mba litigation forum september 2011 -servicing and foreclosure

8/3/2019 MBA Litigation Forum September 2011 -Servicing and Foreclosure

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Litigation Forum:Litigation Involving Servicing and Foreclosure

Michelle CanterLotsteinLegal PLLC

MBA

Regulatory Compliance ConferenceWashington D.C.

September 25, 2011


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Overview

Evolving and Emerging Servicing Claims

Discriminatory Servicing SCRA Bankruptcy Wrongful Foreclosure

Modification Post Foreclosure and Eviction

Effective Defenses for Claims Tips from the Trenches Strategies

addressing claims preparing for next wave of claims


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Fair Servicing Claims

Discriminatory lending and servicing remain

a high priority DOJ Fair Lending Unit examining HAMP

data; census tract information likely to beexamined

CFPB MOUs with states enhance effortsto share information

Banking agencies and HUD referringmatters to DOJ

Certain non-public reviews are ongoing Fair Servicing claims expected to rise Disparate impact theories expected to be

tried


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Fair Housing Complaints

Unique challenges with Fair Housing

Complaints, especially if filed concurrentlywith litigation or a regulatory complaint

Borrower alleges discriminatory basis forservicers actions or inactions

HUD/state agency investigates, issuesdocument requests, seeks interviews ofemployees

HUD HOCs initiate communications withservicer directly regarding modification

Resolution through mediation complicated ifborrowers counsel demands fees


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SCRA Compliance is Critical

SCRA Enforcement prioritized

High risk litigation Much media attention leads to increased

claims Effort supercharged with CFPB Office for

Servicemembers Affairs State overlays with additional legislation

create new compliance hurdles andincrease risk of claims


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Bankruptcy Challenges

Gamut of wrongful foreclosure claims arise

in bankruptcy context Claims often arise Post-Foreclosure US Trustees Office, Chapter 7 Trustees

and debtors counsel bring claims

Proofs of Claim challenges Motions to Avoid Lien Objections to Confirmation Adversary Actions

Federal courts interpreting state law thatmay be unresolved or unclear Conflicting or inconsistent opinions within

a state or between bankruptcy courts


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Bankruptcy Challenges

Borrowers initiate fight to delay or stop

eviction or other action Borrowers file Chapter 13 bankruptcy BK Plan dependent on loan modification Court may not require confirmable plan,

but will let modification process play out Files Lis Pendensto stop new

foreclosure As a court of equity, bankruptcy judges may

view lulling arguments more favorable as

to oral discussions or insist on strict proof Consistency and accuracy is key!


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Wrongful Foreclosure Claims

Issues other than Standing and Procedural

Deficiencies continue to be raised Borrower claims False Start / Re-Start

Foreclosure avoidable (intent toforeclose claims) or wrongful

Foreclosure referral too soon beforeexhausting alternatives to foreclosure

Dual Track continued while loan Modapplication pending

Foreclosure restarted after failed workoutwithout offering other foreclosurealternatives

State-specific statutory violations


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Modification Claims Dominate

Significant volume of claims related to Mods

that are pending, denied or unsatisfactory Various categories of claims emerge

No-Mod (borrower got none) Mo-Mod (borrower wants more)

Re-Mod (borrower wants do-over) Changing Standards from Fannie, Freddie

and FHA present ongoing challenges Impact of Consent Order Leading

Practices still unknown


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No-Mod Claims

No-Mod: Servicer failed to offer/grant

modification, failed to offer/exhaust otherforeclosure alternatives Failure to offer HAMP, HAFA, or HERA Failure to follow timelines or guidelines

Wrongful denial or failure to escalatedenial of mod

Failure to issue Adverse Action Notice


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Mo-Mod and Re-Mod Claims

Borrower alleges Mod offered is not enough

or terms offered are based on wrong info Failure to timely communicate

determination or reasons fordetermination

No material reduction in payments or Noprincipal reduction

Failure to analyze ability to repay or tooffer affordable Mod

Error in inputs, or underwriting of Modapplication or calculating NPV

Failure to give a second look


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Wrongful Foreclosure Defense

State law controls; judicial versus non-

judicial variations may be significant Distinguish attempted wrongful foreclosure

claim; is it recognized? Determine plaintiffs burden

More than defect in foreclosure process? Specific damages or harm? Foreclosure sales price variationAnalyze causal connection between anydefect and result

Watch state consumer protection andFDCPA claims!


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Defending HAMP Claims

Prevailing view = No private cause of action

under HAMP Precedent for no breach of contract claim

where only basis for contract claim is HAMPoffer

Illustrative cases: Acuna v. Chase Home Fin., LLC, 2011 WL1883089, at *4 (E.D.Va. May 17, 2011); Hart v. CountrywideHome Loans, Inc., 735 F.Supp.2d 741, 748 (E.D.Mich.2010);Speleos v. BAC Home Loans Servicing, L.P., 755 F.Supp.2d304, 311 (D.Mass.2010); Hoffman v. Bank of Am., N.A., 2010

WL 2635773 (N.D.Cal. June 30, 2010); Simon v. Bank of Am.,N.A., 2010 WL 2609436 (D.Nev. June 23, 2010) and others.


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Defending Mod Claims

No private cause of action

Mod Guidelines/Statutes/Procedures not ineffect for relevant time period

No justifiable reliance by borrower orpromissory estoppel

Statute of Frauds / Parol Evidence Ruleprevents oral modifications to Note andSecurity Instrument

Oral promise cannot conflict with writing No Waiver of right to foreclose

Consideration of Mod is not a Waiver Suspending dual track not a Waiver Waiver is not a cause of action


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Defending Breach of Contract

Back to the Basics: The documents control

the analysis Trial Period Plan (TPP) orModification Agreement

Effective Defenses Failure to strictly comply with TPP or

Mod terms and condition Borrowers failure to meet conditionsprecedent Payments not timely made All documents not timely submitted Signed agreement not timely returned

No new contract executed for TPP or Mod


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Evolving - TPP Breach Claims

Stagikas v. Saxon Mortg. Services, Inc.,

2011 WL 2652445 (D. Mass., July 5, 2011) Borrower entered into TPP, was not

offered permanent mod filed suit alleging breach of contract,

FDCPA Claims and claims for violationsof MA Consumer Protection Act HELD: Borrower can sue servicer for

breach of trial period plan agreementunder contract theory instead of HAMP


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Evolving Claims TPP Breach

When is a contract a contract?

What are the TPP documents? Is there a viable claim for breach of TPP? Stagikas issued in July 2011, is language in

TPP now different?

Do new TPP guidelines create a host ofnew claims


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Understanding the Mod Docs

Home Affordable Modification Trial Period

Plan Notice

Upon receipt of the documentation and

determination of the borrower's eligibility,

servicers must prepare and send to theborrower a firm offer indicating the borrowerqualifies for the Home AffordableModification.

(Last updated September 20, 2011)
https://www.hmpadmin.com/portal/programs/docs/hamp_borrower/hampverifiedincome.dochttps://www.hmpadmin.com/portal/programs/docs/hamp_borrower/hampverifiedincome.dochttps://www.hmpadmin.com/portal/programs/docs/hamp_borrower/hampverifiedincome.dochttps://www.hmpadmin.com/portal/programs/docs/hamp_borrower/hampverifiedincome.doc


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Tips from the Trenches

Identify HAMP, FHA-HAMP, Securitization

or proprietary Mod hierarchy options basedon Investor Fannie Mae revised 08/26/2011 FHA similar, yet distinct

Understand timelines/docs for actions Understand any state law overlays Distinguish basis for denial

Program eligibility? Underwriting inputs or NPV?

Missing docs? Determine if other servicing practices

questioned


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FHA TPP -- ML 2011-28

Issued 08/15/2011, effective 10/01/2011

Outlines when TPP required before mod orpartial claim Borrower eligibility Minimum 3-month period, payment

amounts and interest rate guidance Defines when TPP fails During TPP, suspend foreclosure If TPP fails, before commencing or

continuing foreclosure, must re-evaluate

borrowers eligibility for other loss mitigationactivities


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Defending TPP Breach Claims

Understand and review the documents and

correspondence Clearly identify the phase of the multi-phase

Mod process Eligibility + TPP + Mod

Borrower and loan eligibility, Borrowersubmits docs, Servicer conducts NetPresent Value (NPV) test


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Ongoing Mod process is ripe for new claims

Litigators need to understand the process What about change in circumstance

(borrower becomes employed after Modapp submitted)?

What about second look before denialor after TPP fails Application of payments analysis is

ongoing If separate foreclosure or bankruptcy

counsel, maintain good communication


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Post Foreclosure Claims

The same claims are often filed post-

foreclosure Adds additional elements of analysis

depending on state law (i.e., redemptionright)

Third-party purchaser at foreclosure salescreates additional affirmative claims Courts reluctant to slam the door on claims

merely because foreclosure is completed


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Investors take varying approaches to post-

foreclosure actions Some refuse to consider modification Others permit modification

Investors may permit borrower to remain in

property if rent payments made for 60-90day period Servicers often required to identify

underlying issue, which may triggerbuyback demand from investor for loan

Modification approval may be impractical


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Wrongful Eviction Claims

Borrower uses eviction proceeding as last

chance for wrongful foreclosure Less formal court process for eviction ripe

for procedural issues upon appeal or

judgment

Borrower claims: Property not vacant Personal property not trash

Loss of heirlooms and valuables Emotional Distress damages

No lawful eviction conducted No proper notice to Borrowers


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Claims We Expect to See

Impact of Interagency Consent Orders and

FHFA Servicing Alignments ongoing Do they establish Leading Practices for

Servicers? When is Dual Track triggered?

If no SPOC, are there affirmative claims? Second Look Review of Mod Denialbefore foreclosure referral or sale?

Do Policies and Procedures align withleading practices


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Maintain a Courtroom View

What happens in a courtroom doesnt stay

in a courtroom! Even a one-off case can become a basis

for a slew of new arguments Coordinated servicer approach + strategic

decisions should guide counsel to limit badfacts resulting in bad law Differentiate attorney role from witness

role Be attuned to industry-wide or

institutional discussions occurring inspecific cases (courts want to learn)


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Lessons Learned from NJ

NJ Supreme Court issued Administrative

Show Cause Orders, Emergency Orderamending Court rules

Foreclosure moratorium for 6 high volumeservicers until Show Cause Orders satisfied

24 other servicers required to fileCertification to evidence proceduressatisfy NJ requirements and acceptable

Ret. Judge Barisonek appointed SpecialMaster to review certification to determine if

servicer satisfied NJ requirements Additional servicers impacted (all GSE

servicers) received request for Certification


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NJ Update since Spring 2011

If certification is lacking, Judge Barisonek

requires supplemental certification torespond to specific inquiries

Hearings held Foreclosures recently resumed

What Have We Learned? The Courtroom is not Vegas What happens in the courtroom doesnt

stay in the Courtroom Efforts failed to keep certifications under

seal all appear in public record Consistency in future filings is critical

P i Ti Wi


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Practice Tip: Witnesses

Guard the testimony of your witness and

remember the Glarum holding Understand the scope of witnesses

knowledge and ensure documents areaccurate

Ensure witnesses are prepared toanswer questions before they are askedabout parties, docs, practices,procedures

Understand delays in providing

documents may create adversepresumptions

Th C Vi


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The Courtroom View

Never assume the risk (a procedural

technicality) is proportional to the actualmagnitude of problem

Understand when/what issues servicer iswilling to litigate

Understand the Media Tolerance of theinstitution! At every stage, clarify role and capacity of

servicer

S i K h P i


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Strategies Know the Parties

Identify all the parties (named/unnamed)

Originator, Holder, Investor, Servicer,Prior Servicers, MERS,Trustee/Foreclosure Counsel,Securitization Parties

Third Parties acting for Borrower,Servicer, Foreclosure Counsel Understand contracts/duties between

parties, including TPPs

St t i K th D


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Strategies Know the Docs

Request and Review

Original Note location Note Endorsement or Allonge Assignment(s) and Other Docs

Date executed and by whom

Date recorded Notarizations and Seals (who, where, when,how)

Foreclosure Statutory Notices Servicing/Contact History Records

Correspondence with Borrowers (includingby TPPs)

St t i E l t C


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Strategies Evaluate Case

High Risk Allegations

SCRA claims Dual Tracking with performing Trial/Perm

Mod in place Foreclosure after bankruptcy filing

Complaint to regulatory agency Discrimination Allegations Spot Servicing Errors (payments, fee

amounts, disclosures, credit reporting) Understand Servicer Expectations

Media Tolerance Reputational Risk

Maintain a Courtroom View

Q ti ?


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Litigation Forum:

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Questions?

A. Michelle Canter

LotsteinLegal PLLCWashington DC | Atlanta

[email protected]

www.lotsteinlegal.com

The information provided here is for informational purposes anddoes not constitute legal advice.
mailto:[email protected]://www.lotsteinlegal.com/http://www.lotsteinlegal.com/mailto:[email protected]

mba litigation forum september 2011 -servicing and foreclosure

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