Borrower Defenses 2022

This piece originally appeared in the January 2022 edition of DS News magazine, online now.

As we move into the New Year, and moratoriums fade, foreclosure activity will no doubt increase from the current historically low levels. With a higher volume of filings, an increase in the number of contested foreclosures in judicial proceedings will also follow. Looking into the crystal ball, what will be the main defenses asserted by borrowers? Are there any trends out there? More importantly, what can servicers do to prepare to head off challenges to foreclosures?

Defenses to Foreclosure: Procedural and Substantive
Defenses to judicial foreclosures range from procedural to substantive. Procedural defenses typically may include pre-foreclosure compliance issues. Compliance issues will range from pre-foreclosure conditions precedent to adherence to mortgage servicing regulations. There will be heightened scrutiny on whether servicers met all of their obligations prior to referral for foreclosure. This involves compliance with all loss mitigation requirements as well as properly tendering notices of intent to foreclose. In other words, were notices of intent to foreclose properly served? How delinquent was the loan at the time of the notice? Were all persons properly served with notices?

More importantly, scrutiny will focus on the servicer handling of borrower requests for loss mitigation or other issues involved with compliance of the CFPB’s moratorium through December 31, 2021. With new debt collection regulations taking effect in late 2021, borrowers may try to craft defenses to foreclosure by claims of violations of the new regulations.

Borrowers may also use these new regulations as an affirmative weapon, asserting counterclaims to forestall the foreclosure action. Issues concerning statutes of limitations and res judicata (based upon prior foreclosure filings against the borrower) will be raised.

Substantive challenges to foreclosures will range from some standard defenses to novel uses of new servicing requirements. Borrowers will continue to raise typical standing issues in foreclosure. Borrowers will make substantive challenges to amounts owed on the loans.

Borrowers that have adjustable-rate loans may be raising certain defenses in 2022 if their interest rate is tied to the LIBOR index. As the LIBOR rate sunsets, issues will arise as to how an interest rate should be calculated. Some borrowers may allege that the rate cannot be changed at all. Servicers need to be reviewing adjustable loans now to see how they will be impacted. While newer vintage adjustable-rate loans may contain terms as to how a rate is calculated if LIBOR ceases to exist, older loans may not contain such terminology, which will give rise to defense claims regarding interest owed on the loan. Servicers also will have to clearly articulate to borrowers what basis will be used for calculation of interest rates if LIBOR no longer exists.

As We Close Out 2021, Are We Starting to See Trends?
Of the cases that are moving in foreclosure in 2021, the percentage of contested cases is higher than the historical average. That trend of a higher percentage of contested cases will carry over to the New Year, and the trends show borrowers being savvier in raising challenges to standing, compliance with servicing regulations, and asserting COVID-19-related issues. Another trend relates to the court system itself. Many courts are backlogged due to COVID-19, and it may cause delays in moving cases towards hearings on summary judgment or trial. Courts are also dealing with issues of whether to continue to permit various proceedings via remote technology or going back to live appearances. Virtual remote hearings have been a cost savings feature for counsel and servicer, and a return to live proceedings may negatively impact the costs of litigation in 2022.

What Can Servicers Do to Prepare for the Upcoming Contested Cases?
Servicers certainly have a full workload as this year ends. With the moratoriums sunsetting, servicers have a large burden of allocating resources to which files will be referred in early 2022. That being said, knowing that an increase in the number of contested files is inevitable, there are certain steps that servicers can take to ensure that contested files can move more efficiently through the court system.

Documentation is and will continue to be an important factor. All contacts regarding loss mitigation need to be clearly documented to refute borrower claims. In legal challenges to foreclosures, servicers will need to be able to document to courts that the servicer indeed complied with all regulatory loss mitigation requirements. With contested litigation, discovery requests from borrowers will certainly increase as well, and servicers need to be prepared to timely respond to those document requests. With new debt collection regulations in effect, it is paramount that servicers work with counsel so that attorneys have requisite periodic statements. In contested matters, there will also be enhanced scrutiny as to claimed charges on a borrower’s account. All the relevant backup documentation must be maintained in order to refute borrower claims.

As we move into a New Year that is hopefully bright, with close working relationships with outside counsel, servicers can successfully manage the hurdles presented by higher contested volumes and heightened regulatory requirements.