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Illinois Adds Foreclosure Tenant Rights
On August 21, Illinois enacted SB 56, which adds rights for tenants of foreclosed properties. The law provides, among other things, that the entry of a judgment of foreclosure shall not terminate or otherwise affect the rights or interest of any occupant of a dwelling unit who has a lease or tenancy resulting from an arm's length transaction and who is not the mortgagor, whether or not the occupant has been made a party in the foreclosure. The bill also provides that the holder of the certificate of sale, the holder of the deed issued pursuant to that certificate, or, if no certificate or deed was issued, the purchaser at the sale shall: (i) assume the lease or tenancy of the mortgaged real estate resulting from an arm's length transaction entered into prior to the confirmation of sale; (ii) assume any federal, state, or local housing subsidy contract for the dwelling unit for the duration of the contract or the assumed lease, whichever is shorter; (iii) assume his or her interest in the mortgaged real estate subject to the rights of any occupant; and (iv) not terminate the occupancy or any occupant's tenancy, except as otherwise allowed under state law. The law also states that a deficiency judgment may not be sought or entered against a deceased mortgagor. All of the changes take effect on November 19, 2013.
California Federal District Court Grants Class Certification in HAMP Litigation
On August 5, the U.S. District Court for the Northern District of California certified a class of borrowers who allege that a mortgage servicer wrongly rejected mortgage modification applications and improperly initiated foreclosure proceedings. Gaudin v. Saxon Mortg. Svcs., Inc., No. 11-1663, 2013 WL 4029043 (N.D. Cal. Aug. 5, 2013). The named plaintiff contends that a trial modification plan provided by her servicer constituted a binding contract that required the servicer to evaluate the borrower under the Home Affordable Modification Program and, if all conditions of the trial plan were satisfied, offer the borrower a permanent modification. According to the borrower, the servicer later, without cause, refused to offer a permanent modification and breached the contract, thereby violating California’s Rosenthal Act and Unfair Competition Law. On the borrower’s motion for class certification, the court held that the case presents significant common questions of law and fact concerning the nature and scope of the trial plan, and that the borrower’s alleged injury is similar to, if not precisely the same as, the potential class because the servicer’s issuance and countersigning of the trial plans constitute a single course of conduct. The court rejected the servicer’s argument that the borrower’s claims are subject to unique defenses because the servicer will argue that the borrower misrepresented her income, explaining that a defendant cannot defeat typicality if it intends to raise similar arguments in response to all class members.
New York Codifies Pre-Foreclosure Filing Requirement
On July 31, New York Governor Andrew Cuomo signed AB 5582, which seeks to reduce the number of incomplete foreclosure cases that are filed, but stalled, awaiting information needed to move the cases to mandatory settlement conferences. To do so, the bill requires a foreclosure attorney who is filing a foreclosure complaint involving a home loan to sign and file a “certificate of merit” with the complaint, stating that, to the best of the attorney’s knowledge, information and belief, there is a reasonable basis for the commencement of such action and that the plaintiff is currently the creditor entitled to enforce the applicable mortgage documents. The attorney also must attach to the complaint or the certificate copies of the relevant debt instruments and any instruments of modification, extension, consolidation, and assignment. The new law allows for the filing of supplemental affidavits where the debt instrument is lost. The new requirements take effect August 30, 2013. This law follows State Attorney General Eric Schneiderman’s enforcement effort to address similar problems – he sued at least one financial institution for allegedly failing to timely file requests for judicial intervention which would trigger court-supervised foreclosure settlement conferences.
Federal Reserve Board Announces Additional Foreclosure Review Settlement
On July 26, the Federal Reserve Board released an amended consent order with one of the several financial institutions that entered into a consent order in April 2011 to resolve allegations that the institutions engaged in improper mortgage servicing and foreclosure processing practices. The agreement follows numerous others released earlier this year. Under this latest agreement the institution will pay roughly $230 million, including $32 million to satisfy its obligation to provide loss-mitigation assistance since it no longer owns a significant residential mortgaging portfolio. Together, all the amended consent orders will provide approximately 4.4 million borrowers a total of more than $3.8 billion in cash compensation while an additional $5.8 billion will be provided by the servicers in commitments for loss-mitigation assistance, such as loan modifications and forgiveness of deficiency judgments. For the participating servicers, the amendments also replace the requirements related to the Independent Foreclosure Review process set out under the original consent orders.
California Appeals Court Holds Foreclosure Deficiency Judgment Protections Apply to Short Sales
On July 23, the California Court of Appeal, Fourth Appellate District, held in a case of first impression that a section of California law that prohibits a deficiency judgment following a foreclosure on a purchase money loan similarly protects borrowers in short sales. Coker v. JP Morgan Chase Bank, N.A., No. D061720, 2013 WL 3816978 (Cal. Ct. App. Jul. 23, 2013). In this case, the lender approved a short sale subject to several conditions, including that the sale proceeds paid to the lender released the lender’s security interest, but that the borrower still was responsible for any deficiency balance. After the sale closed, the lender sought to collect from the borrower the unsatisfied portion of the loan. The borrower filed suit claiming that state law and common law prevented the lender from collecting. On appeal, the court reversed the trial court’s dismissal and held that a state law that has been applied to prohibit deficiency judgments following foreclosure sales also prohibits deficiency judgments following short sales. The court explained that there is nothing in the statute to modify or limit the term “sale” and no other requirement in the statute that a foreclosure must occur to trigger the deficiency judgment protections. Further, the court rejected the lender’s argument that the borrower waived the protection by agreeing as a condition of the sale to be liable for any deficiency after the sale. The court reversed the trial court and remanded for further proceedings.
Rhode Island Adopts Foreclosure Mediation
On July 15, Rhode Island enacted HB 5335 to create a temporary foreclosure mediation program. Effective September 1, 2013 through July 1, 2018, the new law requires mortgagees or their servicers or agents to provide borrowers who are not more than 120 days delinquent written notice that foreclosure cannot proceed without the borrower first having an opportunity to participate in a mediation conference. The law establishes the procedures and requirements for such conferences and prohibits a mortgagee from proceeding with a foreclosure action until the mediator certifies that, after good faith effort by the mortgagee, the parties could not reach agreement.
Colorado AG Investigating Foreclosure Law Firm Fees
On July 11, the Denver Post reported that Colorado Attorney General (AG) John Suthers is investigating whether foreclosure law firms are inflating fees that are added to the cost of the foreclosure and mortgage balance, and subsequently are passed on to borrowers, lenders, and investors. The AG has not filed charges against any firms, but has moved to enforce subpoenas his office issued seeking information from numerous law firms about the foreclosure fees they charged. The investigation covers all costs claimed by the firms, including costs related to posting foreclosure notices on homeowners’ doors, which the AG claims substantially exceed the market rate.
HUD Updates Pre-Foreclosure and Deed-in-Lieu of Foreclosure Requirements, Extends Unemployment Forbearance
On July 9, HUD issued Mortgagee Letter 2013-23, which updates pre-foreclosure sale (PFS) and deed-in-lieu (DIL) foreclosure requirements for FHA-approved mortgagees. For a standard PFS, the letter details (i) the deficit income test that mortgagees must use to determine hardship, (ii) the supporting documentation required for such tests, (iii) the method for calculating cash reserve contributions, and (iv) the requirements for approving a PFS based on imminent default. The letter also explains the eligibility requirements for streamlined PFS and DIL, including with regard to military servicemembers. Among numerous other policy changes, HUD also updated the disclosure requirements for all PFS and DIL transactions and outlined certain arms-length requirements for PFS transactions. Mortgagees must implement the new policies by October 1, 2013. Recently, HUD also issued Mortgagee Letter 2013-22 to extend indefinitely its policy to provide special forbearance for unemployed borrowers. That policy, detailed in Mortgagee Letter 2011-23, was set to expire on August 1, 2013.
Illinois Extends Foreclosure Protections Sunset Provision
On June 20, Illinois enacted HB 99, which extends for three years the protections afforded borrowers in the Illinois Homeowner Protection Act. The Act requires mortgagees to notify homeowners who are at least 30 days late on their payments that they have 30 days to seek housing counseling. A homeowner who seeks counsel gets an additional 30 days to work out a payment plan or refinance their loan, meaning that such homeowners have a “grace period” of up to 90 days. Those protections were set to expire on July 1, 2013, but now will remain in effect until July 1, 2016. The bill took effect immediately.
Nevada Alters Foreclosure Mediation Program
Recently, Nevada enacted AB 273, which altered the state’s foreclosure mediation program to require a trustee under a deed of trust to send certain information concerning the foreclosure mediation program to a borrower concurrently with, but separately from, the copy of the notice of default and election to sell that also must be sent to the borrower. The bill also requires that a borrower facing foreclosure be automatically enrolled in the foreclosure mediation program unless the borrower elects to waive mediation or fails to pay his or her share of the program fee. The bill also adds, among other things, certain procedural requirements for mediators and trustees. These changes become effective on October 1, 2013.