I. Finding the Right Party
- A. Send a “Request for Information” under RESPA
The party most often known to your client is the servicer of the mortgage. This is the party that deals most regularly with the client, by requesting and accepting payments and providing mortgage and escrow statements. As agent for the mortgage owner, the servicer is also the party that should have accurate information about the entity that owns and holds the mortgage. Several federal statutes require the servicer to identify the mortgage owner if a proper request is made.
Sending a “qualified written request” under the Real Estate Settlement Procedures Act (RESPA) has been one method used to compel disclosure of this information from a servicer. The problem with this approach, however, has been that RESPA gave servicers almost three months to comply — the servicer had 20 business days to acknowledge receipt of the request, and 60 business days to provide the information. RESPA regulations that go into effect on January 10, 2014, create a new procedure for information requests and significantly reduce the response period to 10 business days for a request for the mortgage owner.
A written inquiry that seeks information with respect to the borrower’s mortgage loan will now be referred to as “request for information,” rather than a qualified written request. For most requests for information that do not seek information about the mortgage owner, a servicer will need to acknowledge the request within 5 business days of receipt, and respond within 30 business days of receipt. If the borrower or borrower’s agent sends a written request seeking the identity, address or other relevant contact information for the owner or assignee of a mortgage loan, the servicer must respond within 10 business days. Moreover, a servicer is not permitted to extend the time period for responding to such a request by an additional 15 days, as can be done for other requests for information.
The Commentary to Regulation X instructs that a servicer complies with a request for the owner or assignee of a mortgage loan by identifying the person on whose behalf the servicer receives payments from the borrower. To assist in compliance, the CFPB Commentary provides the following examples:
1) A servicer services a mortgage loan that is owned by the servicer or its affiliate in portfolio. The servicer therefore receives the borrower’s payments on behalf of itself or its affiliate. A servicer complies by responding to a borrower’s request with the name, address, and appropriate contact information for the servicer or the affiliate, as applicable;
2) A servicer services a mortgage loan that has been securitized. In general, a special purpose vehicle such as a trust is the owner or assignee of a mortgage loan in a securitization transaction, and the servicer receives the borrower’s payments on behalf of the trust. If a securitization transaction is structured such that a trust is the owner or assignee of a mortgage loan and the trust is administered by an appointed trustee, a servicer complies with a borrower’s request by providing the name of the trust and the name, address, and appropriate contact information for the trustee. If a mortgage loan is owned by “Mortgage Loan Trust, Series ABC-1,” for which “XYZ Trust Company” is the trustee, the servicer should respond by identifying the owner as “Mortgage Loan Trust, Series ABC-1,” and providing the name, address, and appropriate contact information for “XYZ Trust Company” as the trustee.
With respect to investors or guarantors, such as Fannie Mae, Freddie Mac and Ginnie Mae, the Commentary further notes that although these entities might be exposed to some risk related to mortgage loans held in a trust, either in connection with their role as an investor in securities issued by the trust or as guarantor to the trust, they are not the owners or assignees of the mortgage loans solely as a result of their roles as investors or guarantors. Rather than name Fannie Mae as the owner or assignee of a mortgage held in a securitized trust in which Fannie Mae is a guarantor but does not serve as the trustee for the trust, the Commentary would therefore suggest that the servicer should identify the trustee of the trust as the owner or assignee of the mortgage.
However, the Commentary also recognizes that a party such as a guarantor may in certain circumstances assume multiple roles for a securitization transaction. For example, a mortgage loan subject to a request may be held in a trust as part of a securitization transaction in which Fannie Mae serves as trustee, master servicer, and guarantor. Because Fannie Mae is the trustee of the trust that owns the mortgage loan, a servicer complies with the regulation in responding to a borrower’s request by providing the name of the trust, and the name, address, and appropriate contact information for Fannie Mae as the trustee.
A servicer that fails to comply with a request for information is subject to a cause of action for recovery of the borrower’s actual damages, costs and attorney’s fees, as well as statutory damages up to $2,000 in the case of a pattern and practice of noncompliance.
- B. Send a TILA § 1641(f)(2) Request to the Servicer
Similar to RESPA, the Truth in Lending Act contains a provision that requires the loan servicer to tell the borrower who is the actual holder of the mortgage. Upon written request from the borrower, the servicer must state the name, address, and telephone number of the owner of the obligation or the master servicer of the obligation.
One problem with enforcement of this provision had been the lack of a clear remedy. However, a 2009 amendment to TILA explicitly provides that violations of this disclosure requirement may be remedied by TILA’s private right of action found in section 1640(a), which includes recovery of actual damages, statutory damages, costs and attorney fees. Still, because section 1640(a) refers to “any creditor who fails to comply,” some courts have held that there is no remedy against a servicer who fails to comply if the servicer is neither the original creditor nor an assignee. Arguments supporting the view that servicers are liable in this situation are set out in § 18.104.22.168 of NCLC’s Truth in Lending (8th ed. and Supp.).
Another problem with the TILA provision is that it does not specify how long the servicer has to respond to the request. To be consistent with the virtually identical requirement under RESPA, courts may conclude that a reasonable response time should not exceed 10 business days after receipt.
- C. Review Transfer of Ownership Notices
TILA also requires that whenever ownership of a mortgage loan securing a consumer’s principal dwelling is transferred, the creditor that is the new owner or assignee must notify the borrower in writing, within 30 days after the loan is sold or assigned, of the following information:
- the new creditor’s name, address, and telephone number;
- the date of transfer;
- location where the transfer of ownership is recorded;
- the name, address, and telephone number for the agent or other party having authority to receive a rescission notice and resolve issues concerning loan payments; and
- any other relevant information regarding the new owner.
This law applies to any transfers made after May 20, 2009. Attorneys should ask their clients for copies of any transfer ownership notices they have received under this law. Assuming that there has been compliance with the statute and the client has kept the notices, the attorney may be able to piece together a chain of title as to ownership of the mortgage loan (for transfers after May 20, 2009) and determine the current owner of the mortgage. Failure to comply with the disclosure requirement gives rise to a private right of action against the creditor/new owner that failed to notify the borrower.
- D. Check Fannie & Freddie’s Web Portals
Both Fannie Mae and Freddie Mac have implemented procedures to help borrowers to determine if Fannie Mae or Freddie Mac owns their loan. Borrowers and advocates can either call a toll-free number or enter a street address, unit, city, state, and ZIP code for the property location on a website set up to provide the ownership information. The website information, however, may in some cases refer to Fannie Mae or Freddie Mac as “owners” when in fact their participation may have been as the party that had initially purchased the loans on the secondary market and later arranged for their securitization and transfer to a trust entity which ultimately holds the loan.
- E. Check the Local Registry of Deeds
Checking the local registry where deeds and assignments are recorded is another way to identify the actual owner. However, attorneys should not rely solely on the registry of deeds to identify the current holder of the obligation, as many assignments are not recorded. In fact, if the Mortgage Electronic Registration System (MERS) is named as the mortgagee, typically as “nominee” for the lender and its assigns, then assignments of the mortgage will not be recorded in the local registry of deeds. A call to MERS will not be helpful as MERS will only disclose the name of the servicer and not the owner. In addition, some assignments may be solely for the administrative convenience of the servicer, in which case the servicer is the owner of the mortgage loan.
II. Sample Request for Identity of Mortgage Owner under RESPA
[name of servicer]
Attn: Borrower Inquiry Department
Re: [name of debtors, address, account number]
Dear Sir or Madam:
Please be advised that I represent [debtors] with respect to the mortgage loan you are servicing on the property located at [address]. My clients have authorized me to send this request on their behalf (see Authorization below). As servicer of my client’s mortgage loan, please treat this as a “request for information” pursuant to the Real Estate Settlement Procedures Act, subject to the response period set out in Regulation X, 12 C.F.R.§ 1024.36(d)(2)((i)(A).
Please provide the following information:
The name of the owner or assignee of my clients’ mortgage loan;
The address and telephone number for the owner or assignee of my clients’ mortgage loan;
The name, position and address of an officer of the entity that is the owner or assignee of my clients’ mortgage loan; and
Any other relevant contact information for the owner or assignee of my clients’ mortgage loan.
Thank you for taking the time to respond to this request.
Very truly yours,
- III. Authorization of Release Information
Re: Borrowers: [name of debtors]
Account No: [account no.]
Property Address: [address]
We are represented by the law office of [name of firm] and attorney [name of attorney] concerning the mortgage on our home located at [address]. We hereby authorize you to release any and all information concerning our mortgage loan account to the law office of [name of firm] and attorney [name of attorney] at their request. We also authorize you to discuss our case with the law office of [name of firm] and attorney [name of attorney].
Thank you for your cooperation.
Very truly yours,
Summaries of Recent Cases
Published State Cases
Servicer Estopped from Asserting the Statute of Frauds as a Defense to Contract Claim Based on Permanent Mod; Wrongful Foreclosure & Tender
Chavez v. Indymac Mortg. Servs., __ Cal. App. 4th __, 2013 WL 5273741 (Sept. 19, 2013): This case involves the relationship between two principles, the statute of frauds and the doctrine of estoppel. The statute of frauds requires certain types of contracts (and agreements modifying existing contracts) to be memorialized in writing, and invalidates contracts not meeting this standard. Agreements pertaining to the sale of real property are covered by the statute of frauds. A statute of frauds defense, however, is not allowed to fraudulently void a contract. In those cases, “[the doctrine of] equitable estoppel may preclude the use of a statute of frauds defense.” To estop a statute of frauds defense, a plaintiff must show, in part, that the defendant intended (or led the plaintiff to believe they intended) the plaintiff to act upon defendant’s conduct, and that plaintiff did so, to their detriment. Here, the trial court sustained servicer’s demurrer because borrower had not specifically “plead around the statute of frauds” in her complaint. The Court of Appeal disagreed. Both the language of the TPP and the Modification Agreement, combined with the facts alleged in the complaint, preclude a statute of frauds defense. The modification agreement’s language, which was “ambiguous at best and illusory at worse,” promised to “automatically” modify borrower’s loan if she agreed to its terms, fully performed under the TPP, and if her representations continued to be true, but at the same time predicated contract formation on servicer’s execution and return of the Modification Agreement to the borrower. “Under [servicer’s] proposed reading of the Modification Agreement, [borrower] could do everything required of her to be entitled to a permanent modification, but [servicer] could avoid the contact by refusing to send [her] a signed copy of the Modification Agreement for any reason whatsoever.” Despite this language, servicer “objectively intended” to modify borrower’s loan: not only did servicer respond to borrower’s successful TPP completion by sending her the Modification Agreement, but it then accepted borrower’s continued payments. This conduct and the conflicting contractual language in the TPP and Modification Agreement show servicer’s “intent” that borrower act upon this conduct. Borrower detrimentally relied on servicer’s conduct by signing the Modification Agreement, which obligated her to pay additional fees and costs she would otherwise not have paid. Servicer’s statute of frauds defense failed and the demurrer to her breach of contract claim was overturned.
After finding the Modification Agreement enforceable, the court also overturned the demurrer of borrower’s wrongful foreclosure claim, based on a breach of the Modification Agreement. The court did not require tender here, where the servicer “lacked a contractual basis to exercise the power of sale,” which would void the foreclosure. Borrower’s additional claims, that servicer did not provide proper pre-foreclosure notice, would make the foreclosure sale voidable, not void. Under this notice claim alone, borrower would have to tender the amount due, but because her case is partly based on her breach of contract claim, tender is not required.
CC § 2923.5 Pleading Specificity; Damage Causation for Promissory Fraud Claim; Statute of Frauds Applies to Modifications
Rossberg v. Bank of Am., N.A., __ Cal. App. 4th __, 2013 WL 5366377 (Aug. 27, 2013): CC § 2923.5 prevents servicers from filing a notice of default until 30 days after contacting (or diligently attempting to contact) a borrower to discuss foreclosure alternatives. In other words, the servicer must make contact more than 30 days before initiating a foreclosure. Failing to contact or attempting to contact the borrower within the 30 days immediately preceding an NOD does not violate the statute. Here, borrowers alleged their servicer failed to personally meet with them or call them to discuss foreclosure alternatives “in the 30-days leading up to [the NOD].” This insufficient pleading, coupled with the multiple servicer-borrower contacts made before the 30-day window, led the court to affirm the demurrer to borrower’s § 2923.5 claim.
Promissory fraud includes the elements of fraud, but couches them within a promissory estoppel-like structure: 1) a promise made; 2) the intent not to perform at the time of the promise; 3) intent to deceive; 4) reasonable reliance; 5) nonperformance; and 6) damages caused by the reliance and nonperformance. Importantly, a borrower must demonstrate “how the actions he or she took in reliance on the defendant’s misrepresentations caused the alleged damages.” If the borrower would have been harmed even without the promise, reliance, and nonperformance, “causation cannot be alleged and a fraud cause of action cannot be sustained.” Here, borrowers alleged reliance on Bank of America’s promises to modify their loan by providing financial documents, disclosing confidential information, and by continuing to make loan payments. These actions, borrowers alleged, led to their inability to obtain a “replacement loan.” First, borrowers make no causal connection between providing personal information and harm. Second, continuing to make loan payments on a debt owed allowed borrowers to remain in their home and is not causally linked to any damages. Borrowers also fail to show sufficient equity to obtain a replacement loan. Finally, borrowers did not allege that their detrimental reliance led to their default, the real harm. The court affirmed the demurrer to the fraud claim.
The statute of frauds requires certain types of contracts to be memorialized in writing, including contracts involving real property. Additionally, a contract to modify a contract subject to the statute of frauds is also within the statute of frauds. Here, borrowers alleged BoA orally promised to modify their promissory note and deed of trust— contracts that fall within the statute of frauds. Following, any modification to those instruments also falls within the statute of frauds and had to be written to be enforceable. Even though BoA’s communications were about modifying borrower’s loan, and not purchasing real property, it still fell within the statute of frauds because it would modify the contract that did convey real property. Since all BoA’s representations were oral, there was no enforceable contract and no viable contract claims
“Dual Tracking” as Basis for an “Unfair” UCL Claim; Duty of Care
Aspiras v. Wells Fargo Bank, N.A., __ Cal. App. 4th __, 2013 WL 5229769 (Aug. 21, 2013): To bring a UCL claim under the “unfair” prong, borrowers may identify a practice that violates legislatively stated public policy, even if that activity is not technically prohibited by statute. Here, borrowers based their UCL claim on the “unfair” practice of dual tracking, relying on Jolley v. Chase Home Fin., LLC, 213 Cal. App. 4th 872 (2013) (“[W]hile dual tracking may not have been forbidden by statute at the time, the new legislation and its legislative history may still contribute to its being considered ‘unfair’ for purposes of the UCL.”). This court of appeal both distinguished Jolley and declined to follow its “dicta.”
First, the court did not find dual tracking in this case. Before the foreclosure sale, Wells Fargo denied borrowers’ modification application. In a subsequent communication, borrowers were told their modification was still “under review” (though borrowers inadequately pled the specifics of this communication). Here, the court zeroed in on a footnote from Jolley quoting from the California Senate floor analysis of AB 278, which ultimately prohibited dual tracking: “‘[B]orrowers can find their loss-mitigation options curtailed because of dual-track processes that result in foreclosures even when a borrower has been approved for a loan modification.’” (emphasis original to Aspiras). Dual tracking is commonly known as the practice of negotiating a loan modification while simultaneously foreclosing, and the Jolley court used this general conception of dual tracking to find a duty of care. See Jolley, 213 Cal. App. 4th at 905-06. This court seems to regard an approved modification, as opposed to a modification “under review,” as the sole basis for a UCL dual tracking based claim. Since borrowers were never approved for a loan modification in this case, the court reasoned that dual tracking never took place.
The court also disagrees with the Jolley court’s interpretation of “unfair” prong of the UCL. “[I]t is not sufficient to merely allege the [unfair] act violates public policy or is immoral, unethical, oppressive or unscrupulous. . . . [T]o establish a practices is ‘unfair,’ a plaintiff must prove the defendant’s ‘conduct is tethered to an [ ] underlying constitutional, statutory or regulatory provision.’” This court found, unlike Jolley, that dual tracking occurring before HBOR became effective (2013) did not offend any public policy underlying a constitutional, statutory, or regulatory provision.
Finally, this court declined to follow Jolley dicta finding a duty of care arising from modification negotiations. This court followed several federal district courts finding that “‘offering loan modifications is sufficiently entwined with money lending so as to be considered within the scope of typical money lending activities.’” This court opined that finding a duty of care arising from modifications would disincentivize servicers from modifying loans because they could be held liable afterwards. The court attributed much of its disagreement with Jolley to the construction loan at the center of that case. With construction loans, “the relationship between the lender and the borrower . . . is ‘ongoing’ with contractual disbursements made throughout the construction period.” The Jolley court found a duty of care arising from this situation, and then “expanded its analysis beyond lenders involved in construction loans” to more conventional lender-borrower relationships. This court declined to follow that interpretation.
Disputing Title in an Unlawful Detainer: Consolidation
Martin-Bragg v. Moore, 219 Cal. App. 4th 367 (2013): “Routine” unlawful detainers are summary proceedings, meant to resolve quickly and determine possession only. Title, however, can complicate a UD and render it irresolvable as a summary proceeding. Outside of the landlord-tenant context, UD defendants can make title an issue by asserting rightful title as an affirmative defense. In that case, “the trial court has the power to consolidate [the UD] proceeding with a simultaneously pending action in which title to the property is in issue.” Alternatively, the UD court may stay the UD until the other action resolves title. The court may not, however, decide title as part of the UD by affording it full adversarial treatment, as this would impermissibly turn a summary proceeding into a complex trial. Similarly, a court cannot resolve title as part of a UD summary proceeding, as it did here. This unfairly infringes on a defendant’s due process and right to a full, adversarial trial on the title issue (which can include discovery). Once title is put at issue, a defendant’s due process rights are given priority over a plaintiff’s right to a summary proceeding to decide possession. Not only did this court improperly attempt a summary resolution to the title issue as part of the UD case, but it did so in full recognition of the extremely complex nature of this particular title claim and in the face of defendant’s repeated requests for consolidation. This was an abuse of discretion that prejudiced defendant’s case and the court of appeal accordingly reversed.
Unpublished & Trial Court Decisions
CC § 1367.4(b): HOA Must Accept Partial Payments on Delinquent Assessments
Huntington Cont’l Town House Ass’n, Inc. v. Miner, No. 2013-00623099 (Cal. Super. Ct. App. Div. Sept. 26, 2013): The Davis-Sterling Act governs HOA-initiated judicial foreclosures on assessment liens. Specifically, CC § 1367.4 regulates how HOAs may collect delinquent assessment fees less than $1,800 (any legal manner apart from foreclosure) and more than $1,800 (foreclosure, subject to conditions). Here, the homeowners attempted to pay $3,500 to the HOA during foreclosure litigation. This payment more than covered homeowner’s delinquent assessment, but was below the “total” amount owed, which included the assessment, late fees, interest, and attorney’s fees. The HOA refused to accept this “partial payment” and the trial court allowed foreclosure. The appellate division reversed because the plain language of § 1367.4(b) “allows for partial payments and delineates to what debts, and in which order, payments are to be applied.” The HOA should have accepted the payment, which would have brought homeowners current and tolled the 12-month clock that allows HOAs to proceed with foreclosures under § 1367.4.
Dual Tracking Preliminary Injunction: “Pending” vs. “Under Review”
Pearson v. Green Tree Servicing, LLC, No. C-13-01822 (Cal. Super. Ct. Contra Costa Co. Sept. 13, 2013): CC § 2923.6 prevents servicers from foreclosing while a first lien loan modification is “pending.” Here, borrowers submitted their application in January, a servicer representative confirmed it was the correct type of application to qualify borrowers for a modification, and without making a decision, servicer recorded the NOD in May. Whether or not the application was literally “under review” by the servicer when they recorded the NOD does not affect whether they violated § 2923.6. To resolve a “pending” application under the statute, a servicer must give a written determination to the borrower. Only then can they move forward with foreclosure. Servicer also argued that borrower had not demonstrated a “material change in financial circumstances” that would qualify her for a modification review. CC § 2923.6(g) only requires borrowers submitting a second (or subsequent) modification application to demonstrate a change in finances. Here, borrower’s application was her first attempt to modify her loan. An earlier telephone call with a servicer representative does not constitute a “submission” of an application, as servicer argued. Because borrower has shown she is likely to prevail on the merits of her dual tracking claim, the court granted the preliminary injunction, declining tender and setting a one-time bond of $1,000, plus borrower’s original monthly loan payments.
Motion to Compel Discovery in Wrongful Foreclosure Fraud Claim
Pooni v. Wells Fargo Home Mortg., No. 34-2010-00087434-CU-OR-GDS (Cal. Super. Ct. Sacramento Co. Sept. 12, 2013): Discovery requests must be “reasonably calculated to lead to the discovery of admissible evidence.” Here, borrowers sent Wells Fargo interrogatories asking: 1) “DESCRIBE all policies, which YOUR underwriter uses in modifying a loan;” and 2) “DESCRIBE all criterion YOU use to determine if YOU are going to modify a loan.” (emphasis original). Wells Fargo objected to these questions because they sought “confidential information, trade secrets and proprietary business information” and because Wells Fargo’s internal decision making was irrelevant. The only issue being litigated, Wells claimed, was what Wells communicated to the borrowers regarding their modification. The court disagreed, ordering Wells Fargo to answer the interrogatories. To prevail on their fraud claim, borrowers must show that Wells orally represented that they would qualify for a modification, and that 1) Wells mishandled their application, or 2) they did not qualify under Wells’ policies. Under either scenario, Wells Fargo’s internal modification policies are relevant to borrower’s fraud claim and the interrogatories are therefore reasonably calculated to lead to the discovery of admissible evidence bearing directly on that claim. Further, Wells Fargo provided no evidence that the information sought was a trade secret, and borrowers have agreed to a protective order.
Subsequent Servicer-Lender’s Assumed Liability for Original Lender’s Loan Origination Activities
Sundquist v. Bank of Am., N.A., 2013 WL 4773000 (Cal. Ct. App. Sept. 5, 2013): “[T]ort liability of one corporation can be ‘assumed voluntarily by the contract’ by another corporation.” Here, borrowers seek to hold BoA liable for the actions of Mission Hills, borrowers’ original lender. BoA purchased the loan from Mission Hills sometime after loan origination and borrowers assert that through this purchase agreement, BoA assumed all of Mission Hills’ tort liabilities. The trial court disagreed, finding no factual or legal basis for assumed liability. The court of appeal reversed, liberally construing the complaint to adequately allege BoA’s assumption of liability by its purchase of the subject loan from Mission Hills. BoA argued that the assignment from MERS to BAC Home Loans contains no language that would give rise to assumed liability. This agreement, however, may have nothing to do with an agreement assigning the loan itself from Mission Hills to BoA. “[I]t is entirely possible that Mission Hills sold the loan to Bank of America by means of some other agreement, and even after that transfer MERS continued to act as ‘nominee’ –now on behalf of Bank of America instead of Mission Hills—until . . . MERS assigned its interest in the deed of trust the note to BAC.” The court instructed the trial court to vacate its order and to overrule the demurrer with respect to the deceit, breach of fiduciary duty, and aiding and abetting a breach of fiduciary duty causes of action, all of which were pled against BoA, as well as Mission Hills. The court affirmed the sustaining of the demurrers on borrowers’ other causes of action (promissory estoppel, civil conspiracy, negligence, and wrongful foreclosure).
Motion to Compel Responses to Requests for Production & Interrogatories; Sanctions
Becker v. Wells Fargo Bank, N.A., No. 56-2012-00422894-CU-BT-VTA (Cal. Super Ct. Aug. 23, 2013): The court agreed with borrower that Wells Fargo must provide responses to the following requests for production of all documents regarding: 1) all communications with borrowers; 2) the servicing of the loan; 3) credit applied against the balance due on the loan; 4) the disposition of payments made in connection with the loan; and 5) regarding the treatment of taxes applied to the loan. Additionally, the court compelled Wells Fargo to answer interrogatories involving the documents reviewed, employees who worked on the loan, the specific documents requested and submitted for a loan modification, the exact amount owed by borrowers, and an itemized statement for every charge during the life of the loan. The court described Wells Fargo as “a sophisticated company, [capable of] tracking . . . who contacts the borrowers,” and noted that borrower’s request to know all parties who received fees or proceeds from the loan was reasonably related to produce evidence of who had a stake in the loan’s modification. The court sanctioned Wells Fargo $1,500 for its failure to answer borrower’s discovery requests.
Fraud and UCL Claims Based on Dual Tracking: Bank’s Failed Motion for Summary Judgment and Settlement
Rigali v. OneWest Bank, No. CV10-0083 (Cal. Super. Ct. San Luis Obispo Co. Feb. 14, 2013): For a fraud claim to reach a jury, a borrower must show “the existence of some evidence” of: 1) false representation; 2) defendant’s knowledge of falsity; 3) defendant’s intention to deceive borrowers; 4) borrower’s justifiable reliance on the representation; 5) causal damages. Here, borrowers could not produce a “smoking gun” – an exact moment where OneWest misrepresented facts with a clear fraudulent intent—but taken as a whole, borrowers’ facts are enough to let a jury decide if OneWest’s string of (mis)communications with borrowers constituted fraud. Borrowers have produced some evidence that OneWest never intended to modify their loan: OneWest assigned of the DOT to U.S. Bank while they were sending borrowers multiple loan modification proposals; OneWest accepted borrower’s modification payment, and then assigned the loan to U.S. Bank; OneWest waited to refund the modification payment until after U.S. Bank completed the foreclosure sale. While this action stems from events occurring before dual tracking was prohibited by statute, “[d]istilled to its very essence, Plaintiffs are claiming that they were ‘given the runaround’ and then ‘double-crossed’ by OneWest” in a manner identical to dual tracking. Relying on West and Jolley, this court determined that summary judgment was inappropriate.
As to damages, the court pointed to borrowers’ assertions that OneWest convinced them their modification would be approved, delaying borrowers’ decision to hire an attorney and to sue to prevent the foreclosure. Also, had borrowers known the sale was proceeding (defective notice is part of their fraud claim), they allege they would have accessed various family funds to save their home. These damages constitute a viable fraud claim that survives summary judgment.
Tender is not required to state a claim for wrongful foreclosure if doing so would be inequitable. In their tender analysis, this court assumed that borrowers would eventually prevail on the fraud claim, and found it would then be “inequitable to require tender of the full amount due under the note.”
Servicer’s Failure to Endorse Insurance Carrier’s Reimbursement Check May Constitute Breach of Contract
Gardocki v. JP Morgan Chase Bank, N.A., __ F. App’x __, 2013 WL 4029214 (5th Cir. Aug. 8, 2013): In this action to nullify a completed foreclosure sale, the servicer and holder of the loan, JP Morgan, failed to endorse an insurance reimbursement check for storm damage repairs, as required by borrower’s insurance carrier. Under the terms of the mortgage agreement, JP was entitled to inspect the repairs before endorsing a reimbursement check. Borrower claims JP Morgan neither inspected the home nor endorsed the check, as requested. Borrower had made repairs with his own funds, so JP Morgan’s refusal to sign-off on the reimbursement left borrower with insufficient funds to pay his mortgage. After borrower’s default, JP Morgan foreclosed and sold the home. The district court dismissed all of borrower’s claims without explanation. The Fifth Circuit, however, reversed and remanded the case, finding borrower’s arguments to be questions of fact. If the facts in the complaint are true, JP Morgan breached the mortgage agreement for failing to endorse the insurance check, and that the breach could have caused the default, resulting in a wrongful foreclosure.
Discovery Dispute: Bank’s Motion to Strike Expert Disclosure of Handwriting Witness, Borrower’s Motion to Compel Interrogatory Responses
Becker v. Wells Fargo Bank, N.A., Inc., 2013 WL 5406894 (E.D. Cal. Sept. 25, 2013): Borrower seeks to introduce testimony of an expert witness to determine whether borrowers’ loan documents were “robo-signed.” Defendant objected because borrower’s robo-signing related claims involving forged documents were dismissed. Borrower claimed robo-signing was still pertinent to his negligence, emotional distress and UCL claims. The court denied defendant’s motion to strike the disclosure of the witness: defendant had neither alleged a “live” discovery issue, nor had it determined the expert would absolutely not provide relevant testimony.
Borrower brought a motion to compel responses to many interrogatory requests. Most notable was his request that Wells Fargo and Wachovia explain how they became the owners/holders of the borrower’s loan. The court declined to compel a response because defendant’s explanation of corporate succession was sufficient. Borrower also asked defendants to identify how many of their trial modifications eventually became permanent. The court agreed with borrower that “the number of times defendant has permitted a trial modification to transform into a permanent modification has at least some degree of relevance to the fraud and unfair business practices claims.” Parties were ordered to meet and confer to determine that the borrower only wants the number of permanent modifications offered, not details about individual cases.
Loan Owner in Bankruptcy May Sell Loan “In the Ordinary Course of Business” without Bankruptcy Court Approval
Miller v. Carrington Mortg. Servs., 2013 WL 5291939 (N.D. Cal. Sept. 19, 2013): Bankruptcy trustees “may enter into transactions, including the sale or lease of property . . . in the ordinary course of business, without a hearing.” Previously, this court granted a very limited summary judgment motion in favor of borrower, determining “that there is no genuine dispute that the loan at issue was transferred by [loan holder] while it was in bankruptcy (as [borrower] contends) and not before (as Defendants contend).” Now, the court addresses whether the loan holder – while in bankruptcy – could have sold borrower’s loan to a second entity without the bankruptcy court’s explicit approval. In selling either borrower’s loan by itself, or as part of a securitization with other loans, the owner of the loan did not violate bankruptcy law because the sale was in its “ordinary course of business.” The assignment of the loan from the original lender (in bankruptcy) to Wells Fargo was valid, and the eventual foreclosure proper. All borrower’s claims were dismissed.
Glaski-type Claim Fails Because Borrower Could Not Show Defect in Foreclosure Process was Prejudicial
Dick v. Am. Home Mortg. Servicing, Inc., 2013 WL 5299180 (E.D. Cal. Sept. 18, 2013): To state a valid wrongful foreclosure claim, a borrower must show that the problems in the foreclosure process that made it “wrongful” prejudiced borrower in some way, specifically, in their ability to pay their mortgage. Fontenot v. Wells Fargo Bank, N.A., 198 Cal. App. 4th 256, 272 (2011). California courts have failed to find prejudice if a defaulting borrower cannot show that the improper foreclosure procedure (like an invalid assignment) “interfered with the borrower’s ability to pay or that the original lender would not have foreclosed under the circumstances.” If the proper party could have foreclosed, in other words, the borrower cannot sue the improper party who actually foreclosed. This court acknowledged borrower’s possible standing under Glaski v. Bank of America, 218 Cal. App. 4th 1079 (2013) to bring a wrongful foreclosure claim based on an improper assignment of a loan to a trust after the trusts’ closing date, but declines to determine that question because the wrongful foreclosure claim was dismissed on Fontenot grounds.
HOLA Applies to a National Bank, Preempts HBOR
Marquez v. Wells Fargo Bank, N.A., 2013 WL 5141689 (N.D. Cal. Sept. 13, 2013): California federal district courts have adopted several different analyses to determine whether national banks, like Wells Fargo, can invoke HOLA preemption despite HOLA’s application to federal savings associations (FSA). The court acknowledged this split in authority: a majority of courts have applied HOLA preemption to national banks if the loan originated with a federal savings association, while a minority have analyzed what conduct is being litigated—if committed by the FSA, then HOLA is applicable, but if committed by a national bank, HOLA is inapplicable. This court sided with the majority, reasoning that borrowers originally contracted with an FSA and agreed to be bound by the terms of the DOT, which include regulation by HOLA and the OTS.
After establishing HOLA as the appropriate preemption analysis, the court determined that each of borrower’s claims, including four HBOR claims, are preempted by HOLA. State laws regulating or affecting the “processing, origination, servicing, sale or purchase of . . . mortgages” are expressly preempted by HOLA. CC § 2923.55, which prevents servicers from taking foreclosure actions until contacting, or attempting to contact, a borrower to discuss foreclosure alternatives, “fall squarely” within HOLA express preemption. Dual tracking, prohibited by CC § 2923.6, also falls under “processing” mortgages, as does the requirement that servicers provide a single point of contact to borrowers seeking loan modifications (CC § 2923.7). Finally, requiring servicers to verify foreclosure documents before recording them is also preempted, as it also relates to “processing” and “servicing” of a loan. The court dismissed all of borrower’s claims.
Dual Tracking: “Complete” Application & A Private Right of Action under CC § 2924.12
Massett v. Bank of Am., N.A., 2013 WL 4833471 (C.D. Cal. Sept. 10, 2013): To receive a TRO based on a dual tracking claim, a borrower must demonstrate: 1) they submitted a “complete” application and 2) the application is still pending, but the servicer has initiated or continued foreclosure proceedings. Here, to prove they were likely to succeed on the merits on both the “complete” and pending elements, borrowers submitted two emails from a servicer representative, the first acknowledging receipt of their application and noting, “[w]e do not need any further documentation at this point in time.” The second, dated just 13 days before the TRO hearing and 15 before the scheduled sale stated: “The account is currently still in review.” These emails provided sufficient evidence that borrower’s application was complete, still pending, and that they were likely to prevail on a CC § 2923.6 claim. The court found a possible foreclosure sale to constitute “irreparable harm,” not based on the usual loss-of-home argument, but based on HBOR’s statutory scheme. CC § 2924.12 “only authorizes relief ‘[i]f a trustee’s deed upon sale has not been recorded.’ If the scheduled sale goes forward, then, plaintiffs will have no means of contesting Nationstar’s alleged dual-tracking.” Compared to the type of harm likely to be experienced by the borrowers, the TRO will only delay Nationstar’s ability to foreclose, should they deny borrower’s modification application. The balance then, tips in borrowers’ favor. Lastly, the court cited Jolley v. Chase Home Finance, LLC, 213 Cal. App. 4th 872, 904 (2013) in finding a public interest in prohibiting dual tracking. The court granted borrowers a TRO to postpone the foreclosure sale.
Borrower’s “Counter Offer” to a Loan Modification Can Extinguish a Dual Tracking Claim
Young v. Deutsche Bank Nat’l Tr. Co., 2013 WL 4853701 (E.D. Cal. Sept. 10, 2013): HBOR prevents servicers from foreclosing while a first lien loan modification is pending. If a servicer offers a loan modification, a borrower has 14 days in which to accept. If they do not, the servicer can proceed with the foreclosure. CC § 2923.6(c)(2). Here, borrower responded to a loan modification offer, within 14 days, but did so with a “counter offer,” not an acceptance. Servicer did not respond to the counter offer and proceeded with the foreclosure after several months. The court found no dual tracking since borrowers failed to comply with the statute. Borrowers argued their counter offer responded to what they believed to be a modification offered related to the present litigation and settlement communications. Since settlement negotiations cannot be admitted as evidence, borrowers argued, their counter offer should not be considered by the court. Nothing, however, was offered in exchange for accepting the modification (like dismissing the action, for example), so the court did not find this argument persuasive. Additionally, borrowers’ claim that the modification offer was unreasonable and/or not in good faith also failed. Nothing in HBOR requires servicers to provide modifications, or instructs them on the quality of those modifications. The court denied the TRO.
Borrower’s Motion to Strike Bank’s Affirmative Defenses
Burton v. Nationstar Mortg., LLC, 2013 WL 4736838 (E.D. Cal. Sept. 3, 2013): Defendants must “affirmatively state any avoidance or affirmative defense[s]” when responding to a complaint. Fed.R. Civ. Proc. 8(c)(1). Affirmative defenses will be stricken, though, if legally or factually deficient. A legally insufficient affirmative defense will fail under any set of facts stated by defendant. A factually insufficient affirmative defense fails to give the plaintiff fair notice, i.e., state the “nature and grounds” for the defense. If the defense simply states a legal conclusion, without linking it to the facts of the case, it does not provide fair notice. Under each rubric, defendants bear the burden of proof. Here, borrower moved to strike all 20 of Nationstar’s affirmative defenses to his breach of contract and fraud claims as both legally and factually insufficient. The court agreed that 13 affirmative defenses were “bare bones” conclusions of law, devoid of facts, and ordered them stricken with leave to amend. Borrowers’ legally insufficient challenge to Nationstar’s statute of limitations and lack-of-tender defenses failed. Moving to strike a SOL defense “seeks resolution of legal and factual issues not available at this pleading stage.” If Nationstar amends their SOL defense to overcome its factual insufficiencies, it will remain as both legally and factually well-pled. Nationstar’s defense related to tender also remains, as borrower’s use of a tender exception (that the sale would be void, not merely voidable), is premature at this stage.
Rescinded NOD Moots CC §§ 2923.5 & 2924 Claims; Fraud-Based Detrimental Reliance & Damages
Tamburri v. Suntrust Mortg., Inc., 2013 WL 4528447 (N.D. Cal. Aug. 26, 2013): Before recording an NOD, servicers must contact, or attempt to contact, borrowers to discuss foreclosure alternatives. CC § 2923.5. Under the previous version of this statute, and the operative one in this case, the sole remedy was postponing the sale. There was no remedy after a sale occurred. (Under HBOR, economic damages are available under CC § 2924.12 & 2924.19.) In this case, defendants rescinded the NOD and there is no pending foreclosure sale. The court granted summary judgment to defendants because borrower’s § 2923.5 claim was mooted by the NOD rescission.
Wrongful foreclosure claims are based on: 1) an illegal, fraudulent, or willfully oppressive foreclosure; 2) prejudicing the borrower; 3) who tendered the amount due under the loan. Here, the court granted summary judgment to defendants because the rescinded NOD negated the first two elements. Additionally, California courts have found no “preemptive right of action to determine standing to foreclose.”
To allege fraud, a borrower must establish (along with servicer’s fraudulent conduct) detrimental reliance and damages. Here, borrower alleged she “would have behaved differently,” had her servicer not “misrepresented the identity of the owner of [the] loan,” allowing it to profit from a foreclosure, rather than modify the loan. “[B]ehaving differently, by itself, does not establish a claim for fraud. Plaintiff must have relied to her detriment in order to state a claim for fraud.” (emphasis original). Borrower could not demonstrate damages either; she was in default, knew her servicer, attempted to work with them to modify her loan, and was unsuccessful. Knowing who owned the loan would not have changed borrower’s situation. The court accordingly granted summary judgment to defendants on borrower’s fraud claim.
Servicer Wrongfully Foreclosed After Borrower Tendered the Amount Due on the NOD; Damages Assessed According to Loss of Home Equity
In re Takowsky, 2013 WL 5183867 (Bankr. C.D. Cal. Mar. 20, 2013); 2013 WL 5229748 (Bankr. C.D. Cal. July 22, 2013): Notices of default must specify the “nature of each breach actually known to the [loan] beneficiary,” including a statement of how much the borrower is in default. Whatever the actual default amount, the amount listed on the NOD controls. Here, the NOD stated that borrower had breached the second deed of trust, and listed amounts due accordingly. It made no mention of senior liens. Borrower paid her servicer the amount due on the NOD. “In doing so, Plaintiff cured the only default explicitly listed in the NOD,” and by accepting that payment, servicer was prevented from foreclosing. Borrower’s actual default on the senior lien is not relevant because that default was not listed on the NOD. Servicer’s subsequent foreclosure was wrongful because servicer had no power of sale under the NOD. Further, borrower made servicer aware of its confusing misstatements regarding the amount required to prevent foreclosure, so servicer either knew, or should have known, that borrower believed she only had to cure the default on the second lien to prevent foreclosure.
To determine damages, the bankruptcy court assessed borrower’s loss of home equity resulting from the wrongful foreclosure. Equity was calculated by taking the total value of the home and subtracting what borrower owed. The parties contested the property valuation, but the court accepted borrower’s estimation, based on expert testimony and appraisal. Borrower had significant home equity pre-foreclosure, so her damages were substantial (over $450,000). The court denied borrower’s request for damages to compensate her for moving and storage costs. She would have had to sell her home, or lost it to foreclosure eventually, the court reasoned, incurring those costs in due course. The court also denied damages related to emotional distress, pointing again to her likely property loss even without this foreclosure, her pre-existing bankruptcy proceedings, and her choice to remain in the home until the sheriff came to evict her, rather than leaving voluntarily before that stage.
Out of State Cases
HAMP Guidelines Provide Benchmark for “Good Faith” Standards in Foreclosure Settlement Conferences
U.S. Bank, N.A. v. Rodriguez, __ N.Y.S.2d __, 2013 WL 4779543 (Sup. Ct. Sept. 5, 2013): Parties involved in residential foreclosures in New York state must undergo settlement conferences where both servicer and borrower must “negotiate in good faith” to reach a resolution, which includes a loan modification if possible. If the servicer evaluates borrower for a HAMP modification, the un-modified monthly payment must be greater than 31% of the borrower’s monthly gross income for the borrower to qualify. Here, servicer denied borrower a HAMP modification on two grounds. First, borrower’s mortgage payments fell below 31% of their gross monthly income. Borrowers pointed out (on multiple occasions) servicer’s incorrect principal and interest figures which set the mortgage payment too low. Second, the principal and interest could not be reduced by 10% or more, as required in a HAMP Tier 2 analysis. Borrowers objected to the use of a Tier 2 standard when they should have first been evaluated under Tier 1, according to HAMP guidelines. Servicer refused to comply with either request—for using the correct inputs or for evaluating under Tier 1 before Tier 2. The court found this conduct violated the duty to negotiate in good faith under New York law governing foreclosure settlement conferences. As a gauge for evaluating “good faith” conduct, the court used the HAMP guidelines themselves as “an appropriate benchmark [that] would enable the bank to abide by both state and federal regulations.” Since this servicer chose not to abide by the guidelines in evaluating borrower’s financial information, they did not make a “good faith” effort to negotiate. The court made clear that making a good faith effort will not, necessarily, result in a loan modification. The court ordered servicer to give borrower a “final detailed determination on his loan modification application, after review of all possible HAMP options,” and stopped interest accrual on borrower’s loan from the date servicer formally denied a modification.
Servicers Cannot Use “Investor Restrictions” as Excuse Not to Negotiate Settlement Conferences in Good Faith
Deutsche Bank Nat’l Tr. Co. v. Izraelov, 2013 WL 4799151 (N.Y. Sup. Ct. Sept. 10, 2013): Parties involved in residential foreclosures in New York state must undergo settlement conferences where both servicer and borrower must “negotiate in good faith” to reach a resolution, which includes a loan modification if possible. Servicers who refuse to modify a loan because of an investor restriction “must provide the court or referee with suitable documentary evidence of the obstacle, and the court or referee may appropriately direct its production.” Further, if an investor restriction does exist, the servicer must make a good faith effort to convince the investor to waive the restriction for the borrowers in question, and to produce documentary evidence of this effort.
Here, after servicer (HSBC) refused to consider borrowers for a HAMP modification, the referee required documentation of an investor restriction. HSBC produced a one-page document, an agreement between them and another HSBC entity, stating that they are not allowed to participate in HAMP modifications without “express permission.” Deutsche Bank was not mentioned. The referee also required evidence of HSBC’s good faith effort to obtain an investor waiver. Specifically, she required the documentation outlined by HAMP’s guidance on “good faith” efforts (See HAMP, “Q2301.”). The reviewing court agreed this was a reasonable request and that HAMP “good faith” standards are an acceptable gauge to judge a servicer’s conduct, “whether or not the loan qualifies for HAMP.” In this case, the court assumed HSBC made a good faith effort to obtain a waiver. But, after it received a waiver, it refused to consider borrower for a modification. This violated the “good faith” requirement for mandated settlement conferences under New York law. The court ordered the servicer(s) to request documentation from borrowers and to consider them, at least, for a HAMP modification. It also ordered that borrowers are not responsible for interest on their loan accruing from the date HSBC announced it could not offer any modification to borrowers (totaling over three years’ worth of interest).
Borrowers in active chapter 7 and 13 bankruptcies are FHA Loss Mitigation Option eligible, if otherwise compliant with bankruptcy law and orders from their particular bankruptcy court.
Borrowers who received chapter 7 bankruptcy discharge but did not reaffirm the FHA-insured mortgage debt are still eligible for Loss Mitigation Options.
“Continuous income” includes income received by the borrower, “that is reasonably likely to continue” from the date of modification evaluation through the next year. To determine continuous income, servicers must evaluate the borrower’s sources of net and gross income and expenses, and input those numbers to determine if borrower has the income necessary to qualify for a loss mitigation program. Continuous income may include employment income, but it also can encompass “unearned income,” like social security, VA benefits, child support, survivor benefits, and pensions.
Loan Modifications and FHA-HAMP Partial Claims can include arrearages of unpaid interest, escrow fees, and foreclosure attorney fees. “Outstanding arrearages capitalized into modifications are not subject to the statutory limit [30% of the unpaid principle balance at default] on Partial Claims. However, arrearages and related foreclosure costs included in Partial Claims are subject to statutory limit . . . .”
Fannie Mae’s HAMP and Second-Lien Modification Programs have been extended. All HAMP-eligible borrowers must be in a Trial Period Plan by March 1, 2016. All HAMP or Second-Lien Modification Program participants must have permanent modifications by September 1, 2016.
Beginning January 1, 2014, loans evaluated for Fannie Mae HAMP will only be eligible “if the value of the ‘modification’ scenario equals or exceeds the value of the ‘no-modification’ scenario.” A negative NPV result can no longer qualify a loan for HAMP “if the value of the ‘modification scenario is below the value of the ‘no-modification’ scenario.” Even if this is the case, though, the servicer must then evaluate the borrower for other foreclosure alternatives within the Fannie Mae guidelines, before foreclosing.
Establishes processes servicers must follow in eliminating and rescinding foreclosure sales.
Streamlined Modification program is extended to include all loans entering into a Streamlined Modification TPP by December 1, 2015. Freddie Mac HAMP program is extended to include all borrowers entering into a TPP by March 1, 2016 and a permanent modification by September 1, 2016.
All loans evaluated for HAMP on or after January 1, 2014, will only be eligible if they have a positive NPV result (an NPV of $0 or greater). Servicers must consider borrowers with a negative NPV result for other foreclosure alternatives.
The new HAMP Handbook includes and supersedes Supplemental Directives 13-01 through 13-06, and includes revisions to v.4.2.