September 9, 2013

by Bruce J. Bergman
Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. – USFN Member (New York)

If there was ever a time that foreclosing lenders were under pressure to settle cases (at least those involving home loans), today is the time. Courts insist upon it; the government demands that it be done; and there is the lender’s and servicer’s own desire to achieve a performing loan. So it would seem that there could hardly be anything wrong in pursuing some settlement path — except that, in practice, danger lurks if the lender or servicer does not assiduously make clear its position. To immediately make the point: a foreclosure can be upset at any stage if the borrower comes forward and convinces a court that he thought settlement negotiations were proceeding and that he, therefore, was not obliged to defend the case. This is rarely an issue in a commercial foreclosure setting.

In the commercial foreclosure action and the typical magnitude of the case, the foreclosing plaintiff has both the wherewithal and the desire to assure that settlement negotiations do not lead to borrowers’ untoward claims that some concession had been made by the lender. This is accomplished by lenders’ insistence that borrowers sign a pre-negotiation letter before discussions can proceed. Among other things, the letter provides that no change in the mortgage document obligations is arrived at unless there is a new writing signed by the plaintiff and that the foreclosure proceeds during any settlement negotiations, all without waiver of any of the plaintiff’s rights. [Naturally, there is more to it than this; and for those who wish to explore it, attention is invited to 2 Bergman on New York Mortgage Foreclosures § 24.07, LexisNexis Matthew Bender (rev. 2012)]. This formality, however, is rarely pursued in the residential foreclosure case, which then leaves lenders and servicers open to a possible charge that a borrower believed settlement was in the offing.

In an illustrative case, a residential borrower had defaulted in the foreclosure action and later moved to vacate that default, claiming that his lawyer had failed to interpose an answer. For reasons not particularly relevant here, the court was unimpressed with that excuse. Additionally, though, the borrower stated that his attorney had assured him that the foreclosure action would not proceed while negotiations took place, and that his counsel had made five attempts to obtain a loan modification.

Although all of these contentions lacked any documentary support (upon which basis it could be opined that the court could have rejected them), the court found that the assertions were combined with the borrower’s claim that his failure to timely respond to the complaint was also due to his good faith belief in settlement negotiations. The court then ruled that such a good faith belief will supply a reasonable excuse for failure to timely answer.

While it appears that the borrower’s belief was based upon what his own attorney told him, rather than on any representations by the servicer, there was nevertheless some indication that the servicer was entertaining the possibility of a settlement; i.e., perhaps by way of mortgage modification.

The failure here — and which led to the court allowing the borrower to “open up” the action — was the absence of a lender-written declaration that the foreclosure action was proceeding apace, notwithstanding any possible negotiations or any consideration of a mortgage modification. Without that, the door was open for the court to do what it really wanted to do: give the borrower a chance to submit an answer. As a consequence, an answer would necessitate a motion for summary judgment and all of the expense and delay that portends. This is something that might have been avoided by a more dedicated approach to the settlement process.

© Copyright 2013 USFN. All rights reserved.
September e-Update

September 9, 2013

by Harry Beisswenger, CEO
NetDirector – USFN Associate Member

In the mortgage banking industry, more and more regulatory changes continue to trickle down to loan servicers and their attorneys. A number of these regulations are creating more overhead and reducing margins for the various parties to stay in compliance. For instance, some servicers now require up to seven military status checks during the life of a foreclosure file.

This process requires staff going to the Department of Defense (DOD) website and manually entering the borrower’s social security number to access military status information along with downloading the proof of search documents (certificate/screenshot). The search results along with the documents are then manually entered into the attorney/servicer case management system (CMS). As many can attest, the DOD site is not always accessible and it can be very slow due to heavy traffic. An additional time-consuming challenge is obtaining a borrower SSN if it is not included in the referral.

There is another way, however — using privately-developed automated systems. Among those offering the service, NetDirector automates an array of person search-related tasks. Without leaving their CMS, users can obtain military status (with certificate/screenshot) and PACER bankruptcy status (both national and regional) within minutes. They can also find a borrower’s social security number, all names/addresses, and determine whether the borrower is deceased. NetDirector provides automation with various servicer platforms (i.e., LPS Desktop & VendorScape) for Servicemembers Civil Relief Act document uploads and SCRA-related task updates, offering full compliance.

© Copyright 2013 USFN. All rights reserved.
September e-Update

September 9, 2013

by Robert Wichowski
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

The Connecticut Rules of Practice together with one piece of appellate case law have combined to create what could be called a “perpetual motion machine.” This confluence of authority would allow a borrower to, in theory, continually file motions to open a foreclosure judgment and forestall vesting or a sale, ad infinitum.

The matter of First Connecticut Capital, LLC v. Homes of Westport, LLC, 112 Conn. App. 750, 762, 996 A.2d 239 (2009), held that no foreclosure sale could occur during the time for which a party is able to take an appeal after a hearing on a motion that would potentially affect the final judgment. Practically, and when taken in conjunction with Practice Book § 61-11, which provides for an automatic appellate stay upon the hearing of any motion that would affect a final judgment, this means that even if a defendant’s motion to open a judgment of foreclosure is denied, a court must not allow a sale or vesting to occur within 20 days of the denial of the motion. This would occur in order to account for the 20-day appeal period following the denial of such a motion — notwithstanding a motion’s lack of merit or the number of motions that had previously been heard or denied, unless extraordinary measures were taken by the plaintiff or the court.

The Rules Committee to the Superior Court, after input from the Bench-Bar standing Committee on Foreclosures, has adopted a change to Section 61-11 that will remedy this situation and is scheduled to take effect on October 1, 2013. The change adds two subsections that fundamentally alter the procedures for opening foreclosure judgment as well as the automatic appellate stays incident to the denial of any such motions.

Subsection G changes the procedures for motions related to judgments of strict foreclosure. (Strict foreclosure is a procedure in which title will vest in the plaintiff by operation of law without a sale.) The addition provides that if there have been two prior motions brought by the owner of the equity seeking to open or otherwise modify the underlying judgment that have been denied, the filing and hearing of a third motion does not trigger the aforementioned automatic appellate stay, unless an affidavit is filed simultaneously therewith averring that the motion is filed for good cause arising after the court’s ruling on the party’s most recent motion. The affidavit must recite specific supporting facts. If such an affidavit is filed, the automatic stay would be in effect. However, the opposing party will have an opportunity to contest it with a counter-affidavit and a motion to terminate the stay, a hearing of which will be held two weeks after filing. No further appellate stay will be triggered by a decision granting termination of the stay.

The changes regarding sales are far different. Subsection H provides that if a motion to open a judgment of foreclosure by sale has been denied sooner than 20 days from the scheduled sale date (which would otherwise have triggered the automatic stay and required a re-setting of the sale) the sale will continue as scheduled. However, no motion for approval of the sale is to be filed or acted on by the court until the 20-day appeal period has run. Sales in Connecticut are expensive and can cost a plaintiff $3,000-$6,000. In some situations, this new procedure would eliminate the need to have multiple, costly sales.

These amendments to the Connecticut Rules of Appellate Procedure are an important step toward preventing defendants from needlessly impeding a final resolution in foreclosure matters when there is no meritorious reason.

© Copyright 2013 USFN. All rights reserved.
September e-Update

September 9, 2013

by Nikolaus S. Schuttauf
Brennan, Recupero, Cascione, Scungio & McAllister, LLP – USFN Member (Rhode Island)

In an opinion issued September 3, 2013, the U.S. District Court for the District of Rhode Island ordered the stay that had been preventing 825 foreclosures from proceeding be dissolved. [In re Mortgage Foreclosure Cases Misc., 2013 U.S. Dist. LEXIS 125474 (D. R.I. Sept. 3, 2013)]. The order was a victory for members of MERS, which included many national banks, mortgage companies, and mortgage servicers (MERS Members). The MERS Members had vehemently opposed the stay — filing 22 motions to dismiss since June 2013.

In its recent decision, the district court found that the borrowers had no likelihood of success on their claims based upon Rhode Island law. The borrowers had asserted that the assignments of their mortgages are invalid for three primary reasons: (1) the disconnect between the holder of the mortgage and the holder of the note rendered the mortgage invalid; (2) MERS’s “robo-signing” rendered the assignments of the mortgage invalid; and (3) the MERS practice of assigning mortgages was invalid under Rhode Island law. The district court noted that the Rhode Island Supreme Court had already considered these arguments in Bucci v. Lehman Brothers Bank, FSB, 68 A.3d 1069 (R.I. 2013), and that the court had decisively ruled in favor of the MERS Members on each of the three claims. Because the borrowers had no likelihood of success on these claims, Judge McConnell ordered the stay dissolved.

Some Background
The U.S. Court of Appeals for the First Circuit had issued a decision scolding the U.S. District Court for the District of Rhode Island for issuing a stay that prevented MERS Members from excercising their nonjudicial rights to foreclose upon a mortgage in default in Rhode Island. [Fryzel v. Mortgage Elec. Registration Sys., 2013 U.S. App. LEXIS 12068, 2013 WL 2896794 (1st Cir. R.I. June 14, 2013)]. That decision was a victory for the lenders, who appealed to the First Circuit after the Rhode Island District Court refused to lift the stay.

In the wake of the burst in the U.S. housing bubble, numerous Rhode Island borrowers who defaulted on their mortgage obligations brought suit in the district court to prevent foreclosure or eviction. These borrowers maintain that the assignments of their mortgages are invalid, leaving the assignees without the right to foreclose. Many of the mortgages at issue were assigned by MERS to various loan servicers and lending institutions. The lenders argued that Rhode Island law provides that homeowners lack standing to challenge the validity of mortgage assignments and the effect those assignments have on the underlying obligation.

When a motion to dismiss the first of these cases was heard by a magistrate in June 2011, the magistrate recommended that the case be dismissed, agreeing with the lenders that Rhode Island law clearly provided that borrowers have no standing to contest the validity of the assignment of their mortgage. On March 29, 2012, the district court ignored the magistrate’s recommendation and issued a stay preventing the lenders from exercising their rights to nonjudicial foreclosure and requiring the lenders to enter into mediation with the borrowers. Since the stay was issued, the number of cases filed and affected by it has swelled to almost 800. After the district court denied the lenders’ attempt to lift the stay, the lenders appealed to the First Circuit.

In an opinion authored by retired U.S. Supreme Court Justice David Souter, the First Circuit found that the stay was effectively a preliminary injunction, noting the “nature of an order is the product of its operative terms and effect, not its vocabulary and label.” The stay forbids the mortgagees from exercising their rights to nonjudicial foreclosure, and threatens court-imposed sanctions for any lender that violates the stay. The First Circuit concluded that the stay’s “character as an injunction is unmistakable.”

Because the district court took the position that the stay was merely administrative and not a preliminary injunction, the district court had failed to comply with Rule 65 Federal Rules of Civil Procedure. Rule 65 requires that the lenders receive “notice” of the preliminary injunction before it issued, including a hearing “followed by findings that the party to be favored has a substantial likelihood of success in the pending action, would otherwise suffer irreparable harm and can claim the greater hardship in the absence of an order, which will not disserve the public interest if imposed.”

The First Circuit ordered the district court to conduct a proper preliminary injunction hearing as soon as possible and to make written findings on the hearing, “especially on the critical requirement of the mortgagors’ likelihood of success in challenging foreclosure.” The First Circuit noted that “the injunction has so far had no point except to keep mediation alive while allegedly defaulting borrowers remain in their mortgaged houses.” The First Circuit also admonished the district court for imposing a stay of indefinite time and with no cost limitations. The First Circuit ordered that, in the event the stay remains in effect for any of the cases, the district court impose time and cost restrictions upon the stay.

The District Court heard arguments on the preliminary injunction on July 10, 2013.

Conclusion
While the stay has now been dissolved, the district court expressed the hope that the MERS Members would “continue to forego their right to foreclosure and evict,” noting: “It is in all parties’ and the Court’s best interest to have the parties talk to each other in a meaningful way and to attempt to amicably resolve these matters, without the threat and/or negative consequences of having Plaintiffs’ homes taken away from them due to foreclosure or eviction.”

Whether the MERS Members will ultimately choose to proceed with foreclosures or continue negotiations is unknown at this time. What is certain, however, is that there is now no impediment to the MERS Members proceeding with foreclosures if they so choose.

© Copyright 2013 USFN and Brennan, Recupero, Cascione, Scungio & McAllister, LLP. All rights reserved.
September e-Update

August 1, 2013

by Richard M. Leibert
Hunt Leibert
USFN Member (Connecticut)

The regular session of Connecticut’s Legislature for 2013 ended at midnight June 5, 2013. It was a very active session with many proposed bills. The following addresses some bills that will have an effect on servicing defaulted loans. Note, however, that the new legislation regarding mediation is addressed separately in a feature in the USFN Report (Summer Ed. 2013).

Public Act 13-156 — Revisions to the Common Interest Ownership and Condominium Act. The super lien that a homeowners association had was 6 months, which effective upon passage, was increased to 9 months. Further, as of October 1, 2013, if an association makes a demand for payment it must provide a copy of the notice it provides to the unit holder to the holders of any mortgages secured by the condo unit. If the association decides to foreclose, it must provide not less than 60 days’ notice by first-class mail to the holders of all liens secured by the unit with an ability to cure. The notice need only be sent to the last recorded holder of the security interest unless there is a foreclosure pending, which in that case the notice must be sent to the attorney for the foreclosing lienholder. The penalty for failing to provide the notice is that the court shall not include any attorneys’ fees or costs as part of the association’s priority lien.

Public Act 13-174 — Abatement of a Public Nuisance, effective October 1, 2013. This bill broadens the circumstances in which the nuisance law applies. It adds certain municipal ordinance violations to these statutes and makes a corresponding change by allowing the state to file nuisance abatement suits when three or more citations for such violations are issued at a property within a year. By law, courts may not issue a public nuisance abatement order against a financial institution that owns the property or claims an interest of record in it (under a mortgage, assignment of lease or rent, lien, or security interest) and is not found to be a principal or accomplice to the conduct constituting the nuisance. The bill requires the state to prove by a preponderance of the evidence, rather than by the stricter clear and convincing evidentiary standard, that a financial institution claiming an interest of record in the property as specified above was a principal or accomplice to the alleged conduct. It specifies that they can offer the same affirmative defenses as other defendants (i.e., that they have taken reasonable steps to abate the nuisance but were unable to do so).

Public Act 13-136 — Homeowner Protection Rights, effective July 15, 2013, with a provision for unoccupied property. This permits, under certain circumstances, the filing of a motion for judgment of foreclosure simultaneously with a motion for default for failure to appear. Current law prohibits the filing of a motion for default for failure to appear until 15 days following the return date (Conn. Practice Book Section 17-20) and a motion for judgment of foreclosure until 30 days following the return date (Conn. Practice Book Section 17-33A). Under the new law for unoccupied properties, both the motion for judgment of foreclosure and a motion for default for failure to appear can be filed together. Thus, there is a gain of 15 days. In order to take advantage of this new process for unoccupied real property, a mortgagee must prove (by clear and convincing evidence and the use of a proper affidavit) that the real property that is the subject of the foreclosure action is not occupied by a mortgagor, tenant, or other occupant and not less than three of the following conditions exist: (1) Statements of neighbors, delivery persons, or government employees indicating that the property is vacant and abandoned; (2) Windows or entrances to the property that are boarded up or closed off or multiple window panes that are damaged, broken, or unrepaired; (3) Doors to the property are smashed through, broken off, unhinged, or continuously unlocked; (4) Risk to the health, safety, or welfare of the public or any adjoining or adjacent property owners that exists due to acts of vandalism, loitering, criminal conduct, or the physical destruction of the property; (5) An order by municipal authorities declaring the property to be unfit for occupancy and to remain vacant and unoccupied; (6) The mortgagee secured or winterized the property due to the property being deemed vacant and unprotected or in danger of freezing; or (7) A written statement issued by any mortgagor or tenant expressing the clear intent of all occupants to abandon the property.

A foreclosure action shall not proceed under the expedited procedures if there is on the property: (1) an unoccupied building undergoing construction, renovation, or rehabilitation that is (A) proceeding diligently toward completion, and (B) in compliance with all applicable ordinances, codes, regulations, and statutes; (2) a secure building occupied on a seasonal basis; or (3) a secure building that is the subject of a probate action to quiet title or other ownership dispute.

Public Act 13-87 — Requires Inclusion of the Grantee’s Mailing Address in Document Conveying Land, effective October 1, 2013 (P.A. 13-87 repealed C.G.S. § 47-5). In Section 1 Subsection (b), the new law requires that a document conveying land shall also include the mailing address of the grantee. Interestingly, the new law in Section 2 Subsection (b) (9) provides that failing to include the current grantee’s mailing address does not make the instrument invalid.

Public Act 13-184 — Expenditures and Revenue, effective July 15, 2013. This amended Connecticut’s statutory recording fees, increasing the amount a nominee of a mortgage must pay to record any document, including deeds, mortgages, mortgage assignments, and releases. In any document where MERS is a nominee the new recording fees apply. With these fee increases, the basic recording fees for “MERS” documents are: For the first page of the document (except mortgage assignments in which a nominee appears as the assignor), $159 (representing $116 for the first page, and $43 for recording surcharges), and $5 for each additional page. For an assignment of mortgage in which the nominee of a mortgagee appears as assignor, and for a release of mortgage by a nominee of a mortgagee, $159 for the entire assignment or release, regardless of the number of pages. (MERS has filed a complaint in the Superior Court of Connecticut, Judicial District of Hartford, challenging the constitutionality of §§ 97 and 98 of Public Act 13-184 and §§ 81 and 82 of Public Act 13-247. On July 11, 2013, MERS was denied a temporary restraining order in its lawsuit.)

House Bill 6160 — Smoke And Carbon Monoxide Detectors. This bill, with exceptions, requires a seller, before transferring title on a one- or two-family dwelling for which a new occupancy building permit was issued before October 1, 2005, to give the buyer an affidavit certifying that the: (1) permit was issued on or after October 1, 1985; or (2) dwelling is equipped with smoke detection and warning equipment (smoke detectors) complying with the bill. The affidavit must also certify that the building: (1) is equipped with carbon monoxide (CO) detection and warning equipment (CO detector) complying with the bill; or (2) does not pose a risk of CO poisoning because the building does not have a fuel-burning appliance, fireplace, or attached garage. A transferor who fails to provide the affidavit must credit the transferee with $250 at closing. A list of exemptions from affidavit requirements can be found in the bill and include the following:

Exemptions from the affidavit requirement and penalty provision transfers: (1) from one co-owner to another; (2) to the transferor’s spouse, mother, father, brother, sister, child, grandparent, or grandchild where no consideration is paid; (3) under a court order; (4) by the federal government or any of its political subdivisions; (5) by deed instead of foreclosure; (6) when an existing debt secured by a mortgage is refinanced; (7) by mortgage deed or other instrument to secure a debt where the transferor’s title to the real property being transferred is subject to a preexisting debt secured by a mortgage; and (8) by executors, administrators, trustees, or conservators.

©Copyright 2013 USFN. All rights reserved.
Summer USFN Report.

August 1, 2013

by Michael Zevitz
South & Associates, P.C. – USFN Member (Kansas, Missouri)

Electronic recording was made a government priority starting with the passage of the federal ESIGN law in 2000 and with the subsequent adoption of the Uniform Electronic Transactions Act by 47 states. These laws established the legal basis for secure, electronic recording. As such, title underwriters, lending institutions and their legal counsel now fully embrace e-recording.

With a few years of history behind us, we can now state with confidence that e-recording has its benefits:

• Reduces document errors and rejections
• Eliminates mailing and other document delivery costs
• Reduces delivery delays
• Reduces document turn-around time
• Reduces redundancy
• Improves office efficiencies
• Enhances document security
• Enhances efficiency of staff
• Improved audit controls

However, the biggest advantage is TIME! The chart below¹ indicates the estimated time for paper recording versus e-recording:

According to the Property Records Industry Association (PRIA), the national standard-setting body for the land records industry, there are more than 3,600 recording jurisdictions nationwide. PRIA maintains a listing of counties that have implemented e-recording technology and posts the list on the association’s website (www.pria.us). Almost 15 months ago I reported to you that there were 739 jurisdictions accepting e-recording. At the time of publication of this article, the number has grown to over 900, an increase of nearly 22 percent. Most importantly, a significant milestone has been reached with more than 1/4 of all counties in the United States accepting e-recording. I’ll report back to you in a year to see if we have reached the half-way mark!

Copyright 2013 USFN. All rights reserved.
July/August e-Update

¹ Source: PRIA, e-Recording 101 (2009)

August 1, 2013

by Roger D. Bear
Florida Foreclosure Attorneys, PLLC
USFN Member (Florida)

In May of this year, the Florida Supreme Court issued a decision in the case of City of Palm Bay v. Wells Fargo Bank, 2013 WL 2096257. The issue addressed by the court was the priority between a recorded city code enforcement lien with “superpriority” and a prior recorded mortgage.

Florida’s recording statutes normally give priority to a recorded lien like a mortgage against a later recorded lien such as a city code enforcement lien (however, all such liens are inferior to state, county, district, and municipal taxes). The City of Palm Bay attempted to change this priority by enacting in 1997 a municipal ordinance, which specified that recorded code enforcement liens would have priority coequal with the liens of all state, county, district, and municipal taxes, superior in dignity to all other liens, titles, and claims until paid.

In 2007, Wells Fargo filed an action to foreclose its mortgage, recorded in 2004, on residential property located in the city of Palm Bay. Palm Bay was named a defendant in the foreclosure suit due to two code enforcement liens it recorded after the mortgage. In answering the complaint, Palm Bay asserted its code enforcement liens had priority pursuant to the 1997 municipal ordinance. At the hearing on Wells Fargo’s motion for summary judgment, the trial court rejected Palm Bay’s claims of lien superpriority. The trial court reasoned that the legislature’s failure to bestow code enforcement liens priority over a prior recorded mortgage or judgment lien indicated its intent that these liens not have priority and, thus, the common law principle of first in time, first in right applied.

In reviewing the case, the Florida Supreme Court declared that municipal ordinances are inferior to laws enacted by the Florida Legislature and must not conflict with any controlling provision of a state statute. It was undisputed that the Palm Bay ordinance provision establishes a priority that is inconsistent with the priority established by the pertinent provisions of the Florida Statutes.

The court went on to state: “In those statutory provisions, the Legislature has created a general scheme for priority of rights with respect to interest in real property. Giving effect to the ordinance superpriority provision would allow a municipality to displace the policy judgment reflected in the Legislature’s enactment of the statutory provisions. And it would allow the municipality to destroy rights that the Legislature established by state law. A more direct conflict with a statute is hard to imagine. Nothing in the constitutional or statutory provisions relating to municipal home rule or in the Local Government Code Enforcement Boards Act provides any basis for such a municipal abrogation of a state statute. The conflict between the Palm Bay ordinance and state law is a sufficient ground for concluding that the ordinance superpriority provision is invalid.” Therefore, the court concluded that the city’s lien did not have priority over the previously recorded mortgage lien.

This ruling assures mortgage lenders in Florida that they will have priority over later recorded municipal code enforcement liens.

©Copyright 2013 USFN. All rights reserved.
Summer USFN Report.

August 1, 2013

by Lee Perres & Nick Schad
Pierce & Associates, P.C. – USFN Member (Illinois)

Pursuant to a court order issued on June 14, 2013, a trial court within Cook County, Illinois has held that a mortgagee must comply with HUD regulations relating to a face-to-face interview with a mortgagor, “or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid” if the mortgagee or its servicer has any branch office located within 200 miles of the property being foreclosed.

Counsel argued that the HUD face-to-face requirement only applied if a “servicing branch office” was located within 200 miles of the property. While this has been the accepted practice and the HUD interpretation, the court disagreed, specifically stating that the term branch office “is not ambiguous” and applies “to all branch offices of the mortgagee or its servicer, not just those offices regularly performing servicing functions.” The trial court referenced that HUD may have only intended to enforce the requirements within 200 miles of a “servicing branch;” however, without an amendment of the language within HUD’s provisions, the court will not grant HUD’s interpretation of “branch office” any deference.

While this is only the decision of one trial judge in Cook County, other judges have indicated that they will follow this ruling. The statute in question is § 203.604 Contact with the mortgagor and the relevant text has been bolded and underlined below:

(a) [Reserved]
(b) The mortgagee must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid. If default occurs in a repayment plan arranged other than during a personal interview, the mortgagee must have a face-to-face meeting with the mortgagor, or make a reasonable attempt to arrange such a meeting within 30 days after such default and at least 30 days before foreclosure is commenced, or at least 30 days before assignment is requested if the mortgage is insured on Hawaiian home land pursuant to section 247 or Indian land pursuant to section 248 or if assignment is requested under § 203.350(d) for mortgages authorized by section 203(q) of the National Housing Act.
(c) A face-to-face meeting is not required if: (1) The mortgagor does not reside in the mortgaged property, (2) The mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either, (3) The mortgagor has clearly indicated that he will not cooperate in the interview, (4) A repayment plan consistent with the mortgagor’s circumstances is entered into to bring the mortgagor’s account current thus making a meeting unnecessary, and payments thereunder are current, or (5) A reasonable effort to arrange a meeting is unsuccessful.
(d) A reasonable effort to arrange a face-to-face meeting with the mortgagor shall consist at a minimum of one letter sent to the mortgagor certified by the Postal Service as having been dispatched. Such a reasonable effort to arrange a face-to-face meeting shall also include at least one trip to see the mortgagor at the mortgaged property, unless the mortgaged property is more than 200 miles from the mortgagee, its servicer, or a branch office of either, or it is known that the mortgagor is not residing in the mortgaged property.

© Copyright 2013 USFN. All rights reserved.
July/August e-Update.

August 1, 2013

by Jill D. Rein
Pierce & Associates, P.C. – USFN Member (Illinois)

The City Council of Chicago passed the Keep Chicago Renting Ordinance on June 5, 2013; it was published on June 26, 2013 and becomes effective 90 days thereafter (September 24, 2013). This ordinance is officially called the Protecting Tenants in Foreclosed Rental Property Ordinance (Chapter 5-14) and provides as follows:

Tenant Relocation Assistance (5-14-050)
The owner (the purchaser of a foreclosed rental property after the sale has been confirmed by the court and any special right to redeem has expired, or a mortgagee who has accepted a deed-in-lieu of foreclosure or consent foreclosure on a foreclosed rental property) of a foreclosed rental property (defined below) shall pay a one-time relocation assistance fee of $10,600 (per unit, not per occupant) to a qualified tenant (see definition below) unless the owner offers such tenant the option to renew or extend the tenant’s current rental agreement with an annual rental rate that: (1) for the first twelve months of the renewed or extended lease, does not exceed 102 percent of the qualified tenant’s current annual rental rate; and (2) for any twelve-month period thereafter, does not exceed 102 percent of the immediate prior year’s annual rental rate.

This provision does not apply to an owner who became an owner prior to the effective date of this act, a bona fide third-party purchaser, or an owner who will occupy the rental unit as the person’s principal residence.

“Foreclosed rental property” means: (1) a building containing one or more dwelling units that are used as rental units, including a single-family house; or a dwelling unit that is subject to either the Condominium Property Act or the Common Interest Community Association Act that is used as a rental unit; (2) for which legal and equitable interests in the building or dwelling unit were terminated by a foreclosure action pursuant to the Illinois Mortgage Foreclosure Law; and (3) one or more of the units are occupied on the date a person becomes the owner.

“Qualified Tenant” means a person who: (1) is a tenant in a foreclosed rental property on the day that a person becomes the owner of that property; and (2) has a bona fide rental agreement to occupy the rental unit as the tenant’s principal residence. For the purpose of the definition, a lease shall be considered bona fide only if:

• The mortgagor or the child, spouse, or parent of the mortgagor is not the tenant;
• The lease was a result of an arms-length transaction;
• The lease requires the receipt of rent that is not substantially less than fair market rent for the property, or the rental unit’s rent is reduced or subsidized due to the government subsidy.

Any relocation fee must be paid no later than 7 days after the day of complete vacation of the rental unit by the qualified tenant by certified or cashier’s check. The owner may deduct from the relocation fee all rent due and payable for the rental unit occupied by the qualified tenant prior to the date on which the rental unit is vacated, unless such rent has been validly withheld or deducted pursuant to state, federal, or local law.

An owner is not liable to pay the relocation fee to any qualified tenant who: (1) does not enter into a rental agreement after being offered a renewal or extension of the tenant’s rental agreement with a rent in an amount that complies with this ordinance; or (2) against whom the owner has obtained a judgment for possession of the rental unit.

If an owner fails to comply with this section the qualified tenant shall be awarded damages in an amount equal to two times the relocation assistance fee and other damages to which they may be entitled.

The owner shall comply with this section of the ordinance until the property is sold or transferred to a bona fide third-party purchaser.

If a qualified tenant is evicted for cause the owner is not liable for any relocation assistance provided under this section.

Written Notice to Tenants (5-14-040)
No later than 21 days after a person becomes the owner (the date of sale confirmation or execution of a deed-in-lieu or entry of consent judgment of foreclosure) of a foreclosed rental property, the owner shall make a good faith effort to ascertain the identities and addresses of all tenants of the rental units in the foreclosed rental property and notify, in writing, all known tenants of such rental units that, under certain circumstances, the tenant may be eligible for relocation assistance. The notice shall be given in English, Spanish, Polish, and Chinese and be as follows:

“THIS IS NOT A NOTICE TO VACATE THE PREMISES. You may wish to contact a lawyer or your local legal aid or housing counseling agency to discuss any right that you may have.

Pursuant to the City of Chicago’s Protecting Tenants in Foreclosed Rental Property Ordinance, if you are a qualified tenant you may be eligible for relocation assistance in the amount of $10,600 unless the owner offers you the option to renew or extend your current written or oral rental agreement with an annual rent that: (1) for the first twelve months, does not exceed 102% of the immediate prior year’s annual rental rate; and (2) for any twelve-month period thereafter, does not exceed 102% of the immediate prior twelve-month period’s annual rent. The option to renew or extend your lease shall continue until the property is sold to a bona fide third-party purchaser.

If you are eligible as a qualified tenant and the owner fails to pay you the relocation assistance that is due, you may bring a private cause of action in a court of competent jurisdiction seeking compliance with the Protecting Tenants in Foreclosure Rental Property Ordinance, Chapter 5-14 of the Municipal Code of Chicago, and the prevailing plaintiff shall be entitled to recover, in addition to any other remedy available, his damages and reasonable attorneys’ fees.”

The notice shall also include the name, address, and telephone number of the owner, property manager, or owner’s agent who is responsible for the foreclosed rental property.

If the owner ascertains the identity of a tenant more than 21 days after becoming the owner, the owner shall provide the notice within seven days of ascertaining the identity of the tenant.

The notice must be served by:

• Delivering a copy of the notice to the known tenant;
• Leaving a copy of the notice with some person of the age of 13 years or older who is residing in the tenant’s rental unit; or
• Sending a copy of the notice by first-class or certified mail, return receipt requested, to each known tenant, addressed to the tenant.

The notice must also be posted on the primary entrance of each foreclosed rental property no later than 21 days after a person becomes the owner (the date of sale confirmation or execution of a deed-in-lieu or entry of consent judgment of foreclosure).

An owner may not collect rent from any tenant until the written notice is served and posted.

Registration of Foreclosed Rental Property (5-14-060)
No later than 10 days after becoming the owner of a foreclosed rental property, the owner shall register such property with the commissioner.

The registration shall be in a form and manner prescribed by the commissioner and shall contain the following information:

• Name, address and telephone number of owner;
• Address of foreclosed rental property;
• If more than one unit is located in the property, the number of rental units in the property and whether each rental unit was occupied by a known tenant at the time the person became the owner. If occupied, the name and address of each known tenant;
• If the foreclosed rental property consists of only one rental unit, the name of the known tenant at the time the person became the owner;
• Name, address, and telephone number of the owner’s agent for the purpose of managing, controlling, or collecting rents and any other person not an owner who is controlling such property, if any;
• Name, address, and telephone number of a natural person 21 years of age or older, designated by the owner as the authorized agent for receiving notices of code violations and for receiving process, in any court proceeding or administrative enforcement proceeding, on behalf of such owner in connection with the enforcement of this Code. This person must maintain an office or actually reside, in Cook County, Illinois. An owner who is a natural person and who meets the requirements of this subsection as to location of residence or office may designate himself as agent;
• An affidavit signed by the owner which lists, by rental unit, all the qualified tenants at the time the person became the owner; and
• Any other pertinent information reasonably required by the commissioner.

Any owner who fails to register under this section shall be deemed to consent to receive, by posting at the foreclosed rental property, any and all notices of code violations and all process in an administrative proceeding brought to enforce code provisions concerning the property.

The owner shall pay a $250 fee at the time of registration.

If any of the pertinent information changes, the owner shall file a statement indicating the nature and effective date of the change within 10 days after the change takes effect. If the property is sold to a bona fide third-party purchaser the owner shall, within 10 days of such sale or transfer, notify the commissioner in writing in a form and manner prescribed by the commissioner. If the property becomes vacant after registration pursuant to this section, the owner shall comply with the vacant building registration requirement of chapter 13-12, if applicable.

Remedies (5-14-070)
A tenant may bring a private cause of action seeking compliance with section 040 and 050 and the prevailing plaintiff shall be entitled to recover, in addition to any other remedy available, his damages and reasonable attorneys’ fees.

Waiver of Rights Not Allowed (5-14-080)
No rental agreement offered or entered into by an owner after the effective date of this chapter may provide that a tenant agrees to waive or forego the rights and remedies provided under this chapter and any such provision in a rental agreement is unenforceable.

Violation-Penalties-Liability (5-14-100)
Any person found guilty of violating this Chapter, or any rule or regulation promulgated hereunder, shall be fined not less than $500 or more than $1,000. Each failure to comply with respect to each person shall be considered a separate offense and each day that a violation exists shall constitute a separate and distinct offense.

© Copyright 2013 USFN. All rights reserved.
July/August e-Update

August 1, 2013

by James A. Pocklington
Hunt Leibert, P.C.
USFN Member (Connecticut)

On May 31, 2103, the Connecticut Legislature passed “An Act Concerning Homeowner Protection Rights,” Public Act No 13-136. It was signed by the governor on June 18, effective July 15, 2013. The act fundamentally changes the foreclosure mediation program in Connecticut.

First, it lays out a mission statement for mandatory settlement discussions by quantifying the “Objectives of the Mediation Program” and then defining the “ability to mediate” in a manner consistent with those objectives. This change requires individual servicer representatives taking part in the mediation process to be aware of both the program’s statutory requirements and the specifics of any given file’s history in the program. It goes into detail as to how such file-specific familiarity may be obtained.

Next, it alters who may be present during a session and the role of counsel in that regard. Currently, all mortgagors must be physically present for the first meeting, which is critical to obtaining proper intentions, given the significant percentage of separating/separated mortgagors and thereafter at least one mortgagor must be physically present at each session unless waived by the court. A niche is carved out for the mortgagee to appear telephonically with counsel to be physically present. The act changes this, requiring physical attendance at only the first session and permitting telephonic participation with physically-present counsel for all parties. Further, the act explicitly permits the attendance of a non-mortgagor spouse, who may not even be a party to the foreclosure action. The act does not apply the same exception to any other relationship.

Third, it shifts a significant portion of the document collection process from mutual meetings between the mortgagee and mortgagor to meetings between the mortgagor and/or their legal counsel and the court’s foreclosure mediation specialists, with limited direct involvement of the mortgagee or counsel. The act requires the mortgagor to meet with the court’s mediator and for them to work together to provide the necessary documents for any foreclosure alternative. It gives the mortgagor and mediator significant time — up to 84 days from the initiation of the lawsuit — to compile the documentation and submit it to the servicer and/or counsel.

Fourth, it imposes a much stricter timeline on all participating parties. The mortgagee is expected to have a substantive response within 35 days of receipt of a complete financial package for review for any foreclosure alternative, including those options that historically require third-party involvement. The statutory mediation period concludes after the third session between the mortgagee and mortgagor, and any further sessions may be granted by the court on an individual basis only on a showing that it is “highly probable the parties will reach an agreement through mediation” or on a showing that there has been “conduct that is contrary to the objectives of the mediation program.” Any such findings must be articulated on the record.

Lastly, and perhaps most significantly, the act eviscerates the confidentiality of the parties’ settlement negotiations and creates statutory permission for the court to consider anything that takes place in the mediation context. In addition to requiring exhaustively detailed reports by the court’s mediators after each session, which become part of the public record, the court is explicitly permitted to “consider all matters that have arisen in the mediation” as part of its review. This is particularly noteworthy given Connecticut’s motion hearing practice, where the judges sitting on mediation-related issues are currently the same judges who handle any other aspects of a pending foreclosure, up to and including entry of judgment.

©Copyright 2013 USFN. All rights reserved.
Summer USFN Report.

August 1, 2013

by William R. Dziedzic
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

A Connecticut superior court has held that the entry against a lender of a default in an action to foreclose a condominium lien does not preclude the lender from later participating in the proceeding to obtain satisfaction of its obligation from the proceeds of a foreclosure sale. Saddle Ridge Farm Association, Inc., v. Blessing-Palmer, No. 55 Conn. L. Rptr. No.17, 631 (2013). In Saddle Ridge, the plaintiff commenced a foreclosure action seeking to foreclose on unpaid condominium common charges. In addition to naming the unit owner as a defendant, the plaintiff named a lender by virtue of having a recorded mortgage. The lender was subsequently defaulted and the court entered a judgment of foreclosure by sale. The property was sold to a third-party bidder and the sale was subsequently approved by the court.

After the foreclosure sale, and without challenging the underlying foreclosure judgment, the lender filed a motion for supplemental judgment. At a hearing, the unit owner and lender claimed competing priority rights to the surplus funds from the foreclosure sale. The defendant unit owner objected to the disbursement of the surplus funds to the lender on equitable grounds and claimed that because a default judgment entered against the lender, it was precluded from participating in the supplemental judgment proceedings. Therefore, the common law doctrine of “first in time, first in right” did not apply. The defendant lender argued that a default judgment simply precludes a defendant from raising defenses to the underlying foreclosure action and does not preclude participation in the supplemental proceedings.

The court held that the lender was not prevented from participating in the supplemental judgment proceeding because of the default judgment. The court reasoned that the purpose of the judicial sale in a foreclosure action is to convert the property into money and, following the sale, a determination of the rights of the parties in the funds is made, and the money received from the sale takes the place of the property. A foreclosure by sale furnishes conflicting claimants an ideal forum for litigating their differences. Clearly, a resolution of such issues provides the very raison d’être of supplemental proceedings.

Naturally, lenders recognize the importance of promptly notifying their counsel of any pending lawsuits or default notices. However, all may not be lost if a default judgment does enter. A lender may still be able to participate in the supplemental proceedings to obtain surplus funds.

© Copyright 2013 USFN. All rights reserved.
July/August e-Update

August 1, 2013

by Susana Davila
RCO Legal, P.S.
USFN Member (Arkansas, Oregon, Washington)

In July 2011, the Washington State Legislative enacted the Foreclosure Fairness Act (FFA) as an amendment to the Washington Deed of Trust Act, RCW § 61.24, which provides statutory guidance for nonjudicial foreclosure in Washington State. Among other changes to the Deed of Trust Act, the FFA provides seriously delinquent borrowers the opportunity to opt-in to a state-supervised foreclosure mediation program with the beneficiary of their loan, so long as that loan was secured by the borrower’s principal residence. The Washington Department of Commerce (Commerce) was tasked with developing and administering the foreclosure mediation program (the Program).

Soon after implementation of the Program, it became clear that the FFA required further amendments to address ongoing concerns of mediators, borrower advocates, beneficiary advocates, and representatives from Commerce. In late 2011 and early 2012, these stakeholders attended several legislative working sessions to begin drafting the proposed amendments. The amendments to the FFA were enacted via House Bill 2614 on March 29, 2012, nearly one year after the enactment of the FFA.

Amendments to FFA — One important amendment to the FFA was to provide all foreclosure mediators immunity from suit in any civil action based on any proceeding or other official act performed in their capacity as a foreclosure mediator, except in cases of willful or wanton misconduct. Initially, the FFA only provided immunity to mediators who were employees of a dispute resolution center, which is a statewide network of non-profit centers dedicated to mediation activities. This left out a large class of private mediators and attorneys, who had been approved and trained by Commerce to serve as foreclosure mediators. This particular amendment to the FFA was of paramount concern to private mediators, as some beneficiaries and borrowers would not agree to sign separate mediation agreements providing mediator immunity since the same was not contemplated by the legislature when it enacted the FFA.

Another noteworthy amendment to the FFA was the alteration of mediation process timelines. The statute originally provided that the borrower and beneficiary were to mediate within 45 days of the mediation referral, each providing the statutorily outlined disclosures to the other just ten days prior to mediation. However, the beneficiary’s receipt of the borrower’s disclosures ten days before the mediation session proved to be problematic because loss mitigation reviews often take much longer. As a result, mediation sessions held within the 45-day benchmark were largely unproductive since the loss mitigation review was either in progress or the beneficiary had not received a complete financial package from the borrower.

The legislature further amended the statute to require that borrowers provide required disclosures to the beneficiary 23 days after the mediation referral. Then, 20 days after receipt of the borrower’s disclosures, the beneficiary provides its required disclosures to the mediation parties. The amendment also increased the mediation session date from 45 days from referral to 70 days from referral. In theory, the alteration to the disclosure exchange timeline was to ensure the beneficiary had sufficient time prior to the mediation session to review the borrower’s complete financial package for loss mitigation options.

Delays Observed — Amendments to the FFA became effective on June 7, 2012. Quickly thereafter it became apparent that the borrower’s 23-day deadline to produce a complete financial package to the beneficiary was rarely met. It was more likely for the beneficiary to receive borrower disclosures anywhere from 30 to 60 days from the date of the mediation referral. Although the FFA was amended to include a provision that mediators may cancel a scheduled mediation session if they reasonably believe a borrower will not attend a mediation session based on the borrower’s conduct, mediators rarely cancel a mediation session for lack of borrower disclosures. Typically, mediators will allow the borrower an extended period of time in which to produce the documents, much longer than the 23 days intended by the legislature.

The delay in borrower disclosures often causes mediation sessions to be scheduled later than 70 days from the date of referral. Because the beneficiary requires 30 to 45 days to review a complete borrower financial package, most mediation sessions are not held within the 70-day mark, but closer to 120 days. Contributing further to delay of the mediation session is the somewhat cumbersome financial documentation requirements for a loss mitigation review and a recent surge in service-transfers of loans. Preparation for mediation can become a long stream of beneficiary document requests and borrower’s production of additional documentation.

The statute originally required the borrower to produce minimal documentation showing the borrower’s current and future income, debts and obligations, and tax returns for the past two years. However, nearly all loss mitigation programs require a comprehensive financial package from a borrower in order for the beneficiary to review the borrower for applicable programs. The amendment expanded the borrower’s responsibility to provide a Home Affordable Modification Program application or equivalent financial worksheet, debts and obligations, assets, expenses, tax returns for the previous two years, hardship information, and other data commonly required by a federal mortgage relief program. This allows the beneficiary to receive a current and complete financial package for loss mitigation review.

Under the amendments to the FFA, mediators were also given the authority to unilaterally schedule a second mediation session, without agreement of the parties in the mediation. As a result, nearly all mediation referrals result in at least two mediation sessions. This amendment has further elongated the mediation process, and results in both borrowers and beneficiaries paying more fees to the mediator, as authorized by Commerce. The borrower and beneficiary evenly split a mediation fee of $400 for the first mediation session. A second session requires another $400 fee, evenly split. Moreover, a request for postponement of a scheduled mediation session comes at an additional cost to the parties, ranging anywhere from $50 to $100 and is largely borne by the requesting party. The statute only dictates that a mediator may charge “reasonable” fees authorized by the statute and Commerce. The initial fee cannot exceed $400; however, additional fees incurred from second sessions and postponement fees are inconsistent amongst mediators, but are allowable because these fees have been determined “reasonable” by Commerce.

The average foreclosure mediation referral costs the beneficiary $500 for mediation fees alone. Additionally, the beneficiary incurs attorneys’ fees for in-person mediation representation, nonjudicial foreclosure costs, and a “foreclosure tax” implemented by the legislature of $250 for each notice of default issued by the beneficiary. Thus, once the borrower opts-in to foreclosure mediation, the nonjudicial foreclosure process is no longer an economical and expeditious route for foreclosure in Washington. Judicial foreclosure remains an option and would allow beneficiaries to avoid mediation altogether; however, Washington’s one-year redemption period is seen as an obstacle to beneficiaries choosing this path.

Commerce’s Annual Report to the Legislature — The statute tasks Commerce with preparation of an annual report to the legislature on the performance of the Program, the results of the Program, and recommendations for changes to the Program. In December 2012, Commerce published the first of these reports, chronicling the performance of foreclosure mediation from July 2011 to June 2012. As of June 30, 2012, a reported 1,655 mediation referrals were received by Commerce; of those, 579 cases had been closed and certified by a mediator. The remainder of them was either still pending at the time the report was published or was found to be ineligible for mediation.

It is difficult to quantify the success of the foreclosure mediation program. In many instances, the beneficiary and borrower reach an agreement prior to mediation. Of the 579 mediated cases reported by Commerce:

• 113 resulted in agreements where the borrowers stayed in their home, through either modification of the loan, repayment of the arrears, or reinstatement of the loan;
• 78 resulted in agreements reached where the borrowers did not keep their home — such as a pre-foreclosure sale, deed-in-lieu of foreclosure, or cash for keys;
• 272 reached no agreement;
• 116 mediations did not occur. The primary reasons for this include the parties reaching agreement prior to the scheduled mediation, voluntary withdrawal by the borrower from the mediation, or failure of one of the mediation parties to participate in the mediation process.

The data presented by Commerce indicates that the Program has resulted in a significant number of agreements reached in mediation, although it remains unclear if the agreements were reached as a result of the Program, or if they would have come to fruition without it.

Good Faith and Risk of Litigation — Another requirement of the Program is that mediators certify the result of the mediation itself, forcing mediators to determine if the parties mediated in good faith. The statute provides that a violation of the duty to mediate in good faith may include failure to timely participate in mediation without good cause; failure to provide the required disclosures before mediation or pursuant to the mediator’s instructions; failure of a party to designate a representative with adequate authority to fully settle, compromise, or otherwise reach resolution in mediation; or a request by the beneficiary that the borrower waive future claims he may have in connection with the deed of trust as a condition of agreeing to a modification.

The statute enumerates specific reasons a mediator may find that a party failed to mediate in good faith. However, Commerce has provided guidance to the mediators that they have “reasonable discretion” to find a party failed to mediate in good faith and the enumerated reasons are not an exclusive basis for the mediator to find a party failed to mediate in good faith. Important to note is that borrowers are largely not found in bad faith for failing to provide their financial package on time as required by statute. Out of 579 mediated cases, beneficiaries were found to have failed to mediate in good faith in 28 cases and borrowers were found to have failed to mediate in good faith in 53 cases. There is no statutory legal consequence to a finding that the borrower failed to mediate in good faith. Conversely, the failure of a beneficiary to mediate in good faith constitutes a defense to the nonjudicial foreclosure action and is a per se violation of the Washington Consumer Protection Act (CPA), RCW § 19.86. A violation of the CPA subjects the beneficiary to treble damages of an unknown sum to be determined at trial. However, it remains to be seen how a court would quantify damages from a beneficiary’s failure to mediate in good faith, especially because the statute protects the mediator from being called as a witness in a court proceeding arising out of a foreclosure mediation.

Conclusion — As Washington approaches the end of the second year of the Program, and the conclusion of the first year since the statute was amended, it is clear that foreclosure mediation successfully brings parties together to try to reach a mutually acceptable alternative to foreclosure. However, the Program is also not without significant cost and delay to the beneficiary. Further, to the extent that mediated cases result in a higher than average rate of litigation, beneficiaries must evaluate whether participation in the Program continues to be viable.

©Copyright 2013 USFN. All rights reserved.
Summer USFN Report.

August 1, 2013

by Eric D. Cook
Wilford, Geske & Cook, P.A.
USFN Member (Minnesota)

Minnesota’s 2013 legislative session ended on May 20 with the passage of a new foreclosure bill that imposes mandatory loss mitigation obligations on servicers, prohibits dual tracking, and exposes the industry to significant litigation risk for failing to fully exhaust all available options.

The legislation was designed to create a cause of action under state law, allow a mortgagor to enjoin or set aside a foreclosure sale for violations of the new statute, and a prevailing borrower is entitled to recover attorney fees and costs. Minn. Stat. § 580.043 will likely delay some foreclosures, but the increased risk of lawsuits will stand out as the most significant change to Minnesota’s nonjudicial foreclosure process. A last-minute revision to the bill applied it to judicial foreclosures as well as nonjudicial proceedings.

Housing advocates will now gain a strong tool to penalize servicers for a failure to comply with the CFPB final mortgage servicing rules in Regulation X. The new statute has some differences from the CFPB regulations that will make compliance more challenging and uncertain in Minnesota. Legal Aid and other housing advocates pushed for the legislation after a version that included mandatory mediation failed earlier in the session. The loss mitigation requirements are effective August 1, 2013, and the dual-tracking prohibitions will be effective on October 1, 2013.

The law requires a servicer to notify a mortgagor in writing of available loss mitigation options, facilitate the submission and review of loss mitigation applications, offer loss mitigation options if the mortgagor is eligible, and comply with any appeal period applicable to the loss mitigation option. Minnesota courts will likely need to resolve the ambiguities created in § 580.043 and certain to arise in practice, including the extent to which a servicer must assist a borrower in completing a partial application. The new statute may prove challenging for the unwary servicer. The best practice for servicers may be to halt a foreclosure proceeding once a borrower speaks up to inquire about loss mitigation, even if the borrower fails to cooperate thereafter, or fails to provide a complete application. In limited instances, it might be appropriate for a servicer to postpone a scheduled foreclosure sale while exhausting loss mitigation alternatives.

The law also bans dual tracking, which means a servicer must not refer a matter to a foreclosure attorney, or must halt a commenced foreclosure, while negotiating a loan modification. Small servicers (5,000 or fewer mortgage loans) are exempt from most requirements.

On the positive side, a deadline is imposed for a mortgagor to commence litigation for violating the statute. A failure to record a lis pendens before the end of redemption creates a conclusive presumption that the servicer complied with loss mitigation obligations. However, certainty about litigation risks won’t be known until Minnesota’s six-month redemption period expires without the legal challenge.

©Copyright 2013 USFN. All rights reserved.
Summer USFN Report.