Florida BK Court Allows Borrowers to Challenge Foreclosure on Surrendered Property

On February 29, 2016, the United States Bankruptcy Court for the Southern District of Florida ruled that a borrower’s statement of intention to surrender real property does not preclude that borrower from later asserting a defense to a foreclosure proceeding if the bankruptcy trustee did not abandon the property to the lienholder. This decision departs from prior bankruptcy and district judge opinions, and expands the foreclosure defenses available to borrowers who indicate their intent to surrender property securing a mortgage loan in bankruptcy.

In In re Elkouby, the borrower filed a Chapter 7 bankruptcy during the pendency of foreclosure proceedings. The borrower’s bankruptcy filings included a statement of intention to surrender the real property, and she did not dispute the debt or claim the property as exempt. The bankruptcy trustee, however, did not administer the property. After the loan was discharged, the lienholder resumed foreclosure, but the debtor challenged the foreclosure. The lienholder moved to reopen the bankruptcy and to compel surrender. The court (Judge Laurel M. Isicoff) denied the motion. In issuing the ruling, Judge Isicoff recognized there is “an ongoing debate about the meaning of ‘surrender’ and what the consequences of surrender are.” Departing from other decisions, she reasoned that unless the borrower expressly abandons the property to the foreclosing lienholder (either by affirmative action or motion by the lienholder or by an order of the trustee), real property not administered by the bankruptcy trustee reverts back to the debtor at termination of bankruptcy proceedings. A lienholder may pursue lawful recourse, such as foreclosure, but the foreclosure may be challenged by the debtor. The Court noted that the special nature of Chapter 7 proceedings, which explicitly tasks the bankruptcy trustee with the right to distribute and dispose property, requires reversion back to the debtor absent administration.
This recent ruling appears to create a split in authority on a debtor’s ability to contest foreclosure proceedings where the borrower states an intention to surrender the property, and even surrenders the property in Chapter 7 bankruptcy proceedings.
Citation:

In re Elkouby, Case No. 14-23934 (Bankr. S.D. Fla. Feb. 29, 2016)

Additional Resources: American Bankruptcy Institute- Rochelle’s Daily Wire: “Courts Split on Whether Surrender Entails Waiver of Defenses to Foreclosure

CA Supreme Court: Borrowers May Bring Wrongful Foreclosure Actions Challenging Deed of Trust Assignments

Highlights

The California Supreme Court recently held that borrowers have standing to bring wrongful foreclosures claims based on challenges to an assignment of the note and deed of trust to a securitized trust.

• The decision rejects multiple lower court decisions holding that borrowers lack standing to challenge loan assignments.

• While the decision is an interim victory for borrowers who have defaulted on their loan, its holding is limited to whether a borrower has standing to assert wrongful foreclosure claims based assignments, without addressing what evidence is required to prove such a claim.

• The decision expands the claims available in California to challenge a foreclosure.
In this update, we assess the details of the decision and how it will likely cause an increase in wrongful foreclosure litigation.

READ FULL UPDATE

FCC Issues 138-Page Order Addressing TCPA Questions

On July 10, 2015, the Federal Communications Commission issued its highly anticipated “TCPA Omnibus Declaratory Ruling and Order” addressing a number of petitions and comments concerning interpretation of the Telephone Consumer Protection Act of 1991. The Order addresses a wide variety of TCPA topics, including the meaning of certain statutory terms and the application of provisions to today’s technology.  Among other important topics, the Order:

  • Defines (or “reaffirms,” according to the Commission) the FCC’s autodialer definition.
  • Discusses third-party liability for TCPA violations.
  • Tries to clear up ambiguity regarding consent and revocation of consent.
  • Addresses re-assigned cell phone numbers, including the creation of a one-call safe harbor for calls to reassigned numbers under certain situations.
  • Confirms that a one-time text message sent immediately after a consumer’s request for the text does not violate the TCPA or FCC rules or regulations.
  • Exempts certain health-care related messages.
  • Addresses call-blocking technology.

Petitions challenging the FCC’s TCPA Order were filed within days of its July 10 issuance in at least two courts of appeal.  See, ACA Int’l v. Fed. Comm’ns Comm’n, No. 15-1211 (D.C. Cir. filed July 10, 2015) (petition for review), consolidated with Sirius XM Radio, Inc. v. Fed. Comm’ns Comm’n, No. 15-1218 (D.C. Cir. filed July 14, 2015) (petition for review); Prof’l Ass’n for Customer Engagement, Inc. v. Fed. Comm’ns Comm’n, No. 15-2489 (7th Cir. filed July 14, 2015) (petition for review).  Among other arguments, these petitions claim that the Order is arbitrary and capricious, constitutes an abuse of discretion, and exceeds the FCC’s statutory authority.

The TCPA includes statutory penalties of up to $1500 per violation, without any proof of actual damage.  According to a WebRecon report on litigation trends, TCPA lawsuits increased 30 percent from September 2013 to September 2014, from 1,338 to 1,908, including an increase in TCPA class action lawsuits.

Read more:  Perkins Coie Update:  “The July 2015 TCPA Omnibus Declaratory Ruling and Order:  The Good, the Bad, and the Ugly

Supreme Court Decides “Underwater” Debtors Cannot Lien Strip Second Mortgages in Bankruptcy

On June 1, 2015, the U.S. Supreme Court ruled in Bank of America v. Caulkett that borrowers cannot void second mortgages under Chapter 7  bankruptcy protection if the secured property’s value falls below the amount owed on the first mortgage.  In a unanimous decision, the Court held that bankruptcy courts may not use Section 506(d) of the Bankruptcy Code to “strip off” junior liens on property if the value of the property used as collateral is less than the amount the debtor owes to the senior lien holder — that is, when the loan is “underwater.”   The Court’s decision affects the right of junior lienholders to collect on loans in the event of a debtor’s declaration of bankruptcy and the treatment of previously secured, but subordinate, debt in bankruptcy proceedings.

Read more:  The Wall Street Journal: High Court: Underwater Homeowners Can’t Void Second Mortgage in Bankruptcy

New York Times:  Supreme Court Ruling Little Help to Struggling Homeowners

 

CFPB Issues Third Fair Lending Report to Congress

On April 28, 2015, the Consumer Financial Protection Bureau (“CFPB”) released its third Fair Lending Report to Congress.  The report summarizes the CFPB’s fair lending activities during the 2014 calendar year.  The report largely focuses on the efforts of the CFPB’s Office of Fair Lending, which according to Director Cordray’s comments in the report “provides oversight and enforcement of Federal fair lending laws; coordinates the Bureau’s fair lending efforts with Federal agencies and State regulators; works with private industry, fair lending, civil rights, consumer and community advocates to promote fair lending compliance and education; and provides annual reports on these efforts to fulfill its fair lending mandate.”

The report includes a focus on two markets:

Mortgage Lending: The report makes clear that during 2014, mortgage lending was a “key priority” for the Office of Fair Lending in  both enforcement and supervision.  The integrity of the data disclosed under the Home Mortgage Disclosure Act (HMDA), and potential fair lending risks in connection with redlining, underwriting, and pricing are identified as areas of focus.

Auto Lending: The report identifies the indirect auto lending industry as another critical area of focus during 2014.  The report notes that the CFPB considered the use of discretionary pricing policies which it contends has resulted in discrimination against certain minorities in violation of the Equal Credit Opportunity Act (ECOA).  It noted that during the past two years, several supervisory reviews allegedly revealed discretionary dealer markup and compensation policies that may discriminate against certain minorities.

The report also notes fair lending activities in the credit card market, including a CFPB enforcement action against a company that allegedly failured to provide certain consumers with debt relief offers because of national origin.

According to the report, the CFPB’s fair lending enforcement activities during 2014 resulted in financial institutions paying approximately $224 million in monetary relief to over 300,000 consumers.

 

SEC Brings First Enforcement Action Against Credit Ratings Agency

On January 21, the Securities and Exchange Commission (SEC) announced a settlement with a credit rating agency regarding its rating of certain commercial mortgage-backed securities (CMBS). According to the announcement, the ratings agency agreed to pay the SEC more than $58 million to settlement the SEC’s charges, plus an additional $19 million to settle parallel cases announced by the New York Attorney General ($12 million) and the Massachusetts Attorney General’s office ($7 million).  The SEC alleged that the ratings agency (i) misrepresented its conduit fusion CMBS ratings methodology; (ii) published a “false and misleading article purporting to show that its new credit enhancement levels could withstand Great Depression-era levels of economic stress;” and (iii) failed to maintain and enforce internal controls regarding changes to its surveillance criteria. In a separate administrative order, the SEC instituted a litigated administrative proceeding against the former head of the agency’s CMBS Group for “fraudulently misreprent[ing] the manner in which the [ratings agency] calculated a critical aspect of certain CMBS ratings in 2011.”

Read more:  SEC CMBS Order #1#2 and #3;  USA Today (SEC charges ratings agency over ratings); Forbes.com

CFPB Proposes Expanded Foreclosure Protections, New Servicer Obligations

On November 20, 2014, the Consumer Financial Protection Bureau (CFPB) issued a proposed rule expanding protections offered to borrowers who have defaulted on residential mortgages.  The proposed rule, if adopted following a 90 day comment period, would add to the agency’s mortgage servicing rules that became effective earlier this year.  A central part of the proposal would require that mortgage servicers provide additional foreclosure protections to borrowers who have already taken advantage of loss mitigation opportunities and subsequently defaulted.  The rule would also add additional servicing transfer requirements on loan servicers, and add protections for surviving family members and others who inherit or receive property.  The CFPB’s press release summarized the new servicer obligations.

  • Require servicers to provide certain borrowers with foreclosure protections more than once over the life of the loan: Currently, a mortgage servicer must give the borrower certain foreclosure protections, including the right to be evaluated under the CFPB’s requirements for options to avoid foreclosure, only once during the life of the loan. Under the proposed rule, servicers would have to give those protections again for borrowers who have brought their loans current at any time since the last loss mitigation application and again defaulted.
  • Expand consumer protections to surviving family members and other homeowners: If a borrower dies, CFPB rules currently require that servicers promptly identify and communicate with family members, heirs, or other parties, known as “successors in interest,” who have a legal interest in the home. The proposal would expand the circumstances in which consumers would be considered successors under the rules and the protections offered to such successors.
  • Require servicers to notify borrowers when loss mitigation applications are complete: The proposal would require servicers to notify borrowers promptly that the application is complete.
  • Loss mitigation obligations of new servicer during servicing transfers:  The proposal provides that generally a transferee servicer must comply with the loss mitigation requirements within the same timeframes that applied to the transferor servicer. If the borrower’s application was complete prior to the transfer, the new servicer generally must evaluate it within 30 days of when the prior servicer received it. For involuntary transfers, the proposal would give the new servicer at least 15 days after the transfer date to evaluate a complete application. If the new servicer needs more information in order to evaluate the application, the borrower would retain some foreclosure protections in the meantime.
  • Clarify servicers’ obligations to avoid dual-tracking and prevent wrongful foreclosures: The rules currently prohibit a servicer from proceeding to foreclosure once they receive a complete loss mitigation application from a borrower more than 37 days prior to a scheduled sale. The proposal purports to clarify what steps servicers and their foreclosure counsel must take to protect borrowers from a wrongful foreclosure sale.
  • Clarify when a borrower becomes delinquent: The proposed rule attempts to clarify that delinquency, for purposes of the servicing rules, begins on the day a borrower fails to make a periodic payment. Under the proposal, when a borrower misses a payment but later makes it up, if the servicer applies that payment to the oldest outstanding periodic payment, the date of delinquency advances. The proposal also would allow servicers the discretion, under certain circumstances, to consider a borrower as having made a timely payment even if the borrower’s payment falls short of a full payment by a small amount.
  • Provide more information to borrowers in bankruptcy: Currently, servicers do not have to provide periodic statements or loss mitigation information to borrowers in bankruptcy. The proposal would generally require servicers to provide periodic statements to those borrowers, with specific information tailored for bankruptcy. Servicers also currently do not have to provide certain disclosures to borrowers who have told the servicer to stop contacting them under the Fair Debt Collection Practices Act. The proposal would require servicers to provide written early intervention notices to let those borrowers know about loss mitigation options.

The proposed rule is subject to a 90 day comment period.  A full copy of the rule is available at the following link:  Amendments to the 2013 Mortgage Rules under the Real Estate Settlement Procedures Act.

CFPB Issues First Enforcement Action Under New Mortgage Servicing Rules

On September 29, 2014, the Consumer Financial Protection Bureau (CFPB) announced it had issued its first enforcement order under the agency’s new mortgage servicing rules that went into effect in January 2014.  The action claims that the servicer, a Michigan-based federal savings bank and loan servicer, did not comply with the agency’s servicing rules concerning loss mitigation efforts to assist borrowers who had defaulted on their mortgage obligation.  The servicer, which did not admit the allegations, issued a statement noting its history of successful loan modifications and its interest in fousing on its business (rather than a costly and protracted dispute with the emerging federal agency):  “This resolution is in the bank’s best interest and allows us to continue building a great company that is poised for sustainable, long-term growth and value creation, benefitting our shareholders, customers and the communities we serve,” bank CEO Alessandro (Sandro) DiNello said in a statement. “The dedicated employees of Flagstar Bank have completed thousands of successful loan modifications and work incredibly hard to meet and exceed the needs of our customers.”

The conduct alleged by the CFPB occured begining in 2011, and much of the conduct criticized by the CFPB took place before the new servicing rules became effective.  CFPB Director Richard Cordray said in a statement that the action “signals a new era of enforcement” relating to loan servicer activities.  The allegations concerned the loan servicer’s loss mitigation efforts, and focused on such specific details of the servicer’s operations as the number of employees dedicated to loss mitigation and wait time to process borrower requests.  The enforcement order requires that the servicer, among other things, pay $27.5 million to approximately 6,500 consumers whose loans it was servicing (regardless of whether the borrower had defaulted on the mortgage loan); to terminate acquisition of default servicing rights from third-parties until the servicer demonstrates to the CFPB it has the ability to comply with servicing rules; and a $10 million civil penalty.  Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has the authority to take action against institutions who the agency claims to have violated the January 2014 mortgage servicing rules.  The agency has broad authority to take action against institutions it alleges has engaging in unfair, deceptive, or abusive practices.

Read more:  Mortgage News Daily; Wall Street Journal on-line; USA Today.

SEC Awards Whistleblower $30M Under Dodd-Frank Act, Sets Record

On September 22, 2014, the U.S. Securities and Exchange Commission (SEC) announced that it expects to award more than $30 million to a whistleblower who provided information that led to a successful SEC fraud enforcement action.  The award is the highest whistleblower payment under the SEC’s three-year-old Dodd-Frank whistleblower program.  According to the SEC, the final award will range from $30 million to $35 million, and is the fourth payment made to a whistleblower living in a foreign country. The previous high SEC whistleblower payment,  announced in October 2013, was $14 million.  In a written statement, SEC Enforcement Director Andrew Ceresney said, “This whistleblower came to us with information about an ongoing fraud that would have been very difficult to detect.  This record-breaking award sends a strong message about our commitment to whistleblowers and the value they bring to law enforcement.”   The SEC’s whistleblower program was established under the Dodd-Frank Act of 2010.  Under the program, the SEC rewards “high-quality, original information” that results in enforcement actions exceeding $1 million.  Awards can range from 10 to 30 percent of the sanctions collected by the SEC.  The whistleblower payments are funded by an investor protection fund financed through enforcement actions.  The SEC has anonymity protection rules preventing it from disclosing the identities of the whistleblower or the enforcement action.

Read more:  Law360 (“SEC To Hand Out Record $30M Whistleblower Award”)The Wall Street Journal (“SEC to Pay $30 Million Whistleblower Award, Its Largest Yet”); Fortune (“SEC Hands out $30 million in largest-ever whistleblower award”)

 

 

NY Attorney General Accuses Mortgage Lender of Redlining

On September 2, 2014, the New York attorney general filed a lawsuit alleging that a regional bank engaged in unlawful discrimination by systemically denying access to mortgage loans through “redlining” Buffalo’s African-American neighborhoods.   According to AG’s complaint, the bank created a “Trade Area” map defining its lending area that included most of the city of Buffalo and its surrounding areas, but excluded the predominantly African-American neighborhoods in Buffalo’s East Side.   This practice also extended to locating bank branches, according to the government’s allegations.  The bank denies the claims in the complaint, calling them “meritless” and stating that it is confident its residential lending practices met all applicable laws and regulations.  The New York case is reminescent of redlining cases filed by the U.S. Department of Justice during the 1990s, before the housing bubble and expanded mortgage lending, including U.S. v. Chevy Chase FSB which similarly alleged unlawful redlining practices based on the areas the lender excluded from its primary marketing territory.

Read more:  The Wall Street Journal; The New York Times;

 

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