues outweighed the common issues in the purported class’ cases. Specifically, determining whether Citi’s loan modification decisions were untimely would require an inquiry into the specific facts of each borrower’s situation, including changes in income or incomplete documentation. The district court also determined that the Plaintiffs failed to provide sufficient support for their claim that class certification was justified in this case as required by Fed. R. Civ. P. 23(b)(1) because the Plaintiffs failed to adequately explain why the cases they cited supported their position that the cases could not be adjudicated individually. The Plaintiffs attempted to characterize their action as seeking declaratory relief for the first time on appeal, but the Court held that the Plaintiffs waived this issue by failing to raise it before the district court.  The Court’s decision constitutes a significant setback for the Plaintiffs, as the costs of litigating their individual cases may outweigh the amounts they could potentially recover.

Texas Statute Provides Clarity for Unilateral Rescission of Acceleration

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).

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

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

By: Louise Bowes

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.

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.

 

 

Flagstar Bank Agrees to $37.5 Million Settlement with CFPB

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.

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

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.