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  • OCC Issues Bulletin Regarding Temporary Extensions of SCRA Protections

    Lending

    On June 10, the OCC released Bulletin 2016-20 to inform national banks, federal savings associations, and federal branches and agencies of foreign banks (OCC-supervised institutions) of recent temporary amendments to the Servicemembers Civil Relief Act (SCRA). As previously covered in InfoBytes and as outlined in the OCC’s Bulletin, the Foreclosure Relief and Extension for Servicemembers Act 2015 extends through December 31, 2017 the SCRA provision that protects servicemembers against sale, foreclosure, or seizure of property based on a breach of a secured obligation without a court order or waiver for one year following completion of their service. The OCC’s Bulletin notes that HUD updated its “Servicemembers Civil Relief Act Notice Disclosure” (Form 92070) to reflect the temporary extensions.

    Foreclosure OCC SCRA

  • New York Court of Appeals Rules on Lien Priority in Consolidated Mortgages Case

    Lending

    On May 10, the New York Court of Appeals affirmed the lower court's decision that consolidated mortgages qualify as the first mortgage of record under Real Property Law article 9-B (the Condominium Act) when the mortgages were consolidated years prior to unpaid common charges (or charges lien) being filed. Plotch v. Citibank, N.A., No. 57, slip op. at 3 (N.Y. May 10, 2016). In this case, the plaintiff purchased a condominium unit subject to “‘[t]he first Mortgage of record against the premises’” in a foreclosure action in 2010. Prior to the plaintiff’s purchase, the defendant had entered into a consolidation agreement with the unit’s previous owner, whereby the former owner’s two separate mortgages of $54,000 and $38,000 “were consolidated ‘into a single mortgage lien’ for $92,000, which the owner and [defendant] intended to be treated as a single mortgage.” Citing Societe General v. Charles & Co. Acquisition (157 Misc 2d 643 [Sup. Ct., NY County 1993]), the plaintiff contended that the initial mortgage of $54,000 is, pursuant to Real Property Law § 339-z, the first mortgage of record and, therefore, the defendant’s common charges lien against the unit for unpaid charges are unlawful. Specifically, the plaintiff declared that “the second mortgage for $38,000 held by [the defendant] was subordinate to the subsequently recorded common charges lien under Real Property Law § 339-z and was therefore extinguished by the condominium board’s successful foreclosure action.” The defendant, however, cited various cases since Societe General in which lower courts have held that a consolidation agreement recorded prior to common charges lien being filed qualify as the first mortgage under Real Property Law § 339-z. The court held for the defendant bank because (i) there was no intervening lien at the time of consolidation; and (ii) the charges lien were filed years after the defendant filed common charges lien.

    Foreclosure

  • New York Supreme Court Reverses Lower Court's Ruling in Foreclosure Case; Observes eNote and Transfer History Sufficient under ESIGN

    Fintech

    On April 13, the New York Supreme Court, Appellate Division, Second Department issued an opinion reversing a lower court order dismissing a foreclosure action against a borrower who signed a mortgage note electronically (“eNote”). New York Community Bank v. McClendon, 2016 N.Y. Slip Op. 02790 (N.Y. Supp. April 13, 2016). In the proceedings below, the lower court had granted the borrower’s motion to dismiss the foreclosure complaint for lack of standing, accepting the argument that the plaintiff mortgagee lacked standing because it could not produce a chain of valid assignments of the eNote from the original lender to itself. In opposition to the motion to dismiss, the mortgagee had submitted, among other things, a copy of the eNote and a print out of an electronic record of the transfer history of the eNote (“Transfer History”) showing a chain of transfers from the original lender to itself. The court observed that the eNote qualified as a “Transferable Record” under Section 201 of the Electronic Signatures in Global and National Commerce Act (“ESIGN”) and that a person is in “control” of a Transferable Record if “a system employed for evidencing the transfer of interests in the transferable record reliably establishes that person as the person to which the transferable record was issued or transferred.” Citing the UCC, the court further observed that the holder of the eNote would have standing to foreclose and that any person with “control” of the eNote is its holder. After establishing this legal framework, the court concluded that the Transfer History, together with the eNote, were sufficient to establish that the plaintiff mortgagee had control of the eNote under ESIGN and therefore had standing to foreclose as the holder. According to the court, because these rules governing Transferable Records applied to the eNote, the failure of the plaintiff mortgagee to produce proof of assignment was “irrelevant” and the complaint should not have been dismissed for lack of standing.

    Foreclosure ESIGN Electronic Signatures

  • Congress Passes Bill to Extend Foreclosure Protection Element of the SCRA

    Lending

    On March 21, the U.S. House of Representatives passed S.B. 2393, which extends through 2017 the provision of the Servicemembers Civil Relief Act’s (SCRA) that protects servicemembers against foreclosure without a court order or waiver for one year following completion of their service. On January 1, 2016, the foreclosure protection provision reverted back to the period of active duty military service plus 90 days, rather than the period of active duty military service plus one year. Upon the President’s signature, the SCRA’s protection against foreclosure without a court order or waiver will return to the period of active duty military service plus one year through December 31, 2017.       

    Foreclosure Servicemembers SCRA U.S. Senate U.S. House

  • Eleventh Circuit Dismisses Plaintiff's Complaint: Assignee Not Liable under TILA for Servicer's Failure to Provide Payoff Balance

    Lending

    On March 1, the U.S. Court of Appeals for the Eleventh Circuit held that, as an assignee, Fannie Mae is not liable under TILA for a servicer’s failure to provide a borrower with a payoff statement. Evanto v. Federal Nat’l Mortg. Ass’n. No. 14-cv-61573 (11th Cir. March 1, 2016). The plaintiff alleged that, after foreclosure proceedings began, his servicer failed to provide the payoff balance of his mortgage within seven business days, as required under TILA 15 U.S.C. § 1639(g). Relying on the “plain meaning” of 15 U.S.C. § 1641(e), the court ruled that for an assignee of a creditor to be held liable under TILA, the violation must be apparent in the face of the "disclosure statement," which, according to the court, the payoff statement requested by the plaintiff was not because it is provided after consummation. The court opined that “[t]here is no way that the failure to provide a payoff balance can appear on the face of the disclosure statement . . . . we reject [the plaintiff’s] argument that we should fix a supposed ‘loophole’ in the statute.” Id. at *4.

    Notably, the court relied in part on informational statements from the CFPB's website and Black’s Law Dictionary to define “disclosure statement" under TILA.

    CFPB Foreclosure TILA

  • Massachusetts AG Announces New Consumer Advocacy and Response Division

    Consumer Finance

    On March 3, Massachusetts AG Healey announced a new Consumer Advocacy and Response Division (CARD) intended to protect Massachusetts consumers from alleged fraud, unfair business practices, and consumer abuse. The CARD staff will assist consumers with issues such as (i) auto purchasing and financing; (ii) data security and identity theft; (iii) debt collection; and (iv) foreclosure prevention. In 2015, AG Healey’s office handled more than 2,600 consumer complaint cases, resolving issues related to debt collection, auto lending, and securing refunds for disputed charges with cellular phone carriers.

    Foreclosure State Attorney General Auto Finance Debt Collection Privacy/Cyber Risk & Data Security

  • Spotlight Article: California Supreme Court Holds that Borrowers Have Standing to Challenge an Allegedly Void Assignment of the Note and Deed of Trust in an Action for Wrongful Foreclosure

    Lending

    Fredrick-LevinYesterday, the California Supreme Court held in Yvanova v. New Century Mortgage Corp, Case No. S218973 (Cal. Sup. Ct. February 18, 2016) that borrowers have standing to challenge an allegedly void assignment of a note and deed of trust in an action for wrongful foreclosure.  In reaching this decision, the Court reversed the rule followed by the overwhelming majority of California courts that borrowers lacked such standing.  The Court’s decision may have broad ramifications for lenders, investors, and servicers of California loans.

    The Court’s Holding

    In Yvanova, the borrower challenged the validity of her foreclosure on the ground that her loan was assigned into a securitized trust after the trust closing date set forth in the applicable pooling and servicing agreement, allegedly rendering the assignment void.  To date, California courts have rejected hundreds of similar claims.  In Yvanova, the Court held that “a borrower who has suffered a nonjudicial foreclosure does not lack standing to sue for wrongful foreclosure based on an allegedly void assignment merely because he or she was in default on the loan and was not a party to the challenged assignment.”  Slip. Op. at 2.  The Court’s ruling thus breathes new life into this favorite theory of the foreclosure defense bar.

    The Court’s Reasoning

    The Court acknowledged that the majority of California courts have held that borrowers do not have standing to challenge an allegedly void assignment because they are neither parties to, nor intended beneficiaries of, the assignment.  Rather than adopt the majority approach, the Court based much of its decision on Glaski v. Bank of America, 218 Cal.App.4th 1079 (2013), in which the Fifth District Court of Appeal, on substantially similar facts, held that the question of standing turned on whether the alleged defect in the assignment, if proven, would render the assignment void altogether or merely voidable.  Slip. Op. at 12.  The parties to a voidable assignment have the power to ratify the defective assignment; parties to a void assignment have no such power.  Id., at 10.  In the former case, the Court would deny standing because the borrower would be asserting interests belonging solely to the parties to the assignment: only they have the power to ratify the assignment.  Id.  In the latter case, involving an allegedly void assignment, there would be no power of ratification, and thus the borrower would not be “asserting the interests of parties to the assignment; she [would be] asserting her own interest in limiting foreclosure on her property to those with legal authority to order a foreclosure sale.”  Id., at 21.

    Potential Impact of the Court’s Decision

    Although a borrower’s standing to challenge an allegedly void assignment now appears settled under California law, the full impact of the decision will likely take some time to discern.  By recognizing standing to challenge allegedly void assignments, the Court has clearly invited a substantial amount of wrongful foreclosure litigation.  The statute of limitations for wrongful foreclosure is at least three years and, possibly longer, if a borrower can invoke the discovery rule or equitable tolling.  See Cal. Code of Civ. Proc. § 338(d).  Given the large number of securitized loans that have been foreclosed upon in California within the last several years, the number of possible claimants is potentially very large.

    It remains to be seen whether California’s trial courts will be receptive on the merits to wrongful foreclosure suits based on the now reinvigorated void-assignment theory.  There are a number of key legal and factual questions that the California Supreme Court expressly left unanswered.

    The California Supreme Court explicitly did not decide whether a transfer of a note and deed of trust into a securitized trust in violation of the trust instrument renders the assignment void or voidable under governing New York law.  Importantly, the Court acknowledged a conflict between Glaski’s construction of New York law on this issue and a decision of the United States Court of Appeals for the Second Circuit in Rajamin v. Deutsche Bank Nat’.l Trust Co., 757 F.2d 79 (2d Cir. 2014).  Slip. Op. at 27.  In Glaski, the Court of Appeal found that the alleged violation of the trust instrument, if proven, would render the assignment void.  Rajamin considered and expressly rejected Glaski’s construction of New York law.  Nevertheless, the California Supreme Court, in Yvanova, left it to California’s lower courts to determine whether to follow Glaski or Rajamin.  If the lower California courts follow Rajamin then the uptick in wrongful foreclosure cases will likely prove short-lived and muted.  Also important will be how California courts resolve similar issues under Delaware law, which, like New York law, governs many securitization trusts.  Given this split in appellate authority under New York law, certification of the question to the New York Court of Appeals may prove an efficient way to address the uncertainty created by YvanovaSee New York Court of Appeals Rule 500.27 (authorizing New York Court of Appeals to hear determinative questions of New York law in cases pending before federal courts or the highest court of another state).

    The Court also left for future development whether borrowers bringing a wrongful foreclosure action can obtain an order setting aside a completed foreclosure based on the void-assignment theory and whether borrowers will be required to allege tender of the outstanding loan balance to state a cause of action for wrongful foreclosureSlip. Op. at 9 n. 4.  Numerous California decisions hold that tender is required to set aside a completed foreclosure.  If the lower courts continue to enforce the tender requirement, then the impact of Yvanova may be lessened.

    Another significant question that no doubt will arise is whether borrowers can bring pre-foreclosure actions to enjoin ongoing nonjudicial foreclosures based on void assignment allegations.  The Court explicitly left undisturbed, as “not within the scope of review,” a lower court decision “disallowing the use of a lawsuit to preempt a nonjudicial foreclosure.”  Id., at 16–17 (citing Jenkins, 216 Cal.App.4th at 513).  However, a number of courts have carved out exceptions to the rule disallowing judicial preemption of ongoing nonjudicial foreclosure proceedings.  It remains to be seen whether Yvanova will provide an impetus to broaden these exceptions.

    Finally, under California’s Homeowner Bill of Rights, borrowers must be given notice that they are entitled to request “a copy of any assignment, if applicable, of the borrower’s mortgage or deed of trust required to demonstrate the right of the mortgage servicer to foreclose.”  Cal. Civ. Code § 2923.55(B)(iii).  Yvanova will likely inspire a substantial increase in such requests.  And that may lead to an increased number of wrongful foreclosure claims.

    What Happens Next

    Apart from preparing to defend against the expected increase in volume of wrongful foreclosure litigation, servicers and investors may wish to consider steps to reduce their exposure to Yvanova and further unfavorable developments in the law.  Depending on the volume of wrongful foreclosure litigation that Yvanova creates and whether California’s trial courts begin enjoining ongoing foreclosures based on this theory, lenders, investors, and servicers may need to consider revising their foreclosure processes to focus on possession of the note at the relevant time and thereby render irrelevant the validity of the assignment of the deed of trust.  Further, lenders, investors and servicers may wish to explore the use of estoppel certificates obtained from borrowers in loan modification or other loss mitigation relief, where permissible, to establish authority to foreclose.

    Foreclosure Fredrick Levin Loss Mitigation

  • Massachusetts AG Healey Expands Abandoned Housing Initiative

    State Issues

    On January 25, Massachusetts AG Maura Healey announced that she was expanding her Abandoned Housing Initiative (AHI) in response to an increasing number of cities and towns seeking assistance to revitalize their neighborhoods. Under the AHI, the AG’s office seeks to have delinquent owners bring their distressed and abandoned residential properties into code compliance. If the owner refuses, a court-approved receiver completes repairs on the property and receives compensation, utilizing funds from the nationwide state-federal settlement over unlawful foreclosures, once the property is sold. According to Helen Zucco, Executive Director at Chelsea Restoration Corporation, the program “gives banks an incentive to approve construction loans, allows funds to be loaned to receivers at very low interest, and creates a streamlined process for receivers to obtain the funds they need to achieve their important role in [the] process.”

    Foreclosure State Attorney General

  • FTC Announces Settlements with Alleged Mortgage Modification Scammers

    Lending

    On December 15, the FTC announced stipulated court orders banning four individuals from selling debt relief products and services. According to the FTC, the individuals “promised consumers help getting their mortgages modified, but instead stole their mortgage payments, leading some to foreclosure and bankruptcy.” The FTC’s April 2015 complaint states that the defendants targeted homeowners facing foreclosure and “engaged in a course of conduct to advertise, market, sell, provide, offer to provide, or arrange for others to provide [Mortgage Assistance Relief Services], including loan modifications.” The complaint further alleged that consumers never received modifications, lenders did not receive their trial payments, and consumers’ payments were never refunded. The court orders prohibit the individuals from engaging in the practices they respectively exploited, such as telemarketing, selling credit-related financial products and services, using aliases, and using material misrepresentations and unsubstantiated claims to sell financial products and services. Combined, the individuals will pay more than $6,250,000 in monetary judgments.

    Foreclosure FTC Enforcement Mortgage Modification

  • Florida Court Rules in Favor of Mortgagee in HOA Lien Priority Dispute

    Lending

    On December 2, a Florida court of appeals issued a decision reinforcing and clarifying the state’s lien priority law. U.S. Bank Nat’l Ass’n v. Grant, No. 4D14-979 (Fla. Dist. Ct. App., Dec. 2). At issue in the case was whether a homeowner’s association (HOA) lien on real property took priority over a mortgagee’s lien on the same property, where the mortgage was recorded prior to the association’s delinquency lien against the homeowners, but after the recording of the Declaration of Covenants and Restrictions for the HOA. The court held that the HOA lien did not take priority over the mortgage lien because, under Florida common law applicable to liens filed prior to July 1, 2007, the HOA lien could only relate back to the filing of the earlier declaration if the declaration “contain[s] specific language indicating that the lien relates back to the date of the filing of the declaration or that it otherwise takes priority over intervening mortgages.” In this case, the declaration did not contain the required language to put parties on notice of ongoing, automatic liens until the payment of periodic HOA fees. Therefore, the HOA lien did not relate back to the filing of the declaration to give the HOA lien priority over the mortgagee’s lien.

    Foreclosure

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