CFSL Bulletin The latest Consumer Financial Services Litigation news, developments, and legal thinking

Category Archives: Mortgage Foreclosures

CFPB Gives Heads Up to Mortgage Servicers

Posted in Bureau of Consumer Financial Protection; Compliance; Consumer Financial Protection Act; Consumer Financial Protection Agency; Consumer Financial Protection Bureau; Mortgage Foreclosures; Real Estate Settlement Procedures Act

During the Great Recession courts expressed frustration with sloppy paperwork and borrowers’ inability to get anyone to help them work out problem loans. Many courts refused to allow mortgage foreclosures to proceed because of the perceived mess. The Consumer Financial Protection Bureau just made it clear it was not going to tolerate these problems when it comes to the transfer of mortgage servicing rights. 

On Monday, the CFPB issued guidance directing servicers to “make sure consumers are not collateral damage in the mortgage servicing transfer process.” Servicer must be careful when transferring loans servicing rights. The CFPB wants servicers to know that, where appropriate, they will be required to prepare and submit “informational plans describing how they will be managing the related risk to consumers” when making transfers. 

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“Qualified Written Request” Under RESPA – No “Magic” Words, But the Right Questions Must be Asked

Posted in Mortgage Foreclosures; Real Estate Settlement Procedures Act

For the first time, the federal Court of Appeals for the Ninth Circuit recently opined on what constitutes a “qualified written request” under the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. Section 2605(e), in Medrano et al. v. Flagstar Bank, FSB et al., 2012 U.S. App. LEXIS 25274 (9th Cir. Dec. 11, 2012). While the Court held that there are no “magic” words in order for a written request to be deemed a Qualified Written Request (QWR) under RESPA, which would trigger a mortgage servicer’s obligation to respond, in Medrano, the Court sided with the mortgage servicer nonetheless because the borrower’s letters did not raise the appropriate issues necessary for the letters to become QWRs.

Section 2605(e) requires a mortgage loan servicer, upon receipt of a QWR from a borrower, to: (a) acknowledge the QWR within a certain number of days, and (b) make appropriate corrections or respond with a written explanation of clarification that includes specific certain information.  12 U.S.C. §§ 2605(e)(1)(A) & (e)(2). A QWR is defined in the statute as “a written correspondence, other than notice on a payment coupon or other payment medium supplied by the servicer, that,”

(i) includes, or otherwise enables the servicer to identify, the name and account of the borrower; and

(ii) includes a statement of the reasons for the belief of the borrower, to the extent applicable, that the account is in error or provides sufficient detail to the servicer regarding other information sought by the borrower.

Id. § 2605(e)(1)(B). Failure to adhere to these requirements may subject the servicer to liability. Id. § 2605(f). 

In Medrano, the borrowers purchased a home, and entered into a home loan agreement, which was serviced by Flagstar. The borrowers’ monthly loan payment included installments of principal and interest, as well as escrow installments for property taxes and insurance. Subsequently, Flagstar notified the borrowers that their escrow account had insufficient funds, and required the borrowers to increase their monthly payment from $1,917.68 to $2,676.08. Flagstar also gave the borrowers an option to make a one-time lump payment to cover the deficiency. In challenging the increased installment amount, the borrowers’ lawyer sent three letters to Flagstar, including to Flagstar’s counsel, stating that the increase in payment was invalid because the borrowers’ broker previously advised them that their installments would not exceed $1,900 per month. The borrowers’ counsel demanded that Flagstar correct the loan account. Flagstar did not respond to the letters, nor did it make any changes to the borrowers’ account. The borrowers sued Flagstar alleging violations under state law and RESPA. The district court granted Flagstar’s motion to dismiss, and the Ninth Circuit affirmed.

The Court first noted that it never had a previous occasion to interpret Sction 2605(e). It then pointed out, however, that the Court of Appeals for the Seventh Circuit, in Catalan v. GMAC Mortgage Corp., 629 F.3d 676 (7th Cir. 2011), had previously considered the scope of Section 2605(e), which held that Section 2605(e) should be read broadly and that any “reasonably stated written request for account information can be a qualified written request.” (For a discussion of Catalan, see http://www.cfslbulletin.com/2011/01/14/any-reasonably-stated-written-request-for-account-information-can-be-qualified-written-request-under-respa/.) The Ninth Circuit followed the Seventh Circuit’s broad reading of Section 2605(e), holding that RESPA does not require any “’magic’ words” for a correspondence to be considered a QWR.

Nonetheless, the Ninth Circuit held that the borrowers’ correspondence did not meet the standards for a QWR because the borrowers’ three letters constituted “challenges to the terms of the loan and mortgage documents and are not disputes regarding Flagstar’s servicing of the loan.” Because the borrowers were challenging the amount of monthly payments that were due under their loan, the Court considered their correspondence as essentially a request for modification of the loan agreement, not a servicing issue, and should have been addressed to the borrowers’ lender. Therefore, the borrowers’ letters were not QWRs under RESPA, and Flagstar, as servicer, did not have an obligation to respond to the letters. 

While the Ninth Circuit acknowledged that Section 2605(e) should be interpreted to advance RESPA’s “broad remedial purpose,” the Court’s decision in Medrano attempts to balance the rights of borrowers and those of loan servicers which may be inundated with a large volume of inquiries and correspondences. It remains to be seen whether other appellate courts will agree with the Ninth Circuit’s holding if presented with the same or similar sets of circumstances.

The OCC Agrees to Halt the Independent Foreclosure Review Process

Posted in Mortgage Foreclosures

Did the OCC finally agree that the costs of the foreclosure look-back process overwhelmed its benefits, or was the government simply under-staffed and over-budgeted? It appears to be the financial world’s equivalent to the chicken or the egg question. Nonetheless, the OCC announced this week that it and the Federal Reserve had reached a deal with the ten mortgage servicing companies subject to enforcement actions for deficient practices in mortgage loan servicing and foreclosure processing. Pursuant to the deal, the participating servicers are allowed to cease the Independent Foreclosure Reviews of individual foreclosure files, and replace the process with a “broader framework.”

The OCC did not provide details about the agreed upon “broader framework,” other than advising that the deal requires the mortgage servicers to pay $3.3 billion in payments to eligible borrowers and $5.2 billion in other assistance, such as loan modifications and forgiveness of deficiency judgments. Eligible borrowers will not need to take further action, and are not required to have previously filed a request for review. A payment agent will be appointed to administer the payments and to contact the eligible borrowers. The OCC’s press release claims that eligible borrowers are expected to receive compensation ranging from hundreds of dollars up to $125,000, depending on the type of possible servicer error. Moreover, the borrowers are not required to waive any of their potential legal claims against their respective servicer in order to receive payment.

The OCC defended its decision to accept the deal, stating it provides the greatest benefit to consumers subject to unsafe and unsound mortgage servicing and foreclosure practices during the relevant period in a more timely manner than would have occurred under the review process. The OCC further explained that the agreement ensures that more than 3.8 millions borrowers whose homes were in foreclosure in 2009 and 2010 with the participating servicers will receive cash compensation in a timely manner. 

From a broader perspective, this deal provides the benefit of allowing the borrowers and servicers to move on and focus on the future—a future that will hopefully be more positive for both the servicers and the borrowers.

Ringing in the New Year in 2013: California’s Homeowner’s Bill of Rights Law Takes Effect

Posted in Compliance; Mortgage Foreclosures; Preemption; State Consumer Protection Laws

Dubbed as the “Homeowner’s Bill of Rights,” on July 11, 2012, California Governor Jerry Brown signed into law AB 278/SB 900 marking the first U.S. state to adopt into law the residential mortgage foreclosure reform principles outlined in the February 2012 National Mortgage Servicing Settlement with the nation’s top five mortgage servicers. The Homeowner’s Bill of Rights (“HBOR”) makes changes to nonjudicial foreclosure protocols for first lien residential mortgage loans. The law takes effect on January 1, 2013 and sunsets generally on January 1, 2018. HBOR will primarily impact the current practices of financial institutions, lenders, and other mortgage servicers regarding foreclosure proceedings as follows: (1) prohibits “dual tracking” non-judicial foreclosure with a pending loan modification; (2) prohibits the practice commonly referred to as “Robo-Signing” (3) creates a private right of action; and (4) makes attorney’s fees and costs available to the borrower.

The Scope Of The Homeowner’s Bill Of Rights:  With certain exceptions, HBOR applies only to first lien mortgages or deeds of trust that are secured by owner-occupied residential real property containing no more than four dwelling units. Cal. Civ. Code § 2924.15. In addition, HBOR distinguishes between regulated /licensed lenders who conduct 175 or fewer residential foreclosures per year in California (Smaller Residential Mortgage Lenders) and other lenders (Larger Residential Mortgage Lenders) in that some parts of the law do not apply to Smaller Residential Mortgage Lenders. Cal. Civ. Code § 2924.18(b). A deed of trust in the mortgage industry is legal security relating to a property, and is used in place of a mortgage.  In a deed of trust, the loan borrower is the trustor. The borrower/trustor transfers the subject property in a trust to an independent third party, which is the trustee. The trustee holds a conditional title on behalf of the lender or the promissory note holder, the beneficiary. The trustee is delegated with certain trustee powers under the deed of trust. 

The Homeowner’s Bill Of Rights Prohibits Dual TrackingThe law’s prohibition on dual tracking a non judicial foreclosure with a loan modification or short sale is perhaps HBOR’s most significant component. Pursuant to HBOR, a mortgage servicer cannot commence foreclosure by recording a notice of default or notice of sale while a loan modification is pending or during short sale. If the mortgage servicer approves the borrower’s loan modification application, the mortgage servicer generally cannot record a notice of default, notice of sale, or proceed with a trustee’s sale so long as the borrower is in compliance with the terms of the written loan modification. Cal. Civ. Code § 2924.11. This approval must be honored by a subsequent mortgage servicer if the borrower’s loan is transferred or sold.  Cal. Civ. Code § 2924.11(g). If a notice of default or notice of sale has been recorded or a trustee’s sale has been scheduled before the loan modification application was approved, the mortgage servicer must record a rescission of the notice of default or notice of sale, or cancel the pending trustee’s sale upon the approval of the loan modification application. Cal. Civ. Code § 2924.11(d). HBOR’s no-dual tracking provisions apply until January 1, 2018, and do not apply to Smaller Residential Mortgage Lenders.

The Homeowner’s Bill Of Rights Prohibits “Robo-Signing:” In an apparent response to the practice commonly known as “robo-signing,” HBOR requires a mortgage servicer to review the foreclosure documents and ensure that the documents are accurate, complete, and supported by “competent and [reliable] evidence” concerning the borrower’s loan, loan status, and the mortgage servicer’s right to foreclose. Cal. Civ. Code § 2924.17(b). The law places the burden of compliance on the mortgage servicer. 

The Homeowner’s Bill Of Rights Creates A Private Right Of Action For Borrowers To Seek Injunctive Relief Or Monetary Damages:  If a trustee’s sale has not been recorded, a borrower may bring an action for injunctive relief to enjoin the mortgage servicer from proceeding with foreclosure until the mortgage servicer corrects a material violation of the law. Cal. Civ. Code § 2924.12. On the other hand, if a trustee’s sale has already occurred and the deed on sale has been recorded, a borrower may pursue an action for “actual economic damages.” If the court finds that the material violation was “intentional or reckless, or resulted from willful misconduct by a mortgage servicer,” the court may award damages to the borrower the greater of treble actual damages or $50,000 statutory damages. Cal. Civ. Code § 2924.12(b).

The Homeowner’s Bill Of Rights Makes Attorney’s Fees Available To The Borrower:  HBOR authorizes the court to award the prevailing borrower reasonable attorneys’ fees and costs. Cal. Civ. Code § 2924.12(i). Given the discretionary nature of HBOR’s attorneys’ fee provision, it is unclear whether the court may also award attorneys’ fees and costs to a prevailing mortgage servicer. While the idea of reciprocity of attorneys’ fees is not unusual in California, the statutory provision mandating reciprocity applies only to contract provisions containing one-sided attorneys’ fee provisions, rather than to one-sided attorneys’ fee provision contained in a statute, such as HBOR.  

The requirements imposed by HBOR are not insurmountable, but because HBOR imposes significant obligations and restrictions, financial institutions, lenders, and mortgage servicers must implement procedures to ensure compliance with the law. Loan servicing employees and individuals must be given proper training and the right tools in their daily activities for evaluating loans and dealing with borrowers. Finally, it remains to be seen whether any of the provisions of HBOR may be challenged on preemption grounds under the National Bank Act.

TILA Does Not Require a Loan Servicer to Identify the Loan’s Owner

Posted in Mortgage Foreclosures; Real Estate Settlement Procedures Act; Truth in Lending Act

The Ninth Circuit recently sided with a loan servicer who was sued by a borrower for failing to provide him with the loan owner’s information. In Gale v. First Franklin Loan Services et al., 686 F.3d 1055 (9th Cir. 2012), amended, 2012 U.S. App. LEXIS 18545 (9th Cir. Aug. 31, 2012), the Ninth Circuit held that a loan servicer is not required under the Truth in Lending Act (TILA) to disclose the owner of the loan obligation to the borrower even at the borrower’s request. The only exception is when the loan servicer is also the assignee-owner of the loan. 

The Plaintiff borrower in the case was Richard Gale. In November 2006, he refinanced his home mortgage loan with Franklin Loan Services (“First Franklin”). At the time, First Franklin was both the creditor and servicer of the loan. In June 2008, Gale lost his job, and consequently, he fell behind his mortgage payments. Seeking to renegotiate his loan, Gale sent a letter to First Franklin explaining his situation and offering solutions. In his letter, Gale also asked First Franklin for the identity of the “true owner” of his loan. First Franklin did not respond to Gale’s letter. Ultimately, Gale’s home was foreclosed when he continued to fall behind his mortgage payments. Gale subsequently sued First Franklin and others for violation of TILA, among others. The trial court dismissed the TILA claim, and the Ninth Circuit affirmed.

As it concerns the alleged violation of TILA, the issue before the Ninth Circuit was the last sentence of TILA, 15 U.S.C. section 1641(f)(2), which states, “Upon written request by the obligor, the servicer shall provide the obligor, to the best knowledge of the servicer, with the name address, and telephone number of the owner of the obligation or the master servicer of the obligation.” The Court acknowledged that at first read, this sentence seems to apply to all creditors or servicers, but the Court ultimately rejected such a sweeping interpretation of the law. Instead, the Court noted that section 1641 does not apply to servicers in general, but only to “purchasers or assignees of mortgages.” Furthermore, the Court also held the section did not apply to an assignee merely for administrative convenience, as opposed to an assignee-owner of the loan obligation. As First Franklin was the original lender and merely the servicer, the Court held that the section did not apply to it. In reaching its conclusion, the Court examined section 1641 “as a whole before focusing on paragraph (f)(2)” and found that, contrary to what section 1641(f)(2)’s text may suggest, section 1641 is limited in scope to a servicer who is “an assignee of such obligation…” The Court also noted that the section further excluded an assignee “solely for the administrative convenience of the servicer in servicing the obligation.” The Court concluded that subsection (f) must be read “in keeping with the theme of § 1641 as a whole…” 

The Gale decision does not necessarily foreclose any relief to borrowers who find themselves in the same situation as Gale. As the Ninth Circuit pointed out, the 2010 amendment to the Real Estate Settlement Procedures Act (RESPA) required that all servicers must respond to a borrower’s request for information, although such requirement only applies prospectively from 2010. There may also be state law requirements that are broader than those required under TILA. For example, beginning January 1, 2013, California’s so-called Homeowners’ Bill of Rights comes into effect, which defines a “mortgage servicer” much more broadly than TILA’s section 1641. Thus, it is critical that owners of mortgage loans, lenders, and loan servicers are aware of the various other federal and state laws that may or may not require the same sets of obligations.

National Mortgage Database Formed

Posted in Bureau of Consumer Financial Protection; Consumer Financial Protection Act; Consumer Financial Protection Agency; Consumer Financial Protection Bureau; Mortgage Foreclosures

The Consumer Financial Protection Bureau (“CFPB”) and the Federal Housing Finance Agency (FHFA”) have agreed to jointly produce a National Mortgage Database containing detailed mortgage loan information. In a press release dated November 1, 2012, the CFPB said: “The database will primarily be used to support the agencies’ policymaking and research efforts and to help regulators better understand emerging mortgage and housing market trends.”

The National Mortgage Database will include comprehensive information regarding a mortgage loan, from its origination through servicing, and will include borrower characteristics. It will include loan-level data about the mortgage, including the borrower’s credit profile, the terms of the mortgage, the property financed, and the payment history of the loan. Data will be updated monthly and will be available back to 1998. Additionally, this database fulfills an FHFA requirement under prior legislation to conduct a monthly mortgage market survey.

The database will not contain personally identifiable information, and appropriate precautions will be taken by the agencies to ensure that individual consumers cannot be identified through the database. However, the agencies will undoubtedly use the information from the database to better monitor the mortgage industry and to further develop consumer protections.

The agencies hope that the database will help them track the health of the mortgage markets and of consumers, by showing whether payments are being made on time, as well as information regarding loan modifications, foreclosures, and bankruptcies. The database will also be used to conduct surveys to understand consumer decision-making and how they shop for mortgages and deal with distressed homeownership. The agencies will also monitor the performance of various products to identify potential problems or risks. The database will allow policy makers to see how many mortgages consumers may have and how they are performing. The database will be the first comprehensive database to permit such analysis. The database will also include information about a borrower’s other debts, such as auto loans and student loans.

The agencies expect early versions of the full dataset to be complete in 2013. The agencies hope to be able to share database information with other federal agencies, academics an the public once the database is complete.

Illinois Attorney General Sues Mortgage Rescue Companies For Alleged UDAP And Other Violations

Posted in Mortgage Foreclosures; State Consumer Protection Laws

On behalf of the people of the State of Illinois, Illinois Attorney General Lisa Madigan filed five lawsuits on September 27, 2011 against a host of companies, individuals, and lawyers engaged in mortgage rescue work. The cases — People v. Exelpol Management & Consulting, Inc., People v. Loan Litigators International, LLC et al., People v. ZeTrust Legal Services, P.C., et al., People v. Wildermuth, et al.,and People v. Legal Housing & Debt Advisors, LLC, et al. — all contain similar allegations and claims under Illinois Mortgage Rescue Fraud Act (“Rescue Act”) and Consumer Fraud and Deceptive Business Practices Act.

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Illinois Appellate Court Reaffirms That Illinois Interest Act Does Not Prohibit Use of 365/360 Interest Calculation Method

Posted in Mortgage Foreclosures

In a July 12, 2011, opinion, the First District of the Illinois Appellate Court once again held that the Interest Act did not prohibit a lender from using a 365/360 basis to calculate interest, so long as the method of calculation is clearly set forth in the note. Asset Exchange II, LLC v. First Choice Bank, No. 1-10-3718 (July 12, 2011). In affirming the trial court’s dismissal of the plaintiff’s class action based on Sections 9 and 10 of the Illinois Interest Act, 815 ILCS 205/0.01 et seq., the Court made clear that none of the provisions of the Act is applicable to commercial transactions. The decision is important for commercial lenders, who have faced class action lawsuits asserting claims under the Interest Act in recent years, but the Court also reiterated its prior holding in a recent case that the Interest Act does not prohibit the use of a 365/360 method to calculate interest.

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Missouri District Court Dismisses Breach of Contract Claim Based on Use of 365/360 Interest Calculation Method

Posted in Mortgage Foreclosures

On February 8, 2011, the United States District Court for the Eastern District of Missouri rejected a plaintiff’s claim that the calculation of interest on the basis of a 360-day year breached the parties’ contract under Illinois law, in Kreisler & Kreisler, LLC v. National City Bank et al., No. 4:10-cv-00956.

In the first case interpreting RBS Citizens, N.A. v. RTG-Oak Lawn, LLC, No. 10-1729 (Ill. App. Ct. Feb. 11, 2011) (RBS), the court held that an interest calculation provision alleged to be less clear than that in RBS was sufficient to disclose to the plaintiff how interest would be calculated. This decision provides further ammunition for banks facing claims or defenses challenging the 365/360 interest-calculation method. 

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The Doctrine of Issue Preclusion Barred Claims Based Upon an Alleged Fraudulent Mortgage

Posted in Mortgage Foreclosures

In recent decisions, various courts have relied upon the Rooker-Feldman Doctrine to bar a consumer’s federal claims regarding the validity of his or her mortgage after the lender obtained a state court foreclosure judgment. See, e.g., Mohorne v. Beal Bank, S.S.B., 419 B.R. 488, 496-97 (S.D. Fla. 2009) (Altonaga, J.); Figueroa v. Merscorp., Inc., et al., Case No. 10-61296 (S.D. Fla., Jan. 31, 2011). Under the Rooker-Feldman doctrine, a party is barred from seeking appellate review in a federal district court of a judgment of a state court where the federal claims were inextricably intertwined with those in the state action. On Tuesday, March 22, 2011, the Third Circuit Court of Appeals in Kliesh v. Select Portfolio Servicing, Inc., No. 10-3175 (3d Cir., March 22, 2011), 2011 WL 989855, declined to apply the Rooker-Feldman Doctrine, but rather held that the consumer’s claims were barred based on the principles of issue preclusion. 

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Massachusetts High Court Voids Foreclosure of Securitized Mortgage

Posted in Mortgage Foreclosures

In a recent decision that has already received national publicity, the Massachusetts Supreme Judicial Court has become the first state high court to rule that mortgages securing loans that are pooled into a trust and converted into mortgage-backed securities must be specifically assigned to the foreclosing lender before the foreclosure is commenced. A discussion of the case — U.S. Bank National Association, trustee v. Antonio Ibanez (and a consolidated case, Wells Fargo Bank, N.A., as trustee v. LaRace) — follows.

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Recent Lawsuits Allege Miscommunication Regarding Loan Modification Programs

Posted in Fair Housing Act; Mortgage Foreclosures

Recently-filed complaints reflect disputes between borrowers and mortgage servicers over loan modification programs. Mortgage servicers may provide loan modifications to borrowers through their own programs. Some mortgage servicers may provide loan modifications to eligible borrowers through the Home Affordable Modification Program (“HAMP”), an Obama administration program. 

In lawsuits currently pending in the federal courts, borrowers allege miscommunication and misunderstanding over loan modification programs. For example, some plaintiffs have alleged that they relied on statements made by representatives of loan servicers that no further payments needed to be made during the loan modification process, and that their reliance on those statements caused them to become delinquent on their loan. One plaintiff has alleged that he was told that the sale of a property would be postponed because of the loan modification process, and he seeks to have the court set aside the foreclosure of that property. The loan servicers will have a chance to respond to these allegations and other complaints alleging problems with loan modification programs.