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Home Foreclosures: 12.4.2 Notices of Change of Loan Ownership and Servicing Rights of Junior Mortgages

Investors buy and sell second mortgages that have remained inactive for extended periods. The failure to inform borrowers of these transfers of ownership contributes to borrowers’ expectations that there is no need to take action regarding an ongoing payment obligation. During long periods while a loan remains dormant, borrowers may try to contact someone for information about the loan’s status, yet find themselves in the dark.

Home Foreclosures: 12.7 Defenses and Claims Based on State UDAP Statutes

Federal and state laws impose affirmative obligations on owners of second mortgages and their servicers to disclose to borrowers important facts about their accounts, and to do so on a regular basis. These include disclosures of changes of loan ownership and servicing rights, as well as details about the current status of an account. If loan owners and servicers provided the ongoing disclosures required by TILA and RESPA, borrowers would rarely find themselves blindsided and overwhelmed by the sudden appearance of a zombie second mortgage.

Home Foreclosures: 12.4.4a FDCPA Claims Related to Second Mortgages

The Fair Debt Collection Practices Act (“FDCPA”) prohibits a wide range of unfair and deceptive practices by debt collectors.112 NCLC’s manual Fair Debt Collection provides a comprehensive analysis of practices prohibited and remedies available under the FDCPA.113 The Fair Debt Collection manual also analyzes related state

Home Foreclosures: 12.5.3 FHA, VA, and RHS Loans

Three federal agencies insure home loans, FHA, VA, and RHS.160 These agencies insure junior mortgages in limited circumstances.161 Typically they insure certain home improvements loans and loans originated by nonprofits that can take a second lien position.162 The agencies’ major modification programs typically require that the modified loan retain a first-lien position.163 This is true, for example,

Home Foreclosures: 12.6 Contract-Based Claims and Defenses

Efforts to resurrect long-dormant second mortgages can be opposed with contract-based defenses and claims. One approach is to focus on the requirement of most mortgages that the foreclosing party comply with applicable law as a condition to enforcement of the obligation. As discussed in NCLC’s Mortgage Servicing and Loan Modifications treatise,172 the GSE standard security instrument contains such a requirement. TILA and RESPA are applicable laws.

Home Foreclosures: 12.8.1 Introduction

Equitable defenses to foreclosure may be available when a second mortgage has lain dormant with no communication to the borrower for years. The borrower may be able to raise equitable claims against a servicer who emerges as housing values increase to try to collect on the mortgage after failing to provide periodic statements or any notifications regarding the debt for several years.

Home Foreclosures: 12.8.2 General Principles of Laches

The laches doctrine recognizes that foreclosure is an equitable remedy.187 The defense applies when protracted inaction in enforcing the equitable remedy of foreclosure has worked to the disadvantage of the borrower who acted in reliance on that inaction.188 Laches focuses on the inequity of enforcement of the mortgage in view of the particular circumstances of the borrower and the property.189 Two elements must coalesce for laches to apply.

Home Foreclosures: 6.2.3.1 Introduction

FHA-insured lenders may not initiate foreclosure without completing specific loss mitigation steps found in federal regulations.18 These regulatory requirements were incorporated into the terms of most FHA-insured promissory notes and the mortgages.19 For many years, the note and mortgage stated that lenders should not proceed with foreclosure without first satisfying FHA’s regulations.

Home Foreclosures: 6.2.5.1 Introduction

Courts have consistently held that borrowers may raise lender noncompliance with the FHA loss mitigation regulations as a defense to a foreclosure lawsuit.93 Even courts that have rejected affirmative breach of contract claims for lender noncompliance with FHA regulations have generally acknowledged borrowers’ right to assert noncompliance as a shield against foreclosure.94 There are strong policy reasons for allowing this defensive use of the regulations.

Home Foreclosures: 6.2.3.2.5 Periodic review of loss mitigation—24 C.F.R. § 203.605

Unlike the face-to-face meeting requirement, the periodic evaluation regulation at 24 C.F.R. § 203.605 is significantly underutilized in the case law. The regulation states, in part: “Before four full monthly installments due on the mortgage have become unpaid, the mortgagee shall evaluate on a monthly basis all of the loss mitigation techniques provided at § 203.501 to determine which is appropriate.”

Home Foreclosures: 6.2.5.2 Compliance with FHA Guidelines as a Condition Precedent to Foreclosure

Courts have differed on whether noncompliance should be considered as a failure of a condition precedent to foreclosure or an equitable defense, and in some jurisdictions, this difference can have an impact on litigation issues, such as which party has the burden of proof for establishing compliance (or non-compliance) with the regulations.116 For borrowers with mortgage contracts that do not incorporate FHA regulations, it will be crucial to make equity-based arguments in order to avoid claims that the presence of c

Home Foreclosures: 6.2.5.4 Burdens of Proof and Pleading

Borrowers should establish a record of lender noncompliance whether or not they bear the burden of proof. As stated above, in “condition precedent” jurisdictions, the lender may bear the ultimate burden of proof while the borrower bears the burden of proof in “equity” jurisdictions. No matter what, lenders will often point to some loss mitigation steps and claim that these steps are enough to satisfy the regulations.

Home Foreclosures: 6.2.6.1 Introduction

While courts in judicial foreclosure states have consistently upheld the defensive use of FHA-regulations, courts in non-judicial foreclosure states have not provided the same consistent protection.147 Advocates in non-judicial or quasi-judicial foreclosure states generally bring affirmative actions to stop foreclosure, and this places a heavier burden on borrowers than the one placed on borrowers in judicial foreclosure.

Home Foreclosures: 6.2.6.3 Responding to Common Lender Arguments Against Borrowers’ Enforcement of Their Contract Rights

Of course, while the case law has improved for borrowers bringing contract-based claims, there are still cases coming out both ways.173 Because claims based on contract terms are necessarily state law claims, the application of the law will vary in each jurisdiction. Moreover, some Courts may still allow for affirmative litigation to stop a non-judicial foreclosure sale based on regulatory non-compliance even if the borrower does not meet the breach of contract elements.174

Home Foreclosures: 6.2.7.1 Responding to Lenders’ “Substantial Compliance” Arguments

Lenders commonly argue that they have “substantially complied” with the regulations when they clearly have not satisfied them. Typically, they will point to hundreds of collection calls or other letters and claim that the borrower would not have responded to an invitation to a face-to-face meeting.216 Alternatively, they will claim that the borrower is not eligible for loss mitigation as demonstrated by some postforeclosure review of options, and therefore any face-to-face meeting would be unproductive.

Home Foreclosures: 6.2.8 Practical Matters in FHA Litigation

Advocates should pursue discovery of the lender’s preforeclosure or pre-acceleration actions to determine whether it complied with FHA loss mitigation requirements. Because lenders frequently drag out the discovery process, it is important to make requests early.

Home Foreclosures: 6.4.2.1 Acceleration and Foreclosure of Section 502 Direct Loans

A Section 502 mortgage can be accelerated when there has been a default under the terms of the mortgage, most often from failure to make payments due under the mortgage. The account must be delinquent in an amount equal to three scheduled payments or an amount equal to two scheduled payments that have been delinquent for at least three consecutive months.390

Home Foreclosures: 8.8.3.5.1 Individual arbitration

Where an enforceable arbitration agreement forecloses class arbitration, class action litigation in court, and individual court litigation, adequate client representation may require raising the consumer’s claims in an individual arbitration proceeding. Even if an arbitration agreement is not enforceable, it can take years to resolve this issue before even reaching the merits.

Fair Credit Reporting: 4.3.2.4.1 Introduction

One of the most serious consumer reporting problems is the failure of the reporting system to provide consumers a “fresh start” after a bankruptcy discharge. Creditors frequently fail to report an updated status for discharged accounts or continue to report their pre-discharge status and balance. CRAs did not update accounts and judgments they otherwise knew had been discharged.263

Fair Credit Reporting: 4.3.2.4.5 Debts subject to chapter 13

The treatment of accounts subject to a chapter 13 bankruptcy is more complicated. In a chapter 13 bankruptcy, the debtor proposes a plan, which the bankruptcy court confirms. In some cases, at the end of the plan, a debt is discharged. In other cases, a debt is not discharged, but instead the amount and terms are modified and the consumer pays the debt according to the modified terms.286

Fair Credit Reporting: 4.3.3.3 Studies on Mixed Files

Mixed files are a frequent and difficult phenomenon. The CFPB has identified mixed files as a particularly challenging problem for the nationwide CRAs.350 Mixed files also occur at specialty CRAs,351 especially those CRAs reporting public records such as criminal and eviction histories.352