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Mortgage Servicing and Loan Modifications: 10.2.2 Industry Standards and the Duty to Maximize Investor Returns

Industry standards generally provide the guiding principles for determining whether or not a particular industry practice is valid, even when a law has not specifically banned or authorized the practice.16 The failure of a servicer to comply with industry standards may establish a defense to foreclosure, including when that servicer has failed to properly engage in loan modification analysis prior to initiating foreclosure proceedings.17

Mortgage Servicing and Loan Modifications: 10.3.2 Statute of Frauds and Other Arguments Related to Servicer’s Failure to “Sign and Return”

Servicers have made a variety of arguments hinging on the servicer’s own failure to sign and return to the borrower either the trial period plan (TPP) or a permanent modification offer. There are actually at least five distinct arguments here, although servicers themselves tend not to be clear about exactly which one they are making, nor are the courts always clear about which argument they are addressing:

Mortgage Servicing and Loan Modifications: 10.3.4 Failure to Honor Loan Modification and Forbearance Agreements Offered by a Prior Servicer

A homeowner having difficulty making payments, in default, or facing foreclosure is generally much relieved to have the opportunity to enter into a loan modification or forbearance agreement which will deal with the past due payments and fees and should have affordable payments. Unfortunately, sometimes servicers fail to honor the loan modifications or forbearance agreements entered into by their predecessor servicers.

Mortgage Servicing and Loan Modifications: 10.4 Breaches of Oral Promises of Loss Mitigation

Oral promises to consider or extend loss mitigation may lead borrowers not to take other action to stop a pending foreclosure sale. However, it may be difficult to enforce such oral promises, depending on how broadly the statute of frauds is construed in the state in question.96 Partial performance by the borrower might be sufficient to overcome the statute of frauds problem in some states.97

Mortgage Servicing and Loan Modifications: 10.5.1 Overview

Another common problem faced by borrowers seeking loss mitigation is the failure to properly evaluate an application for loss mitigation.100 This may take the form of the document treadmill, whereby servicers continually demand documents that have already been provided or demand documents piecemeal, so that once a new item is provided, the earlier documents are out of date, leading to an endless cycle.

Mortgage Servicing and Loan Modifications: 10.5.2 Negligence

Borrowers have had some success with negligence claims against servicers who fail to properly evaluate them for loan modifications.110 However, some courts have rejected negligence claims on the basis that servicers have no duty of care to the borrower.111 In addition, in some states, a borrower cannot raise a tort claim that significantly overlaps with a contract between the parties.112

Mortgage Servicing and Loan Modifications: 10.5.4 Unfair and Deceptive Acts and Practices Claims

Some borrowers have pursued state law unfair and deceptive acts and practices (UDAP) claims based on dual tracking and other misconduct in the loss mitigation process.117 Deceptive and unfair statements about the borrower’s ineligibility or eligibility for a loss mitigation option may support a UDAP claim.118 Because of the vagaries of each state’s UDAP statute, practitioners should analyze their state law before challenging loss mitigation misconduct under these statutes.

Mortgage Servicing and Loan Modifications: 10.5.5 Wrongful Foreclosure

The tort of wrongful foreclosure is recognized in most states.121 Originally, it was used mostly to raise noncompliance with the state’s statutory foreclosure process, and actions may still be brought on this basis.122 However, courts have also allowed claims for wrongful foreclosure to proceed based on failure to carry out a foreclosure sale in good faith.

Mortgage Servicing and Loan Modifications: 10.5.6 FDCPA and State Debt Collection Statutes

Borrowers have had some success in raising claims against servicers under federal and state fair debt collection laws.126 In one common scenario, which has generated a significant split of authorities, a lender or servicer goes ahead with foreclosure, after having led the borrower to believe, often by unenforceable oral promises, that a foreclosure was canceled and a loan modification was put in place.127 Key questions surrounding these claims include whether the action taken by the servicer con

Mortgage Servicing and Loan Modifications: 10.6.2 HAMP Due Process Rights

Procedural due process claims under the Fifth Amendment arise when the government has deprived a person of a protected liberty or property interest141 without proper notice or an opportunity to be heard. Though the government did not have a direct role in modifying loans under HAMP, servicers, based on the HAMP participation agreements, had an affirmative duty to review loans of eligible homeowners for possible modification. In essence, servicers were acting as the government’s agents in carrying out the HAMP program.

Mortgage Lending: 6.1.1 Scope of This Chapter

This chapter analyzes preemption of state law by the National Bank Act (NBA), the Home Owners’ Loan Act (HOLA), the Federal Credit Union Act (FCUA), and regulations promulgated under those statutes. Although this treatise focuses on mortgage lending, this chapter also cites principles and decisions relevant to non-mortgage lending and other forms of banking activity.

Mortgage Lending: 6.3.1.2.2 Opinion letters preempting state law

On the other hand, before 2004 (and after) the OCC released scores of letters finding that a variety of state laws were preempted.230 Specifically, the OCC opined that provisions of consumer credit statutes requiring national banks to obtain licenses,231 to maintain and allow inspection of certain records,232 to pay annual or other fees,233 and to provide certain disclosures

Mortgage Lending: 9.13.4 State Law and Federal Preemption

State lending laws often include limits on late charges.608 Even states that have deregulated interest rates may have retained caps on late charges. The typical statute caps the amount of the late charge and requires a grace period before it can be charged.

Mortgage Lending: 3.2.4 Mortgage Loan Documents

The Loan Application. There are usually two or more versions of the loan application. If the application was taken in person or by phone, the earliest version may have been handwritten by the broker or loan officer, though most lenders now use electronic loan origination systems. At closing, the borrower is normally asked to sign a computer-generated version. Sometimes the information found in different versions of the application varies. You should get all the versions by requesting the entire lender file. If not, obtain the broker’s file, if one was involved.

Mortgage Lending: 2.3.5.1 Overview

Amortization is the liquidation of a debt through periodic payments that include both interest and principal.175 The reduction over time of the outstanding balance, producing declining balances, is the hallmark of amortization.176 Amortization involves the interaction of multiple loan terms: the unpaid principal balance, the payment period (how often payments are required), the total number of payments required, the payment amount, the interest rate, the method used to calculate accrued interest

Mortgage Lending: 2.4.5.1 In General

Section 2.3.5, supra, discusses fully amortizing loans, which are typical for residential mortgages. But the terms of a loan may also permit or cause negative amortization. In such loans, the unpaid principal balance increases rather than decreases as it does with a conventional loan.

Mortgage Lending: 6.3.2.1 Description of the 2004 Rule

In 2004 the OCC adopted four broad regulations that purported to preempt state laws in the areas of deposit taking, non-mortgage lending, mortgage lending and, generally, powers incidental to the business of banking.253 While these rules are no longer in effect, the first three are similar in structure to the current rules.254 (The current set of preemption rules does not include an incidental powers rule).