New York Court System Proposes Identification of Mortgage Servicer at Initiation of Foreclosure Case

 

 

The New York State Unified Court System recently proposed an amendment to the Request for Judicial Intervention form (RJI) filed at the initiation of a residential mortgage foreclosure case to require identification of the mortgage servicer involved in the case. Comments on the proposal are due by September 23, 2013.

A memorandum from the Court System said it was proposing the amendment at the suggestion of "[a] number of stakeholders involved in mortgage foreclosure cases, including judges and court staff." The memorandum stated that "[i]dentifying the mortgage servicer would enable the court to search for cases by servicer and facilitate the scheduling of matters in mortgage foreclosure parts." No other explanation was provided.

The RJI is a case-initialization document typically filed when an action is commenced in the New York Supreme Courts (or otherwise when a judge’s involvement is necessary for a proceeding). It calls for basic information about the case, such as a complete listing of the parties, identification of counsel, the nature and status of the action, and any related cases. In 2011, the Court System promulgated several addenda to the general RJI, one of which is the Foreclosure Addendum.

The Foreclosure Addendum is used for mortgage foreclosure actions where the property is an owner-occupied residential property housing one to four families or an owner-occupied condominium. It requires the identification and contact information for the defendant and the date on which the 90-day Notice was sent as required under Section 1304(1) of the Real Property Actions and Proceedings Law (mandating that a lender give notice and certain disclosures to a borrower prior to commencing a mortgage foreclosure action). The RJI with the Foreclosure Addendum must be filed when proof of service of the summons and complaint is filed with the county clerk's office. The proposed amendment to the Foreclosure Addendum is simply a line item for including the mortgage servicer’s name. No other information about the mortgage servicer is required, and the mortgage servicer evidently is to be identified even if it is not a party to the action.

The RJI with the Foreclosure Addendum is the trigger for identifying cases that qualify for early settlement conferences as required under state law for certain residential mortgage foreclosure cases. In 2008, the New York Legislature enacted CPLR 3408 to mandate a conference in residential mortgage foreclosure actions within 60 days of filing proof of service "for the purpose of holding settlement discussions pertaining to the relative rights and obligations of the parties under the mortgage loan documents." (A very recent amendment to Rule 3408(a), enacted July 31 and effective August 30, 2013, requires a plaintiff to file proof of service within 20 days of service, expediting the settlement-conferencing process.) Rule 3408 further specifies requirements for the settlement conference.

Shortly after enactment of Rule 3408, the Court System issued a new rule applicable to residential mortgage foreclosure actions, 22 NYCRR 202.12-a, to set forth the schedule and procedures for the settlement conferences. The Rule provides that "[t]he RJI . . . shall request that a settlement conference be scheduled." It also includes a provision that, upon filing the RJI, the court shall send a copy of it (or otherwise the defendant's name and contact information) to a housing counseling agency on a list designated by the Division of Housing and Community Renewal "for the purpose of that agency making the homeowner aware of housing counseling and foreclosure prevention services and options available to the parties."

Rule 202.12-a, similarly to CPLR 3408, sets forth detailed procedures and requirements for the settlement conference in mortgage foreclosure actions. For example, both plaintiff and defendant are directed to bring certain documents to the conference, and both sides "shall engage in settlement discussions in good faith to reach a mutually agreeable resolution, including a loan modification if possible." Both provisions should be reviewed carefully in preparation for a settlement conference.

- Scott M. Himes


Secret Lender-Buyer Side Deal Renders Seller Subordination Agreement Unenforceable

A California Appellate Court ruled recently that a seller’s subordination agreement was unenforceable where the buyer and the lender entered into a side agreement between themselves that the seller knew nothing about and that substantially impaired its security.

In Citizens Business Bank v. Gevorgian et al., the seller sold real property to the buyer subject to seller financing secured by a deed of trust. The buyer then entered into negotiations with the lender for a construction loan to develop 15 single-family residences on the property. Because the lender would not agree to make the loan if its lien were not in first position, the seller agreed to subordinate its security interest.

The lender and buyer entered into a loan agreement, of which the seller was aware, that defined the project as "the construction and completion of all improvements…, including the construction of 15 single family residences" and provided that the loan funds were to be used only for constructing and equipping the project. However, the lender and buyer also entered into a separate letter of understanding modifying the loan agreement by defining the project as "three phases with 5 units in each phase," and providing for immediate disbursement of loan funds to be used to repay existing liens. Neither the lender nor the buyer informed the seller of their letter of understanding.

The court found that the terms of the letter of understanding made material modifications to the loan agreement, about which the seller should have been notified, and these modifications placed the seller’s subordinated lien at greater risk. The court held that, pursuant to public policy, the lender was under a duty to inform the seller of the material modifications to the loan agreement because "public policy … requires protection of subordinating sellers and … a lender and a borrower may not bilaterally make a material modification to a loan to which a seller has subordinated, without the knowledge and consent of the seller to that modification, if that modification materially affects the seller’s rights."

The court also held that such duty was not waived, notwithstanding a provision in the subordination agreement stating that "[l]ender in making disbursements pursuant to any such agreement is under no obligation or duty to, nor has Lender represented that it will see to the application of such proceeds by the person or persons to whom Lender disburses such proceeds and any application or use of such proceeds for purposes other than those provided for in such agreement or agreements shall not defeat the subordination herein…." The court determined that, because public policy rendered the subordination agreement unenforceable, the waiver provision was similarly unenforceable.

The court also rejected the lender’s argument that the seller could not abrogate the subordination agreement because the lender, as a third-party beneficiary, relied on it in making the loan agreement. The court held that, even as a third-party beneficiary of the subordination agreement, the lender was not entitled to enforce it because the buyer had breached it by failing to provide the seller with a copy of the letter of understanding.

- Anthony C. Kaye and Sarah T. Reise


Oklahoma Issues Guidance on New Mortgage Lender License 

 

The State of Oklahoma provided guidance regarding implementation of a recent amendment to its Secure and Fair Enforcement for Mortgage Licensing Act (Oklahoma SAFE Act). Under the amendment, Oklahoma created a new Mortgage Lender License in addition to its existing Mortgage Broker License, and for the first time required certain servicers to be subject to the licensing and substantive requirements of the Oklahoma SAFE Act.

The amendment defined a mortgage lender as any entity that takes an application for a residential mortgage loan, makes a residential mortgage loan, or services a residential mortgage loan and is an approved or authorized mortgagee with direct endorsement underwriting authority granted by the U.S. Department of Housing and Urban Development (HUD), a seller or servicer of Fannie Mae or Freddie Mac, or an issuer for Ginnie Mae.

Mortgage brokers are defined as those who for compensation or gain, or in the expectation of compensation or gain, take a residential mortgage application or offer, negotiate, or modify the terms of a residential loan.

At the time of the amendment’s passage, it was unclear whether an entity that does not have approval or authorization from HUD, Fannie Mae, Freddie Mac, or Ginnie Mae, but otherwise meets the definition of a mortgage lender, was required to obtain the new license. The amendment also did not specify whether a licensed mortgage lender that engages in activities falling under the definition of a mortgage broker was required to obtain a separate Mortgage Broker License.

On August 6, 2013, the State of Oklahoma Department of Consumer Credit issued guidance clarifying these issues. The guidance reiterates the language from the amendment that the Mortgage Lender License is only required for entities engaged in lending or servicing activities and that are also approved or authorized by HUD (with direct endorsement underwriting authority), Fannie Mae, Freddie Mac, or Ginnie Mae. While this is not clear guidance on the issue, it indicates the regulator’s intent to follow the plain statutory language from the amendment. Accordingly, the new Mortgage Lender License requirement appears to apply only to entities with these authorizations. Based on informal conversations with the Oklahoma Department of Consumer Credit, further information on the licensing requirements will be available on the NMLS Resource Center in the near future.

The guidance does clarify that an entity already licensed as a mortgage broker, but that also meets the new definition of a mortgage lender, is not required to hold both licenses. Instead, such a Mortgage Broker Licensee must transition to a Mortgage Lender License through NMLS by December 31, 2013.

It is important for mortgage companies to review their business activities to determine their qualification for a Mortgage Lender License. Any entity that satisfies the definition of a mortgage lender and does not obtain a Mortgage Lender License will be subject to penalties for unlicensed activity under the Oklahoma SAFE Act. The amendment takes effect on November 1, 2013.

- Marc D. Patterson


Georgia Court Reiterates that Creditors Seeking Deficiency Judgments Must Adhere to 30-Day Foreclosure Sale Confirmation Rule

In a recent opinion, the Georgia Court of Appeals reaffirmed that creditors who wish to seek deficiency judgments following a non-judicial foreclosure must seek to have the sale confirmed within 30 days of the sale.

The case, HWA Properties, Inc., v. Community & Southern Bank, involved a suit by a creditor to collect on a promissory note and a guaranty. While this suit was pending, the creditor conducted a non-judicial foreclosure sale of the property securing the loan. In a separate proceeding, the creditor sought court confirmation of the foreclosure sale pursuant to O.C.G.A. §44-14-161(a), which provides that before a creditor may seek a deficiency judgment against the debtor, the creditor must seek and obtain court confirmation and approval of the sale. To confirm the sale, the court must find that the evidence proved that the property was purchased for true market value and that the sale was lawfully advertised and conducted with regularity.

The creditor initially obtained an order confirming the sale in the confirmation proceeding. However, the confirmation order was reversed on appeal because it was based on inadmissible hearsay. While an appeal in the confirmation proceeding was pending, the trial court in HWA granted summary judgment to the creditor on the creditor’s suit to collect on the promissory note, finding that the debtor was liable for the difference between the amount due on the note and the proceeds of the foreclosure sale. However, after the confirmation of the foreclosure sale was reversed, the debtor argued on appeal that the deficiency judgment was invalid because the foreclosure sale was not confirmed by a valid order.

The Georgia Court of Appeals agreed with the debtor. The court found that under well-settled Georgia law, a creditor may only obtain a deficiency judgment against a debtor if the creditor complies with the confirmation requirements of O.C.G.A. § 44-14-161. Under the clear language of the statute, because the sale was not confirmed by a valid order, the debtor could not be liable for a deficiency judgment.

Many creditors elect not to pursue deficiency judgments in Georgia because confirmation proceedings must be initiated within 30 days of a sale. Marshaling sufficient admissible evidence to prove that the property sold at true market value within this short time period often is challenging. However, in those instances where creditors want the option to pursue a deficiency judgment, HWA serves as a reminder to creditors that the statutory confirmation requirements must be adhered to strictly in Georgia.

- Anthony C. Kaye and Sarah T. Reise


New FCC Telemarketing Written Consent Requirement Takes Effect on October 16

Effective October 16, 2013, all sellers and telemarketers will need a consumer's written agreement to make prerecorded telemarketing calls to residential telephone lines or autodialed or prerecorded telemarketing calls to wireless numbers.

Effective October 16, 2013, all sellers and telemarketers will need a consumer's written agreement to make prerecorded telemarketing calls to residential telephone lines or autodialed or prerecorded telemarketing calls to wireless numbers.

In February 2012, the Federal Communications Commission (FCC) amended its rules under the Telephone Consumer Protection Act (TCPA) to require "prior express written consent" for such telemarketing calls. Sellers and telemarketers subject to the Federal Trade Commission's telemarketing rules were already subject to a similar requirement. However, entities under the FCC's exclusive jurisdiction, such as banks, insurance companies, airlines, and common carriers (including telephone companies), were only previously required to obtain the consumer's "prior express consent," which did not need to be in writing.

In addition, the FCC's rules previously contained an "established business relationship" exception to the consent requirement for prerecorded telemarketing calls to residential telephone lines. That exception was eliminated by the 2012 amendments to the FCC's rules. The FCC provided that the written consent requirement would become effective one year after the date on which the Office of Management and Budget's (OMB) approval was published in the Federal Register. The OMB published its approval on October 16, 2012.

To satisfy the "prior express written consent" requirement, the agreement must (1) be signed by the person called, (2) clearly authorize the seller to make autodialed or prerecorded telemarketing calls to such person, and (3) include the telephone number to which the signatory authorizes the telemarketing calls to be made. It must include a clear and conspicuous disclosure informing the signatory that:

  • By signing the agreement, the signatory is authorizing the seller to make autodialed or prerecorded telemarketing calls to the signatory.

  • Signing the agreement is not required as a condition of purchasing any property, goods or services. A "signature" can include an electronic or digital form of signature that is recognized as a valid signature under applicable federal or state contract law.

Ballard Spahr attorneys have extensive experience defending all manner of TCPA lawsuits, and have counseled a number of clients on establishing autodialing and monitoring protocols.

- Barbara S. Mishkin

 


No Right to Jury Trial for Consumer Fraud Claim in Pennsylvania

The Pennsylvania Supreme Court recently refused to grant plaintiffs' request to review a Superior Court decision in December 2012 that held there is no right to a jury trial for claims brought under Pennsylvania's Unfair Trade Practice and Consumer Protection Law (UTPCPL).

 In Fazio v. The Guardian Life Insurance Company, the Superior Court affirmed a bench trial verdict against the plaintiffs and agreed with several Pennsylvania trial court decisions holding that "there is no right to a jury trial for private causes of action under the UTPCPL." The Superior Court explained that "[t]he statute does not specifically enumerate that right." It also emphasized that "the UTPCPL did not merely codify common law claims of fraud. The UTPCPL created a distinct cause of action for consumer protection."

The Superior Court recently reiterated that there is no right to a jury trial in Dearmitt v. New York Life Insurance Company. Also relying on Fazio, a judge in the Eastern District of Pennsylvania recently held in Dings v. Lenhoff that there is no right to a jury trial of UTPCPL claims in federal court.

The practical effect of the Fazio decision is to reduce the settlement value of UTPCPL claims, as it eliminates the risk of a "runaway jury."

- Burt M. Rublin

TEXAS AMENDS PROVISION GOVERNING USE OF NMLS

Texas has added provisions to its Financial Code granting the Texas Office of Consumer Credit Commissioner (the Commissioner) new authority over financial service industry licensees. The law allows the Commissioner to require licensees to utilize NMLS for licensing and registration activities. The amendment also authorizes the Commissioner to use NMLS as a channeling agent to obtain information, including criminal history records from the FBI, U.S. Department of Justice, or any other agency as directed by the Commissioner. The provisions are effective on September 1, 2013.

- Marc D. Patterson


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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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