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Court certifies breach of contract class against bank
On January 30, the U.S. District Court for the Northern District of California certified a class of mortgage borrowers in a breach of contract suit against a national bank (defendant). In doing so, the court approved a class defined as consumers who (i) had a mortgage loan with the defendant; (ii) qualified for a modification of their loan between 2010 and 2018 “pursuant to the requirements of government-sponsored enterprises (such as Fannie Mae and Freddie Mac), the Federal Housing Administration (FHA), [or] the U.S. Department of Treasury’s Home Affordable Modification Program (HAMP)”; (iii) though they qualified, were not offered a loan modification by the defendant due to defendant’s flawed calculations of eligibility; and (iv) had their homes foreclosed upon and sold by the defendant. According to the order, the plaintiffs claimed that in 2013 the “defendant discovered a calculation error that had caused certain fees to be misstated and had resulted in incorrect mortgage modification denials,” but the problem was not fully resolved until 2018.
The court also granted the plaintiffs’ motion for leave to file a third amended complaint in order to add a plaintiff “whose property was secured by an FHA instrument.” The plaintiffs reasoned that they should have a representative for the FHA contracts as well as a representative for the GSE contracts, in case it is argued that the FHA and GSE contracts are so different that each requires its own representative.
9th Circuit affirms no jurisdiction without exhaustion of administrative remedies
On December 27, the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal of a TILA case brought by a consumer against his mortgage lender, citing lack of subject matter jurisdiction under the provisions of FIRREA that require claims involving a bank that is in receivership to be presented to the FDIC before the borrower files suit. In 2009 the consumer filed an adversary proceeding in bankruptcy court against his lender for rescission of his mortgage loan under TILA. The consumer claimed that the lender’s notice of right to cancel was defective when the loan was signed, resulting in an extended rescission period under TILA, but his suit was dismissed for lack of jurisdiction. Once again, in 2012, the district court dismissed the consumer’s TILA suit after finding that the consumer had not exhausted his administrative remedies with the FDIC before filing suit.
On appeal, the three-judge panel rejected the consumer’s claim that his lender was not placed into receivership until after his loan was sold, and therefore he did not have to exhaust his administrative remedies before filing suit. The panel subscribed to the Fourth Circuit’s interpretation of the exhaustion requirement, stating that “even where an asset never passes through the FDIC’s receivership estate, the FDIC should assess the claim first.” According to the opinion, the FIRREA requirement that the consumer exhaust his remedies with the FDIC applied to this action because the panel determined that (i) the consumer’s claim was “susceptible of resolution under the FIRREA claims process”; (ii) the consumer’s claim was related to an act or omission of the lender; and (iii) the FDIC, which “was not required to have possessed the loan before determining a claim” had been appointed as receiver for that lender, stripping the appellate court of subject matter jurisdiction until after the FDIC determined his claim.
California Court of Appeal: Borrowers allowed opportunity to cure default on missed loan modification payments
On December 16, the California Court of Appeal for the First Appellate District allowed borrowers who missed payments on their modified mortgage loan to reinstate the loan and avoid foreclosure by paying the amount in default under the terms of the modified loan, rather than the amount that would have been in default under the original loan terms. According to the court, the borrowers missed four monthly payments on their modified loan, which had deferred certain amounts due on the original loan (including principal). The loan-modification agreement stated that any future default would allow the lender to void the loan modification and enforce the original loan terms. According to the lender, in order to reinstate their account and avoid foreclosure, the borrowers would have to pay the amount that would have been past due on the original loan principal before the loan was modified, plus the four missed monthly payments, associated late charges, and fees and costs. The borrowers filed suit, alleging violations of California Civil Code §§ 2924c and 2953. Section 2924c overrides typical mortgage acceleration clauses to give the borrower the right to cure a default by paying the amount in default rather than the entire principal balance, plus specified fees and expenses. Section 2953 provides that the right of reinstatement created by § 2924c cannot be waived in “[a]ny express agreement made or entered into by a borrower at the time of or in connection with the making of or renewing of any loan secured by a deed of trust, mortgage, or other instrument creating a lien on real property.”
The Court of Appeal reversed the trial court’s grant of summary judgment to the lender. It held that the loan modification at issue was “appropriately viewed as the making or renewal of a loan secured by a deed of trust . . . and is thus subject to the anti-waiver provisions of Section 2953.” Therefore, the court held that the lender had failed to show that the borrowers “could not prevail on their claim” that the lender violated § 2924c and was accordingly not entitled to summary judgment, and remanded the matter to the trial court.
Written request for HAMP assistance resets foreclosures limitations
On December 13, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s grant of summary judgement in favor of a bank and mortgage servicer defendants in an action brought by a consumer to prevent foreclosure of his property. According to the unpublished opinion, in 2016, the consumer, who was struggling with his mortgage payments, submitted loan modification requests on three occasions. In each request, the consumer provided written acknowledgment of the original debt and expressed his desire to pay in order to keep his property. The consumer asserted that Washington state law and the FDCPA prohibited the defendants from instituting foreclosure proceedings on his mortgage because the six-year statute of limitations for filing for foreclosure had expired. On appeal, the three judge panel rejected the consumer’s argument, determining that the limitation on filing for foreclosure had not run, explaining that because the consumer had not communicated to defendants “an intent not to pay,” and each of the modification requests acknowledged the debt in writing, the foreclosure statute of limitations period was restarted each of the three times he submitted his loan modification requests.
District Court orders millions in restitution and civil penalties against two foreclosure relief companies
On November 4, the U.S. District Court for the Western District of Wisconsin ordered restitution and disgorgement, civil penalties, and permanent injunctive relief in an action brought by the CFPB against two former foreclosure relief companies and their principals (collectively, “defendants”) for violations of Regulation O. As previously covered by InfoBytes, in 2014, the CFPB, FTC, and 15 state authorities took action against foreclosure relief companies and associated individuals, including the defendants, alleging the use of deceptive marketing tactics to obtain business from distressed borrowers. The CFPB filed three suits, the FTC filed six, and the state authorities collectively initiated 32 actions. Specifically, the CFPB alleged that the companies and individuals (i) collected fees before obtaining a loan modification; (ii) inflated success rates and likelihood of obtaining a modification; (iii) led borrowers to believe they would receive legal representation; and (iv) made false promises about loan modifications to consumers, in violation of Regulation O, formerly known as the Mortgage Assistance Relief Services (MARS) Rule. Among other things, the court order holds company one and its principals jointly and severally liable for over $18 million in restitution, while company two and its same principals are jointly and severally liable for nearly $3 million in restitution. Additionally, the court ordered civil penalties totaling over $37 million against company two and four principals.
OCC fines national bank $30 million for OREO violations
On October 11, the OCC announced that a national bank has agreed to pay a $30 million civil money penalty to resolve allegations relating to the holding period of other real estate owned (OREO). According to the OCC’s consent order, the bank violated the statutory holding period for OREO. (See previous InfoBytes coverage on OCC OREO regulations here.) The OCC asserted that the bank’s processes and controls for identifying and monitoring the OREO holding period were deficient, and following an investigation it determined the bank allegedly “failed to meet its commitment to implement corrective actions, resulting in additional violations.” While the OCC noted that it will continue to monitor the bank’s corrective actions, it determined that the bank’s implementation of effective policies and procedures to ensure OREO compliance over the last 12 months has “significantly reduced its inventory of OREO assets.”
CFPB files deceptive and abusive allegations against foreclosure relief services company and principals
On September 6, the CFPB announced a complaint filed in the U.S. District Court for the Central District of California against a foreclosure relief services company, along with the company’s president/CEO (defendants), for allegedly engaging in deceptive and abusive acts and practices in connection with the marketing and sale of purported financial-advisory and mortgage-assistance-relief services to consumers. According to the complaint, since 2014 the defendants allegedly violated the Consumer Financial Protection Act (CFPA) and Regulation O by making deceptive and unsubstantiated representations about the efficacy and material aspects of its mortgage assistance relief services, as well as making misleading or false claims about the experience and qualifications of its employees. Additionally, the Bureau alleged the defendants’ representations about their services constituted abusive acts and practices because, among other things, consumers “generally did not understand and were not in a position to evaluate the accuracy of [the defendants’] marketing representations or the quality of the mortgage-assistance-relief services that [the defendants] sold.” Moreover, the Bureau claimed the defendants further violated Regulation O by charging consumers advance fees before rendering services.
In addition, the Bureau entered a proposed stipulated final judgment and order against the company’s principal auditor for providing “substantial assistance in furtherance of [the defendants’] unlawful conduct” in violation of the CFPA and Regulation O. The proposed judgment imposes a $493,403.04 civil penalty, of which all but $5,000 is suspended due to the auditor’s limited ability to pay. The auditor is also permanently banned from providing mortgage assistance relief services or consumer financial products and services.
Conn. Supreme Court reverses foreclosure based on bank misconduct
On August 13, the Connecticut Supreme Court reversed the appellate court’s judgment, concluding a borrower’s special defenses and counterclaims raised against a bank during a foreclosure action “bore a sufficient connection to the enforcement of the note or the mortgage.” According to the opinion, the bank sought to foreclose on real property owned by the borrower, and during that proceeding, the borrower and loan servicer began loan modification negotiations. The borrower contacted the Connecticut Department of Banking, which intervened on his behalf in the negotiations, but the bank subsequently increased the mortgage payment and the parties were unable to reach an agreement. The borrower asserted special defenses and counterclaims, which included, among other things, that the bank allegedly engaged in conduct that increased the borrowers overall indebtedness and caused the borrower to “incur costs that impeded his ability to cure the default, and reneged on loan modifications.” The trial court rendered a judgment of strict foreclosure, which the appellate court affirmed.
On appeal, the Supreme Court held the appellate court incorrectly concluded the borrower’s allegations did not provide a legally sufficient basis for those defenses and counterclaims. The Court noted that the borrower’s allegations—that the bank “engaged in a pattern of misrepresentation and delay in postdefault loan modification negotiations before and after initiating a foreclosure action,” which added to the borrower’s debt and hampered his ability to avoid foreclosure—involved misconduct that “bore a sufficient connection to the enforcement of the note or the mortgage.” To the extent the intervention of the Department of Banking actually resulted in a binding loan modification, the potential breach of such agreement would also “provide a legally sufficient basis for special defenses in the foreclosure action.” Therefore, the Court reversed the appellate judgment upholding the strict foreclosure.
New York increases homeowner safeguards, closes loopholes to prevent deed fraud and mortgage scams
On August 14, the New York governor signed a package of bills intended to increase consumer homeowner protections. According to a press release issued by the governor, the three measures enact homeowner safeguards and close loopholes to prevent deed fraud and mortgage scams.
- A 92 imposes obligations on banks or financial institutions that sell or transfer a mortgage after a borrower has applied for a loan modification. Specifically, the law requires the original holder of the loan to provide the borrower with a list of all modification application documents provided to the buyer or transferee of the mortgage. The measure also requires the new mortgage servicer to honor the terms and conditions of a loan modification that was approved by the original servicer. The act takes effect in 90 days.
- A 1800 requires servicers of vacant or abandoned residential properties to continue to pay homeowners’ association fees or cooperative fees on properties in the state to ensure they do not become dilapidated before a foreclosure is finalized. The act takes effect immediately.
- A 5615 amends state law related to distressed home loans to extend consumer protections for homes in default and foreclosure by, among other things, (i) providing homeowners additional time to cancel a covered contract with a purchaser; (ii) preventing distressed property consultants from inducing the consumer to transfer the deed to the consultant or anyone else; and (iii) allowing consumers to void contracts, deeds, or other agreements material to the consumer’s property where an individual was convicted of or pled guilty to making false statements in connection with that agreement. The act takes effect immediately.
1st Circuit asks Massachusetts high court to resolve foreclosure question
On July 29, the U.S. Court of Appeals for the 1st Circuit certified to the Massachusetts Supreme Judicial Court the question of whether a national bank’s foreclosure notice was valid under Massachusetts law. According to the order, the appellate court granted the bank an en banc rehearing of its February decision, which concluded that the bank’s foreclosure notice was defective and therefore, it could not properly foreclose the mortgage. The court had reasoned that the notice, which stated that the homeowners “could avoid foreclosure if, but only if, the [homeowners] paid the balance due on or before the specified foreclosure date,” was defective because the mortgage required the homeowners to pay the amount at least five days before the foreclosure date. In its petition for rehearing en banc, the bank argued that a Massachusetts state banking regulation required it to use the specific language it had in the notice and that the panel erred in its reading of existing state court precedent. The appellate court noted that the position is debatable and that in a diversity jurisdiction action the court “cannot properly overturn governing state precedent.” Therefore, the appellate court withdrew its earlier opinion, vacated the judgment, and certified to the Massachusetts Supreme Judicial Court the question of whether the statement in the foreclosure notice would render the notice inaccurate or deceptive, voiding the subsequent foreclosure sale under Massachusetts law.