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Litigation Forum: Litigation Involving Servicing and Foreclosure Michelle Canter LotsteinLegal PLLC MBA Regulatory Compliance Conference

Washington D.C. September 25, 2011

Overview
Evolving and Emerging Servicing Claims Discriminatory Servicing SCRA Bankruptcy Wrongful Foreclosure Modification Post Foreclosure and Eviction Effective Defenses for Claims Tips from the Trenches Strategies addressing claims preparing for next wave of claims
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Fair Servicing Claims


Discriminatory lending and servicing remain a high priority DOJ Fair Lending Unit examining HAMP data; census tract information likely to be examined CFPB MOUs with states enhance efforts to share information Banking agencies and HUD referring matters to DOJ Certain non-public reviews are ongoing Fair Servicing claims expected to rise Disparate impact theories expected to be tried
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Fair Housing Complaints


Unique challenges with Fair Housing Complaints, especially if filed concurrently with litigation or a regulatory complaint Borrower alleges discriminatory basis for servicers actions or inactions HUD/state agency investigates, issues document requests, seeks interviews of employees HUD HOCs initiate communications with servicer directly regarding modification Resolution through mediation complicated if borrowers counsel demands fees
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SCRA Compliance is Critical


SCRA Enforcement prioritized High risk litigation Much media attention leads to increased claims Effort supercharged with CFPB Office for Servicemembers Affairs State overlays with additional legislation create new compliance hurdles and increase risk of claims

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Bankruptcy Challenges
Gamut of wrongful foreclosure claims arise in bankruptcy context Claims often arise Post-Foreclosure US Trustees Office, Chapter 7 Trustees and debtors counsel bring claims Proofs of Claim challenges Motions to Avoid Lien Objections to Confirmation Adversary Actions Federal courts interpreting state law that may be unresolved or unclear Conflicting or inconsistent opinions within a state or between bankruptcy courts
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Bankruptcy Challenges
Borrowers initiate fight to delay or stop eviction or other action Borrowers file Chapter 13 bankruptcy BK Plan dependent on loan modification Court may not require confirmable plan, but will let modification process play out Files Lis Pendens to stop new foreclosure As a court of equity, bankruptcy judges may view lulling arguments more favorable as to oral discussions or insist on strict proof Consistency and accuracy is key!
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Wrongful Foreclosure Claims


Issues other than Standing and Procedural Deficiencies continue to be raised Borrower claims False Start / Re-Start Foreclosure avoidable (intent to foreclose claims) or wrongful Foreclosure referral too soon before exhausting alternatives to foreclosure Dual Track continued while loan Mod application pending Foreclosure restarted after failed workout without offering other foreclosure alternatives State-specific statutory violations
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Modification Claims Dominate


Significant volume of claims related to Mods that are pending, denied or unsatisfactory Various categories of claims emerge No-Mod (borrower got none) Mo-Mod (borrower wants more) Re-Mod (borrower wants do-over) Changing Standards from Fannie, Freddie and FHA present ongoing challenges Impact of Consent Order Leading Practices still unknown

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No-Mod Claims
No-Mod: Servicer failed to offer/grant modification, failed to offer/exhaust other foreclosure alternatives Failure to offer HAMP, HAFA, or HERA Failure to follow timelines or guidelines Wrongful denial or failure to escalate denial of mod Failure to issue Adverse Action Notice

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Mo-Mod and Re-Mod Claims


Borrower alleges Mod offered is not enough or terms offered are based on wrong info Failure to timely communicate determination or reasons for determination No material reduction in payments or No principal reduction Failure to analyze ability to repay or to offer affordable Mod Error in inputs, or underwriting of Mod application or calculating NPV Failure to give a second look
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Wrongful Foreclosure Defense


State law controls; judicial versus nonjudicial variations may be significant Distinguish attempted wrongful foreclosure claim; is it recognized? Determine plaintiffs burden More than defect in foreclosure process? Specific damages or harm? Foreclosure sales price variation Analyze causal connection between any defect and result Watch state consumer protection and FDCPA claims!
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Defending HAMP Claims


Prevailing view = No private cause of action under HAMP Precedent for no breach of contract claim where only basis for contract claim is HAMP offer
Illustrative cases: Acuna v. Chase Home Fin., LLC, 2011 WL 1883089, at *4 (E.D.Va. May 17, 2011); Hart v. Countrywide Home Loans, Inc., 735 F.Supp.2d 741, 748 (E.D.Mich.2010); Speleos v. BAC Home Loans Servicing, L.P., 755 F.Supp.2d 304, 311 (D.Mass.2010); Hoffman v. Bank of Am., N.A., 2010 WL 2635773 (N.D.Cal. June 30, 2010); Simon v. Bank of Am., N.A., 2010 WL 2609436 (D.Nev. June 23, 2010) and others.

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Defending Mod Claims


No private cause of action Mod Guidelines/Statutes/Procedures not in effect for relevant time period No justifiable reliance by borrower or promissory estoppel Statute of Frauds / Parol Evidence Rule prevents oral modifications to Note and Security Instrument Oral promise cannot conflict with writing No Waiver of right to foreclose Consideration of Mod is not a Waiver Suspending dual track not a Waiver Waiver is not a cause of action
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Defending Breach of Contract


Back to the Basics: The documents control the analysis Trial Period Plan (TPP) or Modification Agreement Effective Defenses Failure to strictly comply with TPP or Mod terms and condition Borrowers failure to meet conditions precedent Payments not timely made All documents not timely submitted Signed agreement not timely returned No new contract executed for TPP or Mod
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Evolving - TPP Breach Claims


Stagikas v. Saxon Mortg. Services, Inc., 2011 WL 2652445 (D. Mass., July 5, 2011) Borrower entered into TPP, was not offered permanent mod filed suit alleging breach of contract, FDCPA Claims and claims for violations of MA Consumer Protection Act HELD: Borrower can sue servicer for breach of trial period plan agreement under contract theory instead of HAMP

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Evolving Claims TPP Breach


When is a contract a contract? What are the TPP documents? Is there a viable claim for breach of TPP? Stagikas issued in July 2011, is language in TPP now different? Do new TPP guidelines create a host of new claims

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Understanding the Mod Docs


Home Affordable Modification Trial Period Plan Notice

Upon receipt of the documentation and determination of the borrower's eligibility, servicers must prepare and send to the borrower a firm offer indicating the borrower qualifies for the Home Affordable Modification.
(Last updated September 20, 2011)

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Tips from the Trenches


Identify HAMP, FHA-HAMP, Securitization or proprietary Mod hierarchy options based on Investor Fannie Mae revised 08/26/2011 FHA similar, yet distinct Understand timelines/docs for actions Understand any state law overlays Distinguish basis for denial Program eligibility? Underwriting inputs or NPV? Missing docs? Determine if other servicing practices questioned
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FHA TPP -- ML 2011-28


Issued 08/15/2011, effective 10/01/2011 Outlines when TPP required before mod or partial claim Borrower eligibility Minimum 3-month period, payment amounts and interest rate guidance Defines when TPP fails During TPP, suspend foreclosure If TPP fails, before commencing or continuing foreclosure, must re-evaluate borrowers eligibility for other loss mitigation activities
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Defending TPP Breach Claims


Understand and review the documents and correspondence Clearly identify the phase of the multi-phase Mod process Eligibility + TPP + Mod Borrower and loan eligibility, Borrower submits docs, Servicer conducts Net Present Value (NPV) test

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Tips from the Trenches


Ongoing Mod process is ripe for new claims Litigators need to understand the process What about change in circumstance (borrower becomes employed after Mod app submitted)? What about second look before denial or after TPP fails Application of payments analysis is ongoing If separate foreclosure or bankruptcy counsel, maintain good communication

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Post Foreclosure Claims


The same claims are often filed postforeclosure Adds additional elements of analysis depending on state law (i.e., redemption right) Third-party purchaser at foreclosure sales creates additional affirmative claims Courts reluctant to slam the door on claims merely because foreclosure is completed

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Tips from the Trenches


Investors take varying approaches to postforeclosure actions Some refuse to consider modification Others permit modification Investors may permit borrower to remain in property if rent payments made for 60-90 day period Servicers often required to identify underlying issue, which may trigger buyback demand from investor for loan Modification approval may be impractical

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Wrongful Eviction Claims


Borrower uses eviction proceeding as last chance for wrongful foreclosure Less formal court process for eviction ripe for procedural issues upon appeal or judgment Borrower claims: Property not vacant Personal property not trash Loss of heirlooms and valuables Emotional Distress damages No lawful eviction conducted No proper notice to Borrowers
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Claims We Expect to See


Impact of Interagency Consent Orders and FHFA Servicing Alignments ongoing Do they establish Leading Practices for Servicers? When is Dual Track triggered? If no SPOC, are there affirmative claims? Second Look Review of Mod Denial before foreclosure referral or sale? Do Policies and Procedures align with leading practices

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Maintain a Courtroom View


What happens in a courtroom doesnt stay in a courtroom! Even a one-off case can become a basis for a slew of new arguments Coordinated servicer approach + strategic decisions should guide counsel to limit bad facts resulting in bad law Differentiate attorney role from witness role Be attuned to industry-wide or institutional discussions occurring in specific cases (courts want to learn)
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Lessons Learned from NJ


NJ Supreme Court issued Administrative Show Cause Orders, Emergency Order amending Court rules Foreclosure moratorium for 6 high volume servicers until Show Cause Orders satisfied 24 other servicers required to file Certification to evidence procedures satisfy NJ requirements and acceptable Ret. Judge Barisonek appointed Special Master to review certification to determine if servicer satisfied NJ requirements Additional servicers impacted (all GSE servicers) received request for Certification
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NJ Update since Spring 2011


If certification is lacking, Judge Barisonek requires supplemental certification to respond to specific inquiries Hearings held Foreclosures recently resumed What Have We Learned? The Courtroom is not Vegas What happens in the courtroom doesnt stay in the Courtroom Efforts failed to keep certifications under seal all appear in public record Consistency in future filings is critical
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Practice Tip: Witnesses


Guard the testimony of your witness and remember the Glarum holding Understand the scope of witnesses knowledge and ensure documents are accurate Ensure witnesses are prepared to answer questions before they are asked about parties, docs, practices, procedures Understand delays in providing documents may create adverse presumptions
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The Courtroom View


Never assume the risk (a procedural technicality) is proportional to the actual magnitude of problem Understand when/what issues servicer is willing to litigate Understand the Media Tolerance of the institution! At every stage, clarify role and capacity of servicer

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Strategies Know the Parties


Identify all the parties (named/unnamed) Originator, Holder, Investor, Servicer, Prior Servicers, MERS, Trustee/Foreclosure Counsel, Securitization Parties Third Parties acting for Borrower, Servicer, Foreclosure Counsel Understand contracts/duties between parties, including TPPs

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Strategies Know the Docs


Request and Review Original Note location Note Endorsement or Allonge Assignment(s) and Other Docs Date executed and by whom Date recorded Notarizations and Seals (who, where, when, how) Foreclosure Statutory Notices Servicing/Contact History Records Correspondence with Borrowers (including by TPPs)
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Strategies Evaluate Case


High Risk Allegations SCRA claims Dual Tracking with performing Trial/Perm Mod in place Foreclosure after bankruptcy filing Complaint to regulatory agency Discrimination Allegations Spot Servicing Errors (payments, fee amounts, disclosures, credit reporting) Understand Servicer Expectations Media Tolerance Reputational Risk Maintain a Courtroom View
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Questions?
A. Michelle Canter LotsteinLegal PLLC Washington DC | Atlanta 678-466-6502 mcanter@lotsteinlegal.com www.lotsteinlegal.com
The information provided here is for informational purposes and does not constitute legal advice.

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