Works Rights Compliance Alliance

Posted 2 days ago by livinglies on Livinglies’s Weblog
October 9, 2009
Editorial

The foreclosure crisis is being made substantially worse by a shortage of lawyers for people whose homes are at risk.

According to a new study, an overwhelming number of homeowners who face foreclosure do not have legal help in protecting their rights. As a result, people are losing their homes who do not need to.

In 2008, more than three million foreclosures were filed, and the number keeps growing. By one estimate, more than eight million families may lose their homes in the next four years. Having a home taken away is devastating for the families involved. This churning of people out of their houses, and in some cases into homeless shelters or out on the streets, is also expensive and disruptive for the nation as a whole.

The Brennan Center for Justice at New York University School of Law found that 86 percent of people facing property foreclosure last year in economically challenged Stark County, Ohio, lacked counsel. In Queens County, New York, 84 percent of defendants lacked full legal representation in proceedings involving foreclosures on “subprime,” “high cost” or “non-traditional” mortgages — ones disproportionately targeted to low-income and minority populations.

The law of mortgages and foreclosures is complicated even for many lawyers. It is hard to imagine what it must be like for a poor person with little legal knowledge to have to fight on his or her own to keep a home.

Homeowners often have legal defenses, but laypeople are unlikely to know what they are or how to use them. A lawyer can also persuade lenders to slow down foreclosure proceedings, or to renegotiate terms, by invoking the appropriate federal, state and local laws.

Foreclosures should not be allowed to go forward until, as the Brennan Center recommends, homeowners are at least given enough counseling to know whether they have viable legal claims.

Although budgets are tight these days, Congress and the states need to come up with more money for foreclosure legal assistance.

Class actions can be a powerful tool in challenging practices, like predatory lending, that affected large numbers of homeowners. Right now the Legal Services Corporation, which provides essential civil legal services to low income Americans, is barred by law from representing clients in class action suits. Congress should lift that and other unwarranted restrictions on legal service providers. Too many Americans urgently need help.

Your tags: mortgage meltdown, Eviction, foreclosure

Other Tags: bankruptcy, borrower, disclosure, foreclosure defense, foreclosure offense, Lender Liability, securitization, bubble, CDO, currency, GTC | Honor, Investor, Mortgage

Published: October 9, 2009 4:18 pm

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Weapons of Mass Eviction: Faulty Intelligence in Mortgage War Increases “Mistaken Foreclosures”
08/20/2009 By: Adam Weinstein

Anna Ramirez had a tough day by any standard. First, there was the knock at her door by police. Then the forcible ejection of her husband, daughter and grandchildren from the property, and the scattering of their furniture across the front lawn. The chaining shut of her house’s front door. The humiliating realization of her own instant homelessness.

Then there was the acknowledgment by her mortgage lender that it was all a big mistake.

“This came out of nowhere,” said Ramirez – whose house, ironically, is nestled south of Miami in a onetime Florida boomtown called Homestead. “The bank took the house from right under my feet.”

Authorities say the woman’s lender, Washington Mutual – now part of J.P. Morgan Chase – foreclosed on her house while she was refinancing it, then auctioned it to a new owner. Then, after WaMu realized the mistake and reversed the sale, a Miami-Dade county court clerk failed to notify the home’s new owner – who chucked Ramirez and all her stuff off the property.

“This shouldn’t be happening, you know, because we did the right thing,” she said. “We went step by step.”

Doing the right thing is mattering less and less today. According to the data provider RealtyTrac, one of every 355 houses in the nation received a notice of default or foreclosure in July – 360,149 homes in all, a 7 percent jump since June and a 32 percent jump over the same time last year. Growing defaults mean overworked mortgage lenders, servicers, investors, attorneys and courts are making more mistakes – transposing social security numbers, mixing up names and losing payments. And increasingly, the victims of those mistakes are innocent homeowners who are up to date on their loans.

“This story really calls attention to just how inefficient and over-stressed the systems and people who process foreclosures are,” Rick Sharga, a RealtyTrac senior vice president said of Ramirez’ case. “We hear from people who find their homes listed as foreclosures on our website due only to errors from lenders in processing: entering the wrong address, the wrong loan document, sometimes even the wrong owner.”

Ramirez could have had it worse. Staff Sgt. Gerald Thitchener and his wife Katrina temporarily left their Las Vegas condo for his Air National Guard assignment as a fighter-jet mechanic in Tucson, Arizona. When his work was done, they returned to the home at 2981 Country Manor Lane, unit # 118. They found that Countrywide Financial had foreclosed on it, auctioned it and destroyed their belongings – including Katrina’s wedding dress and a photo of Gerald meeting President George H.W. Bush

during the first Gulf War.

But Countrywide was supposed to foreclose on unit #10.

It turned out a contracted inspector mixed up the units, and Countrywide sent a locksmith and a Realtor to inspect the Thitcheners’ apartment. He decided it had been abandoned and told the landlord to “trash out” their condo.

Warren and Norma Becker of Studio City, California, didn’t let events go that far when they started getting junk mail from attorneys who noted that their “home is involved in a foreclosure processing.” They poked around and discovered that a private publisher of foreclosure lists had mistakenly put out a notice of default in their names.

That publisher, Ronald M. Frumkin of Redloc Information Services, said such mistakes were inevitable in Southern California, where he deals with 20,000 similar notices in a month. “A clerk may look up the wrong deed of trust, the legal description may be copied wrong, the legal description may be matched with the wrong parcel or an error in entering all this information into the computer may occur,” he said.

In Ramirez’ home state of Florida, the foreclosure courts have gotten so glutted up with filings that they’re seeking help from the private sector. A panel set up by the state Supreme Court recommended this week that most foreclosure proceedings be sent to contracted mediators for resolution.

The task force didn’t even bother asking to hire more judges and clerks. “Given Florida’s financial situation, it would be a foolish exercise… in the absence of any realistic expectation that such recommendations could be funded,” the court said.

But the courts may be giving themselves more work in the long run. If private mediators don’t cut down on the false foreclosure rate, more angry homeowners may sue their overly exuberant servicers and lenders.

That’s what the Thitcheners ultimately did. They took Countrywide to court over its treatment of them. Some of Gerald Thitchener’s detractors didn’t like the fact that he wore his Air Force uniform to court appearances; that was grandstanding, they argued.

He replied that he’d had no choice: His last dress suit had been thrown out by creditors in the foreclosure.

The courts awarded him and his wife $2.2 million in damages.

Sharga said such cases are the exception to the rule, and he defended mortgage servicers. “We’re dealing with an unbelievably complex situation: 51 sets of foreclosure laws (all 50 states plus DC) being executed by 3,140 county administrators, executed by multiple trustees who are dealing with different contracts from dozens of lenders and trying to address 3 million individual loans,” he said. “That’s a recipe for dysfunction.”

Maybe so, but lenders and servicers need to face the consequences of ousting innocent people from their houses, said John L. Smith, a columnist for the Las Vegas Review-Journal who championed the Thitcheners’ case.

“What do you suppose would happen to you if you inappropriately seized someone’s home, contacted a Realtor, had it sold and pocketed the profit?” he asked. “After you made bail, I mean.”

Unruh Civil Rights Act (Civ. Code, �� 51, 52) – Essential Factual Elements

Plaintiff [Name of plaintiff] claims that [name of lender or trustee] denied [him/ her] full and equal [accommodations/advantages/facilities/ privileges/services] because of [his/her] [sex/race/color/religion/ ancestry/national origin/disability/medical condition/[insert other actionable characteristic]]. To establish this claim, [name of plaintiff] must prove all of the following:

1. That [name of defendant countrywide or wells fargo] [denied/aided or incited a denial of/discriminated or made a distinction that denied] full and equal [accommodations/advantages/facilities/privileges/ services] to [name of plaintiff]; in that they did not call contact or offer plaintiff alternatives to foreclosure as mandated in the newly enacted civil code 2923.5. they then ask for financial documents not required when originating said loan.

2. [That a motivating reason for [name of defendant]’s conduct was [its perception of] [name of plaintiff]’s [sex/ race/color/religion/ancestry/national origin/disability/medical condition/[insert other actionable characteristic];]

[That the [sex/race/color/religion/ancestry/national origin/ disability/medical condition/[insert other actionable characteristic]] of a person whom [name of plaintiff] was associated with was a motivating reason for [name of defendant]’s conduct;]

3. That [name of plaintiff] was harmed; and

4. That [name of defendant]’s conduct was a substantial factor in causing [name of plaintiff]’s harm.

Directions for Use

Note that this instruction uses the standard of “a motivating reason.” The causation standard is still an open issue under this statute.

The judge may decide the issue of whether the defendant is a business establishment as a matter of law. (Rotary Club of Duarte v. Bd. of Directors (1986) 178 Cal.App.3d 1035, 1050 [224 Cal.Rptr. 213].) Special interrogatories may be needed if there are factual issues. This element has been omitted from the instruction because it is unlikely to go to a jury.

“Legitimate business interests” may justify some degree of limitation on consumer access to public accommodations. (Hankins v. El Torito Restaurants, Inc. (1998) 63 Cal.App.4th 510, 520 [74 Cal.Rptr.2d 684].) This will commonly be an issue for the judge to decide. (Harris v. Capital Growth Investors XIV (1991) 52 Cal.3d 1142, 1165 [278 Cal.Rptr. 614, 805 P.2d 873].) If there are contested factual issues, additional instructions may be necessary.
Sources and Authority

Civil Code section 51 provides:

(a) This section shall be known, and may be cited, as the Unruh Civil Rights Act.

(b) All persons within the jurisdiction of this state are free and equal, and no matter what their sex, race, color, religion, ancestry, national origin, disability, or medical condition are entitled to the full and equal accommodations, advantages, facilities, privileges, or services in all business establishments of every kind whatsoever.

(c) This section shall not be construed to confer any right or privilege on a person that is conditioned or limited by law or that is applicable alike to persons of every sex, color, race, religion, ancestry, national origin, disability, or medical condition.

(d) Nothing in this section shall be construed to require any construction, alteration, repair, structural or otherwise, or modification of any sort whatsoever, beyond that construction, alteration, repair, or modification that is otherwise required by other provisions of law, to any new or existing establishment, facility, building, improvement, or any other structure, nor shall anything in this section be construed to augment, restrict, or alter in any way the authority of the State Architect to require construction, alteration, repair, or modifications that the State Architect otherwise possesses pursuant to other laws.

(e) For purposes of this section:

(1) “Disability” means any mental or physical disability as defined in Section 12926 of the Government Code.

(2) “Medical condition” has the same meaning as defined in subdivision (h) of Section 12926 of the Government Code.

(f) A violation of the right of any individual under the Americans with Disabilities Act of 1990 (Public Law 101-336) shall also constitute a violation of this section.

Civil Code section 52 provides:

(a) Whoever denies, aids or incites a denial, or makes any discrimination or distinction contrary to Section 51, 51.5, or 51.6, is liable for each and every offense for the actual damages, and any amount that may be determined by a jury, or a court sitting without a jury, up to a maximum of three times the amount of actual damage but in no case less than four thousand dollars ($4,000), and any attorney’s fees that may be determined by the court in addition thereto, suffered by any person denied the rights provided in Section 51, 51.5, or 51.6.

(b) Whoever denies the right provided by Section 51.7 or 51.9, or aids, incites, or conspires in that denial, is liable for each and every offense for the actual damages suffered by any person denied that right and, in addition, the following:

(1) An amount to be determined by a jury, or a court sitting without a jury, for exemplary damages.

(2) A civil penalty of twenty-five thousand dollars ($25,000) to be awarded to the person denied the right provided by Section 51.7 in any action brought by the person denied the right, or by the Attorney General, a district attorney, or a city attorney.

(3) Attorney’s fees as may be determined by the court.

(c) Whenever there is reasonable cause to believe that any person or group of persons is engaged in conduct of resistance to the full enjoyment of any of the rights described in this section, and that conduct is of that nature and is intended to deny the full exercise of those rights, the Attorney General, any district attorney or city attorney, or any person aggrieved by the conduct may bring a civil action in the appropriate court by filing with it a complaint. The complaint shall contain the following:

(1) The signature of the officer, or, in his or her absence, the individual acting on behalf of the officer, or the signature of the person aggrieved.

(2) The facts pertaining to the conduct.

(3) A request for preventive relief, including an application for a permanent or temporary injunction, restraining order, or other order against the person or persons responsible for the conduct, as the complainant deems necessary to ensure the full enjoyment of the rights described in this section.

(d) Whenever an action has been commenced in any court seeking relief from the denial of equal protection of the laws under the Fourteenth Amendment to the Constitution of the United States on account of race, color, religion, sex, national origin, or disability, the Attorney General or any district attorney or city attorney for or in the name of the people of the State of California may intervene in the action upon timely application if the Attorney General or any district attorney or city attorney certifies that the case is of general public importance. In that action, the people of the State of California shall be entitled to the same relief as if it had instituted the action.

(e) Actions brought pursuant to this section are independent of any other actions, remedies, or procedures that may be available to an aggrieved party pursuant to any other law.

(f) Any person claiming to be aggrieved by an alleged unlawful practice in violation of Section 51 or 51.7 may also file a verified complaint with the Department of Fair Employment and Housing pursuant to Section 12948 of the Government Code.

(g) This section does not require any construction, alteration, repair, structural or otherwise, or modification of any sort whatsoever, beyond that construction, alteration, repair, or modification that is otherwise required by other provisions of law, to any new or existing establishment, facility, building, improvement, or any other structure, nor does this section augment, restrict, or alter in any way the authority of the State Architect to require construction, alteration, repair, or modifications that the State Architect otherwise possesses pursuant to other laws.

(h) For the purposes of this section, “actual damages” means special and general damages. This subdivision is declaratory of existing law.

” ‘The Legislature used the words “all” and “of every kind whatsoever” in referring to business establishments covered by the Unruh Act, and the inclusion of these words without any exception and without specification of particular kinds of enterprises, leaves no doubt that the term “business establishments” was used in the broadest sense reasonably possible. The word “business” embraces everything about which one can be employed, and it is often synonymous with “calling, occupation, or trade, engaged in for the purpose of making a livelihood or gain.” The word “establishment,” as broadly defined, includes not only a fixed location, such as the “place where one is permanently fixed for residence or business,” but also a permanent “commercial force or organization” or “a permanent settled position, (as in life or business).’ ” (O’Connor v. Village Green Owners Assn. (1983) 33 Cal.3d 790, 795 [191 Cal.Rptr. 320, 662 P.2d 427], internal citations omitted.)

Whether a defendant is a “business establishment” is decided as an issue of law. (Rotary Club of Duarte, supra, 178 Cal.App.3d at p. 1050.)

“In addition to the particular forms of discrimination specifically outlawed by the Act (sex, race, color, etc.), courts have held the Act ‘prohibit[s] discrimination based on several classifications which are not specifically enumerated in the statute.’ These judicially recognized classifications include unconventional dress or physical appearance, families with children, homosexuality, and persons under 18.” (Hessians Motorcycle Club v. J.C. Flanagans (2001) 86 Cal.App.4th 833, 836 [103 Cal.Rptr.2d 552], internal citations omitted.)

” ‘Although the Unruh Act proscribes “any form of arbitrary discrimination”, certain types of discrimination have been denominated “reasonable” and, therefore, not arbitrary.’ Thus, for example, ‘legitimate business interests may justify limitations on consumer access to public accommodations.’ ” (Hankins v. El Torito Restaurants, Inc. (1998) 63 Cal.App.4th 510, 520 [74 Cal.Rptr.2d 684], internal citations omitted.)

“Unruh Act issues have often been decided as questions of law on demurrer or summary judgment when the policy or practice of a business establishment is valid on its face because it bears a reasonable relation to commercial objectives appropriate to an enterprise serving the public.” (Harris, supra, 52 Cal.3d at p. 1165, internal citations omitted.)

“It is thus manifested by section 51 that all persons are entitled to the full and equal privilege of associating with others in any business establishment. And section 52, liberally interpreted, makes clear that discrimination by such a business establishment against one’s right of association on account of the associates’ color, is violative of the Act. It follows . . . that discrimination by a business establishment against persons on account of their association with others of the black race is actionable under the Act.” (Winchell v. English (1976) 62 Cal.App.3d 125, 129 [133 Cal.Rptr. 20].)

“Section 51 by its express language applies only within California. It cannot (with its companion penalty provisions in � 52) be extended into the Hawaiian jurisdiction. A state cannot regulate or proscribe activities conducted in another state or supervise the internal affairs of another state in any way, even though the welfare or health of its citizens may be affected when they travel to that state.” (Archibald v. Cinerama Hawaiian Hotels, Inc. (1977) 73 Cal.App.3d 152, 159 [140 Cal.Rptr. 599], internal citations omitted, disapproved on other grounds in Koire v. Metro Car Wash (1985) 40 Cal.3d 24 [219 Cal.Rptr. 133, 707 P.2d 195].)
Secondary Sources

11 California Forms of Pleading and Practice, Ch. 116, Civil Rights: Discrimination in Business Establishments, �� 116.10-116.13 (Matthew Bender)

3 California Points and Authorities, Ch. 35, Civil Rights (Matthew Bender)

In an era where a very large portion of mortgage obligations have been securitized, by assignment to a trust indenture trustee, with the resulting pool of assets being then sold as mortgage backed securities, foreclosure becomes an interesting exercise, particularly where judicial process is involved. We are all familiar with the securitization process. The steps, if not the process, is simple. A borrower goes to a mortgage lender. The lender finances the purchase of real estate. The borrower signs a note and mortgage or deed of trust. The original lender sells the note and assigns the mortgage to an entity that securitizes the note by combining the note with hundreds or thousands of similar obligation to create a package of mortgage backed securities, which are then sold to investors.

Unfortunately, unless you represent borrowers, the vast flow of notes into the maw of the securitization industry meant that a lot of mistakes were made. When the borrower defaults, the party seeking to enforce the obligation and foreclose on the underlying collateral sometimes cannot find the note. A lawyer sophisticated in this area has speculated to one of the authors that perhaps a third of the notes “securitized” have been lost or destroyed. The cases we are going to look at reflect the stark fact that the unnamed source’s speculation may be well-founded.

UCC SECTION 3-309

If the issue were as simple as a missing note, UCC §3-309 would provide a simple solution. A person entitled to enforce an instrument which has been lost, destroyed or stolen may enforce the instrument. If the court is concerned that some third party may show up and attempt to enforce the instrument against the payee, it may order adequate protection. But, and however, a person seeking to enforce a missing instrument must be a person entitled to enforce the instrument, and that person must prove the instrument’s terms and that person’s right to enforce the instrument. §3-309 (a)(1) & (b).

WHO’S THE HOLDER

Enforcement of a note always requires that the person seeking to collect show that it is the holder. A holder is an entity that has acquired the note either as the original payor or transfer by endorsement of order paper or physical possession of bearer paper. These requirements are set out in Article 3 of the Uniform Commercial Code, which has been adopted in every state, including Louisiana, and in the District of Columbia. Even in bankruptcy proceedings, State substantive law controls the rights of note and lien holders, as the Supreme Court pointed out almost forty (40) years ago in United States v. Butner, 440 U.S. 48, 54-55 (1979).

However, as Judge Bufford has recently illustrated, in one of the cases discussed below, in the bankruptcy and other federal courts, procedure is governed by the Federal Rules of Bankruptcy and Civil Procedure. And, procedure may just have an impact on the issue of “who,” because, if the holder is unknown, pleading and standing issues arise.

BRIEF REVIEW OF UCC PROVISIONS

Article 3 governs negotiable instruments – it defines what a negotiable instrument is and defines how ownership of those pieces of paper is transferred. For the precise definition, see § 3-104(a) (“an unconditional promise or order to pay a fixed amount of money, with or without interest . . . .”) The instrument may be either payable to order or bearer and payable on demand or at a definite time, with or without interest.

Ordinary negotiable instruments include notes and drafts (a check is a draft drawn on a bank). See § 3-104(e).

Negotiable paper is transferred from the original payor by negotiation. §3-301. “Order paper” must be endorsed; bearer paper need only be delivered. §3-305. However, in either case, for the note to be enforced, the person who asserts the status of the holder must be in possession of the instrument. See UCC § 1-201 (20) and comments.

The original and subsequent transferees are referred to as holders. Holders who take with no notice of defect or default are called “holders in due course,” and take free of many defenses. See §§ 3-305(b).

The UCC says that a payment to a party “entitled to enforce the instrument” is sufficient to extinguish the obligation of the person obligated on the instrument. Clearly, then, only a holder – a person in possession of a note endorsed to it or a holder of bearer paper – may seek satisfaction or enforce rights in collateral such as real estate.

NOTE: Those of us who went through the bank and savings and loan collapse of the 1980’s are familiar with these problems. The FDIC/FSLIC/RTC sold millions of notes secured and unsecured, in bulk transactions. Some notes could not be found and enforcement sometimes became a problem. Of course, sometimes we are forced to repeat history. For a recent FDIC case, see Liberty Savings Bank v. Redus, 2009 WL 41857 (Ohio App. 8 Dist.), January 8, 2009.

THE RULES

Judge Bufford addressed the rules issue this past year. See In re Hwang, 396 B.R. 757 (Bankr. C. D. Cal. 2008). First, there are the pleading problems that arise when the holder of the note is unknown. Typically, the issue will arise in a motion for relief from stay in a bankruptcy proceeding.

According F.R.Civ. Pro. 17, “[a]n action must be prosecuted in the name of the real party in interest.” This rule is incorporated into the rules governing bankruptcy procedure in several ways. As Judge Bufford has pointed out, for example, in a motion for relief from stay, filed under F.R.Bankr.Pro. 4001 is a contested matter, governed by F. R. Bankr. P. 9014, which makes F.R. Bankr. Pro. 7017 applicable to such motions. F.R. Bankr. P. 7017 is, of course, a restatement of F.R. Civ. P. 17. In re Hwang, 396 B.R. at 766. The real party in interest in a federal action to enforce a note, whether in bankruptcy court or federal district court, is the owner of a note. (In securitization transactions, this would be the trustee for the “certificate holders.”) When the actual holder of the note is unknown, it is impossible – not difficult but impossible – to plead a cause of action in a federal court (unless the movant simply lies about the ownership of the note). Unless the name of the actual note holder can be stated, the very pleadings are defective.

STANDING

Often, the servicing agent for the loan will appear to enforce the note. Assume that the servicing agent states that it is the authorized agent of the note holder, which is “Trust Number 99.” The servicing agent is certainly a party in interest, since a party in interest in a bankruptcy court is a very broad term or concept. See, e.g., Greer v. O’Dell, 305 F.3d 1297, 1302-03 (11th Cir. 2002). However, the servicing agent may not have standing: “Federal Courts have only the power authorized by Article III of the Constitutions and the statutes enacted by Congress pursuant thereto. … [A] plaintiff must have Constitutional standing in order for a federal court to have jurisdiction.” In re Foreclosure Cases, 521 F.Supp. 3d 650, 653 (S.D. Ohio, 2007) (citations omitted).

But, the servicing agent does not have standing, for only a person who is the holder of the note has standing to enforce the note. See, e.g., In re Hwang, 2008 WL 4899273 at 8.

The servicing agent may have standing if acting as an agent for the holder, assuming that the agent can both show agency status and that the principle is the holder. See, e.g., In re Vargas, 396 B.R. 511 (Bankr. C.D. Cal. 2008) at 520.

A BRIEF ASIDE: WHO IS MERS?

For those of you who are not familiar with the entity known as MERS, a frequent participant in these foreclosure proceedings:

MERS is the “Mortgage Electronic Registration System, Inc. “MERS is a mortgage banking ‘utility’ that registers mortgage loans in a book entry system so that … real estate loans can be bought, sold and securitized, just like Wall Street’s book entry utility for stocks and bonds is the Depository Trust and Clearinghouse.” Bastian, “Foreclosure Forms”, State. Bar of Texas 17th Annual Advanced Real Estate Drafting Course, March 9-10, 2007, Dallas, Texas. MERS is enormous. It originates thousands of loans daily and is the mortgagee of record for at least 40 million mortgages and other security documents. Id.

MERS acts as agent for the owner of the note. Its authority to act should be shown by an agency agreement. Of course, if the owner is unknown, MERS cannot show that it is an authorized agent of the owner.

RULES OF EVIDENCE – A PRACTICAL PROBLEM

This structure also possesses practical evidentiary problems where the party asserting a right to foreclose must be able to show a default. Once again, Judge Bufford has addressed this issue. At In re Vargas, 396 B.R. at 517-19. Judge Bufford made a finding that the witness called to testify as to debt and default was incompetent. All the witness could testify was that he had looked at the MERS computerized records. The witness was unable to satisfy the requirements of the Federal Rules of Evidence, particularly Rule 803, as applied to computerized records in the Ninth Circuit. See id. at 517-20. The low level employee could really only testify that the MERS screen shot he reviewed reflected a default. That really is not much in the way of evidence, and not nearly enough to get around the hearsay rule.

FORECLOSURE OR RELIEF FROM STAY

In a foreclosure proceeding in a judicial foreclosure state, or a request for injunctive relief in a non-judicial foreclosure state, or in a motion for relief proceeding in a bankruptcy court, the courts are dealing with and writing about the problems very frequently.

In many if not almost all cases, the party seeking to exercise the rights of the creditor will be a servicing company. Servicing companies will be asserting the rights of their alleged principal, the note holder, which is, again, often going to be a trustee for a securitization package. The mortgage holder or beneficiary under the deed of trust will, again, very often be MERS.

Even before reaching the practical problem of debt and default, mentioned above, the moving party must show that it holds the note or (1) that it is an agent of the holder and that (2) the holder remains the holder. In addition, the owner of the note, if different from the holder, must join in the motion.

Some states, like Texas, have passed statutes that allow servicing companies to act in foreclosure proceedings as a statutorily recognized agent of the noteholder. See, e.g., Tex. Prop. Code §51.0001. However, that statute refers to the servicer as the last entity to whom the debtor has been instructed to make payments. This status is certainly open to challenge. The statute certainly provides nothing more than prima facie evidence of the ability of the servicer to act. If challenged, the servicing agent must show that the last entity to communicate instructions to the debtor is still the holder of the note. See, e.g., HSBC Bank, N.A. v. Valentin, 2l N.Y. Misc. 3d 1123(A), 2008 WL 4764816 (Table) (N.Y. Sup.), Nov. 3, 2008. In addition, such a statute does not control in federal court where Fed. R. Civ. P. 17 and 19 (and Fed. R. Bankr. P. 7017 and 7019) apply.

SOME RECENT CASE LAW

These cases are arranged by state, for no particular reason.

Massachusetts

In re Schwartz, 366 B.R.265 (Bankr. D. Mass. 2007)

Schwartz concerns a Motion for Relief to pursue an eviction. Movant asserted that the property had been foreclosed upon prior to the date of the bankruptcy petition. The pro se debtor asserted that the Movant was required to show that it had authority to conduct the sale. Movant, and “the party which appears to be the current mortgagee…” provided documents for the court to review, but did not ask for an evidentiary hearing. Judge Rosenthal sifted through the documents and found that the Movant and the current mortgagee had failed to prove that the foreclosure was properly conducted.

Specifically, Judge Rosenthal found that there was no evidence of a proper assignment of the mortgage prior to foreclosure. However, at footnote 5, Id. at 268, the Court also finds that there is no evidence that the note itself was assigned and no evidence as to who the current holder might be.

Nosek v. Ameriquest Mortgage Company (In re Nosek), 286 Br. 374 (Bankr D Mass. 2008).

Almost a year to the day after Schwartz was signed, Judge Rosenthal issued a second opinion. This is an opinion on an order to show cause. Judge Rosenthal specifically found that, although the note and mortgage involved in the case had been transferred from the originator to another party within five days of closing, during the five years in which the chapter 13 proceeding was pending, the note and mortgage and associated claims had been prosecuted by Ameriquest which has represented itself to be the holder of the note and the mortgage. Not until September of 2007 did Ameriquest notify the Court that it was merely the servicer. In fact, only after the chapter 13 bankruptcy had been pending for about three years was there even an assignment of the servicing rights. Id. at 378.

Because these misrepresentations were not simple mistakes: as the Court has noted on more than one occasion, those parties who do not hold the note of mortgage do not service the mortgage do not have standing to pursue motions for leave or other actions arising form the mortgage obligation. Id at 380.

As a result, the Court sanctioned the local law firm that had been prosecuting the claim $25,000. It sanctioned a partner at that firm an additional $25,000. Then the Court sanctioned the national law firm involved $100,000 and ultimately sanctioned Wells Fargo $250,000. Id. at 382-386.

In re Hayes, 393 B.R. 259 (Bankr. D. Mass. 2008).

Like Judge Rosenthal, Judge Feeney has attacked the problem of standing and authority head on. She has also held that standing must be established before either a claim can be allowed or a motion for relief be granted.

Ohio

In re Foreclosure Cases, 521 F.Supp. 2d (S.D. Ohio 2007).

Perhaps the District Court’s orders in the foreclosure cases in Ohio have received the most press of any of these opinions. Relying almost exclusively on standing, the Judge Rose has determined that a foreclosing party must show standing. “[I]n a foreclosure action, the plaintiff must show that it is the holder of the note and the mortgage at the time that the complaint was filed.” Id. at 653.

Judge Rose instructed the parties involved that the willful failure of the movants to comply with the general orders of the Court would in the future result in immediate dismissal of foreclosure actions.

Deutsche Bank Nat’l Trust Co. v. Steele, 2008 WL 111227 (S.D. Ohio) January 8, 2008.

In Steele, Judge Abel followed the lead of Judge Rose and found that Deutsche Bank had filed evidence in support of its motion for default judgment indicating that MERS was the mortgage holder. There was not sufficient evidence to support the claim that Deutsche Bank was the owner and holder of the note as of that date. Following In re Foreclosure Cases, 2007 WL 456586, the Court held that summary judgment would be denied “until such time as Deutsche Bank was able to offer evidence showing, by a preponderance of evidence, that it owned the note and mortgage when the complaint was filed.” 2008 WL 111227 at 2. Deutsche Bank was given twenty-one days to comply. Id.

Illinois

U.S. Bank, N.A. v. Cook, 2009 WL 35286 (N.D. Ill. January 6, 2009).

Not all federal district judges are as concerned with the issues surrounding the transfer of notes and mortgages. Cook is a very pro lender case and, in an order granting a motion for summary judgment, the Court found that Cook had shown no “countervailing evidence to create a genuine issue of facts.” Id. at 3. In fact, a review of the evidence submitted by U.S. Bank showed only that it was the alleged trustee of the securitization pool. U.S. Bank relied exclusively on the “pooling and serving agreement” to show that it was the holder of the note. Id.

Under UCC Article 3, the evidence presented in Cook was clearly insufficient.

New York

HSBC Bank USA, N.A. v. Valentin, 21 Misc. 3D 1124(A), 2008 WL 4764816 (Table) (N.Y. Sup.) November 3, 2008. In Valentin, the New York court found that, even though given an opportunity to, HSBC did not show the ownership of debt and mortgage. The complaint was dismissed with prejudice and the “notice of pendency” against the property was cancelled.

Note that the Valentin case does not involve some sort of ambush. The Court gave every HSBC every opportunity to cure the defects the Court perceived in the pleadings.

California

In re Vargas, 396 B.R. 511 (Bankr. C.D. Cal. 2008)

and

In re Hwang, 396 B.R. 757 (Bankr. C.D. Cal. 2008)

These two opinions by Judge Bufford have been discussed above. Judge Bufford carefully explores the related issues of standing and ownership under both federal and California law.

Texas

In re Parsley, 384 B.R. 138 (Bankr. S.D. Tex. 2008)

and

In re Gilbreath, 395 B.R. 356 (Bankr. S.D. Tex. 2008)

These two recent opinions by Judge Jeff Bohm are not really on point, but illustrate another thread of cases running through the issues of motions for relief from stay in bankruptcy court and the sloppiness of loan servicing agencies. Both of these cases involve motions for relief that were not based upon fact but upon mistakes by servicing agencies. Both opinions deal with the issue of sanctions and, put simply, both cases illustrate that Judge Bohm (and perhaps other members of the bankruptcy bench in the Southern District of Texas) are going to be very strict about motions for relief in consumer cases.

SUMMARY

The cases cited illustrate enormous problems in the loan servicing industry. These problems arise in the context of securitization and illustrate the difficulty of determining the name of the holder, the assignee of the mortgage, and the parties with both the legal right under Article 3 and the standing under the Constitution to enforce notes, whether in state court or federal court.

Interestingly, with the exception of Judge Bufford and a few other judges, there has been less than adequate focus upon the UCC title issues. The next round of cases may and should focus upon the title to debt instrument. The person seeking to enforce the note must show that:

(1) It is the holder of this note original by transfer, with all necessary rounds;
(2) It had possession of the note before it was lost;
(3) If it can show that title to the note runs to it, but the original is lost or destroyed, the holder must be prepared to post a bond;
(4) If the person seeking to enforce is an agent, it must show its agency status and that its principal is the holder of the note (and meets the above requirements).

Then, and only then, do the issues of evidence of debt and default and assignment of mortgage rights become relevant.

HON. SAMUEL L. BUFFORD
UNITED STATES BANKRUPTCY JUDGE
CENTRAL DISTRICT OF CALIFORNIA
LOS ANGELES, CALIFORNIA

(FORMERLY HON.) R. GLEN AYERS
LANGLEY & BANACK
SAN ANTONIO, TEXAS

AMERICAN BANKRUPTCY INSTUTUTE
APRIL 3, 2009
WASHINGTON, D.C.

SBS Form 105 – Beneficiary Opening Instruction for AB1137

SBS Form 106 – Beneficiary Section 2923.5 Declaration Instructions

SBS Form 107 – Beneficiary Section 2923.5 Declaration Phase-in Instructions

The Problem: Simply put, the problems the legislature attempted to address in SB 1137 are the consequences of the subprime mortgage crisis leading to declining real property values and historic levels of foreclosures. The legislature wanted to make sure lenders, loan servicers and their agents were communicating with borrowers in default about the borrower’s financial situation and foreclosure alternatives before a foreclosure is started by recording a notice of default (“NOD”).

The political environment this past year was such that every politician wanted to take credit for solving the mortgage/foreclosure crisis. Many tried; most failed. SB 1137, signed by the Governor on July 8, 2008, is urgency legislation which became effective immediately. However, sections 2 and 4 (the notice provisions) were delayed and become effective on Saturday, September 6, 2008. The good news is that the provisions of SB 1137 sunset on January 1, 2013 unless extended by the legislature prior to that time.

1 The author wishes to acknowledge Patric J. Kelly, Esq., Adleson, Hess & Kelly A.P.C. for his work as a contributing editor for this article.

While SB 1137 is full of ambiguities, lacks definitions and may be unconstitutionally uncertain, most beneficiaries, loan servicers and trustees should be able to substantially comply with the spirit of the law if not the letter of the law. As bad as SB 1137 is, it would have been totally unmanageable had it passed without industry input.

What did SB 1137 do? SB 1137 added a number of new code sections including Civil Code §§ 2923.5 and 2924.8 (which are the “notice provisions” of SB 1137 and designated as sections 2 and 4, respectively). Section 2923.5 requires contact with, or due diligence to attempt to contact, the borrower before a notice of default (“NOD”) may be recorded after 9-6-08 or continued where the notice of default was recorded prior to 9-6-08 but the notice of sale (“NOS”) will not be recorded until after 9-6-08. Section 2924.8 requires a new Notice of Sale to Resident to be posted on the residential property and mailed to the resident of residential properties (in English and in 5 other languages) as part of the nonjudicial foreclosure process.

What Loans are Covered under new Civil Code § 2923.5?

Civil Code § 2923.5 only applies to: (1) Loans made from January 1, 2003, to December 31, 2007, inclusive (“Covered Period”); and, (2) loans secured by residential real property that are for owner-occupied residences. For purposes of § 2923.5, “owner-occupied” means that the residence is the principal residence of the borrower. The words “made” and “principal residence” are not defined in the statute, leaving uncertainty as to what these terms mean. Further the statutory definition of “residential property” is not limited to 1-4 residential properties. Therefore, if one unit in any residential property (e.g., an apartment building, a residential unit in a mixed use commercial/residential property, etc) is owner-occupied as the borrower’s principal residence, the borrower may be considered to be covered under Section 2923.5. Lastly, while it appears that the legislature intended to cover loans that were originally intended to be “owner occupied”, the timing of the owner occupancy is also uncertain. Loans meeting the above requirements will be called “covered loans” in this article.

Any loan that was not made between January 1, 2003, through December 31, 2007, is not a “covered loan” and is not subject to the provisions of § 2923.5 (although it still requires a “Notice of Sale to Resident” under certain circumstances discussed below).

Beneficiaries and loan servicers should consult with their compliance attorney to determine how to structure compliance with the provisions of section 2923.5. While legislation is often metaphorically viewed as making “sausage”, SB 1137 is an insult to sausage. Nonetheless, full compliance will be necessary by 9-6-08.

Preconditions to Recording Notice of Default (“NOD”). A trustee, beneficiary, or authorized agent may not file a notice of default (“NOD”) until: (1) 30 days after contact is made with the borrower as required by section 2923.5(a);

or, (2) 30-days after satisfying the due diligence requirements of section 2923.5(g); or (3) after qualifying for one of the exclusions under section 2923.5(h).

Contact with the Borrower (Before Foreclosure). The beneficiary or authorized agent must contact the borrower in person or by telephone in order to: (1) Assess the borrower’s financial situation; and, (2) Explore options for the borrower to avoid foreclosure. Since many lenders already have policies which may fulfill these requirements, those policies should be reviewed as they are likely to fall short of some of the new requirements.

Assessment of the Borrowers Financial Situation; Discussion of Options and Notice of Borrower’s Right to Have a Meeting with Beneficiary or Agent. The assessment of the borrower’s financial situation and discussion of options may occur during the first contact, or at the subsequent meeting scheduled for that purpose. Civil Code § 2923.5 gives no guidance as to what the lender or servicer must do in “assessing the borrower’s financial situation. Similarly, there is no guidance as to what, if any, “options for the borrower to avoid foreclosure” should be discussed.

During the initial contact, the beneficiary or authorized agent must advise the borrower that he or she has the right to request a subsequent meeting and, if requested, the beneficiary or authorized agent shall schedule the meeting to occur within 14 days. (Civ. Code § 2923.5(a).) A beneficiary’s or authorized agent’s loss mitigation personnel may participate by telephone during any contact required by this section. (Civ. Code § 2923.5(d)(2).)

Whether the assessment of the borrower’s financial situation and discussion of options occurs at the initial meeting or at a subsequent meeting within 14 days, the borrower shall be provided the toll-free telephone number made available by the United States Department of Housing and Urban Development (HUD) to find a HUD-certified housing counseling agency. Any meeting may occur telephonically and does not have to be in person.

A borrower may designate a HUD-certified housing counseling agency, attorney, or other advisor to discuss with the beneficiary or authorized agent, on the borrower’s behalf, options for the borrower to avoid foreclosure. That contact made at the direction of the borrower will satisfy the contact requirements of Civil Code § 2923(a)(2). However, any loan modification or workout plan offered at the meeting by the beneficiary or authorized agent is subject to approval by the borrower. (Civ. Code § 2923.5(a)(2)& (f).)

Where the loan servicer undertakes SB 1137, except where a loan servicing agreement is broad enough to specifically authorize the loan servicer to fulfill the requirement of Civil Code § 2923.5 for his principal (beneficiary), the loan servicer (e.g., broker) should consider modifying its loan servicing agreement to specifically authorize the broker/loan servicer to undertake the requirements of

2 While written authority is not required by SB 1137, it may be a preferable practice so that the servicer’s authority is clear.

Civil Code § 2923.5 for the principal.2 While a trustee might be an “agent”, most trustees do not have the information or authority to engage in workout agreements or modifications of the beneficiary’s loan. Because of this, the legislature removed “trustee” from many of the provisions of SB 1137.

It is unclear what type of proof is necessary to satisfy the lender that a person allegedly “designated” by the borrower can speak for the borrower. While not addressed in SB 1137, if an authorized agent (including an attorney) wants to discuss the borrower’s personal financial information (not just options to avoid foreclosure) possessed by the lender or servicer, the lender or servicer should consider obtaining a written authorization to release (discuss) such information with the agent. Otherwise, the lender or loan servicer risks disclosing the borrower’s confidential financial information to a third party who may not prove to be the borrower’s authorized agent. Consideration should be given to providing an authorization form (prepared and approved by counsel). The lender’s counsel approved form of authorization may be provided on the lenders or on the loan servicer’s website or may be delivered in any other fashion (e.g., mailed, faxed, e-mailed or personally delivered) to the borrower or to the borrower’s designated authorized agent. Keep in mind simply to discuss options to avoid foreclosure with the borrower’s “designated agent” probably does not require much proof because these options are usually going to be generic. It is only if these discussions with the borrower’s agent go into the borrower’s personal financial information that a more detailed written authorization might be necessary. The lender’s or loan servicer’s authorization form should not be the sole form accepted as long as the form provides appropriate authorization for the lender or servicer to discuss and disclose the borrower’s personal financial information with the designated agent (i.e., where such conversations are going to take place).

Procedures Where, Despite “Due Diligence”, the Borrower Cannot Be Contacted. A NOD may be filed when a beneficiary or authorized agent has not contacted a borrower provided that the failure to contact the borrower occurred despite the due diligence of the beneficiary or authorized agent. (Civ. Code § 2923.5(g).) “Due diligence” under § 2923.5 means “all of the following:”

(1) A beneficiary or authorized agent shall first attempt to contact a borrower by sending a first-class letter that includes the toll-free telephone number made available by HUD to find a HUD-certified housing counseling agency. (“First Contact Letter”). Although SB 1137 does not specify what HUD number should be used, the HUD website states the following: “To find out more about HUD-approved housing counseling agencies and their services, please call (800) 569-4287 on weekdays between 9:00 a.m. and 5:00 p.m. ET (6:00 a.m. to 2:00 p.m. PT). You can also get an automated referral to the three housing

counseling agencies located closest to you by calling (800) 569-4287, or see our list of these HUD-approved agencies by state.” Nothing in section 2923.5 requires that the First Contact Letter be delayed until the lender or servicer has tried to contact the borrower. Therefore, the First Contact Letter should be sent out shortly after default so that any attempted contacts with the borrower count toward the lender’s “due diligence” requirements.

(2) After the First Contact Letter has been sent, the beneficiary or authorized agent shall attempt to contact the borrower by telephone at least three times at different hours and on different days. Telephone calls shall be made to the primary telephone number on file. A beneficiary or authorized agent may attempt to contact a borrower using an automated system to dial borrowers, provided that, if the telephone call is answered, the call is connected to a live representative of the beneficiary, or authorized agent.

(3) A beneficiary or authorized agent satisfies the telephone contact requirements of § 2923.5(g) if it determines, after attempting contact pursuant to § 2923.5(g), that the borrower’s primary telephone number and secondary telephone number or numbers on file, if any, have been disconnected.

(4) If the borrower does not respond within two weeks after the above telephone call requirements have been satisfied (e.g., calls or determination that the borrower telephone numbers have been disconnected), the beneficiary or authorized agent shall then send a certified letter, with return receipt requested. (“Due Diligence Letter”).

(5) The beneficiary or authorized agent shall provide a means for the borrower to contact it in a timely manner, including a toll-free telephone number that will provide access to a live representative during business hours.

(6) The beneficiary or authorized agent has posted a prominent link on the homepage of its Internet Web site, if any, to the following information: (a) Options that may be available to borrowers who are unable to afford their mortgage payments and who wish to avoid foreclosure, and instructions to borrowers advising them on steps to take to explore those options; (b) A list of financial documents borrowers should collect and be prepared to present to the beneficiary or authorized agent when discussing options for avoiding foreclosure. (This is where the beneficiary or loan servicer may want to put the agent authorization form and list it as a document to bring to the meeting); (c) A toll-free telephone number for borrowers who wish to discuss options for avoiding foreclosure with their mortgagee, beneficiary, or authorized agent; and, (d) The toll-free telephone number made available by HUD to find a HUD-certified housing counseling agency. Civil Code § 2924.5 does not specify in any further detail how or what should be included in the lender or servicer’s website.

While not addressed in SB 1137, where the loan servicer or trustee is subject to the Federal Fair Debt Collection Practices Act (“FDCPA”), it should be careful to

comply with all of the requirements of the FDCPA (e.g., the mini-Miranda warning in 15 U.S.C. § 1692e(11); validation notice under 15 U.S.C. §1692g, etc.) The FDCPA prohibits communication with the consumer in connection with the collection of a debt at any unusual time or place or in a manner or place known (or which should be known) to be inconvenient to the consumer. (“Safe Harbor” hours are between 8:00 a.m. and 9:00 p.m. if not known to be inconvenient to the borrower). Whether you are subject to the FDCPA and how to comply should be discussed with your compliance attorney.

Exclusions from Some of the Requirements of § 2923.5(h). Civil Code § 2923.5(a) [30-day waiting period and borrower contact], (c) [declaration in NOS where NOD occurred prior to enactment of SB 1137], and (g) [due diligence alternative] do not apply if any of the following occur: (1) The borrower has surrendered the property as evidenced by either a letter confirming the surrender or delivery of the keys to the property to the trustee, beneficiary, or authorized agent; (2) The borrower has contracted with an organization, person, or entity 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 beneficiaries; or, (3) The borrower has filed for bankruptcy, and the proceedings have not been finalized. (Civil Code § 2923.5(h).) Whether these exceptions apply and whether a declaration in the NOD or NOS is needed should be discussed with compliance counsel.

Surrender of Keys or Surrender Letter. To avoid disputes, It may be a good practice for lender’s and servicer’s to have a counsel approved form of surrender letter (even where the borrower turns over the keys) to clearly evidence the borrower’s intention. However, no particular form is required and no letter is required where the borrower turns over the keys to the property.

Contract with Foreclosure Avoidance Organizations. Proving that the borrower “has contracted with an organization, person, or entity 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 beneficiaries” may be problematic. Relying on this exception should be limited to situations where counsel or an experienced supervisor has determined that the exclusion applies.

Bankruptcy Exclusion. For the bankruptcy exclusion what does: “the proceedings have not been finalized’ mean? “Finalized” is not defined by § 2923.5(h)(3). However, it likely means that either: (1) an order entered on the court’s docket closing the file by the court; or, (2) an order entered on the court’s docket dismissing the bankruptcy case.

What happens if a lender, trustee or servicer relies on the bankruptcy exclusion and the bankruptcy is dismissed before the sale occurs? Probably nothing if the bankruptcy was filed and not finalized at the time the NOD (or NOS in the transition period) was filed. The trustee, lender or authorized agent should not

engage in the contact requirements of SB 1137 while the borrower is in bankruptcy, as this may violate the automatic stay in bankruptcy.

NOD Recorded on or after 9-6-08, must contain a Declaration of Compliance with Civil Code § 2923.5.

A NOD filed on or after September 6, 2008, shall include: “[A] declaration from the mortgagee, beneficiary, or authorized agent that it has contacted the borrower, tried with due diligence to contact the borrower as required by this section, or the borrower has surrendered the property to the mortgagee, trustee, beneficiary, or authorized agent.” (Civ. Code § 2923.5(b).)

The form of the declaration is not specified in Civil Code § 2923.5(b) The form of the declaration should be provided by compliance counsel and is likely to vary depending on whether compliance is achieved by contact or due diligence or by application of one of the exclusions. Some counsel may even argue that a declaration is not needed for exclusions because no such exclusion is mentioned in Civil Code § 2923.5(b). The more conservative approach, however, would be to draft and use declarations when any exclusion in Civil Code § 2923.5(h) is relied upon.

While not expressly addressed in SB 1137, it is unlikely that the “declaration” must be “sworn” or “under penalty of perjury”. A good argument can be made that when the legislature intends for a “declaration” to be under penalty of perjury, it states so in the statute. For example, Civil Code § 2941.7 (i.e., where a beneficiary cannot be found or where the beneficiary refuses to reconvey after payoff), specifically states that: “The declaration provided for in this section [2924.7] shall be signed by the mortgagor or trustor under penalty of perjury.”

Transition Period Rules. Where the NOD has been recorded “prior to the enactment” of § 2923.5 and a notice of rescission of NOD has not been recorded, the trustee, beneficiary, or authorized agent shall, as part of the NOS filed pursuant to Section 2924f, include a declaration that either: (1) States that the borrower was contacted to assess the borrower’s financial situation and to explore options for the borrower to avoid foreclosure; or, (2) Lists the efforts made, if any, to contact the borrower in the event no contact was made.

The use of the words “prior to enactment of this section [§2923.5] is problematic as the statute was technically enacted on July 8, 2008 when the chaptered bill was enrolled with the Secretary of State after being signed by the Governor. However, Section 10(b) of SB 1137 provides that the provisions of sections 2 and 4 of the Act (i.e., Civil Code §§ 2923.5 and 2924.8) shall become operative “60 days after the “effective date” of SB 1137. The “effective date” was July 8, 2008 and 60 days thereafter should be Saturday, September 6, 2008. The problem that may occur is that Section 10 of SB 1137 is found in what are called the “uncodified sections”, meaning that that section will not appear in the printed code sections relied upon by attorneys. To respond to challenges by consumers,

their representatives and counsel prior to September 6, 2008, beneficiaries, loan servicers, trustees and their respective counsel should keep on hand a chaptered copy of SB 1137 with section 10(b) highlighted for the purpose of promptly responding to claims. However, the most likely statutory interpretation of SB 1137 is that the transition period for loans covered by Civil Code § 2923.5 commences on 9-6-08 where a NOD was recorded prior to 9-6-08 and a NOS will be recorded on or after 9-6-08. It would make no sense for the transition period to predate the time when Civil Code §§ 2923.5 and 2924.8 become effective. Furthermore this interpretation appears more consistent with the legislative intent and is most protective of the consumer.

Clearly, as to loans covered by Civil Code § 2923.5, beneficiaries/servicers who have not implemented SB 1137 compliance by the time this article is read, will be delayed for whatever time it takes to achieve compliance as they cannot record a NOD (or a transitional period NOS) until they have complied with section 2923.5.

Application to Judicial Foreclosure. SB 1137 appears to be inapplicable to judicial foreclosures as it is specifically limited to NODs and NOSs “pursuant to Civil code § 2924.” (Civil Code §§ 2923.5(a)(1), (b) & (c).) Oddly, the legislature may have created incentive for some lenders to use the more costly and time consumer judicial foreclosure process at least where other facts exist for the selection of judicial foreclosure.

Addition of Civil Code § 2923.6 (Servicer’s Duty under Pooling Agreements). SB 1137 added Civil Code §2923.6(a) dealing with pooling and servicing agreements. This section should be reviewed by managers of pools or loan servicers. It appears to be designed to provide some level of protection for servicers and pool managers in offering loan modifications or workout plans to borrowers.

Notices of Sale to Resident of Foreclosure of Residential Rental Properties: (Foreign Language Copies). SB 1137 added Civil Code § 2924.8 which only apply: (1) To loans secured by residential real property; and, (2) If the billing address for the mortgage note is different than the property address.

Section 2924.8 is not limited to “owner-occupied” residential properties nor is it limited to loans made between 1-1-03 and 12-31-07. Section 2924.8 does not define what “address for the mortgage note” means. However, it can be assumed that where the servicer originally, or after the loan is made, has an address for the borrower that is different than the address of the property for the purpose of sending notices under the note, § 2924.8 should be applied.

What Is the New Notice and How Is It given? Section 2924.8 provides that when the trustee or authorized agent posts the NOS: (1) The trustee or authorized agent shall also post the following notice, in the manner required for posting the notice of sale on the property to be sold, and; (2) The trustee, beneficiary, or authorized agent shall mail, “at the same time” [as the posting] in

an envelope addressed to the “Resident of property subject to foreclosure sale” the following notice in English and the languages described in Civil Code § 1632 (i.e., Spanish, Chinese, Tagalog, Vietnamese, and Korean).

The Notice of Sale to Resident shall read:

“Foreclosure process has begun on this property, which may affect your right to continue to live in this property. Twenty days or more after the date of this notice, this property may be sold at foreclosure. If you are renting this property, the new property owner may either give you a new lease or rental agreement or provide you with a 60-day eviction notice. However, other laws may prohibit an eviction in this circumstance or provide you with a longer notice before eviction. You may wish to contact a lawyer or your local legal aid or housing counseling agency to discuss any rights you may have.”

(Civ. Code § 2924.8(a).) The form including foreign language translations were done by the State of California and are posted on the California Department of Corporations website at http://www.corp.ca.gov/FSD/pdf/Notice_of_Sale.pdf.

It is an infraction to tear down the new notice within 72 hours of posting. Violators shall be subject to a fine of one hundred dollars ($100). (Civil Code § 2924.8(b).)

Should the § 2924.8 notice to resident be posted and mailed to the property address on all types of property (i.e., residential, commercial, industrial or vacant land) just to be cautious? No. But the notice probably should be posted and mailed on all residential properties (e.g., single family, multi-unit or mixed use where part of the property is residential) where the billing address for the mortgage note is different than the property address. Since Civil Code § 2924.8 does not specifically refer to “rental property”, the new notice may create some confusion if posted on purely non-residential property. The problem is that the new State approved Notice of Sale to Resident references “rental property” and does not limit that statement to residential rental property. The required language goes on to refer to the “60-day eviction notice” which, in a different code section, expressly only applies to “residential properties. (See, new Code of Civil Procedure § 1161b). Because of these ambiguities between Section 2924.8, the new notice contained in that section and the provisions of new Code of Civil Procedure § 1161b, if the new Notice of Sale to Resident is given to tenants of non-residential properties, it has the risk of confusing nonresidential tenants. Since Civil Code § 2924.8 is designed to protect residential rental tenants, it is best to err on the side of giving the notice whenever the trustee, beneficiary or their agents are not sure.

Should the notice to resident be mailed to the trustor (borrower) or other persons (besides the occupant of the residential rental property) who are entitled to

receive NODs or NOSs? No. The new Notice of Sale to Resident should only be mailed to “Resident of property subject to foreclosure sale”. Civil Code § 2924.8(d) states: “This section shall only apply to loans secured by residential real property, and if the billing address for the mortgage note is different than the property address.” Since is unclear what is meant by “billing address for the mortgage note, we recommend mailing and posting the “notice to resident” in any case where the beneficiary originally, or subsequently, had in its file an address for the purpose of notifying the borrower (e.g., for sending statements) other than that of the secured property. For example, whenever the lender’s file reveals that a street address, rural postal route, P.O. Box, private mailing center (e.g., box) etc. has been used by the borrower, other than the address of the secured property”, the best practice would be to post and mail the new Notice to Resident.

Could such an approach create confusion to the trustor if he/she is occupying the property even though he/she is using an address other than the secured property?

Probably not. The statutory wording expressly states: “If you are renting this property, the new property owner may either give you a new lease or rental agreement or provide you with a 60-day eviction notice. New Code of Civil Procedure § 1161b(b) expressly states: “This section shall not apply if any party to the note remains in the property as a tenant, subtenant, or occupant.” KEEP IN MIND THE PROVISIONS OF CODE OF CIVIL PROCEDURE § 1161b BECAME EFFECTIVE ON JULY 8, 2008 AND IS NOT SUBJECT TO THE 60-DAY DELAY THAT APPLIES TO THE CONTACT AND NOTICE TO RESIDENT PROVISIONS OF CIVIL CODE SECTIONS 2923.5 AND 2924.8.

Addition of Civil Code § 2929.3 (Owner’s Duty to Maintain Property). New Civil Code § 2929.3(a)(1) requires that a legal owner shall maintain vacant residential property: (1) Purchased by that owner at a foreclosure sale (e.g., third party bidder); or, (2) Acquired by that owner through foreclosure under a mortgage or deed of trust (e.g., reversion to lender).

Unlike many local ordinances requiring the lender or trustee to inspect the property prior to recording an NOD, SB 1137, only applies where the “legal owner”, whether it is the lender or a third party purchaser, acquired title through a foreclosure sale. Therefore, the provisions of Civil Code § 2929.3 are likely to most important to the lender’s REO departments or agents.

Penalties for Violation. Civil Code § 2929.3, which only applies to residential real property, provides:

• A governmental entity may impose a civil fine of up to one thousand dollars ($1,000) per day for a violation.

• To impose a fine, the government entity must give notice of the alleged violation, including a description of the conditions that gave rise to the allegation, and notice of the entity’s intent to assess a civil fine if action to correct the violation is not commenced within a period of not less than 14 days and completed within a period of not less than 30 days.

• The notice must be mailed to the address provided in the deed or other instrument as specified in Government Code § 27321.5 (a), or, if none, to the return address provided on the deed or other instrument.

• The governmental entity shall provide a period of not less than 30 days for the legal owner to remedy the violation prior to imposing a civil fine and shall allow for a hearing and opportunity to contest any fine imposed.

• In determining the amount of the fine, the governmental entity shall take into consideration any timely and good faith efforts by the legal owner to remedy the violation.

• The maximum civil fine authorized by this section is one thousand dollars ($1,000) for each day that the owner fails to maintain the property, commencing on the day following the expiration of the period to remedy the violation established by the governmental entity.

• Subject to the provisions of § 2929.3, a governmental entity may establish different compliance periods for different conditions on the same property in the notice of alleged violation mailed to the legal owner.

• For purposes of § 2929.3, “failure to maintain” means failure to care for the exterior of the property, including, but not limited to, permitting excessive foliage growth that diminishes the value of surrounding properties, failing to take action to prevent trespassers or squatters from remaining on the property, or failing to take action to prevent mosquito larvae from growing in standing water or other conditions that create a public nuisance.”

• Notwithstanding the above, a governmental entity may provide less than 30 days’ notice to remedy a condition before imposing a civil fine if the entity determines that a specific condition of the property threatens public health or safety and provided that notice of that determination and time for compliance is given. Fines and penalties collected pursuant to this section shall be directed to local nuisance abatement programs.

• A governmental entity may not impose fines on a legal owner under both Civil Code § 2929.3 and a local ordinance. However, the rights and remedies provided in § 2929.3 are cumulative and in addition to any other rights and remedies provided by law. Unfortunately, section 2929.3 does not preempt any local ordinance many of which are vague at best and probably unconstitutionally uncertain.

New 60-Day Notice to Quit for Tenants in Foreclosed Residential Rental Properties. SB 1137 adds Code of Civil Procedure §1161b provides that a tenant or subtenant in possession of a rental housing unit at the time the property is sold in foreclosure shall be given 60-days’ written notice to quit pursuant to Code of Civil Procedure § 1162 before the tenant or subtenant may be evicted from the property. THIS SECTION WAS EFFECTIVE ON JULY 8, 2008 AND WAS NOT DELAYED. This new section does not apply if any party to the note (e.g., original trustor) remains in the property as a tenant, subtenant, or occupant.

Conclusion

While complex, devoid of necessary definitions and subject to extensive ambiguities, beneficiaries, trustees and their authorized agents must comply and should adopt policies and procedures to attempt compliance no later than September 6, 2008. Hopefully, next year, the legislature will clean up many of the obvious problems in SB 1137. It is unlikely that any legislative relief will become effective until January 1, 2010. Policies and procedures will have to be refined over time to get all of the bugs out. Most beneficiaries and trustees would be well advised to consult counsel regarding implementing SB 1137 into their day-to-day policies and procedures. Compliance packages have been prepared by a number of compliance attorneys that should be able to help guide beneficiaries, servicers and trustees through the SB 1137 compliance maze.

Adleson, Hess & Kelly, a PC (2008)©

Posted 2 days ago by livinglies on Livinglies’s Weblog

Don’t get misled by titles. The wording of the statute clearly uses “verification” not validation. Verification generally means some sworn document or affidavit. This means when you contest the debt under FDCPA (in addition to sending a QWR) the party who is supposedly collecting or enforcing the debt has a duty to “obtain verification”. And that means they can’t verify it themselves unless they are the actual lender. And the statutes says pretty clearly that they must give the lenders name and contact information — past and present. STRATEGY: IF THEY SUPPLY SUCH A DOCUMENT, PICK UP THE PHONE AND SPEAK WITH THE PERSON WHO SIGNED IT.I CAN PRACTICALLY GUARANTEE THEY WILL DISCLAIM EVERYTHING THAT WAS IN IT AND POSSIBLY EVEN THAT THEY SIGNED IT.

15 U.S.C. 1692 ———–

doddermod

The California Usury Law and the Non-Exempt Lender
With the proliferation of exemptions from the California Usury Law, it is surprising to find lenders who are not exempt. However, they still exist. And they still take the risk of unintentionally making an interest-free loan, with limited possibility of acceleration, and with all free or under-priced warrants, equity kickers or other consideration for the loan being voided. A recent case underscores the risk of not having an exemption.
In WRI Opportunity Loans II LLC v. Cooper, 2007 DJDAR 12930 (Aug. 23, 2007), the lender made a loan to the borrower who planned to build residential townhouses and condominiums in West Hollywood. The loan was guaranteed by the two principals of the borrower. In addition to the regular interest on the loan (a spread over Bank of America’s reference rate), the loan documents entitled the lender to receive additional interest according to a fixed schedule if other “contingencies” were to occur. For instance, the lender was to receive a percentage of the sales price of any units sold and was also to receive a specified sum in case the project was not completed. The borrower filed for bankruptcy, and the lender sued the guarantors. The guarantors responded with the defense of usury.
Because the guarantors were individuals, the usury exemption under California Corporations Code Section 25118 was not available. Also, the lender was not a licensed lender in California and did not have available one of the many exemptions from the California Usury Law applicable to various categories of licensed lenders. Hence, the lender first tried to shoehorn itself into the “interest contingency rule” under California common law. Under that rule, interest that exceeds the legal maximum is not usurious when its payment is “subject to a contingency so that the lender’s profit is wholly or partially put in hazard,” provided “the parties are contracting in good faith and without intent to avoid the statute against usury.” Under this common law rule, the non-contingent part of the interest must be materially less than the amount of interest that could have been charged at the highest permissible rate.
Unfortunately for the lender, the “contingencies” in the Cooper case were not true contingencies. No matter what happened to the project, except in some unlikely scenarios, the lender was entitled to an amount of additional interest that would have put the lender over the usury limit.
The lender then tried to shoehorn itself into the statutory exemption for shared appreciation loans under California Civil Code Sections 1917 through 1917.006. That statute permits additional interest to be collected, regardless of the usury law, from “a share of (1) the appreciation in the value of the security property, (2) rents and profits attributable to the subject property, or (3) both.” However, that is not how this lender’s additional interest was calculated, and the court found that the statutory exemption for shared appreciation loans was not applicable.
Finally, the lender argued that guarantors had waived the usury defense through the broad suretyship waivers in the guaranty. The court held that, because the usury law voided the interest provision, the suretyship waivers did not apply to the usury defense.
Moral
Investment or private equity funds that lend money frequently overlook or downplay the need for appropriate licenses and usury exemptions. The Cooper case underscores the continuing need to observe the restrictions imposed upon lenders by the usury law. While many lenders rely upon the transactional exemption in California Corporations Code Section 25118, that exemption is not applicable if any of the borrowers or guarantors is an individual, a revocable trust having one or more individuals as trustors, or a partnership in which, at the time of issuance of the debt, one or more individuals are general partners.

Tim McCandless – Dodder 5 8 09