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Minnesota Supreme Court Rejects Twombly/Iqbal Pleading Standard
On August 6, the Minnesota Supreme Court held in a foreclosure-related case that the plausibility standard announced in Twombly and Iqbal does not apply to civil pleadings in Minnesota state court. Walsh v. U.S. Bank, N.A., No. A13-0742, 2014 WL 3844201 (Minn. Aug. 6, 2014). A borrower sued her mortgage lender to vacate the foreclosure sale of her home, claiming the lender failed to properly serve notice of the non-judicial foreclosure proceeding. The bank moved to dismiss the suit based on the plausibility standard established by the U.S. Supreme Court in Twombly, which requires plaintiffs to plead “enough facts to state a claim to relief that is plausible on its face.” The Minnesota Supreme court held that the state’s traditional pleading standard is controlling, and not the federal standard established in Twombly. The court explained that under the state standard, “a claim is sufficient against a motion to dismiss for failure to state a claim if it is possible on any evidence which might be produced, consistent with the pleader’s theory, to grant the relief demanded.” The court identified five reasons the state rule applies: (i) the relevant state rule does not clearly require more factual specificity; (ii) the state’s rules of civil procedure express a strong preference for short statements of facts in complaints; (iii) the sample complaints attached to the rules show that short, general statements are sufficient; (iv) the rules allow parties to move for a more definite statement if a pleading is overly vague; and (v) there are other means to control the costs of discovery.
CFPB, FTC, And State Authorities Coordinate Action Against Foreclosure Relief Companies
On July 23, the CFPB, the FTC, and 15 state authorities coordinated to take action against foreclosure relief companies and associated individuals alleged to have employed deceptive marketing tactics to obtain business from distressed borrowers. The CFPB filed three suits, the FTC filed six, and the state authorities collectively initiated 32 actions. For example, the CFPB claims the defendants (i) collected fees before obtaining a loan modification; (ii) inflated success rates and likelihood of obtaining a modification; (iii) led borrowers to believe they would receive legal representation; and (iv) made false promises about loan modifications to consumers. The CFPB and FTC allege that the defendants violated Regulation O, formerly known as the Mortgage Assistance Relief Services (MARS) Rule, and that some of the defendants also violated the Dodd-Frank Act’s UDAAP provisions and Section 5 of the FTC Act, respectively. The state authorities are pursuing similar claims under state law. For example, New York Attorney General Eric Schneiderman announced that he served a notice of intent to bring litigation against two companies and an individual for operating a fraudulent mortgage rescue and loan modification scheme that induced consumers into paying large upfront fees but failed to help homeowners avoid foreclosure.
HUD Requires Electronic Retention Of Foreclosure-Related Documents
On July 23, HUD issued Mortgagee Letter 2014-16, which requires FHA mortgagees to retain electronic copies of certain foreclosure-related documents and extends the record retention period to seven years after the life of an FHA-insured mortgage. HUD advises that, in addition to any requirements for retaining hard copies or original foreclosure-related documents, loss-mitigation review documents also must be retained in electronic format. Those documents include: (i) evidence of the servicer’s foreclosure committee recommendation; (ii) the servicer’s Referral Notice to a foreclosure attorney, if applicable; and (iii) a copy of the document evidencing the first legal action necessary to initiate foreclosure and all supporting documentation, if applicable. The letter adds that mortgagees also must retain in electronic format a copy of the mortgage, the mortgage note, or the deed of trust. If a note has been lost, mortgagees must retain both an electronic and hard copy of a Lost Note Affidavit. The letter is effective for all foreclosures occurring on or after October 1, 2014.
HUD Updates Requirements For Pre-Foreclosure Sales And Deeds-In-Lieu Of Foreclosure
On July 10, HUD issued Mortgagee Letter 2014-15, which updates requirements for pre-foreclosure sales (PFS) and deeds-in-lieu (DIL) of foreclosure for all mortgagees servicing FHA single-family mortgages. The letter explains that if none of FHA’s loss mitigation home retention options are available or appropriate, the mortgagee must evaluate the borrower for a non-home retention option, with mortgagors in default or at imminent risk of default being evaluated first for a PFS transaction before being evaluated for a DIL transaction. The letter details eligibility and documentation requirements for standard PFS, streamlined PFS, and DILs, as well as rules for calculating cash reserve contributions for standard PFS transactions. Further, the letter advises mortgagees that they may, under certain conditions, approve a servicemember for a streamlined PFS or DIL without verifying hardship or obtaining a complete mortgagor workout packet. The letter also addresses numerous other topics, including: (i) requirements for real estate agents and brokers participating in PFS transactions; (ii) an initial listing period requirement for PFS transactions; (iii) updated sample language for the PFS Addendum; (iv) validation requirements for appraisals; (v) the criteria under which the HUD will permit non-arms-length PFS transactions; and (vi) minimum marketing period for all PFS transactions.
Freddie Mac Updates Alternative To Foreclosure Requirements, Other Servicing Policies
On July 15, Freddie Mac issued Bulletin 2014-14, which announced a new automated settlement process for mortgage modification settlements. Effective December 1, 2014, servicers must submit the required settlement data for a modification of a conventional first lien Freddie Mac-owned or guaranteed mortgage via the new “Loan Modification Settlement” screen in Workout Prospector. Servicers may begin doing so on or after August 25, 2014. In addition, the Freddie Mac is amending mortgage modification signature requirements to provide that a servicer and any borrowers can agree to extend, modify, forbear, or make any accommodations with regard to a Fannie Mae/Freddie Mac Uniform Security Instrument or the Note, as otherwise authorized by Freddie Mac, without obtaining the co-signer’s signature or consent on the condition that the Security Instrument that was signed by the co-signer contained a provision allowing for such action. The bulletin also, among other things, (i) updates transfer of ownership and assumption requirements; (ii) revises certain requirements for mortgages insured by the FHA or guaranteed by the VA or Rural Housing Service; and (iii) adds several new expense codes related to attorney fees and costs and updates certain attorney fees and costs reimbursement requirements.
Massachusetts AG Requires Mortgage Servicer To Provide Foreclosure-Related Relief
On June 16, Massachusetts Attorney General (AG) Martha Coakley announced that a large mortgage servicer agreed to provide $3 million in borrower relief and pay $700,000 to the Commonwealth to resolve allegations that the servicer failed to provide certain notices to homeowners, as required by state law, and that it unlawfully foreclosed on certain properties. Specifically, the AG alleged that the servicer failed to send state-mandated notices to homeowners in default, and failed to execute proper mortgage assignments, filed in the Massachusetts Registry of Deeds, as required by Massachusetts law. The agreement also resolves claims that a servicer acquired by the settling servicer allegedly initiated foreclosures when it did not hold the actual mortgages, a violation of Massachusetts law, as established by a 2011 state supreme court decision. As described in the AG’s announcement, the agreement requires the servicer to properly execute documents filed in connection with foreclosure proceedings, and to mail to residents notices that are in compliance with applicable statutes and regulations.
Colorado Adds Mortgage Servicer Requirements
Recently, Colorado enacted legislation that requires servicers of residential loans, including lenders and other parties that offer a borrower a loss mitigation option or seek to enforce the power to foreclose and sell the residential real estate that secures a delinquent loan, to establish a single point of contact with a borrower. The bill obligates the single point of contact to inform the borrower about loss mitigation options, the status of the borrower's loan, circumstances that may result in foreclosure, and procedures to submit a notice of error or information request. Further, the bill prohibits the servicer from initiating foreclosure proceedings unless the borrower has not qualified for, accepted, or complied with the terms of a loss mitigation option. The bill provides that if a servicer is engaging in prohibited dual tracking, the public trustee must follow certain procedures, including continuance of the foreclosure sale and withdrawal of the notice of election and demand, provided so the borrower is complying with all applicable terms of a loss mitigation option. In addition, the bill requires a foreclosing lender to disclose that it is illegal for a foreclosure consultant to require a deposit or charge fees in advance for providing services, and requires that the posted notice include a statement regarding the borrower's ability to file a complaint with state and federal authorities if the borrower believes the lender or servicer has violated certain provisions of the bill. The bill takes effect January 1, 2015.
Connecticut Establishes Alternative Foreclosure Method
On June 3, Connecticut Governor Dannel Malloy signed HB 5514, which establishes an alternative to the state’s current foreclosure methods. Under current law, a court may issue a judgment of foreclosure by sale or strict foreclosure. Under the new law, which takes effect October 1, 2014, a court will be permitted to approve a foreclosure sale on the open market provided the lender requests such a sale and the borrower consents. The new method is available only for a first mortgage on a one-to-four family residential property that is the borrower’s principal residence. The bill establishes industry procedures for such sales (including requirements for the foreclosure notice, property appraisal, listing agreement, and purchase and sale contract, and requires foreclosure notices to advise borrowers of the market sale option), as well as judicial procedures. The new law prohibits a borrower who consents to foreclosure by market sale from participating in the state's foreclosure mediation program, but grants such a borrower the right to petition the court to participate under certain circumstances.
South Carolina Allows Expedited Foreclosures For Abandoned Properties
On June 2, South Carolina established a new expedited procedure for mortgage foreclosures on abandoned properties. Governor Nikki Haley signed SB 1007, which allows a mortgagee or its successor to petition a court for an expedited judgment of foreclosure if the property is not occupied and meets at least two of several conditions—e.g. windows or entrances are boarded or otherwise closed, doors are smashed or continually unlocked, utility services have been terminated—and provided the property does not fall within certain exceptions—e.g. it is seasonally occupied or the owner is deceased and the heirs can be identified. The new law took effect immediately.
Massachusetts AG Sues FHFA Over Foreclosure Policies
On June 2, Massachusetts Attorney General (AG) Martha Coakley filed a lawsuit against the FHFA, Fannie Mae, and Freddie Mac for allegedly violating the state’s 2012 foreclosure prevention law, which, among other things, prohibits creditors from blocking home sales to non-profits that intend to resell the property back to the former homeowner. The AG claims that the FHFA has refused to require Fannie Mae and Freddie Mac to comply with the law, and as a result the companies’ “arm's length transaction” policies, under which the parties proposing to purchase a property must attest that there are no agreements that the borrower will remain in the property as a tenant or later obtain title or ownership, restrict the sale of properties in violation of the law. In addition to the alleged violation of the foreclosure prevention law, the AG claims that by illegally applying the arm’s length transaction policies, the companies engaged in unfair or deceptive acts or practices. The AG seeks an order enjoining the companies from applying policies in violation of the foreclosure law, and penalties of up to $5,000 for each unfair or deceptive act or practice. The AG recently notified the FHFA of the potential suit in a letter that also renewed the AG’s calls for the FHFA to allow Fannie Mae and Freddie Mac to include principal reductions as part of their loan modification alternatives.