Salute to Sponsors
Visit Us on YouTube
America's Mortgage News with Don Clement Brought t
South Carolina Legislative Updates
North Carolina Legislative Updates
Expand/Collapse Submenu How to Join
MBAC By-Laws
Login
Officers and Directors
President's Message
Rob Chrisman's Daily Mortgage News & Commentary
Compliance Matters
Educational Opportunities
MAC-PAC
Home
Expand/Collapse Submenu Local Chapters
Local Associations
Upcoming Events
Newsletters - The Bottom Line
Online Store
Committees Leadership
Pope Scholarship Fund
The Dee Mc Candlish Scholarship Fund
Do Business with MBAC Members
South Carolina Consumer Finance Resources
Award Recipients
Former Presidents
Job Postings
Resumes
Contact Us
Compliance Matters

​​

 

 

 

North Carolina Enacts Laws Dealing with Foreclosure Squatters, Assumed Names and Manufactured Home Liens

 

November 2016

 

By Graham H. Kidner, General Counsel, HUTCHENS LAW FIRM

 

The North Carolina General Assembly ended its 2016 legislative session in July and placed some new laws on the statute books that of which servicers and companies that manage REO assets should be aware.

 

Foreclosure Squatters

 

State law already provided for the punishment of persons who, without authorization, enter or remain on property belonging to another or where the property is “so enclosed or secured as to demonstrate clearly an intent to keep out intruders.”  N.C.G.S. § 14-159.12(a).  In a move expressly designed to deal with squatting in foreclosed property, that section has been broadened, effective December 1, 2016, making it a Class 1 felony for a breach of this subsection if, either, the trespasser re-enters real property after having already been lawfully removed, or, the trespasser has “has knowingly created or provided materially false evidence of an ownership or possessory interest."  § 14-159.12(f). 

This amendment will allow the owner of an REO asset to seek the assistance of law enforcement to take prompt and more direct action against former borrowers or rental scammers who seek to either frustrate the lawful actions of servicers or investors that manage REO assets, or who seek to make a quick profit by posing as the owner of the property.

               

Assumed Business Names

All persons, including corporations that do business in North Carolina using an assumed name, must be mindful of amendments to the assumed name statute that took effect on July 1, 2016.  The new statute, the “Assumed Business Name Act”, will completely replace the previous version by July 1, 2022.

As it applies to lenders and servicers, the new use of any assumed business name in the State now requires the registration of that name with the register of deeds in the county in which the entity will engage in business.  An “assumed business name” means any name other than that stated in the company’s articles of incorporation or organization on file with the Secretary of State.  If the entity intends to engage in business in more than one county, only the one registration is required.  Registration is required for each assumed business name in which the entity conducts business in the State.  The Act details the required content and manner of execution of the certificate, and provides for necessary amendments and the withdrawal of the assumed name. 

A State agency may create a form for use by registrants, but use of the form is not mandatory.  No such form has yet been created, and registrants may create their own forms.

Noncompliance with the Act exposes the violator to pay to any person injured by the failure to register the assumed business name his “reasonable expenses, including attorneys’ fees, incurred by the person in ascertaining, for a reasonable purpose, the information required to be stated in the… certificate….”

The Act applies to any new “assumed business names” a person or corporation may use in doing business in North Carolina after July 1, 2016.  For assumed names already registered under the previous law, those remain valid until the old assumed name law expires on July 1, 2022.  After that date, assumed names registered under the previous law must be re-registered as assumed business names under the new law.  The ability to file an assumed name under the old law expires after June 30, 2017, so until then both the old and new methods for registration are in effect. 

 Manufactured Home Liens

Amendments to the law governing manufactured homes address the issues of lien renewal, cancellation and release, among other changes.  Of most interest, unless the certificate of title is unavailable, a new application for the notation of a security interest on a certificate of title for a manufactured home must state the lien’s maturity date.  The DMV must mark the maturity date on the certificate.  In such a case, the perfection of the security interest automatically expires, if not renewed, on the earlier of:  (i) 90 days after the maturity date stated on the application for a security interest, (ii) 15 years plus 180 days after the original maturity date if not extended, or (iii) 90 days after any extended maturity date stated on the application for renewal.  

 If renewed, the perfection of the security interest automatically expires on the earlier of:  (i) 10 years after the date of renewal, (ii) 90 days after the original maturity date if not extended, or (iii) 90 days after any extended maturity date stated on the application for renewal.

With respect to a security interest that is not perfected pursuant to § 20-58(c) (i.e., the application does not state the maturity date) the perfection automatically expires 30 years after the date of issuance of the original certificate of title, unless a different maturity date is stated on the title.

Prior to the date that perfection of the security interest automatically expires, as stated above, the secured party may apply to renew it provided the application contains, among other material, the written agreement of the borrower extending the maturity date.

Amending and supplementing the procedures for lien release found in § 20-58.4, the new law adds a section specifically dealing with the release of a manufactured home lien, providing that the owner may proceed with securing a release in accordance with existing subsection (e), or may proceed under new subsection (e1).  Under subsection (e), if it is impossible for the owner to secure a release from the secured party he may provide the DMV with evidence the debt was satisfied.  Under subsection (e1), the owner may provide a sworn affidavit that the debt was satisfied and that either (i) after diligent inquiry he cannot determine the identity or location of the secured creditor or successor in interest; or, (ii) the secured creditor has not responded within 30 days to the owner’s written request to release the lien.  If the DMV is satisfied as to the legitimacy of the proof provided by the owner under either subsection (e)  or (e1) it must give the secured creditor at least 15 days’ notice to the last address known to the DMV by registered mail.  The DMV must not cancel the security interest if the secured party informs it within the 15 day period that the security interest remains in effect.

It will be important for servicers of manufactured home loans secured by the possession of a certificate of title or by the notation of a lien upon a certificate of title to be watchful for communications from the owner of a secured manufactured home in North Carolina, or from the North Carolina Department of Motor Vehicles, with respect to the satisfaction of the debt secured by the manufactured home or the release of the manufactured home security interest.

These amendments take effect on July 1, 2017.

 

Must a Transferee Debt Collector Send a New Debt Validation Notice to the

Consumer in North Carolina or South Carolina?

November 2016

By Graham H. Kidner, General Counsel, HUTCHENS LAW FIRM

In a case of first impression for the United States Court of Appeals for the Ninth Circuit, and as the first published opinion in any circuit court, the Court in Hernandez v. Williams, --- F.3d ---, 2016 WL 3913445 (9th Cir. July 20, 2016) held that even when a debt collector has already sent the consumer the debt validation notice required by 15 U.S.C. § 1692g, a successor debt collector collecting the same debt who fails to send a new notice to the consumer within 5 days of the successor’s initial communication with the consumer violates § 1692g.

The facts of the case are simple.  Maria Hernandez purchased a car on credit.  When she defaulted, Thunderbird Collections Specialists, Inc. (a debt collector) sent her a letter seeking to collect the debt.  Getting no response, Thunderbird retained the law firm of Williams, Zinman & Parham, PC (“Williams”).  Williams sent Hernandez a collection letter and included an incomplete debt validation notice. The letter informed Hernandez that she could dispute the debt or request additional information about the original creditor, but omitted informing her that she could do so only in writing.

In the putative class action suit filed by Hernandez, the parties filed cross motions for summary judgment.  Williams contended it was not required to send any debt validation notice because Thunderbird had made the “initial communication” with Hernandez and had timely provided the debt validation notice.  The district court agreed, and granted summary judgment for Williams.

The Court of Appeals reversed.  The Court acknowledged § 1692g(a) was ambiguous with respect to whether it applied only to the first debt collector seeking to collect the debt from the consumer or whether it applied to each subsequent debt collector that took on the function of collecting the debt.  Id. at *3-*5.  To resolve this ambiguity, the Court reviewed the broader structure of the Act to answer the question and held that only by requiring each subsequent debt collector to provide the notice could “substantial loopholes” around both the validation notice requirements of § 1692g(a) and the debt verification requirements of § 1692g(b) be avoided.  Id. at *5.  By way of example, the Court posited that if the collection function was transferred within 30 days after the prior debt collector had sent the debt validation notice, and the consumer had not yet requested validation, the consumer’s ability to seek validation may be adversely affected if he had not received a new validation notice from the transferee debt collector.  The Court also observed that the very act of transferring the collection function could result in the loss of information or documents concerning the debt resulting in the transferee debt collector having a different understanding of the amount or nature of the debt.  Only by permitting the debtor to seek validation of the debt from the transferee debt collector could the consumer discover the nature and amount of the debt the transferee debt collector contended the debtor owed.  The Court was also concerned that if the transferee debt collector did not have to send the debt validation notice this could undermine the consumer’s right to have the debt collector cease collection efforts until the debt was verified. 

It is important to recognize that both the Consumer Financial Protection Bureau and the Federal Trade Commission filed an amicus curiae brief in this case, strongly supporting Hernandez’s position. As the Court noted, the CFPB has “delegated rulemaking authority under the FDCPA, and the Federal Trade Commission… shares concurrent authority to enforce the FDCPA with the Bureau.”  Id. at *3, fn4 (citations omitted). 

This is now the law in those states over which the Ninth Circuit has jurisdiction:  Alaska, Arizona, California, Hawai’i, Idaho, Montana, Nevada, Oregon and Washington.  But what about the Carolinas?

The Fourth Circuit Court of Appeals has not addressed this question.  Of the other two circuit courts that have addressed it, neither has issued a published decision although both held that one, initial, debt validation notice was sufficient.  In Lee v. Cohen, McNeile & Papas, P.C., 520 Fed.Appx. 649, 2013 WL 1240812 (10th Cir. March 28, 2013), the Court affirmed the dismissal of a consumer’s claims that a law firm debt collector violated 15 U.S.C. § 1692g(a) by failing to provide a debt validation notice after the firm had been forwarded the account to collect from another law firm that had already sent a debt validation notice and responded to a validation request.  The Court did not explain its decision other than to state it had reviewed the record and that plaintiff had provided “no meaningful support for his contention that Cohen was required by law to validate his debt.”  Id, at *2.

The Sixth Circuit Court of Appeals offered more substance for its decision in Oppong v. First Union Mortgage Corp., 566 F.Supp.2d 395, aff'd, 326 Fed.Appx. 663 (3d Cir.2009)Oppong held that when the responsibility for the collection of a debt is transferred to successive debt collectors, each new debt collector is not required to send a new debt validation notice.  Providing the first debt collector sent the consumer a valid notice, that suffices to meet the obligations of § 1692g.  The Court relied on cases from other jurisdictions:

 

Nichols v. Byrd, 435 F.Supp.2d 1101, 1106 (D.Nev.2006) (holding that if Congress had intended to obligate every subsequent debt collector beyond the first to provide validation notice it would have explicitly called for it in § 1692g); see also Senftle v. Landau, 390 F.Supp.2d 463, 473 (D.Md.2005) (holding that there is only one “initial communication” with a debtor on a given debt under § 1692g(a), even though subsequent debt collectors “may enter the picture.”); Ditty v. CheckRite, 973 F.Supp. 1320, 1329 (D.Ut.1997) (holding that after a validation notice has been timely sent, a subsequent collector does not need to provide additional notice and another thirty-date validation period).

 

To the extent that there is authority to the contrary, see, e.g., Griswold v. J & R Anderson Bus. Serv., 1983 U.S. Dist. LEXIS 20365 (D.Or. Aug. 11, 2005) (holding that each collector must provide information required by § 1692g); see also Turner v. Shenandoah Legal Group, P.C., 2006 WL 1685698, 2006 U.S. Dist. LEXIS 39341 (E.D. Va. June 12, 2006) (stating that every debtor is owed the same duty from each and every debt collector, lest an “end-run around the validation notice requirement” be created), it is not persuasive. Under the FDCPA, the goal of the initial communication is to advise the debtor of his rights and obligations to his creditor. Once the validation information is provided in the initial communication, and once the debtor is made aware of his rights at the time the collection process begins, it would serve no purpose to require that the same information be given again and again, each time the servicing function was passed from one creditor to another.

 

Oppong, 556 F.Supp.2d at 404 (footnote omitted).

In the states covered by the Fourth Circuit, as indicated above, federal district courts have gone both ways.  Senftle v. Landau, 390 F.Supp.2d 463, 473 (D.Md.2005) (no second notice required).  Turner v. Shenandoah Legal Group, P.C., 2006 WL 1685698, 2006 U.S. Dist. LEXIS 39341 (E.D. Va. June 12, 2006) (subsequent notices required).

Conclusion

Given the first reported decision on this issue in a Circuit Court, that the CFPB and the FTC appear to clearly support the interpretation of § 1692g as held in Hernandez, that federal courts in North Carolina and South Carolina have not opined on the issue in any reported or unreported decisions, and that providing a subsequent validation notice is not likely to cause substantial delays to foreclosure proceedings, the Firm believes it would be prudent to do so.  This will not be an issue for most foreclosure cases because for most referrals the Firm already sends the initial debt validation notice as part of its standard procedure.  For practical purposes a subsequent debt validation notice will be required only for transfer files.  When a servicer transfers a foreclosure, or other debt collection file, from a law firm to the Hutchens Law Firm, the Firm will send a new notice within 5 days of its initial communication with the consumer.  Depending on the status of the transferred foreclosure or collection file, the Firm may need to suspend collection activity in the event the consumer requests debt validation.

 

 

Late Fees:  Complying with North Carolina Law; and, Collecting Late Fees
in a Reinstatement Context

November 2016

By Graham H. Kidner, General Counsel, HUTCHENS LAW FIRM

Collectability of Late Fees

Presuming that the applicable loan documents permit the note holder to seek late charges for the failure to timely remit the periodic loan payment, and almost all promissory notes will likely contain language similar to that found in the Fannie Mae/Freddie Mac Multistate Fixed Rate Note (“GSE Note”)[1], late fees are collectable conditioned on compliance with state law.

For closed-end loans (most mortgage loans) North Carolina caps the late fee at 4% of the past due payment, but requires the note holder to send a notice to the borrower each time it intends to collect the late fee.  More specifically, N.C.G.S. § 24-10.1(a) provides that “[s]ubject to the limitations contained in subsection (b) of this section, any lender may charge a party to a loan or extension of credit governed by the provisions of G.S. 24-1.1, 24-1.2, or 24-1.1A a late payment charge as agreed upon by the parties in the loan contract.”  § 24-1.1 governs “a loan, purchase money loan, advance, commitment for a loan or forbearance other than a credit card, open-end, or similar loan….”  § 24-1.1A governs “home loans”, defined to “mean a loan, other than an open-end credit plan, where the principal amount is less than three hundred thousand dollars ($300,000) secured by a first mortgage or first deed of trust on real estate upon which there is located or there is to be located one or more single-family dwellings or dwelling units or secured by an equivalent first security interest in a manufactured home.”  § 24-1.1A(e).  § 24-1.2 has been repealed.

The limitations referred to in § 24-10.1 include the prohibition on a late payment charge “[i]n excess of four percent (4%) of the amount of the payment past due”, (§ 24-10.1(b)(1)), and the charge may not be made “[u]nless the lender notifies the borrower within 45 days following the date the payment was due that a late payment charge has been imposed for a particular late payment which late payment must be paid unless the borrower can show that the installment was paid in full and on time.  No late payment charge may be collected from any borrower if the borrower informs the lender that non-payment of an installment is in dispute and presents proof of payment within 45 days of receipt of the lender's notice of the late charge.”  § 24-10.1(b)(6).  Note that this late charge notice requirement applies to all late charges the lender seeks to collect, not just post-acceleration late charges.

A further limitation is that a lender may not charge a late payment fee “[f]or any payment unless past due for 15 days or more; provided, however, if the loan is one on which interest on each installment is paid in advance, no late payment charge may be charged until the payment is 30 days past due or more.”  § 24-10.1(b)(3).

A lender that seeks to collect late fees in violation of N.C.G.S. § 24-10.1 may “forfeit all late charges to which it would otherwise be entitled under the terms of the loan.”  Swindell v. Federal National Mortgage Association, 330 N.C. 153, 161, 409 S.E.2d 892, 897 (1991).

 

Late Fees in the Context of Reinstatement

 

Late fees for missed monthly payments due and unpaid after the note holder accelerates the loan are treated differently depending whether the borrower reinstates the loan or some other foreclosure-avoidance option is reached.  If there is a reinstatement, late fees for post-acceleration missed monthly payments are generally collectable, presuming the security instrument contains language similar to that found in the Fannie Mae/Freddie Mac North Carolina Uniform Instrument (“GSE DOT”), which provides a right to reinstatement conditioned, inter alia, upon paying the “Lender all sums which then would be due under this Security Instrument and the Note as if no acceleration had occurred….”  GSE DOT ¶ 19.  If the foreclosure-avoidance option chosen is not a reinstatement, such fees very likely are not collectible.

Court opinions addressing this issue are not in abundance, but those that have opined are in agreement.  In 2003 the United States Court of Appeals for the Third Circuit, relying on language substantially similar to that found in the GSE DOT, found the statement that “[t]he reinstatement provision of the mortgage language requires payment of all sums “which would then be due ... had no acceleration occurred”” to be unambiguous and to apply retroactively.  Rizzo v. Pierce & Associates, 351 F.3d 791, 793 (3d Cir. 2003) (emphasis in original).  “In other words, the monthly payments are deemed to have been due each and every month on the dates set out in the mortgage and note. We find this language to unambiguously require plaintiffs to pay the late fees.”  Id. at 793-94.  “Reinstatement essentially allows the borrower a second “bite at the apple.” It follows that the lender should not be penalized, nor the borrower rewarded, for a breach on the part of the borrower.”  Id.

The Rizzo court also made clear that a debt collector demanding the payment of late fees for post-acceleration missed monthly payments does not violate the FDCPA, specifically 15 U.S.C. § 1692f that “prohibits using “false, deceptive, or misleading representation[s] or means in connection with the collection of any debt” and “unfair or unconscionable means to collect or attempt to collect any debt.”  Rizzo, at 794.

The Court observed, however, “that the Rizzos are not obligated to pay the late fees in all cases. If, for whatever reason, the Rizzos did not want to pay the late fees, they were free to pay the loan as accelerated.  Such a payment would nullify any obligation to pay post-acceleration late fees.”  IdWhile there is no case directly on point in the United States Court of Appeals for the Fourth Circuit (with federal appellate jurisdiction for North Carolina and South Carolina) or in North Carolina’s appellate courts, the court’s logic in Rizzo is likely to be accepted. 

The result may not be the same, however, in the event of a Chapter 13 petition for bankruptcy.  In Wells Fargo Bank Minnesota, N.A. v. Guarnieri, 308 B.R. 122 (D.Ct. 2004), Wells Fargo secured a judgment of strict foreclosure, but the amount found due did not include post-acceleration late charges.  Before the “law date”, the borrower filed a voluntary Chapter 13 petition followed by a proposed “cure and maintain” plan under 11 U.S.C. § 1322(b)(5), which did not include post-acceleration late charges. 

Appealing the rejection of its objection to the plan, Wells Fargo, relying on Rizzo, contended that when the bankruptcy court confirms a cure and maintenance plan it effectively reinstates the loan as if no acceleration had occurred and since the security instrument requires payment of late charges in the event of reinstatement, Wells Fargo was entitled to post-acceleration, pre-petition late charges as a part of the “amounts necessary to cure the default” within the meaning of § 1322e.  Guarnieri, at 126.

The district court observed that “[n]o Connecticut court has had occasion to consider Rizzo. Nor, apparently, has any court explicitly decided whether a lender may recover post-acceleration late charges under Connecticut law when the debtor seeks to reinstate a loan rather than redeem it.”   Guarnieri, at 126.  The court rejected Wells Fargo’s argument and found no need to decide that issue because by the terms of the security instrument reinstatement was available only until a judgment enforcing the security instrument was entered.  Instead, the district court found that the borrower’s default was cured under the Code, and nothing in the security instrument required the payment of late fees under such circumstances.  

Conclusion

While there are no Fourth Circuit or North Carolina appellate court opinions on the issue, in the non-bankruptcy context, provided the security instrument contains a statement to the effect that reinstatement is conditioned upon the payment of all sums which then would be due under the security Instrument and the note as if no acceleration had occurred, a convincing argument can be made that the collection of late fees attributable to payments coming due and unpaid after the acceleration of the obligation are collectible as a matter of contract, permissible under North Carolina law (provided the statutory conditions are followed), and there is no violation of the FDCPA.  This is conditioned on the requirement that the late fee charged must not exceed 4%, and the servicer must provide a notice of late payment charge for each late payment charge it intends to make.

Servicers with a North Carolina portfolio of loans should confirm that their late fee collection procedures are in compliance with state law:

  • Late fees do not exceed 4% of the missed monthly payment;
  • A notice is provided to the borrower within 45 days following the date the payment was due that a late payment charge has been imposed for a particular late payment which late payment must be paid unless the borrower can show that the installment was paid in full and on time; and
  • The fee may be charged only when each payment is past due for 15 days or more; provided, however, if the loan is one on which interest on each installment is paid in advance, no late payment charge may be charged until the payment is 30 days past due.

 [1] If the Note Holder has not received the full amount of any monthly payment by the end of _____________ calendar days after the date it is due, I will pay a late charge to the Note Holder.  The amount of the charge will be ________________% of my overdue payment of principal and interest.  I will pay this late charge promptly but only once on each late payment.”  GSE Note, ¶ 6(A).  

 

 

Overview of the CFPB’s Supervisory Highlights Mortgage Servicing

Special Edition - June 22, 2016

November 2016

By Graham H. Kidner, General Counsel, HUTCHENS LAW FIRM

In June the CFPB published its Supervisory Highlights Mortgage Servicing Special Edition, summarizing its recent supervisory examination observations which focus on reviewing for compliance with the Mortgage Servicing Rules and on unfair, deceptive or abusive acts or practices by loan servicers.  As noted in the Highlights, the Bureau recently updated its Supervision and Examination Manual and enhanced the section related to consumer complaints, in particular to review whether servicers have adequate processes in place to expedite the evaluation of complaints or notices of error where borrowers face foreclosure.  Additionally, the Bureau is increasing its focus on compliance with the Equal Credit Opportunity Act. For the latter half of 2016, the Bureau will be conducting a more targeted review of ECOA compliance.

The issues most extensively addressed in the Highlights based on recent supervisory observations are in the following areas:  loss mitigation acknowledgment, loss mitigation offers and related communications, loan modification denial notices, policies and procedures, and servicing transfers.  The Supervisory Highlights provide numerous anecdotal examples of specific violations, the alleged harm to borrowers as a result, and the remedies required by the Bureau, without identifying the at-fault servicers.

Loss Mitigation Acknowledgment Notices

Bureau examiners found numerous violations relating to the requirement that a servicer must acknowledge in writing within 5 days the receipt of a loss mitigation application received 45 days or more before foreclosure sale.  If the application is incomplete, the acknowledgment must inform the borrower of the additional documents and information needed, and a date by which they must be provided.  In addition to process defects, the Bureau reported it had found some statements contained in acknowledgment notices to be deceptive, such as when servicers informed borrowers their homes would not be foreclosed before the deadline to submit additional loss mitigation materials, but the sales went ahead anyway.

The Bureau found other errors, including the failure to timely send the acknowledgment notices, failing to inform the borrowers about additional material needed, requesting documents not relevant to loss mitigation review, and denying loss mitigation before the deadline had passed for the borrower to submit additional materials.

Loss Mitigation Offers

The Bureau found fault with the way some servicers handled proprietary loan modifications, including misleading or deceiving borrowers about whether and when outstanding charges would be deferred or assessed.  Some servicers were found to have made the language in their offers impossible for many borrowers to comprehend, exposing them to risks they did not understand.  Other servicers sent loss mitigation option letters that did not match the terms approved by their underwriting software, thus misrepresenting the actual terms being offered. 

Additionally, the Bureau observed numerous situations where servicers had sought to require borrowers to waive their legal rights to bring claims in court in return for the receipt of a loss mitigation option, in violation of Reg. Z.  Servicers should already be aware of the well-publicized administrative proceeding from July 2015, In re Residential Credit Solutions, in which the servicer paid a hefty penalty for engaging in similar behavior.

Loan Modification Denial Notices

The Bureau found that some servicers fail to provide a reason for the denial of a loss mitigation application, or provide an incorrect reason.  The MSRs require that such an explanation be provided in a denial notice so that the borrower knows whether to appeal.  If the servicer receives a complete loss mitigation application 90 days or more before foreclosure sale or during the pre-foreclosure review period, the borrower has a right to appeal the denial, but is deprived of that right if the servicer fails to inform the borrower of the right to appeal, the amount of time available to appeal, or the reasons for denial.

Servicing Policies, Procedures and Requirements

The Bureau reports a miscellany of errors as the result of servicers failing to have necessary policies and procedures in place to deal with a wide range of borrower inquiries or requests.  These range from the failure to provide borrowers with loss mitigation application forms to identifying which loss mitigation options were available for the particular borrowers who sought relief.  Some of these failings were the result of inadequate communications among servicer personnel, or the failure of servicer employees to understand the loss mitigation options allowed by their loan investors.

Servicing Transfers

While improvements have been observed by the Bureau, there continue to be problems in honoring already agreed loss mitigation resolutions following servicing transfers, as well as, the loss of documents and information provided to the transferor servicers by the borrowers.

Conclusion

The Highlights were positive in many respects, with the Bureau noting considerable improvements made by many servicers to properly staff effective compliance management programs, improve employee training, better utilize technology systems and actively review borrower complaints for allegations of legal violations.  However, servicers would be wise to study the Highlights and continually strive to improve their loss mitigation policies, procedures and processes so as to better serve their customers and avoid adverse action by the Bureau.

 

 

 

 

While Tempting, Lending Loopholes Could Lead to UDAAP Traps

 
IMAGE: Adobe Stock

The Consumer Financial Protection Bureau's recent victory against an online loan servicer serves as an important lesson both as to the CFPB's expansive use of Unfair, Deceptive or Abusive Acts or Practices and the risks associated with joint ventures as well as the mini-correspondent model. Lenders that find loopholes or technicalities contradicting the clear intent and spirit of the laws are subject to UDAAP — the trump card the CFPB can use at any time.

CashCall Inc. created a subsidiary, WS Funding LLC, organized in and under the laws of a Native American tribal land. By virtue of being subject to the tribal land laws, it was able to avoid usury laws of various states, even though CashCall was otherwise subject to these statutes.

However, according to the ruling from the U.S. District Court for the Central District of California, the manner in which CashCall organized the subsidiary rendered CashCall the real party with financial interest. For instance, CashCall provided lines of credit for WS Funding to make payday loans and bought and serviced all of the loans made by the WS Funding.

Further, CashCall was required to make certain minimum payments to the subsidiary and it dictated the underwriting terms. CashCall also reimbursed the subsidiary for marketing and other expenses and provided customer support services.

The CFPB brought suit alleging that CashCall, and not its wholly owned subsidiary, was the real party in interest because it ultimately bore the full economic risk of the loans.

In other words, the subsidiary was from an economic perspective a pass-through entity with little risk, created solely for the purpose of avoiding state usury statutes.

Hence, the applicable choice of law was not the tribal land laws as reflected in the agreements consumers signed, but rather state laws with usury statutes. This misrepresentation, the CFPB claimed, was an unfair, deceptive act or practice.

The federal court agreed. It determined that CashCall was the de facto lender. Further, it determined that the borrowers' state of residence had a far greater interest in the lending activities than the tribal lands' interest therein and that public policy favored the CFPB's potion.

What is notable about the case is that the CFPB in essence utilized UDAAP to address what at its core was an effort to circumvent state consumer protection laws. While in the most technical sense CashCall had legally constructed a means of avoiding usury statutes, the CFPB effectively blew through this effort by using UDAAP as a catch-all to address behavior that the CFPB found impermissible.

More specifically, the Court's analysis on the relationship between CashCall and its subsidiary should be highly instructive to companies in or considering joint ventures or mini-correspondent relationships.

When the parent dominates the subsidiary, making the subsidiary little more than an extension of itself and placing all economic risk on the parent, there is a legitimate chance that the parent company can be treated as the de facto lender.

Ari Karen is a partner at Offit Kurman and CEO of Strategic Compliance Partners.

 

Regulators' Down Payment Disconnect Puts Strain on Homeownership

Ari Karen


August 30, 2016


On one hand, regulators and industry critics have encouraged lenders to participate in programs which benefit the very borrowers for whom the majority of the protections in the Dodd-Frank Act were intended to support.Amid the constant regulatory ambiguity that has become commonplace for lenders since 2011, they have also received two distinctly different messages relating to bond loans offered by down payment assistance programs.

Yet, almost every general regulation passed by the Consumer Financial Protection Bureau has exponentially increased the difficulty in making these loans. For instance, the loan officer compensation laws make bond loans inherently unprofitable. The TILA-RESPA Integrated Disclosure rules create even more barriers due to the possibility of tolerance violations and timing complications.

Now, the Office of Inspector General for the Department of Housing and Urban Development is openly and publicly disagreeing with both Federal Housing Administration and HUD's own Deputy Secretary as to whether such bond loans are permissible if they rely on premium pricing to fund the housing assistance.

Specifically, FHA explicitly states that such lending is lawful, but HUD's OIG is advising lenders of an opposing view which it intends to rely upon and enforce in connection with its audits. HUD's OIG is going so far as to bring the matter to Congress for resolution. In the meantime, however, lenders are essentially making such loans at their own risk.

Between the diminished profitability, the regulatory complications and the legal uncertainty, one wonders whether it's time for lenders to demonstrate to politicians and regulators what happens if the industry gets pushed too far. What would happen ifregulatory insensitivity and infighting finally pushed lenders to simply exit the market altogether?

Perhaps, those who tout their protections for the financially underserved might realize that lenders are not always the enemy and that a predictable regulatory scheme is not simply a luxury — it's a necessity both for the lenders and ultimately the consumers who are supposed to be the beneficiaries of protective regulations.

When lending becomes more risky than profitable, the ultimate losers are the consumers that regulators are trying to protect.

Ari Karen is a partner at Offit Kurman and CEO of Strategic Compliance Partners.

 

CFPB Happy to Remind You Compliance Is Everyone's Responsibility

 


Over the course of the last 12 months, the Consumer Financial Protection Bureau has repeatedly demonstrated its willingness to target enforcement against individuals — including loan officers. In most cases, the enforcement against individuals is connected to an enforcement action against a company. Officers and owners of companies have frequently been targeted when their actions directly contributed to, or permitted the continuance of, violations. Further, loan officers who were alleged to have been involved in a scheme to receive marketing benefits in exchange for title referrals received fines and industry suspensions.Lenders have been struggling for some time with convincing business partners and employees that the Consumer Financial Protection Bureau's reach can and will extend to them. The latest case is an illustration for any doubters that the CFPB is entirely serious in its intentions to bring the full weight of its powers against individuals and businesses alike. Hence, compliance is a legitimate concern for all — not just for business owners.

However, recently, the CFPB issued a consent decree against only a loan officer, who allegedly engaged in a mortgage fee shifting scheme where in exchange for the referral of business, the escrow agent shifted fees at the loan officer's request to assist him in increasing his volume of business. The CFPB required the payment of an $85,000 fine and suspended the loan officer from employment in the industry for one year. Unlike many of the prior consent decrees in which individual enforcement was coupled with actions against an entity, in this case the consent decree was targeted only against the loan officer.

This does not mean the CFPB would not enforce a violation against an entity in a similar situation in the future. Business owners, companies and individuals need to remain vigilant about compliance.

Ari Karen is a partner at Offit Kurman and CEO of Strategic Compliance Partners.

 

 

 

Securing Property Pre-Foreclosure in North Carolina

August 2016

By Graham H. Kidner, General Counsel, HUTCHENS LAW FIRM

There is no statutory authority in North Carolina with respect to the right of a lender, mortgagee or beneficiary (“lender”) under a deed of trust to enter a secured property or take action to preserve, repair or re-key a secured property, or to otherwise exercise possession, dominion or control over the secured property.

Only after a foreclosure is completed does statutory authority guide the process that may be employed to secure possession of the property from persons remaining in occupation.  N.C.G.S. § 45-21.29.  In such cases the clerk of superior court may enter an order for possession in the foreclosure proceeding and the county sheriff’s office will execute the writ.  This ensures speedy possession in favor of the foreclosure sale purchaser provided the occupants cannot claim to be tenants protected by North Carolina’s version of the Protecting Tenants at Foreclosure law.  In such cases, legitimate leases may have to be honored for up to one-year.

The security instrument most commonly used by residential lenders in North Carolina is the NORTH CAROLINA-Single Family-Fannie Mae/Freddie Mac UNIFORM INSTRUMENT Form 3034 1/01 (“GSE DOT”).  Uniform Covenant 7 of the GSE DOT provides, in part:

Preservation, Maintenance and Protection of the Property; Inspections.  Borrower shall not destroy, damage or impair the Property, allow the Property to deteriorate or commit waste on the Property.  ….

Lender or its agent may make reasonable entries upon and inspections of the Property.   If it has reasonable cause, Lender may inspect the interior of the improvements on the Property.  Lender shall give Borrower notice at the time of or prior to such an interior inspection specifying such reasonable cause.

Uniform Covenant 9 provides, in part:

Protection of Lender’s Interest in the Property and Rights Under this Security Instrument.  If (a) Borrower fails to perform the covenants and agreements contained in this Security Instrument, (b) there is a legal proceeding that might significantly affect Lender’s interest in the Property and/or rights under this Security Instrument (such as a proceeding in bankruptcy, probate, for condemnation or forfeiture, for enforcement of a lien which may attain priority over this Security Instrument or to enforce laws or regulations), or (c) Borrower has abandoned the Property, then Lender may do and pay for whatever is reasonable or appropriate to protect Lender’s interest in the Property and rights under this Security Instrument, including protecting and/or assessing the value of the Property, and securing and/or repairing the Property.  Lender’s actions can include, but are not limited to: (a) paying any sums secured by a lien which has priority over this Security Instrument; (b) appearing in court; and (c) paying reasonable attorneys’ fees to protect its interest in the Property and/or rights under this Security Instrument, including its secured position in a bankruptcy proceeding. Securing the Property includes, but is not limited to, entering the Property to make repairs, change locks, replace or board up doors and windows, drain water from pipes, eliminate building or other code violations or dangerous conditions, and have utilities turned on or off. 

 

The most likely cause of action an aggrieved homeowner could bring to seek redress for the exercise of the lender’s rights under the GSE DOT would be an action for trespass to real property.  Other causes of action are conceivable, and it is common practice for aggrieved borrowers to seek redress for unfair or deceptive trade practices under N.C.G.S. § 75-1.1.  Such a cause of action is usually an “add-on”, relying on the alleged adverse facts in the primary cause of action as a basis for the alleged unfair or deceptive conduct. 

To establish a cause of action for trespass, the homeowner would need to allege, and eventually prove, that she had possession of the property when the alleged trespass took place, the entry by the lender was unauthorized, and the homeowner suffered damage as a result of the trespass.   Matthews v. Forrest, 235 N.C. 281, 69 S.E.2d 553 (1952). 

While there are many reported opinions from North Carolina courts on the issue of trespass to real property, there are few that address the entry onto secured property by a lender before foreclosure proceedings have been completed.  One such is Vinal v. Federal National Mortgage Association, 131 F.Supp.3d 529 (E.D. N.C. 2015).  In that case, SunTrust had directed Safeguard Properties to perform an “initial secure” of several residential properties owned by Vinal that were secured by the GSE DOT.  This included the direction to change the locks, secure the property, board broken windows, cut grass, winterize, and take other preservation measures.  Safeguard’s contractors changed the locks on several properties, two of which contained Vinal’s tenants.  They also secured one property they found to be vacant and unsecure because the locks were missing and the doors and windows were open.  They caused damage to a door while changing the lock.

In dismissing Vinal’s action for trespass against Safeguard, the federal district court held that Vinal had expressly authorized SunTrust to enter the property and change the locks in the event of default.  “In agreeing to the provisions in the deeds of trust, Vinal contractually limited his equitable interests in the property upon default and authorized the actions about which he now complains.  Thus, Safeguard's entries were not trespasses.  Rather, because they were authorized entries onto Vinal's properties, accordingly, Vinal's trespass claim fails.”  Id., at 540.

Please be aware that federal court opinions are not binding on North Carolina state courts, although they are considered persuasive.  While we would hope that a state court, asked to rule in a case involving a similar fact pattern to the one in Vinal, would follow the same reasoning in Vinal, such an outcome is not a certainty.

Practical Steps

While we believe the law in North Carolina would uphold the right of the lender to act upon uniform covenants 7 and 9 in the GSE DOT, such rights should be exercised with discretion and care.  To that end we offer these practical steps you should consider employing before you direct your contractors to enter a secured property before the foreclosure sale has been completed:

  • Review the security instrument securing the subject property to ensure it contains property entry clauses as described above, or clauses similar thereto.
  • If reasonable and practicable, secure the consent of the homeowner/borrower, in writing, authorizing your entry to perform specific preservation services.
  • Ensure that you have a legitimate reason for entry; while the GSE DOT may authorize entry for the reasons stated therein, you should be satisfied that entry is justified to protect or preserve the property or to prevent the loss of life or serious injury to persons who may enter the property.
  • Document the basis for entry if it is for reasons other than monetary default, and make sure you have adequate evidence justifying the decision to make entry.  This should include, where applicable:
    • Notes or statements from inspectors containing observations of adverse property conditions;
    • Photographic documentation;
    • Notices or orders from local government agencies containing reports of code violations;
    • Notices from home owners associations concerning property condition issues;
    • Statements from homeowners/borrowers concerning property condition issues.
  • Hire a reputable contractor holding appropriate licenses and having adequate insurance coverage.
  • Perform only the services that are necessary based on the circumstances:
    • Refrain from a one-size-fits-all approach that obliges the contractor to perform a service that may not be necessary for the particular property;
    • Provide the contractor a measure of discretion to perform or not perform an authorized or directed service based upon his observations on the ground;
    • Provide an immediate point of contact for the contractor so that decisions on performing or not performing a service can be made in the field.
  • Ensure the contractor entering the property exercises good judgment and takes precautionary measures, including that he:
    • Makes contemporaneous notes about the property condition;
    • Takes photographs of the property condition issues;
    • Takes photographs of any rooms he enters to document the status of any contents;
    • Does not remove any personal contents from the dwelling (except in extraordinary circumstances with respect to any damaged or dangerous materials that are likely to be a threat to persons entering the property or a threat to the integrity of the property; e.g., broken glass, hazardous chemicals, or items expressly directed for removal).
  • If your contractor re-keys the property he should, depending on the circumstances giving rise to the order to re-key the property:
    • Place notices prominently at the location of the re-key and at other points of access explaining to the homeowner who may return to the property how to gain entry to the property;
    • Place a lock box at the location of the re-key with instructions for the homeowner as to how to contact the contractor or your designated agent in order to access the lockbox.
  • Neither you nor your contractor may exercise the “self-help” described above if in doing so you cause a breach of the peace.  In the event the homeowner or borrower physically opposes the attempt to enter the property, you must immediately cease and desist in your efforts. 
  • In the event that you have difficulty entering the property, or you are prevented from entering the property, or for any other reason you are concerned about incurring legal liability if you enter the property exercising the “self-help” outlined above, you may apply to court for an order authorizing entry.  If you require assistance in doing so, the Firm would be pleased to accept retention to provide legal services in this regard. 

Late Fees:  Complying with North Carolina Law; and, Collecting Late Fees in a Reinstatement Context

 

August 2016

 

By Graham H. Kidner, General Counsel, HUTCHENS LAW FIRM

 

Collectability of Late Fees

 

Presuming that the applicable loan documents permit the note holder to seek late charges for the failure to timely remit the periodic loan payment, and almost all promissory notes will likely contain language similar to that found in the Fannie Mae/Freddie Mac Multistate Fixed Rate Note (“GSE Note”)[1], late fees are collectable conditioned on compliance with state law.

 

For closed-end loans (most mortgage loans) North Carolina caps the late fee at 4% of the past due payment, but requires the note holder to send a notice to the borrower each time it intends to collect the late fee.  More specifically, N.C.G.S. § 24-10.1(a) provides that “[s]ubject to the limitations contained in subsection (b) of this section, any lender may charge a party to a loan or extension of credit governed by the provisions of G.S. 24-1.1, 24-1.2, or 24-1.1A a late payment charge as agreed upon by the parties in the loan contract.”  § 24-1.1 governs “a loan, purchase money loan, advance, commitment for a loan or forbearance other than a credit card, open-end, or similar loan….”  § 24-1.1A governs “home loans”, defined to “mean a loan, other than an open-end credit plan, where the principal amount is less than three hundred thousand dollars ($300,000) secured by a first mortgage or first deed of trust on real estate upon which there is located or there is to be located one or more single-family dwellings or dwelling units or secured by an equivalent first security interest in a manufactured home.”  § 24-1.1A(e).  § 24-1.2 has been repealed.

 

The limitations referred to in § 24-10.1 include the prohibition on a late payment charge “[i]n excess of four percent (4%) of the amount of the payment past due”, (§ 24-10.1(b)(1)), and the charge may not be made “[u]nless the lender notifies the borrower within 45 days following the date the payment was due that a late payment charge has been imposed for a particular late payment which late payment must be paid unless the borrower can show that the installment was paid in full and on time.  No late payment charge may be collected from any borrower if the borrower informs the lender that non-payment of an installment is in dispute and presents proof of payment within 45 days of receipt of the lender's notice of the late charge.”  § 24-10.1(b)(6).  Note that this late charge notice requirement applies to all late charges the lender seeks to collect, not just post-acceleration late charges.

 

A further limitation is that a lender may not charge a late payment fee “[f]or any payment unless past due for 15 days or more; provided, however, if the loan is one on which interest on each installment is paid in advance, no late payment charge may be charged until the payment is 30 days past due or

more.”  § 24-10.1(b)(3).

 

A lender that seeks to collect late fees in violation of N.C.G.S. § 24-10.1 may “forfeit all late charges to which it would otherwise be entitled under the terms of the loan.”  Swindell v. Federal National Mortgage Association, 330 N.C. 153, 161, 409 S.E.2d 892, 897 (1991).

 

Late Fees in the Context of Reinstatement

 

Late fees for missed monthly payments due and unpaid after the note holder accelerates the loan are treated differently depending whether the borrower reinstates the loan or some other foreclosure-avoidance option is reached.  If there is a reinstatement, late fees for post-acceleration missed monthly payments are generally collectable, presuming the security instrument contains language similar to that found in the Fannie Mae/Freddie Mac North Carolina Uniform Instrument (“GSE DOT”), which provides a right to reinstatement conditioned, inter alia, upon paying the “Lender all sums which then would be due under this Security Instrument and the Note as if no acceleration had occurred….”  GSE DOT ¶ 19.  If the foreclosure-avoidance option chosen is not a reinstatement, such fees very likely are not collectible.

 

Court opinions addressing this issue are not in abundance, but those that have opined are in agreement.  In 2003 the United States Court of Appeals for the Third Circuit, relying on language substantially similar to that found in the GSE DOT, found the statement that “[t]he reinstatement provision of the mortgage language requires payment of all sums “which would then be due ... had no acceleration occurred”” to be unambiguous and to apply retroactively.  Rizzo v. Pierce & Associates, 351 F.3d 791, 793 (3d Cir. 2003) (emphasis in original).  “In other words, the monthly payments are deemed to have been due each and every month on the dates set out in the mortgage and note. We find this language to unambiguously require plaintiffs to pay the late fees.”  Id. at 793-94.  “Reinstatement essentially allows the borrower a second “bite at the apple.” It follows that the lender should not be penalized, nor the borrower rewarded, for a breach on the part of the borrower.”  Id.

 

The Rizzo court also made clear that a debt collector demanding the payment of late fees for post-acceleration missed monthly payments does not violate the FDCPA, specifically 15 U.S.C. § 1692f that “prohibits using “false, deceptive, or misleading representation[s] or means in connection with the collection of any debt” and “unfair or unconscionable means to collect or attempt to collect any debt.”  Rizzo, at 794.

 

The Court observed, however, “that the Rizzos are not obligated to pay the late fees in all cases. If, for whatever reason, the Rizzos did not want to pay the late fees, they were free to pay the loan as accelerated.  Such a payment would nullify any obligation to pay post-acceleration late fees.”  IdWhile there is no case directly on point in the United States Court of Appeals for the Fourth Circuit (with federal appellate jurisdiction for North Carolina and South Carolina) or in North Carolina’s appellate courts, the court’s logic in Rizzo is likely to be accepted. 

The result may not be the same, however, in the event of a Chapter 13 petition for bankruptcy.  In Wells Fargo Bank Minnesota, N.A. v. Guarnieri, 308 B.R. 122 (D.Ct. 2004), Wells Fargo secured a judgment of strict foreclosure, but the amount found due did not include post-acceleration late charges.  Before the “law date”, the borrower filed a voluntary Chapter 13 petition followed by a proposed “cure and maintain” plan under 11 U.S.C. § 1322(b)(5), which did not include post-acceleration late charges. 

 

Appealing the rejection of its objection to the plan, Wells Fargo, relying on Rizzo, contended that when the bankruptcy court confirms a cure and maintenance plan it effectively reinstates the loan as if no acceleration had occurred and since the security instrument requires payment of late charges in the event of reinstatement, Wells Fargo was entitled to post-acceleration, pre-petition late charges as a part of the “amounts necessary to cure the default” within the meaning of § 1322e.  Guarnieri, at 126.

 

The district court observed that “[n]o Connecticut court has had occasion to consider Rizzo. Nor, apparently, has any court explicitly decided whether a lender may recover post-acceleration late charges under Connecticut law when the debtor seeks to reinstate a loan rather than redeem it.”   Guarnieri, at 126.  The court rejected Wells Fargo’s argument and found no need to decide that issue because by the terms of the security instrument reinstatement was available only until a judgment enforcing the security instrument was entered.  Instead, the district court found that the borrower’s default was cured under the Code, and nothing in the security instrument required the payment of late fees under such circumstances.  

 

Conclusion

 

While there are no Fourth Circuit or North Carolina appellate court opinions on the issue, in the non-bankruptcy context, provided the security instrument contains a statement to the effect that reinstatement is conditioned upon the payment of all sums which then would be due under the security Instrument and the note as if no acceleration had occurred, a convincing argument can be made that the collection of late fees attributable to payments coming due and unpaid after the acceleration of the obligation are collectible as a matter of contract, permissible under North Carolina law (provided the statutory conditions are followed), and there is no violation of the FDCPA.  This is conditioned on the requirement that the late fee charged must not exceed 4%, and the servicer must provide a notice of late payment charge for each late payment charge it intends to make.

 

Servicers with a North Carolina portfolio of loans should confirm that their late fee collection procedures are in compliance with state law:

  • Late fees do not exceed 4% of the missed monthly payment;
  • A notice is provided to the borrower within 45 days following the date the payment was due that a late payment charge has been imposed for a particular late payment which late payment must be paid unless the borrower can show that the installment was paid in full and on time; and
  • The fee may be charged only when each payment is past due for 15 days or more; provided, however, if the loan is one on which interest on each installment is paid in advance, no late payment charge may be charged until the payment is 30 days past due.

 

 

[1] If the Note Holder has not received the full amount of any monthly payment by the end of _____________ calendar days after the date it is due, I will pay a late charge to the Note Holder.  The amount of the charge will be ________________% of my overdue payment of principal and interest.  I will pay this late charge promptly but only once on each late payment.”  GSE Note, ¶ 6(A).