California’s Highest Court Confirms Lenders Owe No Duty to Borrowers to Process, Review, and Respond to Loan Modification Applications and Nixes Negligence Claim

Wayne Streibich, Diana M. Eng, Cheryl S. Chang, and Jessica A. McElroy

Financial institutions, lenders, and servicers should take note that the California Supreme Court affirmed a Court of Appeal decision confirming there is no duty for a lender to “process, review and respond carefully and completely to” a borrower’s submitted loan modification application. In doing so, California’s highest court resolved a split of authority at the appellate level. However, the Court specifically disclaimed consideration of negligent misrepresentation or promissory estoppel claims, noting that nothing in the opinion “should be understood to categorically preclude those claims in the mortgage modification context.”

In Sheen v. Wells Fargo Bank, N.A.[1] (March 7, 2022), the California Supreme Court affirmed the decision of the Court of Appeal, which upheld the trial court’s decision sustaining defendant lender’s demurrer to plaintiff borrower’s negligence claim in a case involving a junior lien and a lender’s alleged negligence in failing to respond timely to the borrower’s request to modify a second position deed of trust.

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New York Further Extends the COVID-19 Emergency Eviction and Foreclosure Prevention and Small Businesses Acts to January 15, 2022, but Provides a Way to Challenge Hardship Declarations

Wayne StreibichDiana M. Eng, and Chenxi Jiao


Lenders, mortgage servicers, and other financial institutions should take note that the New York State legislature has extended the COVID-19 Emergency Eviction and Foreclosure Prevention Act (“CEEFPA”) and the COVID-19 Emergency Protect Our Small Businesses Act to January 15, 2022. Therefore, the requirements and stays with respect to residential and commercial foreclosures and evictions and credit reporting remain effective through January 22, 2021, to the extent a tenant or mortgagor has submitted a Hardship Declaration. The legislature also amended the statutes, in part, to address the United States Supreme Court’s August decision blocking the enforcement of Part A of the CEEFPA for violating landlords’ due process rights. Per the amendments, landlords and mortgagees can now challenge a self-certified Hardship Declaration in Court.

On September 2, 2021, through a Special Legislative Session, New York State extended the COVID-19 Emergency Eviction and Foreclosure Prevention Act (“CEEFPA”) and the COVID-19 Emergency Protect Our Small Businesses Act (“SBA”) through January 15, 2022. As discussed in our August 17, 2021 Alert, in Chrysafis v. Marks, No. 21A8, — S. Ct. –, 2021 WL 3560766 (Aug. 12, 2021), the United States Supreme Court (“SCOTUS”) granted an injunction blocking the enforcement of CEEFPA and held that Part A of the CEEFPA, a provision allowing tenants to submit an affidavit self-certifying their pandemic-related hardship to prevent eviction, violated the plaintiffs-landlords’ due process rights (“Hardship Declaration”) and was unconstitutional. New York’s new legislation attempts to address this constitutional issue by providing a mechanism for landlords and mortgagees in residential and commercial evictions and foreclosures to challenge the Hardship Declarations by filing a motion.

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U.S. Supreme Court Blocks Enforcement of a Limited Part of New York’s COVID-19 Emergency Eviction and Foreclosure Prevention Act

Wayne Streibich, Diana M. Eng, and Chenxi Jiao


Financial institutions, lenders, and servicers should take note that the United States Supreme Court (“SCOTUS”) granted an injunction filed by plaintiffs-landlords seeking to prevent the enforcement of New York’s COVID-19 Emergency Eviction and Foreclosure Prevention Act of 2020 (“CEEFPA”) because it violates their due process rights. However, SCOTUS limited its ruling to enjoin the enforcement of only Part A of the CEEFPA, which provides that if a tenant self-certifies financial hardship, a landlord generally cannot contest the certification and denies the landlord a hearing. Thus, financial institutions, lenders, and servicers should continue to abide by other prohibitions regarding foreclosures, evictions, and credit reporting in the CEEFPA.

On August 12, 2021, in Chrysafis v. Marks, No. 21A8, — S. Ct. –, 2021 WL 3560766 (Aug. 12, 2021), the United States Supreme Court granted an injunction blocking the enforcement of New York’s COVID-19 Emergency Eviction and Foreclosure Prevention Act of 2020—an anti-eviction law originally passed on December 28, 2020, and subsequently extended. SCOTUS found that the provision allowing tenants to submit an affidavit self-certifying their pandemic-related hardship to prevent eviction violated the plaintiffs-landlords’ due process rights (“Hardship Declaration”).

Background

When enacted on December 28, 2020, the CEEFPA stayed all pending residential eviction proceedings and foreclosure actions for 60 days and provided a further stay through May 1, 2021, to those defendants who provided their landlord or lender/servicer, as applicable, with a Hardship Declaration certifying that they have been negatively impacted as a result of the COVID-19 pandemic. On May 4, 2021, the CEEFPA was extended to, among other things, protect tenants who submitted a Hardship Declaration from eviction until August 31, 2021.

On May 6, 2021, a small group of landlords and the Rent Stabilization Association (“Landlords”) filed a lawsuit in the Eastern District of New York challenging the constitutionality of the CEEFPA. The district court dismissed the Landlords’ complaint and the United States Court of Appeals for the Second Circuit denied the Landlords’ request for an injunction pending their appeal. The Landlords then filed for a petition for a writ of certiorari to the Supreme Court and, on July 26, 2021, filed an application for emergency injunctive relief, which was presented to Justice Sotomayor and referred to SCOTUS.

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How SCOTUS Clarified the Spokeo Standard of “Concrete” Harm Necessary to Establish Article III Standing, and What It Means for the Future of Class Actions

Ana Tagvoryan, Deborah A. Skakel, Edward W. Chang, Scott E. Wortman, Jeffrey N. Rosenthal, Chenxi Jiao, and Harrison M. Brown

On June 25, 2021, the United States Supreme Court issued its decision in TransUnion LLC v. Ramirez, No. 20-297, 2021 WL 2599472 (U.S. June 25, 2021) (“TransUnion”), providing much needed clarity regarding the type of “concrete” harm necessary to establish a plaintiff’s standing under Article III of the United States Constitution.

In a 5-4 decision authored by Justice Kavanaugh, the Court expounded on its ruling in Spokeo, Inc. v. Robins, 578 U.S. 330 (2016), using several examples to illustrate how to measure the harm plaintiffs allege from a statutory violation. As Justice Kavanaugh succinctly stated: “No concrete harm, no standing.”

In TransUnion, the lower court certified a class of 8,124 absent class members who purportedly suffered injury under the Fair Credit Reporting Act (“FCRA”) because TransUnion had placed an alert on their credit report indicating that the consumer’s name was a “potential match” to a name on the list maintained by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) of terrorists, drug traffickers, and other serious criminals.

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New York’s COVID-19 Eviction and Foreclosure Prevention and Small Businesses Acts Extended to August 31, 2021—What You Need to Know

Wayne Streibich, Diana M. Eng, and Alina Levi

Lenders, mortgage servicers, and other financial institutions should take note that New York State passed legislation extending the protections set forth in the COVID-19 Emergency Eviction and Foreclosure Prevention Act of 2020 and the COVID-19 Emergency Protect Our Small Businesses Act of 2021 to August 31, 2021. Thus, the requirements and stays with respect to residential and commercial foreclosures and evictions imposed by the legislation remain effective through August 31, 2021.

On May 4, 2021, Governor Cuomo signed a bill extending both (i) the COVID-19 Emergency Eviction and Foreclosure Prevention Act of 2020 (the “EEFPA”); and (ii) the COVID-19 Emergency Protect Our Small Businesses Act of 2021 (“SBA”), to August 31, 2021 (S.6362-A/A.7175-A) (the “Extended Act”). The purpose of the Extended Act, which is effective immediately, is to maintain protections prohibiting residential and commercial evictions, foreclosure proceedings, credit discrimination, and negative credit reporting related to the COVID-19 pandemic until August 31, 2021, if the borrowers, mortgagors, and/or tenants submit the required Hardship Declaration with the foreclosing party, landlord/their agent, or the Court. In practice, however, some courts have extended the stay even without the required Hardship Declaration.  

Highlights of the Extended Act are summarized below, but please refer to the full text of the Extended Act for additional information.

LIMITS OF THE EXTENDED ACT

  • The Extended Act still does not apply to residential eviction and foreclosure actions involving vacant and abandoned properties, listed on the statewide vacant, and abandoned property electronic registry (as such terms are defined in Sections 1309(2) and 1310 of New York’s Real Property Actions and Proceedings Law) prior to March 7, 2020, and which remain on such registry.
  • The Extended Act also does not apply to, and does not affect, any residential or commercial mortgage loan made, insured, purchased, or securitized by a corporate governmental agency of the state constituted as a political subdivision and public benefit corporation or the rights and obligations of any lender, issuer servicer, or trustee of such obligations.
  • The portion of the Extended Act addressing the SBA still only applies to commercial tenants, who independently own and operate their business, have 50 or fewer employees, and experience financial hardship and are unable to pay the rent or other financial obligations under the lease in full or obtain an alternative suitable commercial property as a result of:
      1. significant loss of revenue during the COVID-19 pandemic; and/or

      2. significant increase in necessary expenses related to providing personal protective equipment to employees or purchasing and installing other protective equipment to prevent the transmission of COVID-19 within the business; and/or

      3. moving expenses and difficulty in securing an alternative commercial property make it a hardship for the business to relocate to another location.

  • The Extended Act still permits residential and commercial evictions of tenants, who persistently and unreasonably engage in behavior that substantially infringes on the use and enjoyment of other tenants or occupants or cause a substantial safety hazard to others.

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The Hunstein Effect—Examining the Eleventh Circuit’s Ruling and What’s Next for Debt Collectors and Their Third-Party Service Providers

Wayne Streibich, Nicole R. Topper, Scott E. Wortman, and Anthony Richard Yanez

The U.S. Court of Appeals for the Eleventh Circuit has delivered a novel and highly consequential interpretation of the Fair Debt Collection Practices Act that is potentially transformative for debt collectors and their third-party service providers.

On April 21, 2021, in Hunstein v. Preferred Collection and Management Services, Inc., — F.3d — (2021), the U.S. Court of Appeals for the Eleventh Circuit issued a decision on a case of first impression, finding that a debt collector’s transmittal of a consumer’s personal information to its letter vendor constituted a prohibited third-party communication “in connection with the collection of any debt” within the meaning of section 1692c(b) of the Fair Debt Collection Practices Act (“FDCPA”). As discussed below, this ruling has broad ranging ramifications for the accounts receivable management industry and will likely foster a new wave of litigation under the FDCPA.

By way of background, this lawsuit originated from unpaid bills for medical treatment at a hospital. The hospital assigned the unpaid bills to a debt collector that had contracted with a third-party vendor for printing and mailing its collection letters. The collector electronically transmitted to its vendor certain information about the plaintiff/debtor such as: (1) his status as a debtor, (2) the exact balance of his debt, (3) the entity to which he owed the debt, (4) that the debt concerned his son’s medical treatment, and (5) his son’s name. The vendor then used that information to generate and send a dunning letter to the debtor. The debtor received the dunning letter and then filed a lawsuit in the Middle District of Florida alleging violations of both the FDCPA and the Florida Consumer Collection Practices Act. The district court dismissed the lawsuit for failure to state a claim by concluding that the debtor had not sufficiently alleged that the collector’s transmittal of information to the letter vendor was a communication “in connection with the collection of a debt.” The debtor then appealed to the Eleventh Circuit.

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CFPB Issues Debt Collection Interim Final Rule Due to the Ongoing COVID-19 Pandemic

Wayne StreibichDiana M. Eng, and Chenxi Jiao

The CFPB’s interim final rule amends Regulation F to, among other things, (i) require debt collectors to provide written notice to certain consumers about the CDC’s temporary eviction protections; and (ii) prohibit debt collectors from misrepresenting that a consumer is ineligible for eviction protection under the CDC’s moratorium. Debt collectors should take the necessary steps to ensure compliance with the amendment.

On April 19, 2021, the Consumer Financial Protection Bureau (“CFPB”) issued an interim final rule to amend Regulation F at 12 C.F.R. § 1006 (the “IFR”) to require debt collectors to provide consumers with disclosures relating to the Centers for Disease Control and Prevention (“CDC”) order, titled “Temporary Halt in Residential Evictions to Prevent the Further Spread of COVID-19” (86 FR 16731 (Mar. 31, 2021)) (the “CDC Order”). The CDC Order “generally prohibits a landlord, owner of a residential property, or other person with a legal right to pursue eviction or possessory action from evicting for non-payment of rent any person protected by the CDC Order from any residential property in any jurisdiction in which the CDC Order applies.” This prohibition applies to any agent or attorney acting on behalf of a landlord or owner of a residential property. Notably, however, the CDC Order does not cover foreclosure on a home mortgage.

The CFPB issued the IFR due to its concerns that consumers are unaware of their protections under the CDC Order and that debt collectors may be engaging in eviction-related conduct that violates the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. (the “FDCPA”). The IFR applies to “debt collectors,” “consumers,” and “debt,” as defined in the FDCPA.

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CFPB Proposes COVID-19 Rule to Amend Its Mortgage Servicing Rule and Provide Additional Guidance Related to the Pandemic

Jonathan K. Moore, Scott D. Samlin, Chenxi Jiao, and Louise Bowes Marencik

On April 5, 2021, the Consumer Financial Protection Bureau (“CFPB”) issued a notice of proposed rulemaking that proposes amendments to its Mortgage Servicing Rule (the “Proposed Rule”) to provide additional assistance for borrowers impacted by the COVID-19 emergency. The pandemic has resulted in nearly three million borrowers with delinquent mortgages, which is more homeowners in default than any time since the peak of the Great Recession in 2010. Nearly 1.7 million borrowers will exit forbearance programs in September and the following months upon expiration of the maximum term of 18 months in forbearance for federally backed mortgage loans. The Proposed Rule is intended to ensure that these homeowners have the opportunity to be evaluated for loss mitigation options prior to their loans being referred to foreclosure.

If finalized, the Proposed Rule would apply to all mortgages on a principal residence and amend Regulation X (12 CFR 1024).

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CFPB Proposes Delay of Effective Date for Debt Collection Rules

Jonathan K. Moore and Louise Bowes Marencik

On April 7, 2021, the Consumer Financial Protection Bureau (“CFPB”) issued a Notice of Proposed Rulemaking delaying the effective date of its recent debt collection final rules. The final rules, which were issued on October 30, 2020 and December 18, 2020, were scheduled to become effective on November 30, 2021. However, in light of the ongoing COVID-19 pandemic, the CFPB has proposed delaying the effective date until January 29, 2022, in order to give the affected parties additional time to review and comply with the new rules.

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NY Department of Financial Services Enforces First-in-the-Nation Cybersecurity Rules and Fines Mortgage Lender $1.5 Million for Failure to Comply

Andrea M. Roberts and Diana M. Eng

In March 2017, New York State’s Department of Financial Services (“DFS”) implemented the nation’s first cybersecurity rules requiring all regulated entities, such as banks, insurers, financial businesses, and regulated virtual currency operators, to fortify their cybersecurity protocols by implementing and maintaining cybersecurity policies (the “Cybersecurity Regulation”). These protocols and policies include, among other things, establishing a detailed security plan, increasing the monitoring of third-party vendors, appointing chief information security officers, and reporting breaches to the Superintendent of the Department of Finance within 72 hours of identifying a Cybersecurity Event.[1] The Cybersecurity Regulation is codified at 23 NYCRR 500.

For the second time, DFS has fined a regulated entity for failure to comply with the Cybersecurity Regulation. In March 2020, DFS commenced an examination of Residential Mortgage Services, Inc. (“Residential”), a Mortgage Banker (as defined in the Banking Law) based in Maine and licensed in New York. The examination encompassed a general compliance, safety, and soundness review, as well as compliance with the Cybersecurity Regulation. During the review, Residential disclosed for the first time a Cybersecurity Event, which had occurred nearly 18 months earlier. Specifically, an employee, who handles sensitive personal data, received a phishing e-mail and clicked on a hyperlink to a malicious website. DFS determined that although Residential’s technical support staff was alerted to the suspicious activity, Residential’s internal investigation was inadequate since it did not conduct any further inquiry after concluding the unauthorized access was limited to the employee’s e-mail account. Further, DFS determined Residential failed to satisfy the notification requirements of the Cybersecurity Regulation, as Residential failed to (i) identify whether the employee’s mailbox contained private consumer data during the breach and which consumers were impacted; and (ii) notify the Department of Finance within 72 hours of identifying a Cybersecurity Event. Finally, DFS determined that Residential was missing a comprehensive cybersecurity risk assessment, which should have led to the periodic evaluation of controls designed to protect nonpublic information and information systems.

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