With thousands of cases unfolding across the country, keeping track of the ones that most impact your business can be a full-time job. Knowing what’s happening in the legal sphere as it pertains to your industry can be crucial, and can make the difference between success and failure. But where to begin?
DS News spoke to a half dozen lawyers specializing in mortgage law and servicing to get the lay of the land as one year winds down and another looms ahead of us. What 2017 court cases set precedents that will impact the industry in 2018? Which still unsettled cases have the most potential to shape the servicing landscape in the years that follow? What issues were facing these attorneys in the past year, and what lessons have they taken away about how law firms and servicers can best work together to meet common goals?
Read on to learn what was on the radar in 2017 for these legal professionals.
Storms and Statutes
The damage unleashed by natural disasters has been one of the defining stories if 2017. California has been swept by massive wildfires, and an unrelenting hurricane season brutalized locales such as Texas, Florida, and Puerto Rico. As Matthew R. Reinhardt of Quintairos, Prieto, Wood & Boyer, P.A. pointed out, the U.S. Virgin Islands also took severe hits, with both Hurricane Irma and Hurricane Maria steamrolling the islands while each storm was still at a Category 5. Initial estimates claimed that as much as 80 percent of the islands’ properties were affected by the twin hurricanes, so naturally that toll also extended to the court system, resulting in closures and delays. President Trump’s disaster declaration for the region also kicked off a 90-day moratorium on foreclosures of FHA-issued mortgages, and the Department of Housing and Urban Development recently extended that moratorium until March 9, 2018, for Hurricane Irma, and March 19, 2018, for Hurricane Maria.
“Although all U.S. Virgin Islands courts have reopened and recovery efforts are progressing, the long-term effects of the hurricanes will continue to be felt in 2018,” Reinhardt said.
He added, “Communication remains difficult or impossible in many areas, and property inspections are necessary to determine the best outcomes for each investment. Law firms with a presence and experience in the U.S. Virgin Islands can be essential partners for servicers operating in the territory under these challenging circumstances.”
Back in the States, Attorney General Jeff Sessions made efforts to roll back the bar former Attorney General Eric Holder put into place in 2015 when it comes to local and state police being able to seize property without warrants or criminal charges. As Phyllis A. Ulrich of Carlisle Law explained, “That decision to expand civil-asset forfeiture by federal prosecutors could have a huge impact on mortgage professionals moving forward.” She noted that the federal forfeiture statute allows for the authorities to send a notice letter to a lienholder after a property has been seized as part of a criminal proceeding. The lienholder then has 35 days to file a claim before the lien is removed from the property—without any due process. “Because of this new power, federal prosecutors appear to be overzealously pushing these civil-asset forfeiture powers,” noted Ulrich.
As an example, Ulrich described a situation where the authorities could sell a property that isn’t actually owned by the criminal, but where they have an unpaid land-installment contract in the property. “The good news is, in September 2017, the U.S. House of Representatives unanimously approved three amendments that would defund the federal forfeiture program,” Ulrich continued. However, as of this writing, the bill had not passed.
On the New York front, the case of HSBC Bank USA, N.A. v. Ozcan may be one of the most significant decisions issued in the Empire State in 2017, according to Greg Sanda of Schiller, Knapp, Lefkowitz & Hertzel, LLP. Sanda explained that Ozcan “lessens one of the thorniest evidentiary problems for servicers prosecuting foreclosures in New York.” At issue is the process of proving that the “90-day letter” was mailed to the borrower. “New York courts have made proving compliance more difficult by imposing an undue evidentiary burden on servicers under the guise of ‘strict compliance’,” said Sanda, explaining that the onerous standards imposed by New York require direct proof of mailing “or proof of a standard office procedure ensuring an item is properly addressed and mailed.”
“Ozcan alleviates this burden to an extent,” Sanda said, “holding that a mailing may be proved in any number of ways, not just the two listed above, as long as the documents relied upon and affidavit testimony meet the requirements of the business records exception to the hearsay rule.” Sanda added that this revised standard should prove easier for large and medium-sized servicers to satisfy.
Mark Hernandez of Quintairos, Prieto, Wood & Boyer, P.A. shifted the focus to a Florida case that resolved an ongoing statuteof-limitations issue. In Bollettieri Resort Villas COA v. Bank of New York Melon, a first complaint was filed on February 1, 2008, with a September 1, 2007 default date. The case was voluntarily dismissed on May 19, 2011. A second foreclosure complaint was then filed on January 1, 2013, with a September 1, 2007 breach date. That would have put the second foreclosure outside the state’s five-year statute of limitations (SOL). “In Bollettieri, the court acknowledged that the bank’s second complaint was sufficient to establish that the foreclosure could be based on any of the missed payments since the initial breach and the complaint was therefore not barred by statute of limitations,” Hernandez said.
Hernandez explained that after the Florida Supreme Court decided not to hear the case, the case law was left standing so that “a foreclosure complaint containing an initial default date occurring more than five years prior to the filing of the complaint is not barred by the statute of limitations provided that the bank alleges and proves a continuous state of default which includes defaults within five years of the filing of the complaint.”
The Shape of 2018—And Beyond
Of course, the machinery of law never stops churning, so there are inevitably a number of cases still wending their way through the system that will have large impacts on the industry in 2018—and in the years to come. We asked our panel of experts to highlight legal rulings still tied up in the courts that will impact mortgage professionals in 2018, as well as any other hot topics that will likely come into play this year.
Ulrich cited questions surrounding Official Form 113, the national form plan for Chapter 13 bankruptcies. Ulrich explained that the time in which all creditors have to file a proof of claim in a Chapter 13 case has been drastically reduced from roughly 150 days to 70 days after the filing of the case. “Furthermore,” Ulrich said, “if a proof of claim is not timely filed, including claims for loans secured solely by the principal residence of the debtor, then the provisions of the Chapter 13 plan control—which upsets the way most bankruptcy court jurisdictions dealt with such claims, which was the claim controls over the plan provisions.”
For Sanda, it’s a pair of decisions issued by Justice Thomas F. Whelan out of the Suffolk County Supreme Court in New York that are most “worth watching” in 2018: Nationstar Mortgage, LLC v. Donald MacPherson and Wilmington Savings Fund Society, FSB v. Ardith DeCanio. “These trial court decisions have the potential to alter the landscape of the statute of limitations, providing that the terms of the mortgage determine when the maturity of a loan is accelerated, not the commencement of a foreclosure,” Sanda said.
“Specifically, where a mortgage permits a borrower to reinstate by tendering all missed payments and fees—a provision contained in the standard Fannie/Freddie form mortgage— Justice Whelan held the plaintiff lacks the legal means to accelerate a mortgage debt until a judgment of foreclosure issues,” Sanda continued. “This theory has been advanced in multiple jurisdictions across the country recently, most notably in Florida, and it will be interesting to see whether an appellate court addresses the issue in 2018. An appellate court’s endorsement of Justice Whelan’s view would be an enormous benefit to servicers in New York.”
Statute of limitations is often a thorny area, and Roy A. Diaz of SHD Legal Group, P.A. said that it will likely remain so in the state of Florida in 2018. “Based on the state of the law as of today, servicers are adjusting loans with SOL issues to redemand within a five-year default period,” Diaz said. “This is consistent with the majority of appellate rulings. Law related to challenges of standing has evolved to statewide recognition that a party who successfully challenges a lender’s standing to sue cannot claim entitlement to attorney fees under the nonenforceable note and mortgage.”
Sonia McDowell of Quintairos, Prieto, Wood & Boyer, P.A. expanded on the issue. “The Fourth District ruled this past year that Florida Statute 57.105 must be strictly construed and has two elements: that the party must have prevailed and the party had to be party to the contract. Nationstar Mortgage LLC v. Glass held that, ‘the movant must establish that the parties to the suit are also entitled to enforce the contract containing the fee provision.’ Further, ‘where a party prevails by arguing the Plaintiff failed to establish it had the right pursuant to the contract to bring the action, the party cannot simultaneously seek to take advantage of a fee provision in that same contract.’”
“And the Fourth District is not alone,” continues McDowell. “The Third District held in Bank of New York Mellon Tr. Co., N.A. v. Fitzgerald that, because the borrower ‘successfully obtained a judgment below that of the bank lacked standing to enforce the mortgage and note against her, we find that no contract existed between the bank and Fitzgerald that would allow Fitzgerald to invoke the mutuality provisions of section 57.105(7).”
Glass and companion case Lakmaitree are currently before the Florida Supreme Court, waiting to see if the court will accept jurisdiction in a case that could have massive implications for consumer protections. “If these rulings stand,” said McDowell, “they may result in a radical shift in foreclosure and consumer debt collection defense as Borrowers would be precluded from recovering attorneys’ fees if they are successful in defending the suit based on challenges to standing, one of the most basic and often-utilized defenses. Plaintiffs and Defendants alike will be anxiously awaiting the court’s decision in 2018 as trial courts throughout the state are beginning to follow suit and deny Defendants’ entitlement to attorneys’ fees.”
Ulrich discussed one situation many in the industry have no doubt encountered: the confusion and complications that can occur when someone who signed and initialed a mortgage isn’t actually identified in the body of the mortgage. “In the case of Bank of New York Mellon v. Rhiel, the Bankruptcy Appellate Panel of the United States Court of Appeals for 6th Circuit certified a Question of State Law to the Ohio Supreme Court in September of 2017. The Ohio Supreme Court accepted the certified Question of State Law and will answer the following questions: 1) Whether an individual who is not identified in the body of a mortgage, but who signs and initials the mortgage, is a mortgagor of his or her interest? 2) Is a mortgage signed and initialed by an individual whose name is not identified in the body of the mortgage, but whose signature is properly acknowledged pursuant to Ohio Revised Code Sec. 5301, invalid as a matter of law such that parol evidence is not admissible to determine the intent of the individual in signing the mortgage?
According to Ulrich, the Ohio Supreme Court’s opinion on this matter “will determine if a Chapter 7 Trustee in a bankruptcy case can avoid the mortgage encumbering the debtor’s interest in the property so that she can bring money into the bankruptcy estate for the benefit of unsecured creditors.”
Partnering for the Future
Beyond all the rules and regulations, the servicing industry is, like any other business venture, about people. We asked our legal experts about how law firms and servicers could better partner in 2018, and how they could improve that symbiotic relationship going forward.
“In judicial jurisdictions, the issue of streamlining should be focused on the ability to provide quality litigation support,” Diaz said. “Mortgagees must place value on good litigation practice, which is a concept that has historically been less of an issue. Streamlining ease of obtaining supporting documentation and informed client communication is critical to ensuring streamlined litigation. Mortgagees should establish quality litigation staff to work closely with a Plaintiff’s counsel.”
Hernandez pinpoints communication as key. “The mortgage industry is a fast-paced environment and defense attorneys/borrowers are always looking to develop new strategies to avoid or delay foreclosure actions,” Hernandez said. “It is imperative that law firms and the mortgage industry stay proactive on educating themselves on potential litigated issues. This may include continual news blasts or some inhouse training by law firms to the servicers as to hot topic issues.”
“Because lawyers are ‘in the field’ working cases through the court systems, servicers will always benefit from practical tips from the lawyers as to what works and what does not work from the court’s standpoint,” said Ulrich. “Whether method of servicing, escalation procedures, attendance to and at mediations or working with loss mitigation with borrowers, it pays for the servicers to understand what the courts feel needs improvement. Opening up to suggestions from the lawyers as to how to improve the impression the courts have of the servicer would greatly reduce wrinkles with timelines and improve relationships with everyone involved with the case. Although this is not a new suggestion for 2018, it is becoming more imperative for servicers to fall into good grace with the courts so that the courts make a turn from being overly pro-borrower/debtor.”
With the future ever uncertain, a strong partnership between mortgage professionals and the legal experts who support them will be as crucial as ever.