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Contested Mortgage Foreclosure, MERS and Beyond: Latest Developments Navigating MERS Challenges, Securitization, Loan Modifications, FDCPA, TILA and More

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WEDNESDAY, DECEMBER 11, 2013

Presenting a live 90-minute webinar with interactive Q&A

Joseph J. Patry, Attorney, Blank Rome, Washington, D.C.

Andrew K. Stutzman, Partner, Stradley Ronon Stevens & Young, Philadelphia

Katrina Christakis, Partner, Pilgrim Christakis, Chicago

Gregory S. Korman, Partner, Katten Muchin Rosenman, Los Angeles

John R. Chiles, Partner, Burr & Forman, Ft. Lauderdale, Fla.

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Background on MERS® and Borrower Challenges to MERS®

Joe Patry 202-772-5940, [email protected]

• Mortgage Electronic Registration Systems, Inc. – MERS was created in the 1990s to streamline the mortgage industry using e-

commerce – As the mortgagee of record, MERS receives service of process, legal notices

and other mail regarding the mortgaged properties – The MERSCORP Holdings, Inc. Mailroom sorts, scans, and transmits the

documents to the MERS® Member servicing the mortgage loan involved

• MERSCORP Holdings, Inc. – Owns and operates the MERS® System, a database that tracks changes in servicing and

ownership rights for loans registered in the database

– Because MERS is a common agent for its members, an assignment is not needed when these rights change hands

– These are transfers are not recordable transactions – i.e., changes in servicing and note ownership are not recorded in the land records (and never have been) because they are not transfers of an interest in real property

– Approximately 3,000 lenders, vendors, and government entities are members of MERS

– Members enter into a membership agreement with MERS®

Background on MERS®

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MERS’ Role as Mortgagee •Mortgage Electronic Registration Systems, Inc. (MERS) is named as the

mortgagee "acting solely as a nominee for Lender and Lender's successors and assigns." •Standard Fannie Mae/Freddie Mac mortgage describes MERS role:

"Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this [Mortgage], but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender's successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing and canceling this [Mortgage.]"

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Carpenter v. Longan •“Mortgage Follows the Note”

•US Supreme Court case from 1872: “The note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity.” Carpenter v. Longan, 83 U.S. 271, 274, 21 L. Ed. 313 (1872)

•Principle has been codified in Article 9 of the UCC: •“The attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage, or other lien.” §9-203(g)

•Transfer of the note causes an equitable assignment of the mortgage. In re Trierweiler, 484 B.R. 783, 789 (B.A.P. 10th Cir. 2012)

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“Split the Note” Theory

•MERS holds the mortgage as an agent of the note holder •Theory has been advanced the MERS “splits” the mortgage because the note and mortgage are held by different entities •Restatement of Property Third § 5.4 Addresses this situation:

“1. A transfer of an obligation secured by a mortgage also transfers the mortgage unless the parties to the transfer agree otherwise, and 2. A mortgage may be enforced only by, or in behalf of, a person who is entitled to enforce the obligation the mortgage secures.”

•The comments explain: •“As mentioned, in general a mortgage is unenforceable if it is held by one who has no right to enforce the secured obligation. For example, assume that the original mortgagee transfers the mortgage alone to A and the promissory note that it secures to B. Since the obligation is not enforceable by A, A can never suffer a default and hence cannot foreclose the mortgage. B, as holder of the note, can suffer a default. However, in the absence of some additional facts creating authority in A to enforce the mortgage for B, B cannot cause the mortgage to be foreclosed since B does not own the mortgage. This result is changed if A has authority from B to enforce the mortgage on B's behalf. For example, A may be a trustee or agent of B with responsibility to enforce the mortgage at B's direction. A's enforcement of the mortgage in these circumstances is proper. . . . The trust or agency relationship may arise from the terms of the assignment, from a separate agreement, or from other circumstances. Courts should be vigorous in seeking to find such a relationship, since the result is otherwise likely to be a windfall for the mortgagor and the frustration of B's expectation of security”

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“Split the Note” Theory

•MERS holds the mortgage as an agent of the note holder •Theory has been advanced the MERS “splits” the mortgage because the note and mortgage are held by different entities •Restatement of Property Third § 5.4 Addresses this situation:

“1. A transfer of an obligation secured by a mortgage also transfers the mortgage unless the parties to the transfer agree otherwise, and 2. A mortgage may be enforced only by, or in behalf of, a person who is entitled to enforce the obligation the mortgage secures.”

•The comments explain: •“As mentioned, in general a mortgage is unenforceable if it is held by one who has no right to enforce the secured obligation. For example, assume that the original mortgagee transfers the mortgage alone to A and the promissory note that it secures to B. Since the obligation is not enforceable by A, A can never suffer a default and hence cannot foreclose the mortgage. B, as holder of the note, can suffer a default. However, in the absence of some additional facts creating authority in A to enforce the mortgage for B, B cannot cause the mortgage to be foreclosed since B does not own the mortgage. This result is changed if A has authority from B to enforce the mortgage on B's behalf. For example, A may be a trustee or agent of B with responsibility to enforce the mortgage at B's direction. A's enforcement of the mortgage in these circumstances is proper. . . . The trust or agency relationship may arise from the terms of the assignment, from a separate agreement, or from other circumstances. Courts should be vigorous in seeking to find such a relationship, since the result is otherwise likely to be a windfall for the mortgagor and the frustration of B's expectation of security”

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Split the Note Theory Has Been Rejected

•Theory has been soundly rejected because of the agency: relationship between MERS and its members

•“In Kansas, an agency relationship may be created expressly or by implication. In an express agency, the principal has delegated authority to the agent by words which expressly authorize the agent to perform a delegable act. An implied agency exists where the principal and the agent intend to create a relationship whereby when the agent acts on this authority, others will believe in and rely on the agent's acts. In re Tax Appeal of Scholastic Book Clubs, Inc., 260 Kan. 528, 535, 920 P.2d 947 (1996). Here, the language of the Mortgage evidences an express agency between MERS and U.S. Bank because it explicitly authorizes MERS to act on behalf of U.S. Bank in all situations related to the enforcement of the Mortgage…” •U.S. Bank, N.A. v. Howie, 47 Kan. App. 2d 690, 697, 280 P.3d 225, 230 (2012)

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Tenth Circuit BAP Rejects Note Splitting •In re Trierweiler, 484 B.R. 783

•Wyoming Bankruptcy trustee filed an adversary proceeding claiming that a MERS mortgage was unenforceable because the mortgage and note were held by different entities •The trial court rejected that theory and found that there was an agency relationship, based on the mortgage and MERS’ agreement with its members •The trustee appealed to the 10th Circuit Bankruptcy Appellate Panel, and the BAP affirmed:

•“The Trustee has pointed to no Wyoming authority that prohibits the loan originator from agreeing to have someone other than the beneficial owner of the debt hold the mortgage and enforce the debt as its agent. We note that Wyoming has a statute that contemplates conveying real estate to a mortgagee in a representative capacity, which suggests that Wyoming allows original parties to a note and mortgage to name someone other than the noteholder as the mortgagee. The Trustee nevertheless contends that he can avoid the Mortgage under the theory that there is no named mortgagee since the Mortgage impermissibly denotes MERS as both Mortgagee and as nominee for the Lender and its successors and assigns. The Trustee is in effect contending that MERS is granted two independent and conflicting roles—mortgagee and nominee. But this is not what the Mortgage states. Under the Mortgage, Borrowers conveyed an interest in their property to “MERS (solely as nominee for Lender and Lender's successors and assigns).” Nominee is defined in Blacks Law Dictionary as “[a] person designated to act in place of another, usually in a very limited way [or a] party who holds bare legal title for the benefit of others[.]” In other words, as nominee for the lender and its successors and assigns, MERS is a limited agent. That agency relationship is addressed in the MERS membership rules which require MERS to comply with the instructions of the holder of the Note. MERS' actions were subject to the direction of either FIB, as the servicer, or Fannie Mae, as the note holder. As stated above, there is nothing impermissible in this arrangement. We conclude there is no split between the Note and Mortgage arising from MERS being named as Mortgagee on behalf of the original lender and its successors and assign. At all times, the Note and the Mortgage were united. “ In re Trierweiler, 484 B.R. 783, 791-92 (B.A.P. 10th Cir. 2012)

•Fifth Circuit has also rejected this theory (among numerous other cases): Martins v. BAC Home Loans Servicing, L.P., 722 F.3d 249 (5th Cir. 2013)

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MERS Ability to Assign •Borrowers have challenged MERS ability to assign mortgages •Courts have rejected these challenges. •Culhane v. Aurora, 2013 U.S. App. LEXIS 3313, *18 (1st Cir. 2013):

•“The plaintiff's claim hinges on the asseveration that MERS did not legitimately hold the mortgage at the time of assignment and, therefore, had nothing to assign to Aurora. Even though the original mortgage papers designated MERS as the holder of the mortgage, the plaintiff's thesis runs, this designation was a nullity because MERS never owned the "'beneficial half' of the legal interest" in the mortgage. We reject this thesis: there is no reason to doubt the legitimacy of the common arrangement whereby MERS holds bare legal title as mortgagee of record and the noteholder alone enjoys the beneficial interest in the loan. The law contemplates distinctions between the legal interest in a mortgage and the beneficial interest in the underlying debt. These are distinct interests, and they may be held by different parties. See Black's Law Dictionary 885 (9th ed. 2009) (defining "beneficial interest" as a "right or expectancy in something (such as a trust or estate), as opposed to legal title to that thing"). So it is here: prior to the assignment to Aurora, MERS held the legal interest and Deutsche held the beneficial interest.” •“Absent a provision in the mortgage instrument restricting transfer -- and there is none here6 -- a mortgagee may assign its mortgage to another party. Because such an assignment is an interest in land, it requires a writing signed by the [*21] assignor. “ Id. at *21

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Strafford Live Webinar

ANDREW K. STUTZMAN Philadelphia, PA December 11, 2013

Contested Mortgage Foreclosure, MERS and Beyond: Latest Developments

Stradley Ronon Stevens & Young, LLP 15

THREE WAYS IN WHICH A PERSON MAY QUALIFY AS THE “PERSON TO ENFORCE THE NOTE” UNDER THE UCC

(1) by being its holder (i.e., in possession of the note where the note is payable to the person or is payable to bearer); See UCC § 1201 (definition of “holder”), § 3201 (manner of negotiation). This determination requires physical examination not only of the face of the note but also of any indorsements. (2) by being a nonholder in possession who has the rights of a holder. See UCC §§ 3203, 3301(2). This method of becoming a person with a right to enforce a note arises when a party obtains possession of a note by means of a “transfer,” rather than a “negotiation.” See In re Veal, 450 B.R. 897, 911 (9th Cir. BAP 2011) (comparing UCC § 3-201 (definition of negotiation) with UCC § 3-203(a) (definition of transfer)). (3) if the note has been destroyed or is lost or is in the wrongful possession of an unknown person or a person that cannot be found, by establishing that the person was formerly in possession of the note with the right to enforce when the loss of possession occurred (and the loss was not a result of a transfer of lawful seizure). See UCC § 3309.


ARGUMENT: PRE-PAYMENT PROVISIONS DESTROY THE NOTE’S NEGOTIABILITY

(AND AVOID THE UCC’S ENFORCEABILITY RIGHTS)

Claimed “non-monetary obligation to give the note holder notice of a prepayment of principal strips the Note of its status as a negotiable instrument.” In re Walker, 466 B.R. 271 (Bkrtcy. E.D. Pa. 2012) REJECTED: “The right …, under the note, to prepay part of the principal does not constitute an "additional undertaking or instruction" that adversely affects the negotiability of the note.” Id. The fact that defendants must notify the lender in the event they opt for prepayment imposes no additional liability on them and is not a condition placed on defendants' promise to pay. Rather, notification is simply a requirement of the exercise of the right of prepayment which, as noted, defendants are free to reject. This requirement does not render the note in issue non-negotiable.” Id. See also In re Sia, 2013 WL 4547312 (Bkrtcy. D.N.J.) (examining terms of the note and rejecting claims that form conditions or obligations sufficient to destroy negotiability)



ARGUMENT: TRUST LAW OVERRIDES UCC AND PSA WAS BREACHED => ASSIGNMENT VOID

Regardless of the UCC, the Pooling and Servicing Agreement (PSA) and New York trust law govern the holder’s rights in the note. Application of the PSA and New York trust law compels the conclusion that the holder has no rights in the note. In re Walker, 466 B.R. 271 (Bkrtcy. E.D. Pa. 2012) “Based on the foundational premise that the PSA and New York law, rather than the UCC, control, the Debtor then asserts that the transfer of the Note to BNYM was not carried out in conformity with the requirements of the PSA, and that the lack of compliance with the PSA requires the disallowance of the Proof of Claim.” Id.


REJECTED: NOTE IS NEGOTIABLE INSTRUMENT => UCC APPLIES

“The Debtor overlooks the fact that the Note's status as a negotiable instrument was established at the outset of the transaction—when the Debtor executed the Note in favor of Allied—long before the assignment of the Note to the Trust.” In re Walker, 466 B.R. 271 (Bkrtcy. E.D. Pa. 2012) It therefore is difficult to understand how a later agreement (the PSA)—to which the Debtor is not a party—could alter the nature of the contract and instrument she executed years earlier.” Id.


REJECTED: BORROWER LACKS STANDING FOR PSA VIOLATIONS

“A judicial consensus has developed holding that a borrower lacks standing to 1, challenge the validity of a mortgage securitization or 2, request a judicial determination that a loan assignment is invalid due to noncompliance with a pooling and servicing agreement, when the borrower is neither a party to nor a third party beneficiary of the securitization agreement, i.e., the PSA.” In re Walker, 466 B.R. 271 (Bkrtcy. E.D. Pa. 2012) “This claim is frivolous, because [the borrower] has no standing to enforce the terms of the PSA, as he is neither a party to it, or an intended third-party beneficiary.” Calvino v. Conseco Finance Serv. Corp., 2013 WL 4677742 (W.D.Tex.)



A VOID / VOIDABLE DISTINCTION FOR CHALLENGES…

“We hold only that a mortgagor has standing to challenge a mortgage assignment as invalid, ineffective, or void (if, say, the assignor had nothing to assign or had no authority to make an assignment to a particular assignee).” Culhane v. Aurora Loan Services of Nebraska, 708 F.3d 282 (1st Cir. 2013) “Withal, a mortgagor does not have standing to challenge shortcomings in an assignment that render it merely voidable at the election of one party but otherwise effective to pass legal title.” Id. “Unlike the alleged problems . . . that an assignor had nothing to assign, or was contractually barred from making a particular assignment, the alleged problem of a trust not complying with the terms of its Trust Governing Documents is an ancillary consideration that does not void the transfer.” Koufos v. U.S. Bank, N.A., 2013 WL 1189502 (D.Mass.)


A SIMILAR APPROACH…

Although “an obligor cannot defend against an assignee’s efforts to enforce the obligation on a ground that merely renders the assignment voidable at the election of the assignor, Texas courts follow the majority rule that the obligor may defend ‘on any ground which renders the assignment void.’” Reinagel v. Deutsche Bank, 2013 WL 5832812 (C.A.5 (Tex.)) However, borrowers, as non-parties to the PSA, “have no right to enforce its terms unless they are its intended third-party beneficiaries.” Id. “[E]ven assuming that the [borrowers] are third-party beneficiaries, the fact that the assignments violated the PSA – a separate contract – would not render the assignments void, but merely entitle the [borrowers] to sue for breach of the PSA.” Id. Thus, allegations of a breach of a PSA would, at most, let borrowers sue as third-party beneficiaries of the PSA (if established), but “they cannot use allegations of such a breach as a basis to contest an otherwise valid mortgage assignment.” Svoboda v. Bank of America, 2013 WL 4017904 (W.D.Tex.)



IS CALIFORNIA VOID? (whether a post-closing date transfer into a securitized trust

is the type of defect that would render the transfer void?)

“New York Estates, Powers & Trusts Law section 7-2.4, provides: “If the trust is expressed in an instrument creating the estate of the trustee, every sale, conveyance or other act of the trustee in contravention of the trust, except as authorized by this article and by any other provision of law, is void.” Glaski v. Bank of America, N.A., 2013 WL 4037310 (Cal.App. 5 Dist.) “Because the WaMu Securitized Trust was created by the pooling and servicing agreement and that agreement establishes a closing date after which the trust may no longer accept loans, this statutory provision provides a legal basis for concluding that the trustee’s attempt to accept a loan after the closing date would be void as an act in contravention of the trust document.” Id.


HELD: BORROWER HAS STANDING TO CHALLENGE TRUST’S CHAIN OF OWNERSHIP

“Transfers that violate the terms of the trust instrument are void under New York trust law, and borrowers have standing to challenge void assignments of their loans even though they are not a party to, or a third party beneficiary of, the assignment agreement.” Glaski v. Bank of America, N.A., 2013 WL 4037310 (Cal.App. 5 Dist.) “We conclude that a borrower may challenge the securitized trust’s chain of ownership by alleging the attempts to transfer the deed of trust to the securitized trust (which was formed under New York law) occurred after the trust’s closing date.” Id. “As a result, Glaski has stated a cognizable claim for wrongful foreclosure under the theory that the entity invoking the power of sale (i.e., Bank of America in its capacity as trustee for the WaMu Securitized Trust) was not the holder of the Glaski deed of trust.” Id.


BUT, WHAT ABOUT OTHER CASES THAT REJECTED STANDING?

“These cases are not persuasive because they do not address the principle that a borrower may challenge an assignment that is void and they do not apply New York trust law to the operation of the securitized trusts in question.” Glaski v. Bank of America, N.A., 2013 WL 4037310 (Cal.App. 5 Dist.) “We are aware that some courts have considered the role of New York law and rejected the post-closing date theory on the grounds that the New York statute is not interpreted literally, but treats acts in contravention of the trust instrument as merely voidable. Despite the foregoing cases, we will join those courts that have read the New York statute literally.” Id.



IS GLASKI BEING FOLLOWED?

“[M]any courts have held that mortgagors, who are not parties to the transactions securitizing their loans, cannot rely on a PSA’s terms to defend against foreclosure.” Deutsche Bank v. Adolfo, 2013 WL 4552407 (N.D.Ill.) “However, Illinois courts have recognized an exception to this general rule: ‘a borrower may raise a defense to an assignment that would render it ‘absolutely invalid,’ that is, void.’” Id. “However, we are persuaded by the courts that have held that a transfer that does not comply with a PSA is voidable, not void.” Id. “A contrary interpretation would injure the parties that the statute is designed to protect. [C]ertificateholders would be harmed if they could not receive foreclosure proceeds because a transfer, otherwise effective under Article 3, did not comply with 2.01(b).” Id. “[B]ecause New York law permits a beneficiary to ratify a trustee’s ultra vires transactions, ‘such transactions are, accordingly, voidable.’” Svoboda v. Bank of America, 2013 WL 4017904 (W.D.Tex.)


IS GLASKI BEING FOLLOWED (AT ALL)?

A “third party, and ‘particularly the obligor’ cannot successfully challenge the validity or effectiveness of the transfer when the assignment is merely voidable.” In re Sandri, 2013 WL 5925655 (Bkrtcy. N.D. Cal.) “This court does not agree with the next prong of the Glaski analysis: that an assignment violating the trust agreement or [PSA] is void under New York state law and thus subject to challenge by non-parties. New York intermediate appellate courts have repeatedly and consistently found that an act in violation of a trust agreement is voidable, not void.” Id. Accord Apostol v. Citimortgage, 2013 WL 6140528 (N.D. Cal.); Dahnken v. Wells Fargo Bank, N.A., 2013 WL 5979356 (N.D. Cal.); Boza v. US Bank Nat. Ass’n., 2013 WL 5943160 (C.D. Cal.); Subramani v. Wells Fargo Bank, N.A., 2013 WL 5913789 (N.D. Cal.); Diunugala v. JP Morgan, 2013 WL 5568737 (S.D. Cal.)


Andrew K. Stutzman www.stradley.com

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First Party Collections: THE CFPB’S EXPANDING VIEW OF THE FDCPA

Katrina Christakis [email protected]

Strafford Webinar

December 11, 2013

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“We find that debt collection constitutes one of today’s most important consumer financial concerns.”

—Director Cordray March 20, 2013

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• Prescribe rules with respect to debt collection • Issue guidance concerning compliance with the law • Collect complaint data • Educate consumers and collectors • Undertake research and policy initiatives related to

consumer debt collection

CFPB Has Primary FDCPA Oversight

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• FTC Report on Debt Buying (January 30, 2013) • CFPB Report on FDCPA (March 20, 2013) • Joint FTC-CFPB Roundtable (June 6, 2013) • CFPB Bulletin on UDAAP in Consumer Debt

Collection (July 10, 2013) • CFPB Bulletin on Effect of Debt Payments on Credit

Reports and Scores (July 10, 2013) • CFPB ANPR (November 6, 2013)

2013 Agency Pronouncements re FDCPA

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• “The FTC receives more consumer complaints about debt collectors, including debt buyers, than about any other single industry”

• “Many of these complaints appear to have their origins in the quantity and quality of information that collectors have about debts”

• Initiated study for 2 main purposes: • Obtain better understanding of debt buying market; and • Explore relationship between debt buying and information

problems that can occur in collections

The FTC Report

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• Receive few underlying documents about debts • Receive information required for debt validation • May also receive some additional information, but

usually do not provide it to consumers • Rarely receive dispute history • Accuracy of information provided about debts at

time of sale not guaranteed • Limitations placed on debt buyers’ access to account

documents • Availability of documents not guaranteed

The FTC Report

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• Provides background on FDCPA, and debt collection industry at large

• Suggests expanding scope to creditors: • “The FDCPA principally applies only to third-party

collectors; in general these are collection agencies, debt purchasers, and attorneys regularly engaging in debt collection. For the most part, first-party creditors are not subject to the FDCPA, although the Dodd-Frank Act, state laws, and Section 5 of the FTC Act prohibit them from engaging in unfair, deceptive or abusive practices in their own collection activity.”

The CFPB Report

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• Harassing alleged debtor and others • Demanding amount other than what permitted by law or

contract • Failing to send required written notice of the debt • Threatening dire consequences if failure to pay • Failing to identify self as a debt collector • Disclosing alleged debt to third parties • Impermissible calls to consumer’s place of employment • Failing to verify disputed debts • Continuing to contact consumer after C&D letter

The CFPB Report

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• Speakers included consumer advocates, credit issuers, collection industry members, state and federal regulators, and academics to exchange information on a range of issues.

• Topics discussed: • amount and quality of documentation available • information needed to verify and substantiate debts • costs/benefits of providing additional disclosures about

debts and debt-related rights • information issues relating to pleading and judgment in

debt collection litigation

The Roundtable

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• Issued bulletin “to clarify the contours” of obligations of “all covered entities” to refrain from committing UDAAPs under Dodd-Frank Act in context of collecting consumer debts

• “Original creditors and other covered persons and service providers under the Dodd-Frank Act involved in collecting debts related to any consumer financial product or service are subject to [UDAAP prohibition]

• “The Bureau will use all appropriate tools to assess whether supervisory, enforcement, or other actions may be necessary.”

The First CFPB Bulletin

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• Collecting amounts not authorized • Failing to post payments and then charging late fees • Disclosing debt to employer and co-workers • Falsely stating character, amount, or status of debt • Misrepresenting that communication is from atty • Misrepresenting whether payment/non-payment

will be provided to credit bureaus • Misrepresenting that debt will be waived or forgiven • Threatening to take action without intention to do so

The First CFPB Bulletin: UDAAP Examples

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• “In response to recent practices observed during supervisory examinations and enforcement investigation, the [CFPB] issues this bulletin to provide guidance to creditors, debt buyers, and third-party collectors about compliance with the [FDCPA] and [UDAAP provisions of Dodd-Frank] when making representations about the impact that payments on debts in collection may have on credit reports and credit scores.”

Second CFPB Bulletin

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• Potentially deceptive statements: • Paying debts to improve consumer’s credit report • Paying debts to improve consumer’s credit score • Paying debts to improve consumer’s creditworthiness

• “Prevalence of these types of potentially deceptive claims is a matter of significant concern to the CFPB.”

• “Debt owners should take steps to ensure that any claims that they make about the effect of paying debts in collection on consumers’ credit reports, credit scores and creditworthiness are not deceptive.”

Second CFPB Bulletin

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• Seeks comment, data and information re debt collection practices

• “Experience suggests that first party collections are a significant concern”

CFPB issues ANPR (Nov. 6, 2013)

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• What rules and other actions, if any, would be useful under the FDCPA and Dodd-Frank?

• How rules should define and use relevant terms? • Whether rules should exclude certain types of debts

or subject them to difference requirements?

ANPR: Means of Addressing “Problems”

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• “Bureau believes that improving the integrity and flow of information within the debt collection system is of critical importance.”

• Considering implementing rules related to the transfer of specified information or documents as part of the sale or placement of account.

• Solicits comments to series of very specific questions.

ANPR: Transfer of and Access to Info

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• Concerns raised over inability of consumers to recognize debt and adequacy of creditor/collector practices to investigate disputes and verify debts.

• How should total amount of debt be itemized? • If current owner not original creditor, what

additional information should be included? • Should additional consumer rights be included in

“validation letter?” • What steps should be taken to investigate disputes,

and what info should consumers be provided?

ANPR: Dispute and Investigation Issues

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• Communications with consumers • Methods, timing, location • Consumers represented by counsel • Servicemember issues

• Communications with third parties • Voice mail conundrum • Caller ID technologies • Demands to cease communications

ANPR: Collector Conduct

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Questions? THANK YOU.

Katrina Christakis pilgrimchristakis.com

[email protected]

CALIFORNIA’S HOMEOWNER BILL OF RIGHTS What is it and what does it mean to you?

Gregory S. Korman Katten Muchin Rosenman

[email protected]

LEGISLATIVE FINDINGS Why the Homeowner Bill of Rights?

The legislature finds: California is “still reeling” from the economic impacts of

“wave of residential foreclosures” All this foreclosure activity “has adversely affected property

values” and resulted in “less money for schools, public safety, and other public services”

The “Urban Institute” says every foreclosure costs local governments just under $20,000

It is essential to the state’ economic health to “mitigate” the negative effects on state and local economies and the housing market caused by continuing foreclosures

Read between the lines: To delay and/or prevent foreclosures

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LEGISLATIVE FINDINGS How do we do that?

By “modifying the foreclosure process” To “ensure that borrowers who qualify are considered

for, and have a meaningful opportunity to obtain, available loss mitigation options”

These changes are “essential” to ensure the crisis does not get worse by “unnecessarily adding foreclosed properties to the market when an alternative to foreclosure may be available.”

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WHO IS SUBJECT TO THE BILL OF RIGHTS? “Mortgage servicers”

Essentially anyone who manages the loan account, interacts with the borrower, enforces the note and deed of trust, etc.

But not the foreclosure trustee

Must conduct more than 175 residential foreclosures per year in California If fewer then that, the new law doesn’t apply to you

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WHO BENEFITS? The “borrower”

Defines “borrower” as: natural person mortgagor or trustor eligible for foreclosure prevention program

BUT NOT Anyone who surrenders the property (by letter or turning

over the keys) Anyone contracting with an organization whose “primary

business” is advising people “who have decided to leave their homes on how to extend the foreclosure process and avoid their contractual obligations to mortgagees or beneficiaries.”

Anyone in pending bankruptcy

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WHAT LOANS APPLY? Only first-position mortgages/liens Owner-occupied One-to-four unit residences

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NEW RULES Right to Modification or Other Foreclosure

Alternative Servicer has to tell borrower they can seek a

modification Servicer has to give a roadmap for applying Service has to consider borrower for all alternatives

available Servicer has to confirm receipt of documents Servicer has to give borrower time to appeal a denial Servicer doesn’t have to give a modification

But apparently does if the servicer offers the program and the borrower meets the criteria

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NEW RULES Cannot move forward with the foreclosure process if:

A “complete” first-lien modification application is pending Application is complete when borrower gets in all documents

within the lender’s “reasonable” deadline Appeal is pending Modification or alternative is approved in writing and

borrower is performing Assignees must honor prior servicer’s approved foreclosure

alternatives

Cannot charge a fee for application or collect late fees during the process

Servicer must provide borrower with executed copy of modification or foreclosure alternative agreement

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NEW RULES FOR SECURITIZED LOANS More holds on foreclosure:

Servicer cannot move ahead (by recording a notice of default, notice of sale, or conducting a foreclosure sale) if while a “complete” application for a first lien loan modification is pending until: The borrower doesn’t accept the offered modification within

14 days of the offer; The borrower accepts but then defaults on the modification; The servicer determines in writing that the borrower is not

eligible and the appeal period (under the new appeal right) expired

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NEW RULES FOR SECURITIZED LOANS When the servicer denies a mod application, the

servicer has to send written notice identifying the reasons for the denial, including: The time for an appeal of the denial; If denial based on investor disallowance, the “specific

reasons” for the investor disallowance If the denial based on net present value calculation, the

monthly gross income and property value used to calculate the net present value and a statement that the borrower may obtain all of the inputs used in the net present value calculation upon written request to the mortgage servicer

If borrower had previously breached an offered modification, put that in.

Description of other foreclosure prevention alternatives if applicable, including a list of steps the borrower must take to be considered for those options. If borrower already approved for another alternative, the information necessary to complete it

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NEW RULES The appeal right:

If the borrower’s application is denied, the borrower shall have “at least” 30 days from the date of the written denial to appeal the denial and to provide evidence that the servicer’s determination was “in error.”

If the application is denied, the servicer cannot move ahead with foreclosure (by recording a notice of default, notice of sale, or conducting a foreclosure sale) until the later of: 31 passes after borrower notified in writing of the denial

(i.e., the appeal period lapses) If there was an appeal, the later of:

15 days after the appeal is denied 14 days after the borrower declines the offered modification

after appeal; or The date the borrower breaches the accepted modification (by

missing the first payment or otherwise)

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NEW RULES Lender protection?

To minimize the risk of borrowers submitting multiple applications for the “purpose of delay,” servicer does not have to reevaluate borrowers already given “a fair opportunity to be evaluated” before

January 1, 2013, or who have already been considered under this new law,

unless there has been a “material change in the borrower’s

financial circumstances” since the previous application and that change is documented by the borrower and

submitted to the mortgage servicer.

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NEW RULES Acknowledgment of receipt

When borrower submits a complete application or any document in connection with a modification application, the servicer has to acknowledge receipt in writing within 5 business days.

The first acknowledgment letter has to include: Description of the modification process, including estimate

of when a decision will be made after a complete application submitted, and how long the borrower has to consider an offer;

Deadlines, including to submit missing documents; Expiration dates for submitted documents; and Any deficiencies in the application

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BEEFING UP EXISTING RULES Pre-foreclosure contact requirements

Must contact borrower to assess borrower’s financial situation and explore options to avoid foreclosure

Advise in initial contact right to another meeting If borrower requests another meeting schedule it

must be scheduled within 14 days Discussion of financial condition and exploring

options can happen in first or second meeting Provide borrower with toll-free number for HUD-

certified housing counseling agency Borrower can designate in writing an attorney, HUD-

certified housing counsel, or “other advisor” (whatever that means) to discuss financial condition and explore options, but the borrower still gets to approve any workout plan

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BEEFING UP EXISTING RULES More hurdles to foreclosure Servicer cannot record notice of default until:

Servicer gives written notice of all of the following: Borrower’s potential rights under Servicemembers Civil

Relief Act That borrower can request a copy of the note, deed of trust,

and any assignment of the deed of trust “required to demonstrate the right of the mortgage servicer to foreclose,”

That the borrower can request a pay history from the last time the borrower was less than 60 days late.

Waits 30 days from initial contact or from completed “due diligence”

Gives a written decision about borrower eligibility for an offered first lien loan modification if the borrower has provided a “complete” application

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BEEFING UP EXISTING RULES Notice of default must include:

Declaration that servicer contacted the borrower, tried with diligence to contact the borrower, or doesn’t have to do so because borrower does not meet

the statutory definition of “borrower” (e.g., debtor has an open bankruptcy)

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BEEFING UP EXISTING RULES “Diligence” requirement; servicer must

Send first-class letter with the HUD-certified counseling agency telephone number

Attempt to call the primary telephone number on file for the borrower at least three times at different hours on different days. Servicer can use an autodialer if upon answering the call is connected to a

live representative. Beware of the TCPA!

Due diligence is satisfied if the primary number—and any secondary numbers are disconnected

Wait two weeks after three telephone calls; if borrower doesn’t respond then send another letter—this time certified mail—that includes the toll-free HUD counseling number

Provide a toll-free number to a live representative during business hours

Post a “prominent link” on the “homepage” of its website listing: Options to avoid foreclosure and instructions for borrower who want to

explore them List of financial documents borrowers should collect and be prepared to

present A toll-free telephone number for borrowers who wish to discuss options The phone number for HUD-certified housing counseling agencies

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RELATED NEW RULE Declaration of diligence

Servicer’s declaration of compliance/diligence required by Civil Code § 2923.55 “shall be accurate and complete and supported by competent and reliable evidence”

Servicer shall ensure that it has received competent and reliable evidence to substantiate the borrower’s default and the right to foreclose, including the borrower’s loan status and loan information

The borrower can sue for failure to do this and get attorney’s fees

The government can bring a civil action against a servicer that engages in multiple and repeated uncorrected violations of this requirement ($7500 per mortgage civil penalty).

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NEW RULES: SINGLE POINT OF CONTACT When a borrower asks for a foreclosure prevention

alternative, the servicer must “promptly” establish a “single point of contact” and provide one or more direct means of communication with

the single point of contact. A “single point of contact” means

an individual or a team, each of whom has ability and authority to perform the statutory functions (essentially shepherding the mod process)

The servicer “shall ensure” that each member of the team is knowledgeable “about the borrower’s situation and current status in the alternatives to foreclosure process.”

Single point of contact stays on the account until the servicer determines all loss mitigation options are exhausted or the borrower’s account becomes current

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NEW RULES: SINGLE POINT OF CONTACT Responsibilities of a single point of contact:

Communicating the process for applying and any deadlines for required submissions;

Coordinating receipt and notifying borrower of missing documents;

Having access to current information and enough people to timely, accurately, and adequately inform the borrower of application status;

Ensuring borrower is considered for all alternatives offered by the servicer;

Having access to people who can stop foreclosure proceedings

If the single point of contact has a supervisor, the borrower can request a transfer to the supervisor

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FEEDING THE LITIGATION FRENZY This is the big one.

New private right of action by the borrower for a “material violation” of Civil Code §§ 2923.55, 2923.6, 2923.7, 2924.9, 2924.10, 2924.11, or 2924.17. Basically all the rules we have discussed

Safe harbor if the servicer fixes it before trustee’s deed upon sale is recorded.

Violation does not affect sale to bona fide purchaser for value

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FEEDING THE LITIGATION FRENZY Remedies:

Before foreclosure (technically before a trustee’s deed upon sale is recorded) the borrower can seek an injunction

After foreclosure the borrower can seek damages If the material violation was “intentional or reckless”

or resulted from “willful misconduct” the court “may award” the greater of treble actual damages or statutory damages of $50,000

Borrower gets attorney’s fees if he gets an injunction or “was awarded damages.”

These rights and remedies are “in addition to and independent of” any other rights or remedies.

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INVITING MORE REGULATION Authorizes state regulators to promulgate

regulations that are enforceable only by that agency. But what about the UCL? Probably not separately enforceable under the UCL

but after Rose v. Bank of Am. who knows? And given the remedies, probably doesn’t matter

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CONCLUSION Be careful Get your compliance down Document everything you do with the borrower Get ready for more litigation, and more

shakedown settlements Get ready to take some cases to trial?

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TILA and HAMP: New Legal Developments

Prepared by:

John R. Chiles| Partner Ft. Lauderdale

TILA: Recent Changes Under Dodd-Frank • Several new provisions added to TILA by Dodd-Frank create new post

origination disclosure duties, including: 15 U.S.C. 1641(f)(2) " . . . . Upon written request by the obligor, the servicer shall provide the obligor, to the best knowledge of the servicer, with the name, address, and telephone number of the owner of the obligation or the master servicer of the obligation." 15 U.S.C. 1641(g) "In addition to other disclosures required by this subchapter, not later than 30 days after the date on which a mortgage loan is sold or otherwise transferred or assigned to a third party, the creditor that is the new owner or assignee of the debt shall notify the borrower in writing of such transfer. . . .“ 15 U.S.C. 1640(a) – added the text in red. “Except as otherwise provided in this section, any creditor who fails to comply with any requirement imposed under this part, including any requirement under section 1635 of this title, subsection (f) or (g) of section 1641 of this title, or part D or E of this subchapter with respect to any person is liable to such person in an amount equal to the sum of . . . .”

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Civil Liability Under TILA • Actual damages. 15 U.S.C. 1640(a)(1). • Statutory Damages: $400-$4,000. See 15 U.S.C.

1640(a)(2)(A). • Attorney's fees and costs. 15 U.S.C. 1640(a)(3). • Limit on Class Damages: lesser of $1 Million or 1 percent of

Defendant's net worth. 15 U.S.C. 1640(a)(2)(B). • Who is liable? Creditors under 1640(a). Assignee can also be liable for violations which are "apparent on

the face" of disclosures. See 15 U.S.C. 1641(a) and (e). Except Assignees “solely for adminsitrative convenience” such as for

purposes of foreclosure. Reed v. Chase Home Fin., LLC, 893 F. Supp. 2d 1250, 1252 (S.D. Ala. 2012) aff'd, 723 F.3d 1301 (11th Cir. 2013).

No specific right of action for servicers.

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15 U.S.C. 1641(f)(2): Compliance • Only a "servicer" is obligated to respond to a written request to identify and

provide telephone number and address for owner or "master servicer." • Deadline to respond is a "reasonable time." Santos v. Fed. Nat. Mortg. Ass'n, 889

F. Supp. 2d 1363, 1366 (S.D. Fla. 2012). • What is a "master servicer" – Not a defined term in TILA or Reg Z. Regulation X (RESPA) does define the term. See Reg. X, 4 C.F.R. §

3500.21(a) (defining "master servicer" as "the owner of the right to perform servicing, which may actually perform the servicing itself or do so through a subservicer" and defining subservicer as "a servicer who does not own the right to perform servicing, but who does so on behalf of the master servicer").

• How must the Owner/Master Servicer be identified - No "magic words" are required but must be unambiguous. Runkle v. Fed. Nat. Mortg. Ass'n, 905 F. Supp. 2d 1326 (S.D. Fla. 2012) order vac. in part on reconsid., 12-61247-CIV, 2012 WL 6554755 (S.D. Fla. Dec. 2, 2012). No magic words means a Master Servicer can be identified simply by

disclosing the nature of the servicing relationship, so long as the servicing relationship described unambiguously meets the definition of master servicer.

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Imputing Liability • Split of Authority: Can a Creditor be held vicariously liable for a servicer's violation

of Section 1641(f)(2)? Strict Interpretation: the plain meaning of the statute does not provide a

means by which to impute liability from a servicer to a creditor. See Holcomb v. Fed. Home Loan Mortg. Corp., 24 Fla. L. Weekly Fed. D 15, 2011 WL 5080324 (S.D. Fla. Oct. 26, 2011); Kievman v. Fed. Nat. Mortg. Ass'n, 901 F. Supp. 2d 1348 (S.D. Fla. 2012).

Looser Interpretation: the statute must be construed liberally to permit imputation of liability from the servicer to the creditor to protect the consumer and give meaning to all parts of the statute. See Khan v. Bank of New York Mellon, 849 F. Supp. 2d 1377 (S.D. Fla. 2012); Montano v. Wells Fargo Bank N.A., 2-80718-CIV-2012 WL 5233653 (S.D. Fla. Oct. 23, 2012); Kissinger v. Wells Fargo Bank, N.A., 888 F. Supp. 2d 1309 (S.D. Fla. 2012); Davis v. Greenpoint Mortg. Funding, Inc., 1:09-CV-2719-CC-TLW, 2011 WL 7070221 (N.D. Ga. March 1, 2011) report and recommendation adopted in part, rejected in part on other grounds, 1:09-CV-2719-CC-TLW, 2011 WL 7070222 (N.D. Ga. Sept. 19, 2011).

Third way: Only a servicer/assignee is obligated under 1641(f)(2). Gale v. First Franklin Loan Services, 701 F.3d 1240 (9th Cir. 2012).

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Assignee Liability

• Consumer Solutions REO, LLC v. Hillery, C-08-4357 EMC, 2010 WL 1222739 (N.D. Cal. March 24, 2010). (reading the addition of 1641(g)(1) to mean there is "no clear Congressional intent to preclude creditor liability" and applying "common law agency theory" to TILA to impute liability to a creditor for a servicer's violation of 1641(f)(2)). Contains the interesting conclusion that "1641(a) addresses

horizontal liability between predecessor and successor whereas 1641(f)(2) addresses potential vertical liability as between agent and principal.

Likely superseded by Gale in the 9th Circuit, but still cited outside the 9th Circuit as persuasive authority for imputing liability to creditors.

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Assignee Liability Cont. • Rinegard-Guirma v. Bank of Am. NA, 3:10-CV-0106S-PK, 2012 WL 1110071 (D.

Or. April 2, 2012) (applying Hillery, Davis, and Khan to hold that "the purpose of Congress' 2009 TILA amendment, other statutory language within TILA, and case law recognizing the possibility that assignees of creditors can also be held liable for servicer's 1641(f)(2) violation.") Also appears to effectively limit the scope of the limitation on assignee liability

to violations which are apparent on the face to liability for origination based disclosures, not post origination disclosures.

• Rinegard-Guirma v. Bank of Am. NA, 10-cv-01065-PK, 2013 WL 5934548 (D. Or. Nov. 1, 2013) (revisiting the issue in light of the 9th Cicuit’s Opinion in Gale). “The Ninth Circuit's construction of § 1641(f) in Gale effectively creates three

categories of servicers, First, there are the servicer-assignees who own the loan obligation. Such servicers are obligated to respond under § 1641( f)( 2) and can be held liable for failure to do so. Second, there are the servicer-assignees who are only nominal owners of the obligation for administrative convenience. These servicers have a duty to respond under § 1641( f)( 2) but there exists no right of action to enforce that obligation. Third, there are servicers who are not assignees, either substantively or nominally. These servicers have no duty under § 1641( f)( 2) to respond to a borrower's request for information, nor can they be held liable for failing to respond.”

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Assignee Liability Cont. • Another Split: Even if a creditor may be held liable for a servicer's

violation, the limitation on liability for assignees, who are only liable for violations which are apparent on the face of initial disclosures, can provide an additional defense against imputing liability which is not available to creditors. See Signori v. Fed. Nat. Mortg. Ass'n, 12-80662-CIV, 2013 WL 1278193 (S.D. Fla. Mar. 27, 2013) (holding that assignee could not be held liable due to express limitation on liability protecting assignees). But See: St. Breux v. U.S. Bank, Nat. Ass'n, 919 F. Supp. 2d

1371, 1379 (S.D. Fla. 2013) (holding that limitation on liability did not prevent imputation of liability to assignee for servicer's purported violation of 1641(f)(2); Cenat v. U.S. Bank, N.A., 12-80663-CIV, 2013 WL 1136585 (S.D. Fla. Mar. 19, 2013) (applying St. Breux); Rinegard-Guirma v. Bank of Am. NA, 3:10-CV-0106S-PK, 2012 WL 1110071 (D. Or. Apr. 2, 2012) .

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Guillaume v. Fed. Nat'l Mortg. Ass'n • After authoring a pro vicarious liability opinion in Montano v. Wells Fargo

Bank N.A., No. 12-80718-CIV. D 20, 2012 WL 5233653 (S.D. Fla. Oct. 23, 2012), Senior District Judge Kenneth Ryskamp abruptly reversed course in Guillaume v. Fed. Nat'l Mortg. Ass'n, 928 F. Supp. 2d 1337 (S.D. Fla. 2013) Facts: the Plaintiff was a foreclosure defendant, did not seek the information

in discovery, and promptly sued after a defective response letter was sent without further communication. This is a fairly common fact pattern.

Held that the circumstances suggested that the request for information and ensuing lawsuit was not a genuine effort to secure information, but was instead an effort to gain leverage in the foreclosure by suing on a technical violation and securing a claim for statutory damages and attorney fees through a collateral action, and thus fell outside Congress' intended purpose for the statute.

In Gallowitz v. Fed. Home Loan Mortg. Corp., 13-60291-CIV, 2013 WL 1948040 (S.D. Fla. May 13, 2013), District Judge Dimitrouleas expressly declined to follow Guillaume.

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12 C.F.R. 226.36(c)(1)(iii) • Providing that: “In connection with a consumer credit transaction secured

by a consumer's principal dwelling, no servicer shall . . . [f]ail to provide, within a reasonable time after receiving a request from the consumer or any person acting on behalf of the consumer, an accurate statement of the total outstanding balance that would be required to satisfy the consumer's obligation in full as of a specified date.” 12 C.F.R. § 226.36(c)(1)(iii). “Reasonable time” has been interpreted to mean 7 days.

• Spit of authority on whether privately actionable. See Kievman v. Fed. Nat. Mortg. Ass'n, 901 F. Supp. 2d 1348 (S.D. Fla. 2012) (holding that no private right of action exists to enforce Section 226.36); but see Runkle v. Fed. Nat. Mortg. Ass'n, 905 F. Supp. 2d 1326 (S.D. Fla. 2012) order vacated in part on reconsideration, 12-61247-CIV, 2012 WL 6554755 (S.D. Fla. 2012) (holding that Section 226.36 is privately actionable).

• Split of authority on whether the regulation only applies to high cost loans. See Montano v. Wells Fargo Bank N.A., 2012 WL 5233653 (S.D. Fla. Oct. 23, 2012) (holding that Section 226.36 only applies to high cost loans); but see Danier v. Fed. Nat. Mortg. Ass'n, 2013 WL 462385 (S.D. Fla. Feb. 7, 2013) (declining to extend Montano).

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Claims Predicated on HAMP • The law has remained fairly unified that HAMP itself does not create a private right

of action nor can borrowers enforce the terms of HAMP guidelines or participation agreements as they are not third party beneficiaries. See Wigod, 673 F.3d 547, 559 n. 4 (7th Cir. 2012) (citing Miller v. Chase Home Fin., LLC, 677 F.3d 1113, 1117 (11th Cir. 2012)) for the holding that HAMP itself does not create a private right of action and, while not evaluating claims sounding in contract, affirming dismissal of claims based on promissory estoppel after TPP did not result in modification). Instead cases are brought to enforce the TPP as a contract or promise

triggering estoppel principals. • The problem is most often with the TPP itself: Is it a contract? On the one hand, the typical TPP tries to be clear that it does not serve to modify

the underlying documents. On the other hand, their often appears to a be a quid pro quo created by the TPP:

the borrower’s promise to make certain monthly payments, submit financial documentation, etc. What the lender promises in return is less clear.

Certain vagueness and/or contradictory provisions in the TPP makes it difficult to ascertain what the lender promises, making it unclear if there is true contract formation.

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The Typical TPP • TPP language differs from institution to institution but they often contain similar

passages to the following, as quoted in the opinion Gaudin v. Saxon Mortgage Services, Inc., 11-CV-01663-JST, 2013 WL 4029043 (N.D. Cal. Aug. 5, 2013)

• Statement of Borrowers Representations: A. I am unable to afford my mortgage payments for the reasons indicated in my Hardship Affidavit and as a result, (i) I am either in default or believe I will be in default under the Loan Documents in the near future, and (i i) I do not have sufficient income or access to sufficient liquid assets to make the monthly mortgage payments now or in the near future; B. I live in the Property as my principal residence, and the Property has not been condemned; C. There has been no change in the ownership of the Property since I signed the Loan Documents; D. I am providing or already have provided documentation for all income that I receive (and I

understand that I am not required to disclose any child support or alimony that 1 receive, unless I wish to have such income considered to qualify for the Offer);

E. Under penalty of perjury, all documents and information I have provided to Lender pursuant to this Plan, including the documents and information regarding my eligibility for the program, are true and correct; and

F. If Lender requires me to obtain credit counseling, I will do so.

• Explanation of Lender’s Obligations: “If I am in compliance with this Trial Period Plan (the “Plan”) and my representations in Section 1

continue to be true in all material respects, then the Lender will provide me with a Home Affordable Modification Agreement....”

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Typical TPP Cont.

• Counter-Signature Requirement: “I understand that after I sign and return two copies of this Plan to the Lender, the Lender will

send me a signed copy of this Plan, if I qualify for the Offer or will send me written notice that I do not qualify for the Offer. This plan will not take effect unless and until both I and the Lender sign it and Lender provides me with a copy of this Plan with the Lender's signature.”

• Disclaimer of Modification: “I understand that the Plan is not a modification of the Loan Documents and that the Loan

Documents will not be modified unless and until (i) I meet all of the conditions required for modification, (ii) I receive a fully executed copy of the a Modification agreement, and (iii) the Modification Effective Date has passed. I further understand and agree that the Lender will not be obligated or bound to make any modification of the Loan Documents if I fail to meet any one of the requirements under this Plan. I understand and agree that the Lender will not be obligated or bound to make any modification of the Loan Documents or to execute the Modification Agreement if the Lender has not received an acceptable title endorsement and/or subordination agreements from other lien holders, as necessary, to ensure that the modified mortgage Loan retains its first Lien position and is fully enforceable.”

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Claims Arising from TPP's • Numerous courts had held that the language of the standard Trial

Payment Plan ("TPP") under the Home Affordable Mortgage Program ("HAMP") made no concrete promises that the loan would be modified after TPP payments were submitted, and in any event such promises did not form a contract because they were unsupported by consideration (based on the preexisting duty to pay caused by Note and Mortgage). See e.g. Senter v. JPMorgan Chase Bank, N.A., 810 F. Supp. 2d 1339, 1357 (S.D. Fla. 2011).

• However, Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012) has caused a tidal shift in the other direction. Held: Counter-signed stated-income TPP created contract and

estoppel claims for permanent modification. Court rejected standard arguments: Lack of definite terms, no

promise, no consideration.

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Circuit Decisions Consistant with Wigod • Young v. Wells Fargo Bank, N.A., 717 F.3d 224 (1st Cir. 2013) (increase in

payment from TPP to permanent mod did not breach TPP, however, failure to timely tender permanent loan modification agreement did breach TPP, adopting Wigod).

• Corvello v. Wells Fargo Bank, NA, Nos. 11-16234, 11-16242, 2013 WL 401729 (9th Cir. Aug. 8, 2013) (bank was obligated to offer borrowers permanent mortgage modification after they complied with program's trial period plan (TPP) in the absence of timely notice to the contrary, adopting Wigod). See also West. v. JPMorgan Chase Bank, N.A., 214 Cal. App. 4th 780, 154

Cal. Rptr. 3d 285 (Cal. Ct. App. 2013), reh'g denied (Apr. 11, 2013), review filed (Apr. 26, 2013) (borrower's compliance with TPP obligated creditor to offer permanent modification).

Case law before Wigod was less onerous. Gaudin v. Saxon Mortg. Services, Inc., C 11-1663 RS, 2011 WL 5825144 (N.D. Cal. Nov. 17, 2011) (denying motion to dismiss on grounds that TPP was not a contract obligating Defendant to review for a modification).

• Large number of district court judges and state appellate court's have adopted Wigod.

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Rejection or Distinguishing of Wigod • Pennington v. HSBC Bank USA, N.A., 493 Fed. App'x 548, 554 n. 7 (5th Cir.

2012) cert. denied, 133 S. Ct. 1272 (U.S. 2013) (rejecting Wigod to the extent Wigod stands for the proposition that a lender cannot verify borrower income post-TPP to ensure continuing economic hardship exists as necessary to qualify for modification).

• In re Jenkins, 488 B.R. 601, 614 (Bankr. E.D. Tenn. 2013) (rejecting Wigod, and adopting prior cases which hold that TPP's do not form a contract for modification).

• Reitz v. Nationstar Mortg., LLC, 4:12CV117SNLJ, 2013 WL 3282875 (E.D. Mo. June 27, 2013) (declining to follow Wigod as non-binding and holding that TPP does not create a contractual promise or promissory estoppel claim to modify the loan because the TPP and HAMP guidelines afford lender discretion in whether or not to extend permanent modification).

• Baehl v. Bank of Am., N.A., 3:12-CV-00029-RLY, 2013 WL 1319635 (S.D. Ind. Mar. 29, 2013) (distinguishing Wigod where the lender does not countersign and return the TPP and alerted the borrower that her submissions were not sufficient to qualify for a HAMP mod).

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Rejection or Distinguishing of Wigod Cont. • Spaulding v. Wells Fargo Bank, N.A., 714 F.3d 769 (4th Cir. 2013)

(rejecting borrower's contract, tort, and statutory claims and distinguishing Wigod in cases where allegation is failure to provide TPP upon submission of HAMP application, as opposed to failure to provide permanent modification after TPP performance by borrowers).

• Gordon v. JPMorgan Chase Bank, N.A., 505 Fed. App'x 361 (5th Cir. 2013) (distinguishing Wigod in situations where the alleged promise to modify the loan if certain conditions are met is conveyed orally).

• Freitas v. Wells Fargo Home Mortg., Inc., 703 F.3d 436, 437 (8th Cir. 2013) (affirming dismissal of fraudulent misrepresentation and promissory estoppel claims predicated on TPP which did not result in modification without mentioning Wigod).

• McFadden v. Fed. Nat. Mortg. Ass'n, 12-1125, 2013 WL 2151199 (4th Cir. Amy 20, 2013) (rejecting claims for equitable relief to set aside a foreclosure sale predicated on purported promises made concerning a HAMP modification without mentioning Wigod).

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HAMP Claims and Class Cert. • Recent decisions on certification of classes for claims predicated

on TPP's which did not result in permanent loan modifications have not been unified in result or reasoning: In re Bank of America Home Affordable Modification Program

(HAMP) Contract Litigation, 2013 WL 4759649 (D. Mass. Sept. 4, 2013) (holding that due to the predominance of individual fact issues as to why individual TPP agreements do not mature into permanent loan modifications, the putative class could not meet the elements of predominance and superiority so as to sustain a class under Rule 23).

Gaudin v. Saxon Mortgage Services, Inc., 11-CV-01663-JST, 2013 WL 4029043 (N.D. Cal. Aug. 5, 2013)(certifying class action, common element of law and fact was the Mortgagee's uniform practice of not considering the TPP legally binding).

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John R. Chiles| (954) 414-6205| [email protected]

QUESTIONS?

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