Foreclosure Defense

A resource for homeowners and businesses facing foreclosure

Header Right

Main navigation

You are here: Home

CFPB Eliminated Dual Tracking

by

The CFPB eliminated dual tracking, which occurs when the bank simultaneously considers a modification application and moves ahead with foreclosure. These things plainly are inconsistent with one another, especially if the borrower loses the property before the bank makes a decision on the modification application.

Dual or double tracking was particularly problematic for borrowers because they often misunderstood that they were being, or could be, double tracked. They often failed to respond to foreclosure notices because the bank told them it would not conduct a foreclosure sale until it decided the modification application. To borrowers, this meant that they didn’t have to worry about the notices the bank sent, or any summons and complaint. The problem for these borrowers is that foreclosure is a process that ends with a foreclosure sale but starts with something else (the “something else” varies by jurisdiction). There are often actions that the borrower could undertake to delay the foreclosure sale but they have to take them at the appropriate time or they’re lost forever. Borrowers were lulled into inaction and then prejudiced by their inaction.

CFPB Amended RESPA Regulations to Stop Dual Tracking

The RESPA rules are contained in Regulation X, which the CFPB amended effective January 10, 2014. The amendments impacting foreclosure defense are in Subpart C, 12 CFR 1024.30 et seq. Section 1024.41 governs the loan servicer’s obligations in evaluating and responding to modification applications and contains the provisions aimed at eradicating double tracking.

Subsection (f) restricts the servicer from commencing a foreclosure unless “[a] borrower’s mortgage loan obligation is more than 120 days delinquent.” This 120-day timeframe is the “pre-foreclosure review period.” If a borrower submits a “complete loss mitigation application” during the pre-foreclosure review period, the servicer cannot commence a foreclosure process unless: (i) The servicer notified the borrower that the borrower is not eligible for any loss mitigation option and any succeeding appeal process has terminated; (ii) The borrower rejects all loss mitigation options offered by the servicer; or (iii) The borrower fails to perform under an agreement on a loss mitigation option. This is particularly significant in non-judicial foreclosure states where commencement of a foreclosure is effectively synonymous, or nearly synonymous, with completion of a foreclosure.

Subsection (g) is more significant in judicial foreclosure states because it requires the servicer to decide a modification application before taking the dispositive step in a foreclosure. It provides that if a borrower submits a complete loss mitigation application after the servicer has taken the first step in any foreclosure process but more than 37 days before a foreclosure sale, the servicer shall not move for foreclosure judgment or order of sale, or conduct a foreclosure sale, unless: (1) There is no pending modification application or appeal of any denial of any modification application; (2) The borrower rejects all loss mitigation options offered by the servicer; or (3) The borrower fails to perform under an agreement on a loss mitigation option.

 

 

Predatory Lending is a Defense, Not a Claim

by

Predatory lending is a defense to foreclosure; it is not an affirmative claim that would entitle a borrower to damages from the lender.

Difference between foreclosure defenses and claims for damages

As discussed in my last post, in the Aubut case the Connecticut Appellate Court recognized that predatory lending is a defense to foreclosure. The defense depends on what the lender new or should have known at the time it made the loan. Though predatory lending might give rise to a claim for money damages against the lender that made the loan, the foreclosing plaintiff is rarely that. Most often, because of the prevalence of mortgage securitizations, the foreclosing plaintiff is an assignee of the loan. The question thus becomes whether you can hold a mortgage loan assignee liable for damages for what the original lender knew or should have known. The Aubut court answered “no.” The foreclosing plaintiff in that case was the ultimate assignee of the loan. The court noted that an assignee takes the loan subject to all defenses that might have been asserted against the assignor. But the assignee does not take the loan subject to the assignor’s liabilities unless the assignee expressly assumes those liabilities. Since the plaintiff had not assumed any liabilities, predatory lending could be a defense to foreclosure but not a counterclaim for damages.

Distinction is good for borrowers

This is a significant distinction. If it were a counterclaim instead of a defense, the courts likely would offset the damages the bank would have to pay against the amount the borrower owed on the loan. But that just reduces the debt. Since most large lenders do not pursue the borrowers for deficiencies between the amount owed and the property value in any event, the offset would be a Pyrrhic victory at best for the borrower. What borrowers really want is to save the property. A counterclaim can’t do that; this predatory lending defense can.

Predatory Lending Defense

by

The concept of “predatory lending” has been around for some time, not as a foreclosure defense unto itself but as an umbrella term for defenses sounding in things like unconscionability, unclean hands and equitable estoppel. The Connecticut Appellate Court seems to have changed that in its 2016 decision in Bank of America, N.A. v. Aubut. Our courts now recognize predatory lending as a defense that precludes foreclosure if the original lender knew or should have known that the loan was destined to fail.

Courts used to excuse banks for knowingly making bad loans

Before 2007 there was a huge demand for mortgage backed securities. Since mortgages are the primary ingredient of mortgage backed securities, the huge demand for the securities meant a huge demand for mortgages. That, in turn, meant a decline in the quality of the mortgages. In other words, mortgage originators made loans to people who could not afford them. The originators didn’t care whether the borrowers could afford the loans because the originators sold the loans into securitizations, making them somebody else’s problem. See The Big Short.

But the “lender, you should have known better” foreclosure defense never got any traction, mainly because the courts had refused to impose on lenders a duty to make sound lending decisions.

Connecticut Appellate Court changes the philosophy

The Appellate Court in Aubut seems to have changed that philosophy. The borrowers alleged a special, or affirmative, defense that the plaintiff could not foreclose because “the loan which was originated by [the original plaintiff] was unaffordable.” The court considered whether this unaffordability defense – which the borrowers had captioned “predatory lending” – was legally viable. It noted that there is no legal authority that coherently defines a predatory lending defense. The defendants argued that “their predatory lending allegations should be considered within the context of the recognized equitable defenses of fraud, unclean hands, unconscionability, and equitable estoppel.” The court agreed, noting that it did not really matter what the defendants called the defense as long as it provided the plaintiff with sufficient notice of the facts claimed and the issues to be tried. And, the borrowers had alleged a litany of facts, which, if true, supported a claim that the original lender knew or should have known that they could not afford the loan.

The court then set about fashioning a new defense. It noted that since foreclosure is an equitable remedy, a court can withhold it on equitable grounds. The predatory lending defense implicated the recognized equitable defenses of fraud and unconscionability, unclean hands, and equitable estoppel. These principles can be combined to plead a single special defense of predatory lending asserting that because the original lender knew or should have known that the loan was “destined to fail from [its] inception,” the plaintiff should not be permitted to enforce the mortgage.

Though the court did not expressly impose a duty on lenders to determine whether the borrower can afford a prospective loan, it seems to have implied one because the notion that the lender “knew or should have known” suggests foreseeability, which in turn suggests a duty. For example, negligence law imposes a duty to prevent foreseeable harm to others. Foreseeability in the negligence context is determined by whether the actor knew or should have known that the act would cause the harm. In the foreclosure defense context, the harm is a loan that failed.

Now Connecticut has a predatory lending foreclosure defense

In short, under Aubut, a residential mortgage borrower can avoid foreclosure if the loan was predatory when made. A loan is predatory if the originator knew or should have known that it would be just a matter of time before the borrower defaulted. Given this definition of predatory, mortgage originators may well have a duty to make an affordability determination before making a mortgage loan.

Mortgage Securitizations May Help Borrowers

by

Endorsements in blank and Pooling and Servicing Agreements may make it impossible for banks to prove they have the right to foreclose. I explained endorsements in blank in Produce the Note, An Alternate View, Part 3 and the right to foreclose, or standing, in Produce the Note, An Alternate View, Part 1. The Pooling and Servicing Agreement (PSA) is the heart of a mortgage securitization. It requires a “depositor” or “transferor” to transfer all of the mortgage loans being securitized to a trustee who “holds” them for the benefit of the investors who buy the mortgage back securities.

The mortgage notes transferred to the trustee pursuant to the PSA must be endorsed in blank. But, under UCC 3-301, transferring possession of a bearer note transfers only the right to enforce the note. It does not transfer ownership of the note and ownership, I have argued, determines who has the right to foreclose. UCC 3-301 affords a non-owner of the note, or even a thief, the right to enforce the note.

Because PSAs routinely required notes in the pool to be endorsed in blank, parties in the secondary mortgage market often endorsed notes in blank well before the PSA depositor or transferor would come into possession. So, if the foreclosing party produces the PSA as proof of its ownership on a motion to dismiss for lack of standing, the borrower will want to know who transferred possession to the foreclosing party and to see proof of that transferee’s ownership. This process should be pursued for every link in the chain all the way back to the party that endorsed the note in blank. The foreclosing party normally has the burden of proof on standing and it likely will be difficult, if not impossible, for the foreclosing party to prove ownership for every transferee in the chain. The longer the chain, the harder it will be. If proof of ownership is lacking at any link, it follows that the foreclosing party has not established the right to foreclose and the foreclosure action should be dismissed.

Treasury’s Servicer Ratings for Modifications are Eye Opening

by

The Treasury Department recently issued The Making Home Affordable Program Performance Report Through April 2011 which reviews mortgage servicers in their administration of President Obama’s Making Home Affordable program. Bank of America, J.P. Morgan Chase Bank and Wells Fargo Bank did so poorly that the government will withhold the financial incentives it pays for mortgage modifications made through the program until these servicers show improvement.

The Report includes a number of metrics for the servicers reviewed but the one I found most interesting was the “Income Calculation Error %.” The borrower’s income is critical to a determination of whether the borrower qualifies for a Making Home Affordable modification. The Making Home Affordable-Compliance unit (MHA-C) did its own income calculation for certain applicants and compared it to the servicer’s income calculation. Differences of 5% or more between MHA-C’s and the servicer’s calculation were included in the “Income Calculation Error %.” Treasury set a benchmark of less than 5% meaning that Treasury believes that MHA-C’s and the servicer’s calculations should be within 5% of each other 95% of the time. None of the ten servicers reviewed met the benchmark. The results ranged from 6% for GMAC Mortgage and Litton Loan Servicing to 33% for Ocwen Loan Servicing. J.P. Morgan Chase was 31%, Bank of America was 22% and Wells Fargo was 27%.

This data means that many borrowers did not get mortgage modifications because the servicer miscalculated their income. We can applaud the Treasury for taking steps to correct the servicers’ miscalculations for future applications. But what’s being done for those who lost a modification opportunity because of an income miscalculation?

Forensic Mortgage Audits are of Limited Utility

by

A forensic mortgage audit is an analysis of the loan from the application, to the closing and through the default. The primary goal is determine whether there are violations of the Truth in Lending Act (TILA) or the Real Estate Settlement Procedures Act (RESPA). A secondary goal is to determine whether loan payments were properly applied and all loan charges are consistent with the loan documents. Forensic auditors maintain that this information can give a borrower leverage in mortgage modification negotiations. I’m not so sure.

TILA and RESPA violations, or improper payment applications and loan charges, are claims that the borrower must prove in court. Merely presenting a forensic mortgage audit report that concludes the bank engaged in wrongdoing does not mean that the bank engaged in wrongdoing. The bank is entitled to have the borrower’s claims follow the normal litigation process. This means pleadings, documents discovery, depositions, experts, dispositive motions and possibly a trial. The bank can subject the audit report, and the person that prepared it, to close scrutiny. The bank will have its own competing audit report. This is all time consuming and expensive for the borrower. The banks, of course, know this. They also know that a borrower in mortgage default is not likely to have the financial resources to pay a lawyer to fight the fight. It’s true that this type of litigation is also expensive for the bank, but the bank may just want to see how far into the litigation the borrower’s resources will take him. Think of it like a game of litigation chicken. The bank is in a better position to win that game.