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Spotlight Article: California Supreme Court Holds that Borrowers Have Standing to Challenge an Allegedly Void Assignment of the Note and Deed of Trust in an Action for Wrongful Foreclosure
Yesterday, the California Supreme Court held in Yvanova v. New Century Mortgage Corp, Case No. S218973 (Cal. Sup. Ct. February 18, 2016) that borrowers have standing to challenge an allegedly void assignment of a note and deed of trust in an action for wrongful foreclosure. In reaching this decision, the Court reversed the rule followed by the overwhelming majority of California courts that borrowers lacked such standing. The Court’s decision may have broad ramifications for lenders, investors, and servicers of California loans.The Court’s Holding
In Yvanova, the borrower challenged the validity of her foreclosure on the ground that her loan was assigned into a securitized trust after the trust closing date set forth in the applicable pooling and servicing agreement, allegedly rendering the assignment void. To date, California courts have rejected hundreds of similar claims. In Yvanova, the Court held that “a borrower who has suffered a nonjudicial foreclosure does not lack standing to sue for wrongful foreclosure based on an allegedly void assignment merely because he or she was in default on the loan and was not a party to the challenged assignment.” Slip. Op. at 2. The Court’s ruling thus breathes new life into this favorite theory of the foreclosure defense bar.
The Court’s Reasoning
The Court acknowledged that the majority of California courts have held that borrowers do not have standing to challenge an allegedly void assignment because they are neither parties to, nor intended beneficiaries of, the assignment. Rather than adopt the majority approach, the Court based much of its decision on Glaski v. Bank of America, 218 Cal.App.4th 1079 (2013), in which the Fifth District Court of Appeal, on substantially similar facts, held that the question of standing turned on whether the alleged defect in the assignment, if proven, would render the assignment void altogether or merely voidable. Slip. Op. at 12. The parties to a voidable assignment have the power to ratify the defective assignment; parties to a void assignment have no such power. Id., at 10. In the former case, the Court would deny standing because the borrower would be asserting interests belonging solely to the parties to the assignment: only they have the power to ratify the assignment. Id. In the latter case, involving an allegedly void assignment, there would be no power of ratification, and thus the borrower would not be “asserting the interests of parties to the assignment; she [would be] asserting her own interest in limiting foreclosure on her property to those with legal authority to order a foreclosure sale.” Id., at 21.
Potential Impact of the Court’s Decision
Although a borrower’s standing to challenge an allegedly void assignment now appears settled under California law, the full impact of the decision will likely take some time to discern. By recognizing standing to challenge allegedly void assignments, the Court has clearly invited a substantial amount of wrongful foreclosure litigation. The statute of limitations for wrongful foreclosure is at least three years and, possibly longer, if a borrower can invoke the discovery rule or equitable tolling. See Cal. Code of Civ. Proc. § 338(d). Given the large number of securitized loans that have been foreclosed upon in California within the last several years, the number of possible claimants is potentially very large.
It remains to be seen whether California’s trial courts will be receptive on the merits to wrongful foreclosure suits based on the now reinvigorated void-assignment theory. There are a number of key legal and factual questions that the California Supreme Court expressly left unanswered.
The California Supreme Court explicitly did not decide whether a transfer of a note and deed of trust into a securitized trust in violation of the trust instrument renders the assignment void or voidable under governing New York law. Importantly, the Court acknowledged a conflict between Glaski’s construction of New York law on this issue and a decision of the United States Court of Appeals for the Second Circuit in Rajamin v. Deutsche Bank Nat’.l Trust Co., 757 F.2d 79 (2d Cir. 2014). Slip. Op. at 27. In Glaski, the Court of Appeal found that the alleged violation of the trust instrument, if proven, would render the assignment void. Rajamin considered and expressly rejected Glaski’s construction of New York law. Nevertheless, the California Supreme Court, in Yvanova, left it to California’s lower courts to determine whether to follow Glaski or Rajamin. If the lower California courts follow Rajamin then the uptick in wrongful foreclosure cases will likely prove short-lived and muted. Also important will be how California courts resolve similar issues under Delaware law, which, like New York law, governs many securitization trusts. Given this split in appellate authority under New York law, certification of the question to the New York Court of Appeals may prove an efficient way to address the uncertainty created by Yvanova. See New York Court of Appeals Rule 500.27 (authorizing New York Court of Appeals to hear determinative questions of New York law in cases pending before federal courts or the highest court of another state).
The Court also left for future development whether borrowers bringing a wrongful foreclosure action can obtain an order setting aside a completed foreclosure based on the void-assignment theory and whether borrowers will be required to allege tender of the outstanding loan balance to state a cause of action for wrongful foreclosure. Slip. Op. at 9 n. 4. Numerous California decisions hold that tender is required to set aside a completed foreclosure. If the lower courts continue to enforce the tender requirement, then the impact of Yvanova may be lessened.
Another significant question that no doubt will arise is whether borrowers can bring pre-foreclosure actions to enjoin ongoing nonjudicial foreclosures based on void assignment allegations. The Court explicitly left undisturbed, as “not within the scope of review,” a lower court decision “disallowing the use of a lawsuit to preempt a nonjudicial foreclosure.” Id., at 16–17 (citing Jenkins, 216 Cal.App.4th at 513). However, a number of courts have carved out exceptions to the rule disallowing judicial preemption of ongoing nonjudicial foreclosure proceedings. It remains to be seen whether Yvanova will provide an impetus to broaden these exceptions.
Finally, under California’s Homeowner Bill of Rights, borrowers must be given notice that they are entitled to request “a copy of any assignment, if applicable, of the borrower’s mortgage or deed of trust required to demonstrate the right of the mortgage servicer to foreclose.” Cal. Civ. Code § 2923.55(B)(iii). Yvanova will likely inspire a substantial increase in such requests. And that may lead to an increased number of wrongful foreclosure claims.
What Happens Next
Apart from preparing to defend against the expected increase in volume of wrongful foreclosure litigation, servicers and investors may wish to consider steps to reduce their exposure to Yvanova and further unfavorable developments in the law. Depending on the volume of wrongful foreclosure litigation that Yvanova creates and whether California’s trial courts begin enjoining ongoing foreclosures based on this theory, lenders, investors, and servicers may need to consider revising their foreclosure processes to focus on possession of the note at the relevant time and thereby render irrelevant the validity of the assignment of the deed of trust. Further, lenders, investors and servicers may wish to explore the use of estoppel certificates obtained from borrowers in loan modification or other loss mitigation relief, where permissible, to establish authority to foreclose.
OCC Releases Quarterly Mortgage Metrics Report Showing Continued Improvement through Third Quarter of 2015
On December 14, the OCC released its quarterly Mortgage Metrics Report. The report shows continued improvement of the mortgage performance of first-lien mortgages during the third quarter of 2015. 93.9% of mortgages included in the report were current and performing at the end of the quarter, compared to last year’s 93%. In addition, 30 to 59 days past due mortgages made up 2.3% of the portfolio, representing a 4.4% decrease from a year earlier, and 60 or more days past due mortgages made up 2.6%, representing a 16.1% decrease. The report also highlights a decline in both foreclosure activity and the need for other loss mitigation actions. The OCC’s report reflects performance data on first-lien residential mortgages serviced by eight national banks maintaining large mortgage-servicing portfolios.
The CFPB's Mortgage Originations Agenda in 2016
Now more than ever, financial services firms need to proactively focus on issues of concern identified by the CFPB and ensure that they are engaged in industry best practices that are clearly identified and carefully monitored. In the mortgage originations sphere, the new TRID/ KBYO rule, MSAs, LO compensation, UDAAP, and fair lending are all issues for companies to focus on in the coming year.TRID/KBYO
Compliance with the new TILA-RESPA Integrated Disclosure/Know Before You Owe (TRID/KBYO) rule will likely be an area of Bureau concern in 2016. The rule took effect on October 3, 2015 and does not include a “hold harmless” period for errors as lenders implement the new disclosure requirements, although letters from the OCC, FDIC, and CFPB have clarified that regulators will focus in the beginning on institutions’ implementation plans, training, and handling of early technical problems. It is likely that the CFPB will require remediation back to the rule’s compliance date when it identifies tangible consumer harm, but it is unlikely that the Bureau will bring enforcement actions initially based on technical issues where there is no tangible consumer harm.
GSEs have also issued letters stating they will not perform TRID/KBYO compliance file reviews at the beginning of the implementation period. The GSEs further stated that it will not exercise its repurchase and other remedies unless (1) a required form is not used or (2) a practice would impair its enforcement of its rights against borrowers. In contrast, the FHA has stated that it expects lenders to comply with “all federal, state, and local laws, rules, and requirements applicable to the mortgage transaction as outlined in [the] FHA Handbook….”
MSAs and RESPA Enforcement
The CFPB set forth a strong position in October 2015 regarding Section 8 of RESPA, which generally prohibits kickbacks in connection with the referral of settlement services. Through enforcement actions, the CFPB has taken a broad interpretation of the term “thing of value,” finding that the opportunity to participate in a business—even if market rates are paid for services—can itself constitute a thing of value sufficient to create Section 8 liability for kickbacks.
This calls into question the legality of marketing services agreements (MSAs) generally. While the CFPB has stated that it does not view MSAs as per se illegal and has acknowledged that it does not have the authority to declare them per se illegal without a formal rulemaking process, it is possible that the Bureau may pursue further public enforcement actions regarding MSAs if it does not see institutions pulling back from using them. State examiners are also aware of the issue and may refer nonbank entities that they supervise to the CFPB if they see issues with MSA usage. Courts are getting the opportunity to weigh in on these RESPA issues, through the appeal to the D.C. Circuit of the PHH enforcement action and the 9th Circuit’s reversal of the district court’s refusal to certify the class in Edwards v. FAC.
LO Compensation Rule
The CFPB has been aggressive in applying the Federal Reserve Board’s LO Compensation rule, as amended by the CPFB. While the rule was passed to avoid steering of borrowers into certain products, the CFPB does not need to establish steering to prove a violation and instead tends to build cases based on technical non-compliance with the rule. In bringing cases under the rule, the CFPB often names individuals as well as companies. It should be noted that the CFPB views payments to LLCs controlled by producing branch managers based on mortgage profits as illegal compensation under the rule. In examinations, the CFPB typically looks for a written compensation plan and cites institutions that do not reflect their compensation practices in their plan, even if those practices are legal.
Examination Enforcement Trends and UDAAP
The CFPB has heighted its focus on vendor management, scrutinizing vendor products and services during examinations (including the marketing of these products and services as well as the value they add), and will bring enforcement actions or court cases where it finds issues. Biweekly payments are one area of heighted scrutiny, as the CFPB has been skeptical of the value added by this service. The Bureau has also focused on loss mitigation contracts that suggest that a borrower has waived rights in connection with receiving the modification.
Fair Lending
“What’s old is new again” in 2016 fair lending – issues such as pricing, discretion, and the charging or waiving of fees remain important. Regulators will remain focused on redlining and access to credit. The September 24, 2015 Hudson City Savings Bank enforcement action, requiring the bank to pay $27 million, focused on the role of brokers in redlining. The CFPB’s Office of Fair Lending and Equal Opportunity is a hybrid examination and enforcement division, which provides insight into the CFPB’s approach to fair lending. The CFPB also will look at nonbanks’ fair lending and bring enforcement actions against these institutions to the extent it finds problems.
FHA Submits Annual Report to Congress, Capital Reserves Exceed 2%
On November 16, HUD released FHA’s annual report to Congress on the financial condition of its Mutual Mortgage Insurance (MMI) Fund. For the first time since 2008, the report shows that FHA’s MMI fund’s capital ratio exceeds the congressionally required 2% threshold, standing at 2.07%. The report points to FHA policy changes and program improvements as the driving factors behind the improved MMI fund capital ratio. Notably, the report states that the agency’s decision to reduce annual mortgage insurance premiums by a half percent (i) marginally decreased the projected time to reach the 2% capital ratio; (ii) enabled over 75,000 new creditworthy borrowers to purchase homes; and (iii) compensated for the credit risk of the Forward mortgage loan program. Finally, the report highlights the agency’s efforts to reduce risk and improve loss mitigation by making substantial revisions to its credit guidelines, including strengthening its underwriting guidelines to discourage extreme risk layering and prohibiting seller-funded down-payment assistance.
CFPB and FTC Announce Settlement with National Mortgage Servicing Company
On April 21, the CFPB and the FTC announced a joint enforcement action against a national mortgage servicing company, ordering the company to pay roughly $63 million in relief and penalties for allegedly mishandling home loans for borrowers who were trying to avoid foreclosure. Both regulators allege that from 2010 to 2014, the servicing company failed to honor modifications made to loans it acquired from other firms. According to the complaint, the company allegedly insisted that homeowners make the higher monthly payments and also make payments before providing loss mitigation options. Moreover, the CFPB and FTC claim the company illegally harassed borrowers who fell behind, made false threats, and revealed debts to the borrowers' employers. The servicing company will pay $48 million in relief to eligible homeowners and a $15 million civil money penalty to the CFPB.
OCC Issues Updated RESPA Examination Guidance to Supervised Institutions
On April 14, the OCC issued the “Real Estate Settlement Procedures Act” booklet as part of the Comptroller’s Handbook, which is prepared for use by OCC examiners in connection with their examination and supervision of national banks and federal savings associations (collectively, “banks”). The revised booklet, which replaces a similarly titled booklet issued in October 2011, reflects updated guidance relating to mortgage servicing and loss mitigation procedures resulting from the multiple amendments made to Regulation X over the past several years. Notable revisions reflected in the revised booklet include: (i) the transfer of rulemaking authority for Regulation X from HUD to the CFPB; (ii) new requirements relating to mortgage servicing; (iii) new loss mitigation procedures; (iv) prohibitions against certain acts and practices by servicers of federally related mortgage loans with regard to responding to borrower assertions of error and requests for information; and (v) updated examination procedures for determining compliance with the new servicing and loss mitigation rules. The OCC notified its applicable supervised financial institutions of the changes affecting all banks that engage in residential mortgage lending activities by distributing OCC Bulletin 2015-25.
CFPB Proposes Amendments to Mortgage Servicing Rules
On November 20, the CFPB announced the issuance of a proposed rule to amend RESPA (Reg. X) and TILA (Reg.Z). The proposed rule changes primarily focus on clarifying, revising or amending (i) Regulation X’s servicing provisions regarding force-placed insurance, early intervention, and loss mitigation requirements; and (ii) periodic statement requirements under Regulation Z’s servicing provisions. In addition, the proposed amendments also revise certain servicing requirements that apply when a consumer is a potential or confirmed successor in interest, is in bankruptcy, or sends a cease communication request under the Fair Debt Collection Practices Act. Further, the proposed rule makes technical corrections to several provisions of Regulations X and Z. The public comment period will be open for 90 days upon publication in the Federal Register.
FHA Updates its Single Family Housing Policy Handbook
On September 30, the FHA published updates to several sections of its Single Family Housing Policy Handbook. The updates only apply to loans originated on or after June 15, 2015 and are a result of FHA’s attempt to create a consolidated Handbook that is intended to be a single authoritative source of relevant FHA policy. The updates relate to a variety of policies including origination/processing of loan applications, underwriting, and mortgage closing requirements. They also relate to several specific programs and products including refinances, ARM loans, new construction, weatherization, and solar and wind technologies. Future updates are anticipated regarding (i) doing business with FHA; (ii) servicing and loss mitigation; (iii) claims and disposition; and (iv) quality control, oversight, and compliance issues.
Federal Housing Administration Posts Draft Servicing Section of its Single Family Housing Policy Handbook
On September 11, as part of its initiative to develop a single authoritative source for Federal Housing Administration (“FHA”) Single Family Policy, the FHA posted a draft of the servicing section of its Single Family Housing Policy Handbook. The draft servicing section covers post endorsement to the end of the mortgage insurance contract and provides specific guidance on the following: (i) general servicing requirements for FHA-insured mortgages; (ii) servicing of performing mortgages; (iii) default servicing, including HUD’s Loss Mitigation Program and conveyance standards; (iv) loss mitigation performance; and (v) special mortgage program servicing for active and inactive programs. On September 18, 2014, the FHA will host an industry briefing call to go over the organization and structure of the draft servicing section. The FHA is accepting comments on the draft servicing section through October 17, 2014.
Special Alert: CFPB Bulletin Re-Emphasizes Focus on Mortgage Servicing Transfers
On August 19, 2014, the CFPB issued Bulletin 2014-01 to address “potential risks to consumers that may arise in connection with transfers of residential mortgage servicing rights.” The bulletin, which is the latest in a series of CFPB regulations, statements, and guidance on this subject, replaces the Bureau’s February 2013 bulletin on mortgage servicing transfers and states that “the Bureau’s concern in this area remains heightened due to the continuing high volume of servicing transfers.” It further states that “the CFPB will be carefully reviewing servicers’ compliance with Federal consumer financial laws applicable to servicing transfers” and “may engage in further rulemaking in this area.”
The bulletin contains the following information, which is summarized in great detail below:
- Examples of policies and procedures that CFPB examiners may consider in evaluating whether the servicers on both ends of a transfer have complied with the CFPB’s new regulations requiring, among other things, policies and procedures reasonably designed to facilitate the transfer of information during servicing transfers and to properly evaluate loss mitigation applications.
- Guidance regarding the application of other aspects of the new servicing requirements to transfers.
- Descriptions of other Federal consumer financial laws that apply to servicing transfers, such as the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and the prohibition on unfair, deceptive, and abusive acts or practices (“UDAAPs”).
- A statement that “[s]ervicers engaged in significant servicing transfers should expect that the CFPB will, in appropriate cases, require them to prepare and submit informational plans describing how they will be managing the related risks to consumers.” This largely reiterates the Bureau’s statements in its February 2013 bulletin.
In a press release accompanying the bulletin, CFPB Director Richard Cordray stated that: “At every step of the process to transfer the servicing of mortgage loans, the two companies involved must put in appropriate efforts to ensure no harm to consumers. This means ahead of the transfer, during the transfer, and after the transfer. We will not tolerate consumers getting the runaround when mortgage servicers transfer loans.
