October 13, 2014

by Benjamin W. Hopkins
Petosa, Petosa & Boecker, L.L.P. – USFN Member (Iowa)

On September 17, 2014, the Iowa Court of Appeals released a decision resolving a long, simmering issue concerning the state’s foreclosure judgment statute of limitation. In Kobal v. Wells Fargo Bank, N.A., Iowa Ct. App. No. 13-1926, the court unequivocally concluded that the two-year statute of limitation in Iowa Code Section 615.1 applies only to the foreclosure judgment, not the underlying mortgage.

The case involved a foreclosure judgment entered in 2008. An execution sale was not held within the two-year limitation period and, thereafter, the mortgagor filed an action to quiet title. The mortgagor contended the provision in section 615.1 that “After the expiration of … two years from … entry of judgment … all liens shall be extinguished,” rendered both the judgment and the underlying mortgage unenforceable. The court disagreed, finding such an interpretation wholly inconsistent with the language and context of Iowa Chapter 615.

The mortgagor has filed a petition for rehearing and, in any case, the issue will not be fully resolved until the Iowa Supreme Court weighs in on the matter. In the meantime, Kobal offers some comfort that engaging in loss mitigation efforts, after entry of a foreclosure judgment, will not expose the investor to risk that — should two years pass — its collateral will be lost.

© Copyright 2014 USFN. All rights reserved.
October e-Update

October 13, 2014

by Orin J. Kipp
Wilford, Geske & Cook, P.A. – USFN Member (Michigan)

While many circuits have previously ruled on the ability of a Chapter 13 debtor to strip the lien of a wholly unsecured junior creditor, the Eighth Circuit had yet to officially join the majority. It had come close, in In re Fisette, 455 B.R. 177 (B.A.P. 8th Cir. 2011), when the Minnesota trustee appealed a BAP ruling allowing such treatment. However, the Eighth Circuit did not rule on the lien-strip issue in Fisette due to procedural deficiencies in the matter. As such, the Circuit remained in limbo regarding this hot topic because of the non-binding nature of the BAP decision in Fisette. More recently, the issue has been adjudicated with finality, as In re Schmidt was decided in late August (No. 13-2447).

Case Background: In 2012, the Schmidts filed a Chapter 13 bankruptcy petition. In November 2012, they filed a motion to value seeking: (1) a determination that there was no equity in their home to support a third priority mortgage; (2) that the mortgagee’s lien be reclassified as a non-priority unsecured claim; and (3) that the lien be avoided upon successful completion of their Chapter 13 plan. The bankruptcy court, relying on Fisette, ruled in favor of the debtors. The mortgagee appealed to the District Court, which affirmed. An appeal to the Eighth Circuit followed.

The Eighth Circuit focused on the interplay between 11 U.S.C. 506(a)(1) and 11 U.S.C. 1322(b)(2), ruling that under Bankruptcy Code section 506(a)(1), a creditor’s under-secured claim is treated as a secured claim up to the value of the creditor’s interest in the collateral. The excess debt is treated as an unsecured claim. Moving then to section 1322(b)(2), the court opined that the dividing line drawn by this section runs between the lienholder whose security interest in the homestead property has some “value,” and the lienholder whose security interest is valueless. The Circuit distinguished the Supreme Court’s decision in Nobleman v. American Savings Bank, 508 U.S. 324 (1993), in that the creditor’s claim in Nobleman was partially secured, and the focus was based on whether section 1322 allows bifurcation of a partially secured claim and stripping the lien from the unsecured portion of that claim. In Schmidt, however, the creditor’s claim was wholly unsecured. As such, the Eighth Circuit held that, based upon the wholly unsecured nature of the creditor’s claim, the anti-modification language contained in section 1322 did not apply and the lien could be stripped upon successful completion of the Chapter 13 plan.

While this decision is not entirely a surprise, as each circuit that has addressed the issue has reached the same conclusion, it nonetheless provides yet another hurdle for lenders and servicers to overcome in bankruptcy proceedings. It is important for lienholders to vigilantly monitor bankruptcy cases in order to be prepared to timely oppose such a motion if there is a question as to the value of the property and the amount of equity, if any. (The Eighth Circuit is comprised of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.)

© Copyright 2014 USFN. All rights reserved.
October e-Update

October 13, 2014

by Linda J. St. Pierre
Hunt Leibert — USFN Member (Connecticut)

The U.S. Bankruptcy Court for the District of Connecticut has ruled on an issue of first impression that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) did not eliminate the absolute priority rule in individual Chapter 11 cases. The recent decision stems from a contested confirmation of a single Chapter 11 plan of reorganization in two separate, but jointly-administered, Chapter 11 bankruptcy cases: In re Lucarelli, Case No. 13-30350, and In re Lucarelli’s Executive Answering Service, LLC, (LEAS), Case No. 13-30443.

In the individual case, the debtors sought to retain ownership interests in LEAS, while unsecured creditors would not be paid in full. Confirmation of the individual case was met with an objection by one of the unsecured creditors who was not being paid in full under the plan, asserting a violation of the absolute priority rule. Unless unsecured creditors were paid in full, the absolute priority rule would effectively prevent confirmation of the individual case.

The court followed the analysis taken in In re Maharaj, 681 F.3d at 560, and said that it “must determine the meaning of the Congressional language ‘property included in the estate under section 1115’ found in § 1129(b)(2)(B)(ii) and ‘property of the estate includes, in addition to the property specified in section 541’ found in 1115.” The court’s review wavered on whether the court should adopt, what has otherwise become known as, the “narrow view” or, alternatively, opt for the “broad view.”

Having determined that the statutes held ambiguous, competing interpretations, and having further noted that the canon of statutory construction is a presumption against implied repeal, the court chose to take the narrow view (given adoption of the broad view would amount to an implied repeal of the absolute priority rule in individual Chapter 11 cases). The court stated that “the ambiguity of the statutes, the established canon disfavoring implied repeal, and the lack of any useful legislative history” left no alternative but to adopt the narrow view. Effectively, this view holds that the absolute priority rule applies in individual Chapter 11 cases. Consequently, an individual debtor whose liabilities exceed the Chapter 13 debt limits, and whose creditors will not consent to less than full payment of their claims, is required to undergo the functional equivalent of a liquidation.

In its final remarks, the court in Lucarelli noted that the adoption of the narrow view would serve to make Chapter 11 reorganization far less attractive to individual debtors and would make confirmation of a nonconsensual plan virtually impossible.

The Lucarelli decision provides a powerful tool to many creditors in individual Chapter 11 cases. Servicers should consult with their local counsel to determine whether a plan objection based upon an absolute priority rule violation is viable.

Editor’s Note: The author’s firm was appearing counsel in the Lucarelli case.

© Copyright 2014 USFN. All rights reserved.
October e-Update

August 29, 2014

by Santo Longo
Bendett & McHugh, PC – USFN Member (Connecticut, Maine, Vermont)

On July 3, 2014, the Maine Supreme Judicial Court issued its opinion in Bank of America v. Greenleaf, 2014 ME 89. In its decision, the court clarified the standing requirements in Maine. In addition to being the one entitled to enforce the note, the plaintiff also must be the “owner” of the mortgage. This ownership requirement is not described in, or required by, the state statutes. However, in reading the line of Supreme Judicial Court decisions leading up to Greenleaf, it can be discerned that one becomes an “owner” of a mortgage either by being the original mortgagee or by receiving a valid assignment of mortgage from the original mortgagee.

The trial court in Greenleaf had entered a foreclosure judgment on behalf of Bank of America. The borrowers appealed, claiming, among other things, that Bank of America did not have standing to foreclose because the only assignment introduced into evidence was from Mortgage Electronic Registration Systems, Inc. (MERS), as nominee for Residential Mortgage Services, Inc. (RMS), to BAC Home Loans Servicing, LP f/k/a Countrywide Home Loans Servicing, LP — which thereafter merged into Bank of America. There was no assignment of mortgage from RMS. The mortgage also contained the following language in bold and all capitals “FOR PURPOSES OF RECORDING THIS MORTGAGE, MERS IS THE MORTGAGEE OF RECORD.”

The court, seemingly attracted to the bolded language, seized on that language to find that MERS only had the right to record and was never a mortgagee under Maine law. The court referenced, but summarily disregarded, other persuasive provisions of the mortgage that would have bolstered claims that MERS did have the rights of a traditional mortgagee¹. The court found that “the mortgage conveyed to MERS only the right to record the mortgage as nominee for the lender, RMS” and “when MERS then assigned its interest in the mortgage to BAC, it granted to BAC only what MERS possessed — the right to record the mortgage.” The court also noted that there was “no evidence in the record purporting to demonstrate that MERS acquired any authority with respect to Greenleaf’s mortgage by any means other than that defined in the mortgage itself.” As a result, the court concluded that since BAC only acquired the right to record the mortgage, it never became the “owner” of the mortgage, and Bank of America, as successor to BAC, did not have standing to foreclose.

Since Greenleaf, foreclosures in Maine on MERS mortgages have largely halted. MERS has issued a directive to its members not to obtain assignments from the original lender. Fidelity National Financial group of title companies has issued underwriting guidelines that require an assignment from the lender before a title policy will be issued without an exception. First American’s underwriting guidelines also require an assignment of mortgage from MERS and an assignment of mortgage from the original lender or other evidence (satisfactory to First American) that MERS had the authority to assign the mortgage and not just the right to record the mortgage. Obtaining the assignments from the original lenders will be impossible in many instances because many of the lenders are out of business. However, there are some that are still in business, and some servicers have powers of attorney from their correspondent lenders and could therefore execute assignments on the lenders’ behalf.

Other than obtaining assignments from the lenders, there have been discussions regarding introducing into evidence the MERS® System Rules of Membership and the current servicer’s MERS® Membership Application. These two documents, together with the MERS® Procedures, constitute the MERS® Membership Agreement as defined in the glossary of the current MERS® System Rules of Membership. The problem with this proposal is that the current servicer’s membership application is not relevant to the original lender’s application, and the current servicer cannot use its application to prove to the court what the original lender’s application stated. Also, the servicer may not know what version of the MERS® System Rules of Membership was in effect at the time the mortgage originated, and the court would likely preclude any of this testimony from the servicer.

Another proposal is to bring a quiet title or declaratory judgment action against the original lender before commencing the foreclosure action. There is Maine precedent that if the note holder and the mortgagee are not the same person, the note holder holds equitable title and the mortgagee holds legal title and further holds the mortgage in trust for the note holder. In equity, therefore, the note holder has the better title. Once a quiet title or declaratory judgment action results in a judgment in favor of the note holder, and that judgment has been recorded, the foreclosure could then be commenced.

As if the ruling concerning the MERS assignment was not bad enough, the court in Greenleaf also interpreted the Maine demand letter statute in a way that contradicted Maine practice. The court stated that the amount needed to cure the default must be fixed for the entire cure period, despite the fact that one or two additional monthly payments will come due if the borrower tenders the cure at the end of the 35-day cure period. Thus, in such an instance, the borrower will have “cured” the default but may still be one or two payments in arrears. Because most servicers’ demand letters were non-compliant with this new statutory interpretation, and since the foreclosure judges are, by rule, precluded from entering judgment unless they determine that the statutory demand letter requirements have been “strictly performed,” it is anticipated that many pending cases will be dismissed. In such a situation, the loan will need to be re-demanded, and after the new demand expires, the foreclosure will need to be recommenced.

Lastly, the Supreme Judicial Court raised the bar for the qualifications of a witness used to introduce business records. The court required that the witness be “intimately involved in the daily operation of the business” and that witness testimony show the first-hand nature of his or her knowledge of the servicer’s records. The court also established that the witness would need to testify as to how the servicer’s payment records are created, checked for accuracy, and accessed, and that the witness’s review of the records showed that the proper processes for creating, checking for accuracy, and accessing the records were followed for the loan in question. Thus, in order to obtain judgment (by motion or by trial), the proper foundation will need to be laid or the court may either dismiss the case (with or without prejudice) or enter judgment, with costs, for the defendant.

Conclusion
While the Greenleaf case has certainly revolutionized Maine foreclosure practice, significant questions remain open regarding how best to proceed to foreclosure, particularly in cases involving MERS and MERS assignments.

© Copyright 2014 USFN. All rights reserved.
September e-Update


¹For example, the court referenced the following language: “[Borrowers] mortgage, grant and convey the Property to MERS (solely as nominee for Lender and Lender’s successors and assigns), with mortgage covenants, subject to the terms of this Security Instrument, to have and to hold all of the Property to MERS (solely as nominee for Lender and Lender’s successors and assigns) and to its successors and assigns, forever … [Borrowers] understand and agree that MERS holds only legal title to the rights granted by [Borrowers] in this Security instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right: (A) to exercise any or all of those rights, including, but not limited to, the right to foreclose and sell the Property; and (B) to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument ... [Borrowers grant and mortgage to MERS (solely as nominee for Lender and Lender’s successors in interest) the property described [below

August 29, 2014

by Sandra A. Brown
Little, Bradley & Nesbitt, P.A. – USFN Member (New Mexico)

On February 13, 2014, the New Mexico Supreme Court changed the landscape of the foreclosure map in New Mexico, by specifying when and how lenders need to establish standing to foreclose, and by providing further guidance on the New Mexico Home Loan Protection Act. [Bank of New York as Trustee for Popular Financial Services Mortgage/Pass Through Certificate Series # 2006 v. Romero, 2014-NMSC-007, 320 P.3d 1].

Romero presented the court with an intriguing and rare set of facts. The borrowers had signed a promissory note to refinance their home with Equity One, Inc. Two years later, Bank of New York proceeded to foreclosure, with a note attached to its complaint lacking any indorsements. The original note admitted into evidence at trial contained two indorsements: an indorsement to bearer from Equity One, and a special indorsement from Equity One to JPMorgan Chase. A witness for the current servicer of the loan testified at trial that his records indicated that the note had been transferred to the Bank of New York based upon a pooling and servicing agreement (which was not entered into evidence at trial).

The Supreme Court held that the lack of standing is a potential jurisdictional defect, which may not be waived, and may be raised at any time, even for the first time by the Supreme Court. The court further held that a lender is required to demonstrate, under the New Mexico Uniform Commercial Code, that it has standing to bring a foreclosure action at the time it files suit.

In Romero, the court determined that the explanation provided by the lender as to the indorsements contained on the original note was not sufficient to establish standing, as the indorsements were conflicting. The court found that without dates establishing when the conflicting indorsements were executed, it could not determine whether the indorsement to bearer or the special indorsement should control. The court further opined that Bank of New York could not establish itself as the holder of the note simply by possession of it, and that the court would not consider the fact that no one else was attempting to claim possession of the note as supporting Bank of New York’s status as note holder. Since this decision, the New Mexico Court of Appeals has issued subsequent decisions supporting the Supreme Court’s ruling, recognizing that a lender must be able to establish its standing at the time of the filing of its complaint. See Deutsche Bank National Trust Co. v. Beneficial N.M., 2014-NMCA-__, No. 31,503, 2014 WL 1819300; Bank of New York Mellon v. Lopes, 2014-NMCA-__, No. 32,310, 2014 WL 3670094.

Even though it noted that this issue was moot in the present case, the court also held that the New Mexico Home Loan Protection Act is not preempted by federal law, and that the ability of a borrower to have a reasonable chance of repaying a mortgage loan must be a factor in determining whether a “reasonable, tangible net benefit” was conveyed to the borrower, so as not to violate the anti-flipping provisions of the statute. See NMSA 58-21A-4(B) 2003. In Romero, the court found that such a benefit was not conveyed, despite the $43,000 that the borrowers received from the refinance, because the lender did not adequately consider the borrowers’ ability to repay the loan and relied on their self-reported income.

© Copyright 2014 USFN. All rights reserved.
September e-Update

August 29, 2014

by Holly Smith
South & Associates, P.C. – USFN Member (Kansas, Missouri)

There is a split of authority among the circuits as to whether or not a debtor must articulate a dispute in writing under the validation of debts section of the Fair Debt Collection Practices Act (FDCPA), specifically 15 USC 1692g(a)(3). This is certainly a topic for servicers to monitor because of the strict liability penalties imposed by the FDCPA.

15 USC 1692g states:

(a) Within five days after the initial communication with a consumer in connection with the collection of any debt, a debt collector shall, unless the following information is contained in the initial communication or the consumer has paid the debt, send the consumer a written notice containing —

(1) the amount of the debt;
(2) the name of the creditor to whom the debt is owed;
(3) a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector;
(4) a statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of the judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; and
(5) a statement that, upon the consumer’s written request within the thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.

Third Circuit — In 1991, the Third Circuit (comprised of Delaware, New Jersey, Pennsylvania, and the Virgin Islands) issued a decision that a consumer debtor must voice a dispute in writing that contests the validity of the debt, Graziano v. Harrison, 950 F.2d 107 (3d Cir. 1991). The Graziano opinion states: “that reading 1692g(a)(3) not to impose a writing requirement would result in an incoherent system in light of the explicit writing requirements stated in sections 1692g(a)(4)-(5) and 1692g(b).” Id. The court also concluded that written statements create a record of the dispute.

Ninth Circuit — Several years later, in 2005, the Ninth Circuit (comprised of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Guam, and Northern Mariana Islands) issued an opinion regarding 15 USC 1692g(a)(3) that the dispute need not be expressed in writing. Camacho v. Bridgeport Financial, Inc., 430 F.3d 1078 (9th Cir. 2005). The court recited four main reasons in its decision: (1) there are explicit contrasting writing requirements in the statute; (2) the statute provides for other protections in event of dispute that only depend on a dispute and not whether there was a prior writing; (3) the legislative purpose of allowing debtors to challenge the initial communication is furthered by permitting oral objections; and (4) reading the statute to conclude that some rights are triggered by oral disputes and others require a written statement would not mislead consumers.

Second Circuit — In May 2013, the Second Circuit (comprised of Connecticut, New York, and Vermont) decided a case, also based on 15 USC 1692g, with similar facts to the two cases referenced above. The Second Circuit decision agreed with the reasoning of the Ninth Circuit, holding that a dispute brought under 15 USC 1692g(a)(3) need not be in writing. Stating in relevant part, “the right to dispute a debt is the most fundamental of those set forth in 1692g(a) and it was reasonable to ensure that it could be exercised by consumer debtors who may have some difficulty with making a timely written challenge.” Hooks v. Forman, Holt, Eliades & Ravin, LLC, 717 F.3d 282 (2d Cir. 2013).

Conclusion
Consumer disputes are becoming increasingly common and although the cases cited here pertain to a very specific portion of the FDCPA, it is a part of the FDCPA that should never be ignored. Most importantly, because of the current split among the circuits, these decisions should be watched closely in all jurisdictions.

© Copyright 2014 USFN. All rights reserved.
September e-Update

August 29, 2014

by Robert H. King
Rosicki, Rosicki & Associates, P.C. – USFN Member (New York)

While we postulate about the debt collection rules from the federal Consumer Financial Protection Bureau (CFPB), on the state level, the New York State Department of Financial Services (DFS) closed the comment period for its revised proposed regulations on the debt collection industry, targeting non-originating debt collectors which includes servicers. This is the DFS’s second set of proposed rules to regulate the debt collection and servicing industry since July 2013.

Original creditors and their subsidiaries, affiliates, and employees are exempt. Attorneys acting in connection with a pending legal action to collect debt on behalf of a client, and organizations that provide non-profit credit counseling and debt liquidation, are exempt as well.

Statute of Limitations — Of particular interest for servicers operating in the New York area is a provision relating to loans that may be close to reaching the statute of limitations. The new rule will require a servicer to develop reasonable procedures for determining if the loan is subject to an expiring statute of limitations. If the servicer knows or has reason to know the statute of limitations may have expired, the servicer would be required to send a notice to the borrower disclosing information warning the borrower about re-affirmation of the debt before they make a payment. The notice must also include a statement informing the borrower that a lawsuit commenced on expired debt violates the Fair Debt Collection Practices Act, 15 U.S.C.§ 1692, in addition to other specific disclosures. An acceptable form of the notice can be found within the body of the regulations.

In addition, the revised proposed rules set forth debt validation requirements and procedures, or what the DFS calls requests for substantiation. Under the proposed rule, whenever the borrower makes an initial oral or written request to validate the debt, the servicer must provide information as to how to request substantiation of the debt; there are deadlines for providing responses to those requests. If the debt was charged-off, meaning “… the accounting action taken by an original creditor to remove a financial obligation from its financial statements by treating it as a loss or expense …” the servicer must respond to the request within 60 days of receipt and must stop collection activities until validation is complete.

Rounding out the rules are requirements that will apply to situations when a debt payment schedule or other agreement to settle the debt is agreed upon, arguably including loan modification agreements. In those situations, the servicer is required to send written confirmation of the new payment schedule or agreement to settle the debt, and include the material terms, conditions, and a prescribed notice that the borrowers are liable for the new debt along with a list of income not subject to further collection. Further, the proposed rules impose a restriction on contacting borrowers by electronic mail without first obtaining the borrower’s consent to communicate in that manner.

Tellingly, the proposed rules fail to give any statement of statutory authority for DFS to promulgate these rules and enforcement provisions and penalties for non-compliance are not addressed. Servicers will need to institute processes to assess their New York portfolios to comply with these regulations, as well as to reconcile those processes with developing federal and state laws.

© Copyright 2014 USFN. All rights reserved.
September e-Update

August 29, 2014

by James Pocklington
Hunt Leibert – USFN Member (Connecticut)

Connecticut is a judicial foreclosure state with two forms of foreclosure. While the majority of foreclosures in the state go through the strict foreclosure process, when there is either equity in the property or the United States is a party, the court will order a judicial sale. Connecticut’s judicial sales are conducted by a “Committee for Sale,” an attorney appointed by the court to act as the agent of the court. Committees are bound be a number of standing orders affecting their responsibilities, expectations, timelines, and even permissible reimbursement.

In the recent judicial decision, Equity One, Inc. v. Shivers (150 Conn. App. 745l, 2014 Conn. App. LEXIS 254), which may be familiar to readers through prior decisions on standing, Connecticut’s Appellate Court reversed a lower court ruling that had awarded fees and costs to a committee awarded during a bankruptcy stay. This has created a substantial delay in court-agent reimbursement and a public policy concern.

As the reader is no doubt aware, the automatic stay provision in 11 U.S.C. § 362(a) prevents a judicial sale from proceeding. Historically, committees would bring a motion for approval of their interim fees and costs to be reimbursed for their expenditures as an agent of the court. Until Shivers, these fees and costs would be approved as, pursuant to Conn. Gen. Stat. 49-25, fees and costs for the cancelled sale are to be borne by the foreclosing plaintiff.

In Shivers, the court interpreted 49-25’s provision that says expenses “be taxed with the costs of the case” as the type of indemnification discussed in In re Metal Center, 31 B.R. 462, and determined that awarding interim fees for a cancelled sale, even if they are statutorily required to be paid by the plaintiff, to be action against the debtor in violation of the stay.

The impact of Shivers is still being felt. Connecticut’s committees for sale are volunteer appointment agents of the court, not dissimilar from guardians ad litem, and are now being forced to wait extended periods before being reimbursed for expenses incurred. While it is unclear if there will be a judicial or legislative response to this new interpretation, it may also impact the willingness of qualified applicants to volunteer, if they may not see a repayment of their expenses for significant time.

© Copyright 2014 USFN. All rights reserved.
September e-Update

August 29, 2014

by Joseph A. Camillo, Jr.
Shechtman Halperin Savage, LLP – USFN Member (Rhode Island)

The foreclosure crisis has led many states to adopt mediation programs to improve communications between borrowers and lenders and achieve alternatives to foreclosure while stabilizing communities. Previously, Rhode Island enacted mediation legislation superseding several local ordinances. On July 8, 2014, the governor signed legislation amending the statute to clarify that process. It takes effect October 6, 2014, and Banking Regulation 5 will also be amended to incorporate these changes.

The new amendments provide significant changes to the 2013 statute. Specifically, the new law will mandate that mortgagees provide mediation notices to mortgagors prior to initiating foreclosure (subject to the exemptions), regardless of whether the date of delinquency is less than 120 days prior to September 13, 2013. Also, the previous exemptions from compliance were expanded to include reverse mortgages and non-first mortgages.

Furthermore, certain statutory definitions were clarified. Of particular significance is the definition of “mortgagor,” which was amended to eliminate non-borrower owners except to the extent they hold record title as an heir or devisee of a borrower and live in the property as their principal residence. This includes a representative of the estate appointed with authority to participate in a mediation conference. Additionally, “mortgage” was amended to mean a first-lien mortgage. Finally, “mortgagee” was amended to include agents or employees of a mortgagee, including a mortgage servicer acting on its behalf.

Previously, notice had to be sent by both certified and first-class mail. The new amendments change that requirement by simply providing that written notice to the mortgagor must be sent. The new amendments also eliminate the requirement for the plat and lot number to be included on the mediation notice.

One of the most significant changes is that R.I.G.L. 34-27-3.1 was repealed in its entirety, eliminating the 45-day notice of intent “NOI” requirement.

Another substantial change is the penalty provision for non-compliance with the statute. As the current statute reads, a mortgagee failing to send mediation notices within 120 days of delinquency must foreclose judicially under R.I.G.L. 34-27-1, et seq. Because, the Rhode Island judicial foreclosure process is somewhat undefined, title companies have been reluctant to opine as to what would be an insurable judicial foreclosure. This left many loans where the mediation notices were not sent within 120 days of delinquency, stalled as servicers wait for further direction. Under the new law, a mortgagee may now alternatively still proceed with mediation and nonjudicial foreclosure by paying a penalty of $1,000 per month until the notice is sent. These penalties will be paid directly to the mediation coordinator prior to completion of the mediation process. The aggregate penalty for violation has been capped for any servicer between the enactment of the original law (September 13, 2013) and the effective date of the amendment (October 6, 2014) to an amount of $125,000. Thus servicers should commence sending out notices for older loans fitting this description as soon as possible.

The amendment resolves many of the questions and issues that remained after the 2013 statute went into effect. In the months to come, it will be interesting to see the title insurance companies’ response as well as the penalty calculation methodology. Ultimately, the unified process and clarifications discussed above should facilitate compliance with the statute going forward.

© Copyright 2014 USFN. All rights reserved.
September e-Update

August 29, 2014

by Elizabeth M. Abood-Carroll
Orlans Associates, P.C. – USFN Member (Michgan)

A bankruptcy appellate panel (BAP) in the Sixth Circuit recently reversed a bankruptcy court and ruled that a wholly unsecured lien can be stripped in a “chapter 20” case. In the bankruptcy world, a “chapter 20” is an unofficial term that refers to a debtor who files and completes a chapter 7 case and subsequently files a chapter 13 case in a short period of time.

The debtor in In re Cain, 2014 Bankr. LEXIS 3060 (BAP 6th Cir. July 14, 2014), obtained a chapter 7 discharge. A few months later, she filed a chapter 13 case seeking, in relevant part, to avoid a wholly unsecured second mortgage on her residence. Due to the chapter 7 discharge within the preceding four years, the debtor was not eligible for a discharge in her chapter 13 case, pursuant to 11 U.S.C. § 1328(f).

Upon the successful completion of her chapter 13 plan, the debtor filed a motion to avoid the second lien. The motion was unopposed. The bankruptcy court denied the motion by relying on 11 U.S.C. § 1325(a)(5)(B), which says a chapter 13 plan must provide for a secured creditor to retain its lien until either the debt is paid in full or the debt is discharged. Because the debt was not paid in full and the debtor was ineligible for a discharge, the bankruptcy court ruled that the debtor was not entitled to strip the second mortgage in her chapter 13 case.

The BAP found the lower court had erred in denying the lien strip. The B.A.P. recognized that the issue has not been addressed by the Sixth Circuit; and it relied on Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663(6th Cir. 2002), which permits a lien strip on a debtor’s principal residence if it is wholly unsecured under 11 U.S.C. § 506(a). The relevant inquiry is whether the claim is secured or unsecured.

In regards to the debtor’s ineligibility to receive a discharge, the BAP ruled that ineligibility under § 1328(f) does not prevent the debtor from receiving other types of relief under Chapter 13.

In this case, there was no dispute that the second lien had no value. Consequently, the BAP ruled that second lien was to be treated as an unsecured claim and was not protected by the requirements of § 1325. The determining factor was the wholly unsecured status of the creditor’s claim rather than the debtor’s ineligibility for a discharge.

(Note: The Sixth Circuit is comprised of Kentucky, Michigan, Ohio, and Tennessee.)

© Copyright 2014 USFN. All rights reserved.
September e-Update

August 29, 2014

by Wendy Walter
RCO Legal, P.S. – USFN Member (Alaska, Oregon, Washingtn)

On August 19th, the Consumer Financial Protection Bureau (CFPB or Bureau) replaced its February 2013 guidance directed at servicers and related to servicing transfers with Bulletin 2014-01. This new bulletin gets into detail on the recent issues the Bureau has found in examinations of servicers engaged in servicing transfers. The bulletin also discusses application of the new servicing rules in a service transfer situation and outlines a new disclosure process for certain loan servicing transactions.

Findings in recent examinations — Based on recent examinations conducted by the Bureau, it was discovered that servicers failed to properly identify loans that were in a trial or permanent modification with the prior servicer at the time of transfer. Also it found that transferee servicers failed to honor trial or permanent modifications that were offered by the prior servicer. The Bureau is also concerned with finding that borrowers have had to resubmit financial documents to the transferee servicer because the prior servicer did not send the transferee servicer the complete record. These situations are deemed by the Bureau to be in violation of UDAAP (Unfair and Deceptive Acts and Practices) prohibition and if they occurred after January 10, 2014, they potentially violated the requirements for the servicers to have policies and procedures to avoid issues when a loan is being service-transferred. 12 CFR 1024.38(b)(4).

Application of Servicing Rules to Service Transfer Situations — In the non-binding guidance, the Bureau also points out that if there is a service transfer, the transferee servicer might have to comply with the early intervention and written notice requirements again even though the default originated with the prior servicer. This is confusing for a borrower, but it could set the clock back on pre-foreclosure loss mitigation because of a servicing transfer. Another highlight from this section is that the Bureau indicates that its examiners will heavily scrutinize any servicer that takes longer than 30 days from receipt of a complete loss mitigation application at the transferor servicer where the borrower could suffer negative consequences because of the delay.

Disclosure of Service Transfer Plans in “Appropriate” Cases — In certain cases (probably larger portfolio sales), the CFPB will require a servicer to submit plans to the Bureau, prior to the transfer, explaining how it is going to manage associated customer risks. The CFPB, in turn, will use these plans to help formulate a subsequent examination that the Bureau may conduct post-transfer.

For more information, here is a link to the bulletin on the CFPB’s website: http://files.consumerfinance.gov/f/201408_cfpb_bulletin_mortgage-servicing-transfer.pdf.

© Copyright 2014 USFN. All rights reserved.
September e-Update

August 11, 2014

by Jeffrey A. Bunda & Sarah D. Miranda
Hutchens Law Firm
USFN Member (North Carolina)

Unlike many states, the North Carolina General Assembly seems to be reversing the Great Recession-era trend of increasing consumer protection by, instead, repealing certain regulations and streamlining the process of liquidating distressed property. Amendments were made last year to three state statutes that are relevant to servicing loans in North Carolina.

Powers of Attorney — The first of those changes involve the recording requirements for powers of attorney. The legislature sought to address questions about where and when a power of attorney (POA) should be recorded when the selling entity may own property in multiple counties across the state, but has its power of attorney recorded in only one county. This situation arises most often in an REO context. Under the old statute, there was no way to tell whether the conveying entity had authority to act for the principal (e.g., a servicer executing a deed) unless the conveying deed specifically referenced the deed book and page of the recorded POA. A title searcher attempting to determine if there was authority for the attorney-in-fact to sign the conveyance deed would have to search all North Carolina counties or guess at the county in which the POA might have been recorded.

N.C.G.S. Section 45-28, as re-written, provides new clarity by requiring that a POA affecting real property shall be registered in the county in which the principal is domiciled or where the real property is located. If the principal is not a NC resident, the POA may be recorded in any county in the state where the principal owns real property. If that real property lies in more than one county, the POA shall be registered in any one of those counties. The revised statute, which went into effect June 26, 2013, goes on to state that if the conveying deed is recorded in a different county other than the one where the POA is registered, the conveyance must contain the recording information for the POA in order for it to be located. It should be noted that failure to comply with the new statute does constitute an infraction; however, it will not affect the validity or enforceability of the conveyance deed from the bank to the new owner. While the practical effect of this legislation may seem onerous to servicers liquidating statewide portfolios, this legislation will cut down on REO-related inquiries, delays in closings, and even lost contracts by comforting the buyer that the attorney-in-fact indeed has authority to act for the principal.

Evictions — The next legislative amendment is important to note in the context of evictions. North Carolina House Bill 802 revised portions of the existing landlord and tenant law by shortening the time periods for judgments to be entered from previously “not in excess of ten days” to requiring judgment on the same day on which the conclusion of all the evidence and submission of legal authority occurs. In addition, the bill also shortened the time period for a landlord to dispose of personal property remaining on the premises after the landlord has been given possession. The previous ten-day period has been replaced with a shorter seven-day period to dispose of personal property remaining on the premises following lawful possession by a landlord. During the seven-day period, the landlord may move the personal property for storage purposes, but shall not throw away or otherwise dispose of such personal property prior to the expiration of the seven-day period. These changes apply to all evictions on or after September 12, 2013, and assist the servicer during the post-lockout period to promptly dispose of any personal property and transfer the asset into its REO portfolio.

COB Authority re Foreclosure Suspension — Lastly, the most dramatic reversal in North Carolina’s mortgage servicing legislation is the outright repeal as of August 23, 2013, of the Commissioner of Banks’ (COB) authority to unilaterally suspend foreclosures if it suspected that a “material violation” of law occurred with either the origination or the servicing of the loan. In 2008 and 2009, the consumer advocacy groups persuaded the General Assembly to enact sweeping reforms to existing North Carolina foreclosure and servicing law, including the adoption of the S.A.F.E. Mortgage Licensing Act. This act gave broad power to the COB to regulate previously unregulated servicers and exercise broad authority over servicing activities — especially in the context of foreclosure. N.C.G.S. Section 45-21.16B gave the commissioner the authority to prohibit the clerk of court from considering a foreclosure petition if, in its own discretion, it felt that a violation of prevailing origination and servicing law (state and federal) had occurred. This “stay” was only good for 60 days. Regardless, the law left the servicer no avenue for appeal or for due process unless it was able to persuade the commissioner’s office that, in fact, no material violation of origination or servicing law had occurred.

The program was enacted as part of the legislation that created the North Carolina State Home Foreclosure Prevention Project (SHFPP), which was in response to the subprime mortgage crisis that preceded the Great Recession in the final years of the last decade. The purpose of the SHFPP was to inform homeowners about governmental and non-profit homeownership preservation assistance. The commissioner also oversaw this program.

Shortly after the SHFPP was renewed in 2010 (and expanded to include all “home loans”), oversight of the SHFPP was transferred to the North Carolina Housing Finance Agency (HFA). The legislation that transferred the oversight of the SHFPP to the HFA, however, did not give it the power to “suspend” foreclosures. This power remained with the COB. The General Assembly recognized, though, that since the COB no longer had its hand in foreclosures, it should not have a role in deciding whether to suspend a foreclosure. Accordingly, this power, although rarely used, was removed from the COB, but the HFA did not receive it.

Conclusion — This article is meant only as a summary of some of the statutory revisions relevant to mortgage servicers, and the authors recommend that servicers contact their local NC counsel for more detailed information on how to ensure compliance with the legislative changes.

© Copyright 2014 USFN. All rights reserved.
Summer 2014 USFN Report