OFFICIAL P U B L I C AT I O N OF THE ALFN VOL. 4 ISSUE 1
STATE OF THE STATES
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OHIO MINNESOTA SOUTH CAROLINA VIRGINIA FLORIDA WA S H I N G TO N , D. C . AND A SPECIAL INSERT ON ARIZONA
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We know, just as you do, that this market is cyclical and right now we’re at the bottom of one of those cycles. For the broader economy and average American, that’s great news and it’s something we’re proud to celebrate.
- Frank Sinatra. We (the folks here @ANGLE) couldn’t agree more.
For our members and industry, it means that this is a time for expansion into new revenue streams and a doubling down on efforts to retain existing clients. Earning new business is a hard-fought battle. That’s why, at ALFN, we’re grateful for your membership and your contributions to our events, publications, and groups like Women in Legal Leadership (WILL) and our Junior Professionals & Executives Group (JPEG). The articles you write are the foundation of this very publication. Your expertise guides our panels and webinars. Your volunteerism leads our member groups and the good we do through service projects in various cities. Your generous sponsorships support our events and help us attract new and existing clients to support and expand your businesses. For all of that, we’re incredibly thankful and profoundly honored to be the organization where you choose to give your time, share your expertise, and generously support. That’s why this Spring, in support of our fifteenth annual ANSWERS conference, we’re giving something back to you. In fact, we’re giving back over $15,000 worth of member goodies that will help your team travel to our events, promote your brands, and further the reach of your expertise. Each week, ANSWERS registrants are entered into a weekly drawing for one of those giveaways. We’re doing that because this Summer we’re planning the biggest and best ANSWERS you’ll ever experience. More clients, more activities, more education, more networking, more fun, and more business to be done, earned, and referred. We hope to see all of our ANGLE readers and each ALFN member this summer at the Hyatt Lost Pines resort and spa in Austin, Texas. This celebration is for you. Thank you.
PRESIDENT & CEO AMERICAN LEGAL & FINANCIAL NETWORK
STATE OF THE STATES
OFFICIAL P U B L I C AT I O N O F T H E ALFN
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THESE AREN’T THE KIND OF
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ARIZONA FORECLOSURE LANDSCAPE PRESENTED BY FOLKS & O’CONNOR PA G E 8
STATE SNAPSHOTS OHIO PG.20 M I N N E S OTA P G . 2 1 SOUTH CAROLINA PG.22 VIRGINIA PG.23 FLORIDA PG.26 WA S H I N G T O N , D. C . P G . 2 7
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briefs 2017 ALFN EVENTS SAVE THE DATES INTERSECT: SERVICING + BANKRUPTCY THE HIGHLAND DALLAS DALLAS, TEXAS FEBRUARY 13 JPEG SERVICE PROJECT DALLAS ANIMAL SHELTER DALLAS, TEXAS FEBRUARY 14 WILLPOWER GEORGETOWN WESTIN WASHINGTON, DC APRIL 3 ADVOCACY DAY GEORGETOWN WESTIN WASHINGTON, DC APRIL 4 ANSWERS HYATT LOST PINES AUSTIN, TX JULY 16-19 INTERSECT: SERVICING + FORECLOSURE THE HIGHLAND DALLAS DALLAS, TEXAS NOVEMBER 14 WANT MORE INDUSTRY INTEL? Check the complete industry calendar for ALFN and other events online at alfn.org for event more details and registration info.
ANOTHER INTERSECT THIS FALL
EXCEPT THIS TIME THE FOCUS IS ON MORTGAGE SERVICING OPERATIONS AND THE FORECLOSURE PROCESS. This Winter we held the industry’s first day-long summit focused solely on the intersection of mortgage servicing and consumer bankruptcies. This Fall, we’re returning to Dallas for yet another Intersect event, this time focused on the intersection of mortgage servicing operations and the foreclosure process. Get your plans organized early, as we expect to grow attendance from the 120+ and nearly 80 clients who attended Intersect BK. Rooms will be maxed out and seating will be limited so mark your calendars, book your flights, register and reserve rooms early! You won’t won’t want to miss Intersect FC this Fall! REGISTER, SPONSOR OR LEARN MORE AT ALFN.ORG/INTERSECT
SOMETHING NEW AT ALFN.ORG
INTRODUCING GUEST BLOGGERS WITH MONTHLY COLUMNS Are you a great writer with an interest in tracking federal legislation or regulatory developments? Or an associate member eager to discuss operational and other business management functions? Then volunteer as a guest blogger and help us develop new and fresh content on the blog at ALFN.org. We’re opening two regular volunteer guest blogger spots for ALFN.org in 2017. You’ll be responsible for developing and maintaining your monthly column. One spot is reserved for an attorney/trustee member and the other is reserved for an associate member of the ALFN. Let us know if you’re interested in the gig by emailing us at ANGLE@ALFN.org. RG/NEW_DUES
VOLUNTEER, VOLUNTEER, VOLUNTEER!
WONDER HOW SOME OF THESE FOLKS GET ON PANELS OR NAB FEATURES IN THE ANGLE OR ALWAYS SEEM TO HAVE THE MARKETING EDGE? Volunteering is the cornerstone of maximizing your membership value. Here’s a helpful hint: assign relationship managers for the ALFN and do it strategically. Make sure you have at least one person in Women in Legal Leadership, another in the ALFN’s award-winning young professionals network, JPEG, and more spread across other practice groups like Bankruptcy and Marketing. Does everyone get ALFN emails? If not, send us a complete list and we’ll make sure all the right people on your team are getting updates and reminders on speaking, sponsoring and other ways to contribute and max out your exposure through the assocation’s events, publications, programs and services. If your membership covers multiple states, then make sure at least one person from each state has a committed volunteer spot so you’re represented from sea to shining sea! IS YOUR CONTACT INFO UPDATED? IS YOUR ONLINE DIRECTORY LISTING OPTIMIZED? DO YOU KNOW WHO HAS ACCESS TO YOUR ALFN.ORG ACCOUNT? WELL, LOG IN!
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LET’S MAKE A PLAN TAKE THE LONG VIEW AND WIN WITH YOUR SPONSORSHIP DOLLAR Did you know that if you spend more than $5,000 annually in sponsorships (or other upgrades like directory enhancements and advertising) that you qualify for a customized, annual sponsorship package that includes discounts, freebies and the benefit of quarterly invoicing? That’s right. And all of that engagement will also count toward your ALFN ASSURE Member Rewards Program points and help you work toward the exclusive, invitation-only ASSURE mixers at ANSWERS.
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FIFTEENTH ANNIVERSARY ALFNANSWERS.ORG
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Get with your clients and pay the good will forward: servicer scholarships for ANSWERS 2017 are now available. Complete details are available online and three levels of financial support are available to qualifiying mortgage servicers.
To celebrate fifteen years of ANSWERS we’ve giving away over $15,000 in member goodies over the course of, you guessed it, fifteen weeks! Each Friday (March 10 through June 16) we’re giving one of fifteen awesome prizes to celebrate ANSWERS.
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ALFN ANGLE / PAGE 7
ANGLE AND FOLKS & O’CONNOR TAKE A CLOSE LOOK AT THE
Arizona’s mortgage deficiency statutes and the case law interpreting them are complex in nature and can leave lenders, investors and other financial institutions to navigate an uncertain environment. This article includes a checklist of items to be considered to determine whether a mortgage lender has the right pursuant to applicable Arizona law to obtain a mortgage deficiency judgment against a borrower, or guarantor, of a loan secured by real property subsequent to: • an administrative non-judicial trustee’s foreclosure sale of the subject property (trustee’s sale); • a judicial foreclosure lawsuit upon the subject property (judicial foreclosure); or • a lawsuit upon the remaining unsecured promissory note and/or guaranty obligation following the closing of a short-sale pursuant to which the mortgage lender: • releases its mortgage lien on the subject property in exchange for receipt of funds in an amount less than the loan balance, and • obtains a written acknowledgement from the loan obligors that the lender is not waiving its deficiency rights (short sale).
Step One: Determine whether the mortgage loan is “purchase money” vs. “non-purchase money.”
OF THE ARIZONA FORECLOSURE AND SERVICING LANDSCAPE
BY LARRY O. FOLKS. ESQ.
• A loan is a purchase money obligation if it secures a mortgage given to secure the payment of the balance of the purchase price, or to secure payment of all or part of the purchase price, of the real property being sold in the loan transaction. • A construction loan is a purchase money obligation when (i) the deed of trust securing the loan covers the land and the structure constructed thereon; and (ii) the loan proceeds were in fact used to construct a single-family home or duplex (hereinafter, a “residence”) subject to the “anti-deficiency” statutes. • A home improvement loan unrelated to the acquisition or construction of a residence is a non-purchase money obligation. • Home equity loans that are not 80/20 loans typically are non-purchase money obligations. • A mortgage loan secured by a borrower’s residence is a non-purchase money obligation if the proceeds of the loan are used to purchase a different residence, such as a vacation home. • Refinancing a purchase money obligation by the original, or a new, mortgage lender does not, in and of itself, convert the nature of the obligation to non-purchase money. The refinanced loan remains a purchase money loan to the extent of the original purchase money amount. In addition, refinance loan proceeds used to pay inter- est, late fees and a mandatory construction deposit directly related to the original purchase money loan and rolled into to the refinanced loan are considered part of the purchase money obligation. Conversely, refinance loan proceeds used for any purpose other than to acquire or construct the residence (such as interest, maintenance, utilities, marketing fees and penal- ties) are not considered part of the purchase money obligation. • A mortgage lender may obtain a money judgment for the traceable non-purchase money portion of a mortgage loan in (i) a judicial foreclosure; (ii) a suit upon its unsecured mortgage loan note after its mortgage lien has been extinguished by a senior lien foreclosure; and (iii) in a suit when the mortgage lender elects to waive its collateral and sue directly on the mortgage loan note. This remedy is typically available concerning a “cash out” refinance loan of the original purchase money loan which results in the borrower, or borrowers, receiving funds in excess of the original loan balance from the refinance loan proceeds. THE CONTENT OF THIS ARTICLE is not intended to address every possible scenario of Arizona mortgage deficiency law. Also, the term “mortgage” is used herein with the understanding that the vast majority of mortgage liens in Arizona are evidenced by recorded deeds of trust. Furthermore, this article should not be used as a substitute for conducting current legal research. For questions about the issues addressed herein or for other issues related to mortgage deficiencies in Arizona, contact Larry Folks, Esq., Managing Partner, Folks & O’Connor at Folks@FolksOconnor.com or learn more about the firm on the following pages. To directly reference Arizona Mortgage Statutes, see A.R.S. §§ 33-729, 33-814 and 12-1566.
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Step Two: Determine whether the real property that secures the loan fits within the statutory definition of a “qualified property” protected by Arizona’s “anti-deficiency” statutes. The general rule is that deficiency judgments are barred by Arizona’s anti-deficiency statutes when the collateral for the subject mortgage loan is a completed single-family home or duplex located on 2.5 acres or less. Specifically, the plain language of the anti- deficiency statutes provide that a “Qualified Property” protected by Arizona’s anti-deficiency statutes means real property of “2.5 acres, or less” and that is limited to and utilized as a “single-one-family or single-two- family dwelling.”
Concerning Loans Originated on or before December 31, 2014:
Analyze the physical characteristics of the real property which secures the mortgage loan to attempt to determine whether it is a qualified property protected by the anti-deficiency statutes: • Vacant land cannot be “utilized as” a dwelling and is not a Qualified Property. • A single one-family or single two-family residential structure, which is not completed, cannot be “utilized as” a dwelling and is not a Qualified Property.1 • Real property which secures a mortgage loan and exceeds 2.5 acres in size does not fit within the statutory definitions for anti-deficiency protection and is not a Qualified Property. It does not matter if a single one-family or single two- family residential structure is located on the property if it exceeds the acreage limit. • Real property which has a structure located on it that is not a single one-fam1 On January 23, 2015, the Arizona Supreme Court overruled the Arizona Court of Appeals’ Mueller decision. See M&I Marshall & Ilsley Bank v. Mueller, 228 Ariz. 478, 268 P.3d 1135 (App. 2011) overruled by BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC, 236 Ariz. 363, 366-67, 340 P.3d 1071, 1074-75, 704 Ariz. Adv. Rep. 19 (2015). The Mueller Court had found that individual homeowner borrowers were entitled to the protection of Arizona’s anti- deficiency statute A.R.S. § 33-814(G), following a non-judicial trustee’s foreclosure sale, when they had never actually occupied a partially construct- ed single-family residence, but “intended to occupy it upon its completion.” Under those facts, the Court concluded that the individual homeowner borrowers were “utilizing’ the partially constructed residence as a dwelling for the purpose of applying the anti-deficiency statute definition. Whereas, the Arizona Supreme Court held in Wildwood as follows: (i) vacant land is not “utilized” as a dwelling even if the borrower intends to construct a home on the property in the future; and (ii) for real property to be “utilized” as a dwelling, a residential structure must be completed on it (emphasis added). Id. The Wildwood Court further explained that an individual homeowner borrower does not have to occupy a completed residential structure for it to qualify as being “utilized” as a dwelling for “anti-deficiency” protection under A.R.S. § 33-814(G), provided that the individual homeowner borrower has the requisite intent to occupy the property as their residence. Id.
ALFN ANGLE / PAGE 10
ily or single two- family residential structure, such as four condominium units, does not fit within the statutory definition and is not a Qualified Property. • A 1/10th fractional interest in a single-family residential condominium is a “dwelling” within the anti-deficiency statutes definition and is a Qualified Property. The type of borrower and their intent concerning use of the real property can be the determining factor of whether or not it is a “qualified property” protected by the anti-deficiency statutes. • A completed single-family or single two-family residential structure is a “dwelling” as defined by the anti-deficiency statutes. If an individual homeowner borrower, or borrowers, intend to occupy the structure as their primary residence, regardless of whether they have ever actually occupied the structure, it is being “utilized as” a dwelling and, thus, is a Qualified Property. • A completed single-family condominium is a “dwelling” as defined by the anti-deficiency statutes. If the condominium is owned by investment borrowers who occasionally occupy and rent it out, it is “utilized as” a dwelling and, thus, the condominium is a Qualified Property. • A partially constructed single-family residence owned by a commercial builder-developer borrower who is holding the residence for eventual sale to its first occupant and does not intend to occupy the residence is not “utilized” as a single one-family dwelling and, as such, the partially constructed residence is not a Qualified Property. This rule has been extended to apply to fully constructed and never occupied single-family homes owned by a commercial builder-developer as well.
Concerning Loans Originated after December 31, 2014:
On April 22, 2014, Governor Jan Brewer signed into law House Bill 2018, which amended Arizona’s anti- deficiency statutes to add identical new subsections located at A.R.S. § 33-729(C) and (D) (applicable to judicial foreclosures) and § 33-814(H) and (I) (applicable to non-judicial trustee’s foreclosure sales). The amendments apply to loans originated after December 31, 2014, and clarify and expand the circumstances in which deficiency judgments are allowed. New subsections (H) and (I) added to supplement A.R.S. § 33-814(G), the non-judicial trustee’s foreclosure sale anti-deficiency statute, are set forth in their entirety below: H. For deeds of trust that are originated after December 31, 2014, subsection G [the anti-deficiency definition subsection] of this section
does not apply to trust property as follows: 1. Trust property owned by a person who is en- gaged in the business of constructing and selling dwellings that was acquired by the person in the course of that business and that is subject to a deed of trust given to secure payment of a loan for construction of a dwelling on the property for sale to another person. 2. Trust property that contains a dwelling that was never substantially completed. 3. Trust property that contains a dwelling that is intended to be utilized as a dwelling but that is never actually utilized as a dwelling. I. For the purposes of this section, a dwelling is substantially completed if either of the following occurs: 1. Final inspection is completed, if required by the governmental body that issued the building permit for the dwelling. 2. If a final inspection is not required by the governmental body that issued the building permit, the dwelling has been completed in all material respects as prescribed in the applicable ordinances and regulations of the governmental body that issued the building permit for the dwelling. Subsections (C) and (D) added to A.R.S. §33729, the anti-deficiency statute applicable to judicial fore- closures, include the same language. The statutory amendments clarify that: • a lender may obtain a deficiency judgment against a builder or developer concerning a construction loan that the builder or developer obtained in the ordinary course of business to construct a home and sell it to a third-party; and • a lender may obtain a deficiency judgment against any borrower if (i) a dwelling was never substantially completed upon the property which secures the mortgage loan; or (ii) the structure upon the property which secures the mortgage loan was never actually utilized as a dwelling. These amendments were intended to overrule the aforementioned Mueller Arizona Court of Appeals decision.
ON APRIL 22, 2014, GOVERNOR JAN BREWER SIGNED INTO LAW HOUSE BILL 2018, WHICH AMENDED ARIZONA’S ANTI- DEFICIENCY STATUTES TO ADD IDENTICAL NEW SUBSECTIONS . . . APPLICABLE TO JUDICIAL FORECLOSURES AND NON-JUDICIAL TRUSTEE’S FORECLOSURE SALES. THE AMENDMENTS APPLY TO LOANS ORIGINATED AFTER DECEMBER 31, 2014, AND CLARIFY AND EXPAND THE CIRCUMSTANCES IN WHICH DEFICIENCY JUDGMENTS ARE ALLOWED.
The amendments include a specific definition of a substantially completed dwelling to mean either (i) that a final inspection has been completed by the govern- mental body that issued the building permit for the structure; or (ii) if no final inspection is required by the government body, then the dwelling has been completed in all material respects prescribed by the applicable governmental ordinances or regulations.
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Step Three: Consider whether contractual anti-deficiency protection or fair market value waivers included in the loan documents are enforceable.
• A borrower cannot prospectively waive anti- deficiency statute protections. • A guarantor can prospectively waive anti- deficiency statute protections. • Borrowers and guarantors cannot prospectively waive the fair market value credit required by the deficiency statutes and fully discussed below. • A borrower can waive the right to a fair market value credit determination after a non-judicial trustee’s foreclosure sale commences. Although there is no case on point, the same rule likely applies to guarantors as well.
Step Four: Determine which of the four general rules listed below apply to the mortgage loan to be sued upon by the mortgage lender. RULE #1: PURCHASE MONEY LOAN + SECURED BY A QUALIFIED PROPERTY • Trustee’s Sale: NO DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER. Note that only deeds of trust may be foreclosed through a trustee’s sale. • Judicial Foreclosure: NO DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER. • Short Sale: NO DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER. The mortgage lender cannot elect the remedy to voluntarily release/waive the mortgage lien on the real property collateral and sue the borrower directly on the unsecured note. • Unless prospectively waived in the ALFN ANGLE / PAGE 12
loan documents, a mortgage lender should presumptively assume that any guarantor of the mortgage loan will receive the same anti-deficiency protection against a deficiency judgment as the borrower. • An example of when Rule #1 applies is if a mortgage lender has made a loan that the borrower used to purchase a single-family home or duplex located on 2.5 acres or less. RULE #2: PURCHASE MONEY LOAN + SECURED BY A NON- QUALIFIED PROPERTY • Trustee’s Sale: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER. A mortgage deficiency lawsuit must be filed within 90 calendar days after the date of the trustee's sale. The 90-day statutory deadline after the date of the Trustee’s Sale is an absolute bar against filing a mortgage deficiency lawsuit after that date. • Judicial Foreclosure: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER. • Short Sale: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER. • Mortgage lender can obtain a deficiency judgment against a guarantor of the loan based up- on the independent guaranty contract. • An example of when Rule #2 applies is if a mortgage lender has made a loan to a borrower used to purchase real property used for any non- residential purpose (such as an office building, restaurant or other business purpose). RULE #3: NON-PURCHASE MONEY LOAN + SECURED BY A QUALIFIED PROPERTY • Trustee’s Sale: NO DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Judicial Foreclosure: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER. • Short Sale: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER. • Unless prospectively waived in the loan documents, a mortgage lender should presumptively assume that any guarantor of the mortgage loan will receive the same anti-deficiency protection against a deficiency judgment as the borrower. • An example of when Rule #3 applies is if a mortgage lender has made a non-purchase money loan to a borrower and the real property securing the loan is located on 2.5 acres or less and is “utilized” as a single-one-family or a single-two- family dwelling. NOTE SPECIAL EXCEPTION: If a mortgage lender holds a non-purchase money promissory note and junior deed of trust lien upon a Qualified Property and a senior lien holder completes a Trustee’s Sale of the property to extinguish the mortgage lender’s junior lien, then the mortgage lender can sue the borrower and/or guarantor upon the remaining unsecured promissory note and/or guaranty for a deficiency. This exception applies even if the same mortgage lender holds both the senior promissory note and deed of trust lien foreclosed upon and the junior promissory note and/or guaranty and deed of trust lien extinguished by the senior lien Trustee’s Sale.2 In addition, the junior mortgage lender may apply for any excess foreclosure sale proceeds that result from the senior lien holder’s Trustee’s Sale, apply them against the junior loan balance and still sue the borrower for deficiency judgment. Furthermore, the 90-day limitations period does not apply to this type of suit, because it is technically a suit on the junior promissory note and not a deficiency lawsuit under the foreclosure statute.
RULE #4: NON-PURCHASE MONEY LOAN + SECURED BY A NON-QUALIFIED PROPERTY • Trustee’s Sale: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER. • Judicial Foreclosure: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER. • Short Sale: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER. • Mortgage lender can obtain a deficiency judgment against a guarantor of the loan based up- on the independent guaranty contract. • An example of when Rule #4 applies is if a mortgage lender has made a non-purchase money loan to a borrower and the real property securing the loan is a real property used for a non- residential purpose (such as an office building, restaurant or other business purpose).
Step Five: Consider the “fair market value” credit limitation of any deficiency judgment obtained by the mortgage lender.
• Any deficiency following a trustee’s sale or a judicial foreclosure permitted against either a borrower or a guarantor is subject to a “fair market value” credit limitation.3 In particular, the deficiency amount is calculated as, and limited to, the loan balance due on the date of the foreclosure sale less the greater of the actual foreclosure sale price or the “fair market value” of the property on the
date of the sale. • Borrowers and guarantors cannot prospectively waive the “fair market value” credit limitation. • The successful bid at a non-judicial trustee’s sale does not per se constitute admissible evidence of the “fair market value” of the property foreclosed upon by the lender. The lender must offer affirmative valuation evidence, such as an appraisal report and expert appraiser testimony, to establish the “fair market value” of the property as of the date of the foreclosure sale. • The “fair market value” determination is made by the court and not a jury.
Miscellaneous Matters • There is no statutory right of “redemption” fol- lowing a trustee’s sale. • Any judgment debtor, or their successor-in- interest, in a judicial foreclosure is granted a statutory right of redemption, which allows them to recover title to the subject property after the date of the Sheriff’s sale of the property. The redemption period is either 30 days or six months after the date of the sheriff’s sale, as determined by the court pursuant to the requirements of the judicial foreclosure statute. • To redeem the property, the judgment debtor must pay the purchase price at the Sheriff’s sale, 8% interest accrued thereon, and certain taxes and assessments. In addition, each judgment debtor is granted the right to apply
to the Court for a “fair market value” determination within 30 days after the Sheriff’s sale of the property. Moreover, failure of a judgment debtor to make a timely request for a fair market value determination may result in denial of the request. When any one judgment debtor applies for a fair market value determination, the right to redeem the property is extinguished as to all judgment debtors. • An arbitration clause included in a promissory note is enforceable to compel arbitration of a mortgage deficiency action. • The deficiency statute expressly provides that any deficiency judgment obtained subsequent to a non-judicial trustee’s sale may include interest on the amount of the deficiency from the date of sale at the rate provided for in the loan docu- ments. Further, the deficiency statute has been held to authorize an award of attorneys’ fees and costs by the Court.
Conclusion The vast majority of residential foreclosures con- ducted in Arizona concern trustee’s sales related to loans secured by deeds of trust upon single-family residences located on 2.5 acres or less. In such cases, if the mortgage lender completes the trustee’s sale, the lender may not obtain a deficiency judgment against the borrower or a guarantor, unless they have waived the anti-deficiency statute’s protection.
2 This has been the rule of law for many years. On December 8, 2016, however, the Arizona Court of Appeals held the opposite in an unpublished memorandum decision (which provides that it is not precedential). See Northern Trust, NA v. Wareing, 2016 WL 7156439 (App. 2016). In that case, a mortgage lender that conducted a non-judicial trustee’s sale of a purchase money loan first-priority deed of trust secured by a property located on 2.5 acres and utilized by the borrowers as a single-family residence was barred by the trustee’s sale “anti-deficiency” statute A.R.S. § 33-814(G) from bringing either a deficiency action or suing directly on the lender’s remaining unsecured non-purchase money home equity line of credit note that had been secured by a second-priority deed of trust lien on the residence prior to the trustee’s sale foreclosure. The Court did indicate that the mortgage lender could have elected to judicially foreclose both of its mortgage liens to obtain a deficiency judgment based on the junior non-purchase money home equity line of credit. This will likely be an evolving area of Arizona foreclosure law 3 Unless waived after a non-judicial trustee’s foreclosure sale has commenced.
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Despite the foregoing, as illustrated by the rules above, there are many instances in which a mortgage lender may pursue collection of a deficiency balance from a borrower, or guarantor, subsequent to a trus- tee’s sale, judicial foreclosure or short sale.
balance due as of the foreclosure sale of either the actual sale price at the foreclosure sale, or the “fair market value” of the property foreclosed upon as of the date of the foreclosure sale, whichever is greater, which is determined by the Court.
In such cases, if the mortgage lender completes a trustee’s sale, the lender must file the deficiency lawsuit against the borrower and any guarantors within 90 days after the date of the foreclosure sale. This limitations period is a strictly enforced, absolute bar date for filing a mortgage deficiency lawsuit following a trustee’s sale. In addition, the borrower and guarantors shall receive a credit against the loan
A useful resource to assist in understanding the scope and applicability of the Arizona mortgage deficiency statutes is the Ins and Outs of Foreclosures, Third Edition 2010, which is available for purchase from the State Bar of Arizona.
ALFN ANGLE / PAGE 14
About the Author
Larry Folks is a partner at Folks & O’Connor, PLLC, which represents banks, credit unions and mortgage servicers in every county of Arizona concerning a broad range of legal services related to consumer and commercial loan workout, bankruptcy, collection, foreclosure, mortgage deficiency and other creditors’ rights litigation cases. If you have any questions about the issues dis- cussed in this publication, or to explore engaging the legal services of Folks & O’Connor, PLLC, please contact the firm directly.
Larry O. Folks, Esq.
firstname.lastname@example.org 1850 N. Central Ave. Suite 1140 Phoenix, AZ 85004 Office Line 602-256-5906 Direct Line 602-256-9101 Fax Line: www.folksoconnor.com
Pictured (L to R)
Eugene O’Connor, Partner Larry Folks, Partner Mary Ann Hess, Partner Lisa Kass, Associate Attorney ALFN ANGLE / PAGE 15
SNAKES ON A PLANE?
LESSONS FROM THE ROAD WITH SALLY GARRISON ONCE UPON A TIME, MY BOSS THOUGHT IT WOULD BE A GOOD IDEA TO SEND ME OUT ON THE ROAD….AND NOW I AM WRITING THIS COLUMN SO YOU CAN LEARN AND LAUGH AT MY EXPENSE.
THIS COLUMN REGULARLY APPEARS IN THE QUARTERLY WOMEN IN LEGAL LEADERSHIP NEWSLETTER, WILLed. CONNECT WITH SALLY AT SALLY@BAER-TIMBERLAKE.COM AND SUBSCRIBE TO WILLed AT ALFN.ORG/WILL
My favorite emotional support animal on a flight in 2016 was a duck.1 His name: Daniel Turducken Stinkerbutt. He had the most adorable shoes and enjoyed watching the clouds from his window seat. As a general rule, ducks do not comfort me; they are rarely toilet trained (Daniel wears diapers) and are too close to geese for my liking. Geese are demonic spirits with feathers and snake-necks. Nevertheless, Mr. Stinkerbutt is charming. He did, however, cause me to wonder what animals are eligible for emotional support status. Am I going to have to sit next to someone’s emotional support anaconda? What if my emotional support duck looks tasty to someone else’s emotional support anaconda? I really don’t want to witness a NatGeo special at cruising altitude. As a preliminary matter, “service animals” and “emotional support animals” are not always synonymous. The ADA, which generally falls under the purview of the U.S. Department of Justice, narrowly defines “service animal” as “any dog that is individually trained to do work or perform tasks for the benefit of an individual with a disability, including a physical, sensory, psychiatric, intellectual, or other mental disability. Other species of animals, whether wild or domestic, trained or untrained, are not service animals for the purposes of this definition.” 28 C.F.R. §36.104 and §Pt. 36, App. A. Consequently, emotional support animals do not enjoy the same protection under the ADA as service animals. Not all dogs qualify, either. They must be trained to perform specific work or tasks to qualify. Despite the ADA’s narrow definition, emotional support animals are more generously considered by the DOT. In 2003, the DOT issued guidelines that expanded the definition of service animal to include emotional support animals without limitation as to species or training. 14 C.F.R. §382.117; DOT’s Notice of Policy Guidance Concerning Service Animals in Air Transportation, published at 68 FR 24874 - 02. Pursuant to §382.117, airlines are not allowed to deny transportation to an animal because the animal will offend or annoy another passenger – score one for the anaconda. However, the DOT does set out some exceptions for emotional support animals on planes: You are never required to accommodate certain unusual service animals (e.g., snakes, other reptiles, ferrets, rodents, and spiders) as service animals in the cabin. With respect to all other animals, including unusual or exotic animals that are presented as service animals (e.g., miniature horses, pigs, monkeys), as a carrier you must determine whether any factors preclude their traveling in the cabin as service animals (e.g., whether the animal is too large or heavy to be accommodated in the cabin, whether the animal would pose a direct threat to the health or safety of others, whether it would cause a significant disruption of cabin service, whether it would be prohibited from entering a foreign country that is the flight's destination). If no such factors preclude the animal from traveling in the cabin, you must permit it to do so. However, as a foreign carrier, you are not required to carry service animals other than dogs. 14 C.F.R. §382.117(f). Please note the limitation on snakes is elective in nature. It remains at the airline’s discretion. This has put airlines in the precarious position of making decisions that impact an individual’s wellbeing in flight and may invite a pricey lawsuit. It has been reported that the DOT’s Service Animal Working Group, which includes representatives from airlines, mental health professionals, and service animal groups, has recommended a change to the DOT’s definition of service animal to trained dogs only, with emotional support animals to include dogs, cats, and rabbits.2 I suppose I am relieved that I will not have to sit next to Mr. Wiggles the Anaconda, but I would be disappointed in a world where Daniel Turducken Stinkerbutt could not fly amongst the clouds with me. 1 The duck was not on my flight. His adventure was live tweeted by Mark Essig @mark_essig. The New York Times published an outstanding article about Daniel Turducken Stinkerbutt: https://www.washingtonpost.com/news/animalia/wp/2016/10/20/daniel-the-emotional-supportduck-takes-his-first-plane-ride-soars-in-popularity/?tid=ss_tw-amp&utm_term=.4aa15e8049ea 2 http://thebark.com/content/push-stricter-rules-service-pets-airplanes and http://newyork.cbslocal.com/2016/10/13/new-rules-for-service-pets-on-planes/
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OHIO LAWMAKERS HAVE CLOSED A SUBSTANTIAL LOOPHOLE THAT THREATENED SECURED CREDITORS’ LIEN STATUS IN BANKRUPTCY PROCEEDINGS. BY ADAM HALL, ESQ. WITH MANLEY DEAS REACH HIM AT ABH@MANLEYDEAS.COM
ntil recently, both debtors and trustees have had incentives to routinely look for administrative defects in residential mortgages. For trustees, avoiding a mortgage makes additional funds available to pay off other creditors (even if that means the mortgage lender is harmed). Debtors' attorneys often try to save their clients from having to pay secured debt. A common method of avoiding a mortgage lien under Ohio law has been to argue that the document wasn’t executed according to the prerequisites in the Ohio Revised Code (O.R.C. § 5301.01) and therefore wasn’t entitled to be recorded in the first place (see the Burks case). Examples of problems have included omissions in the reciting language, a missing notary stamp, or typographical errors in the date or time the acknowledgment was taken. Because the mortgage wasn’t entitled to be recorded, it failed to give notice. As a result, the trustee or debtor could stand in the shoes of a bona fide purchaser for value under 11 U.S.C. ALFN ANGLE / PAGE 20
§ 544 and avoid the lien. Recently, though, the Supreme Court of Ohio’s holding in In Re Messer substantially reduced the practice. In the Messer case, the court held that O.R.C. § 1301.401 applies to all mortgages recorded in Ohio and provides constructive notice that a recorded mortgage was deficiently executed under O.R.C. § 5301.01. Following Messer, debtors couldn’t avoid a mortgage lien without showing actual fraud or forgery. Governor John Kasich extended the protections in Messer when he signed Amended Senate Bill 257 (which takes effect on April 6, 2017). The bill, as codified in O.R.C. § 5301.07, "create[d] a presumption of validity for recorded real property instruments, . . . reduce[d]the time period for curing certain defects related to those instruments, and . . . provide[d] constructive notice for those instruments." The new law essentially eliminates all mortgage avoidance powers except those based on actual fraud because the statute created a
rebuttable presumption that once a real property instrument is accepted by the county recorder, the instrument is enforceable against the interest of the person who signed it. The law also substantially shortened the time necessary to cure execution defects contained in O.R.C. § 5301.07(b) from 21 years to four. Now, after four years, the document can’t be attacked. Put another way, a recorded instrument is presumed valid when recorded and deemed valid four years afterwards. Finally, SB 257 "applies to all real property instruments notwithstanding any other provision of the Revised Code." This includes deeds and leases, and will likely be interpreted to apply to recorded oil and gas leases, as well. SB 257 supersedes current Ohio law and retroactively affects all recorded real property instruments, even those filed well before the bill's effective date. It should make lien avoidance actions go the way of the dodo bird.
hile Homeowner Association (HOA) liens for unpaid assessments typically have priority over second mortgages and other junior liens (because the HOA liens “relate back to” the HOA’s previously-recorded declaration), first mortgages receive special treatment under Minnesota law. Despite that special treatment, HOAs often demand payment of substantial bills by lenders foreclosing first mortgages. In addition to the regular monthly dues, the HOA bills may come riddled with line items for special assessments, attorneys’ fees, late charges, interest, and more. When the bills threaten to delay sale closings, lenders must quickly decide whether to pay the bills or delay matters, potentially losing sales, to challenge the HOA’s invoices. Minnesota law generally provides a clear outline of what charges must be paid by foreclosing lenders. The foreclosing lender for a first mortgage is only required to initially pay the “unpaid assessments for common expenses levied which became due, without acceleration, during the six months immediately preceding the end of the owner’s period of redemption.” The lender is not responsible for late charges and attorneys’ fees assessed during or prior to the six-month look-back period, because the HOA statute specifically omits these amounts in the list of allowed charges.
A foreclosing lender who claims a first mortgage position, should also ensure that property records are consistent with that senior lien claim as early as possible. If an HOA forecloses its own lien and has a sheriff’s sale, all junior mortgage liens that fail to redeem from the HOA’s foreclosure will become wiped out. If there is a previous mortgage that was paid off by the intended first mortgage, but not properly satisfied or released of record, the intended first mortgage could be deemed a second mortgage and wiped out by the HOA lien foreclosure. A Minnesota court recently decided that the priority order of liens may be set as soon as the HOA’s sheriff’s sale is completed. This same result could also occur when intended first and second mortgages are recorded in the wrong order. For that reason, mortgage holders should record Request for Notice of prior lien foreclosure instruments, and promptly and diligently review any foreclosure notices they receive, as well as related property records. Lenders should never assume they hold first mortgages until after they have reviewed property records
exhibiting that status. If a lender does challenge an HOA through litigation, a court can award reasonable attorneys’ fees and litigation costs to the prevailing party. Moreover, if the lender is able to establish that the HOA willfully failed to comply with the HOA statutes, the court may award punitive damages as well. In sum, lenders need to be wary of HOA liens and their foreclosures, and act quickly to spot and resolve issues as soon as they arise. Otherwise, lenders may end up paying significant and unnecessary costs to HOAs, or worse, lose their liens entirely to HOA lien foreclosures.
Unfortunately, unscrupulous or ill-informed HOAs may add all of the unpaid association dues, late charges, and attorneys’ fees to their bills regardless of their timing. Often, these unlawful charges are paid by lenders who are too busy to challenge every line item. Of course, once the first mortgage holder completes foreclosure, the redemption period expires, and that lender becomes the outright owner of the HOA property, that party becomes subject to all HOA dues and assessments going forward. If those assessments become delinquent, the foreclosing lender would become subject to collection costs, including attorneys’ fees, similar to any other unit owner. Certain associations may also strategically time when they levy special assessments to try to get lenders on the hook for those expenses. Unfortunately, there is a significant ambiguity in the HOA statute at issue (Minn. Stat. § 515B.3116) that can be particularly troublesome for foreclosing lenders. For example, consider the instance when an abandoned, mortgaged HOA unit has a fire in one year causing the HOA to incur costs for repairing that unit, but the lender does not foreclose its mortgage until the following year. The HOA may delay levying the repair costs until after the mortgage foreclosure sale. Since the HOA lien statute does not define when those repair costs “became due,” it is unclear whether the lender is truly obligated to pay those assessments.
BY KEVIN DOBIE, ESQ. AND BRIAN LIEBO, ESQ. WITH USSET, WEINGARDEN & LIEBO, PLLP. REACH THEM AT KEVIN@UWLLAW.COM AND BRIAN@UWLLAW.COM
ALFN ANGLE / PAGE 21
T NEW LAW GIVES TENANTS MORE PROTECTIONS IN VIRGINIA FORECLOSURES
BY SEAN M. FOERSTER, ESQ. WITH ROGERS TOWNSEND THOMAS, PC. REACH HIM AT SEAN.FOERSTER@RTT-LAW.COM
ou service a mortgage loan secured by real property in South Carolina. The loan goes into default. You refer the loan to local foreclosure counsel to review title and then initiate foreclosure proceedings against the property. Bad news: your attorney informs you that the county tax collector previously sold the property at a tax sale for non-payment of county taxes. What do you do? Don’t panic, take a deep breath, and find out whether redeeming the property is still an option. In South Carolina, there is a one year period after the date of the tax sale during which the defaulting taxpayer, a mortgagee, or any other lienholder can redeem the property by paying the delinquent taxes, penalties, and costs. More bad news: the redemption period has expired. What now? Still not panicking, still breathing deeply. Now you want to find out whether the tax collector has already issued a tax deed to the tax sale purchaser. If a tax collector discovers or is informed of any error in the tax sale process prior to the issuance of the tax deed, the tax collector has the authority to unilaterally void the tax sale. If you or your attorney can identify any defects in the tax sale, a simple phone call to the tax collector may be able to get the tax sale voided. But…bad news again: the county tax collector has already issued a tax deed to the tax sale purchaser. Now you can finally panic, right? ALFN ANGLE / PAGE 22
Wrong. You’re still calm and collected because you remembered the following two key words to recovering property lost at a tax sale in South Carolina: strict compliance. South Carolina’s tax sale statutes dictate the procedures that county tax collectors must follow leading up to, during, and following county tax sales of real and personal property. They are designed to afford full due process to interest holders of the property and provide them with every opportunity to save the property from tax sale. Because South Carolina, as a matter of public policy, abhors the notion that the nonpayment of a few thousand dollars in taxes can result in the government seizure of property worth a hundred times more, our state courts hold county tax collectors to a strict statutory compliance standard. What this means is that any instance of statutory non-compliance by the tax collector, no matter how technical or minor, could be grounds for overturning a tax sale. This is very high bar, and often results in South Carolina tax sales being overturned when challenged through a lawsuit. For example, a tax sale has been overturned where the tax map number listed in the newspaper advertisement for the tax sale was one digit off. A tax sale has been overturned where the tax collector did not mail the notice of delinquent taxes to the “best address available” for the property owner. A tax sale has been overturned where the court decided that the notice of delinquent taxes required to be physically posted somewhere on the property
was not placed in a conspicuous enough place. A tax sale has been overturned where the tax collector closely paraphrased, rather than directly quoted, the language required by statute to be included in the notice of delinquent taxes posted on the property. There are multiple other grounds recognized under South Carolina law for overturning a tax sale. Have your attorney analyze the tax collector’s entire file to see if the tax collector strictly complied with each and every statutory requirement. If you or your attorney discover a defect and decide to file a lawsuit to overturn the tax sale, there is normally a two year statute of limitations for doing so that runs from the date of the tax sale. Just when you though the news could not get any worse: the two year limitations period for challenging the tax sale has expired. OK, now you can panic, and even sweat a little. But all hope is not lost. There is a gray, little-explored area of South Carolina tax sale case law holding that the two year statute of limitations does not bar a lawsuit challenging a tax sale based on a “jurisdictional” defect in the tax sale proceedings. Consult your attorney as to whether your tax sale challenge falls within the exception to the statute of limitations. Otherwise, be thinking about how much you are willing to pay the tax sale purchaser to purchase the property back or whether you are content with merely recovering the surplus funds, if any, generated by the tax sale.
BY JOHN ANSELL, ESQ. WITH ROSENBERG & ASSOCIATES, LLC. REACH HIM AT JANSELL@ROSENBERG-ASSOC.COM
he Virginia General Assembly has passed, and the Governor has signed, House Bill 1623. This Bill replaces the section of the Virginia Code (Virginia Code §55-225.10) that previously codified the now-sunset federal Protecting Tenants at Foreclosure Act (“PTFA”). This new provision removes the reference to the PTFA and inserts new language that gives tenants a modicum of increased protection in the event the property they rent is foreclosed upon. Specifically, the new statute, set to become effective July 1, 2017, declares that a foreclosure sale of a tenant-occupied property acts to terminate any rental agreement that it is then in effect. Despite the fact that the rental agreement is terminated, any tenancy then in effect is converted to a month-to-month tenancy and will continue as such until a notice of termination of the rental agreement is sent to the tenants. All other terms of the terminated lease will remain in effect. Once the property is foreclosed, the foreclosure purchaser (either a third-party or the lender, in the event the property is sold back to them) can send notice to the tenants informing them that the lease is terminated, which will terminate the right to occupancy 30 days from the due date of the next rent payment, unless the lease provides for a different time period.
After the foreclosure, the tenant remains liable for any rents that come due after the foreclosure, but demand for rent cannot be made and late charges cannot be assessed against the tenants unless and until the tenants are provided with notice providing the name, address, and telephone number of the party to whom rent is to be paid. For servicers, assuming the intent is to recover possession of the property in anticipation of placing it into the REO market, this statutory change means that once the property has been foreclosed, the notice of termination of the lease must be sent prior to any demand for possession of the property. This is a change from the current procedure, where generally speaking, a five-day notice to tenants is all that is required. Because the terms of the lease can differ and can provide for longer time frames for termination of the right to occupancy, servicers and/or law firms must review any leases that are presented to them from tenants to determine the applicable time frame. There is no form for the notice of termination prescribed by the statute, so servicers or law firms will need to create the form. In addition, if a lender or servicer wants to allow the tenants to remain in the property for a period of time, they should immediately provide notice to the tenant of the name, address, and telephone number for the party to whom payments are to be sent. ALFN ANGLE / PAGE 23
HYATT LOST PINES JULY 16-19
PRACTICE OF LAW TECHNICAL CLARIFICATION ACT OF 2017 AND ITS RECEPTION ON CAPITOL HILL DURING ADVOCACY DAY 2017 When borrowers prevail in a foreclosure action, they base their claim for entitlement to attorneys’ fees on Fla. Stat. 57.105(7), which reads as follows: If a contract contains a provision allowing attorney’s fees to a party when he or she is required to take any action to enforce the contract, the court may also allow reasonable attorney’s fees to the other party when that party prevails in any action, whether as plaintiff or defendant, with respect to the contract.
BY LUKE KIEL, ESQ. WITH GILBERT GARCIA GROUP. REACH HIM AT LKIEL@GILBERTGROUPLAW.COM
Typical mortgages only give the lender the right to attorneys’ fees and costs, not borrowers. But, in Florida, borrowers are able to collect attorneys’ fees under Fla. Stat. 57.105(7), which provides for reciprocity in the application of contract provisions covering attorneys’ fees. However, Florida courts have also held that borrowers cannot rely on the reciprocity of Fla. Stat. 57.105(7) for entitlement to attorneys’ fees when the borrower(s) successfully maintained a position in the litigation that there was no relationship between the borrower(s) and the Plaintiff (that Plaintiff lacked standing). Essentially, borrowers are estopped from claiming entitlement to attorneys’ fees under 57.105(7) when they successfully challenged the plaintiff’s relationship to the subject contract (mortgage) and/or prevailed on standing. See HFC Collection Ctr., Inc. v. Alexander, 190 So. 3d 1114 (Fla. 5th DCA 2016); Sand Lake Hills Homeowners’ Association v. Busch, 2017 Fla. App. LEXIS 568, (Fla 5th DCA 2017). Florida trial courts have also adopted this analysis. See Bank of America National Association v. Smith, No. 50-2012-CA-004410-XXXX-MB, (Fla. 15th Cir. Ct. January 25, 2017); Trust v. Jallali, No. CACE07010279, 2016 WL 5372654 (Fla. 17th Cir. Ct. September 21, 2016); Deutsche Bank Nat. Trust Co. v. Perez-Sanchez, 2015-027703-CA-01, 2016 WL 2855508 (Fla. 11th Cir. Ct. May 16. 2016); Wells Fargo Bank, N.A. v. Hepworth, No. 50-2009-018458XXXX-MB, 2016 WL 1730590 (Fla. 15th Cir. Ct. April 28, 2016). HFC Collection Ctr., Inc. v. Alexander, 190 So. 3d 1114 (Fla. 5th DCA 2016) • 5th DCA agreed with the collection company that because the defendant prevailed at the trial level due to the argument that no contract existed between the parties, that the defendant could not then employ Fla. Stat. 57.105(7) as a basis for entitlement to attorneys’ fees. Sand Lake Hills Homeowners’ Association v. Busch, 2017 Fla. App. LEXIS 568, (Fla 5th DCA 2017) • Appellate court reversed award of attorneys’ fees for defendants in “ARD” case because trial court had found that no contract existed between plaintiff and the defendants, so the defendants were not entitled to attorneys’ fees under the fee provision of the underlying contract. Bank of America National Association v. Smith, No. 50-2012-CA-004410-XXXX-MB, (Fla. 15th Cir. Ct. January 25, 2017) • Trial court held that borrower was estopped from claiming entitlement to attorneys’ fees and costs under Fla. Stat. 57.105(7), after successfully maintaining the position that plaintiff lacked standing to foreclose. Trust v. Jallali, No. CACE07010279, 2016 WL 5372654 (Fla. 17th Cir. Ct. September 21, 2016) • Trial court found that defendant was not permitted to “prevail on the merits of the mortgage foreclosure action based on the position that Plaintiff did not have standing to foreclose and thereafter,” use the same note and mortgage to claim entitlement to an award of attorneys’ fees under Fla. Stat. 57.105(7) Deutsche Bank Nat’l Trust Co. v. Perez-Sanchez, No. 2015-027703-CA-01, 2016 WL 2855508 (Fla. 11th Cir. Ct. May 16. 2016) • Trial court held that defendant could not rely on the loan documents to establish an entitlement to attorney's fees under Fla. Stat. 57.105(7) after taking the position that plaintiff was a stranger to those documents and lacked standing. Wells Fargo Bank, N.A. v. Hepworth, No. 50-2009-018458XXXX-MB, 2016 WL 1730590 (Fla. 15th Cir. Ct. April 28, 2016) • Trial court found that neither party was entitled to an award of attorneys’ fees when plaintiff lacked standing to commence the foreclosure action. ALFN ANGLE / PAGE 26
The judicial system is designed to provide a level playing field for everyone. Attorneys must adhere to the rules of professional conduct, strictly follow federal and state laws and rules of procedure, and conduct themselves in a manner consistent with their responsibilities as officers of the court. Presiding judges are charged with enforcing these rules. Allowing others to step into this would threaten the delicate balance in our judicial system. Against Congress’s clear intent, courts have found collection attorneys can be subject to the Fair Debt Collection Practices Act (FDCPA) even when they are engaged in litigation. As a result, collection attorneys are routinely sued for technical violations of the FDCPA that arise from errors from statements made or omitted in pleadings and discovery. This rips authority from presiding judges, who are charged to ensure proceedings remain fair, and puts them with another body. Additionally, the Dodd-Frank Act inadvertently allowed the Consumer Financial Protection Bureau (CFPB) to gain authority over attorneys acting under a presiding judge using executive branch power to tip the scales of justice. Lawyers are deemed to be “providing a financial service” to the very borrowers they are suing in court. This creates conflicts of interest for lawyers who are duty bound to their creditor clients. This perverts our justice system by weakening attorney-client relationships and compromises the fiduciary duty that lawyers have to clients who hired them to provide services. Overview of the Bill The Practice of Law Technical Clarification Act states that attorneys should not be subject to the Fair Debt Collection Practices Act (“FDCPA”) when, and only when under the supervision of a presiding judge. This narrow scope ensures that attorneys remain subject to the FDCPA when involved in traditional collection activities like sending letters or making phone calls to consumers. Additionally, the Dodd-Frank Act included exclusion in Section 1027(e) for the “practice of law,” but a poorly written exception has led the CFPB to interpret the exclusion so that
creditors’ rights do not qualify. This has led to an untenable outcome where lawyers are deemed to be “providing a financial service” to the very borrowers they are suing in court. This interpretation creates conflicts of interest for lawyers who are duty bound to their creditor clients. The proposed legislation clarifies that creditors rights attorneys qualify for the 1027(e) exclusion. We want to emphasize that this bill only excludes attorneys from federal regulation as a “debt collector” when engaging in litigation-related activities - in other words, practicing law within the purview and oversight of the court. Reception on the Hill Early this month on April 4th, members of the ALFN, USFN and NARCA met in Washington, D.C. to discuss the bill and meet with elected officials in both chambers of Congress. During a special breakfast session during Advocacy Day, Congressman Dave Trott met with attendees to discuss the importance of the bill and advise on how best to pitch the bill with other members of Congress.
ATTENDEES CONDUCTED OVER 100 MEETINGS WITH MEMBERS OF CONGRESS AND LEGISLATIVE AIDS. Throughout the afternoon, attendees held meetings with their states’ Congressional Delegations. Attendees conducted over 100 meetings with members of Congress and legislative aids. This year, the “ask” was for Democrats to sign on and co-sponsor the Bill while Republican Members were urged to contact Congressman Trott’s office for a planned roll-out of Republican support. This was to ensure a balanced, bipartisan coalition of support around the bill. Advocacy Day was held at the Westin Georgetown in Washington, D.C. on April 4, 2017.
DID FEDERAL RELIEF PROGRAMS HAMP AND HARP SUNSET AS ANTICIPATED ON DECEMBER 31, 2016? NOT EXACTLY…FHFA SAYS TWO-MONTH GAP BETWEEN OLD AND NEW PROGRAM The Federal Housing Finance Agency’s Home Affordable Modification Program (HAMP) has been a loss mitigation option available to defaulted Borrowers since 2009. Initially scheduled to sunset in December of 2013, HAMP was extended until December 31, 2016. Fannie Mae and Freddie Mac consolidated three modification programs, Standard Modification, the Streamlined Modification and HAMP, into the Fannie Mae Flex Modification program. Servicers may begin to submit cases for Flex Modification consideration to Fannie Mae and Freddie Mac as early as March 1, 2017 with mandatory implementation effective October 1, 2017. In the interim, cases can still be considered for both Standard and Streamlined Modifications. There will be a two-month gap between HAMP’s official sunset and the availability of a similar loss mitigation option. There are a few preliminary notable differences between HAMP and the Flex Modification program. The Flex Modification program offers broader eligibility requirements. Properties that are vacant or condemned are eligible for the Flex Modification but would not have been eligible for HAMP. Another significant difference between the programs is the monthly repayment term. Under the Flex Modification guidelines, the monthly repayment term for the new mortgage will be set at no more than forty percent of the borrower’s monthly income, which is higher than the thirty-one percent permitted under the HAMP guidelines. As the new program is implemented and Borrowers are considered for eligibility we are certain more differences will become apparent. The Federal Housing Finance Agency’s Home Affordable Refinance Program (HARP) was also set to sunset on December 31, 2016, but the program has been extended to September 30, 2017. Additional options are anticipated beginning in October 2017. By Jacqueline F. McNally, Esq. with Stern & Eisenberg P.C.. She can be reached at jmcnally@ sterneisenberg.com ALFN ANGLE / PAGE 27
HYATT LOST PINES JULY 16-19
ith every loan therein lies the probability of loan default. Creditors understand the risk assessment and many have procedures in place to engage in workout solutions in lieu of costly litigation. Some loan documents will even contain clauses requiring workout options. In the residential mortgage servicing arena, workouts are also commonplace, but most form mortgages or deeds of trust that govern the terms of the loan do not contain a provision that obligates the parties to engage in loss mitigation. However, the obligations of loss mitigation requirements have become quite blurred and even though the underlying loan documents may not expressly require loss mitigation, servicer and investor requirements, federally mandated loss mitigation requirements, state regulations, consumer protection statutes, and mortgage settlement actions—including the Department of Justice’s National Mortgage Settlement—all say otherwise and set forth additional requirements for mortgage servicers to engage in loss mitigation. Over the last 8 years, this has resulted in a surge of loss mitigation agreements, mainly in the forms of repayment agreements, modifications (trial and permanent), forbearance agreements, short-sale agreements, consent foreclosures, and deeds-in-lieu of foreclosure.
THESE AREN’T THE KIND OF
CLAUSES YOU WANT TO MESS WITH
ADAM WILDE, ESQ CIATES
CODILIS & ASSO
Historically, creditors engaging in loan workouts, especially in mortgage servicing, do so with the objective of mitigating its losses—not the losses of a borrower. In other words, the mortgage servicer would analyze the costs associated with taking a loan through foreclosure and compare it to the cost of a loan workout. If the workout option proves more cost-effective, a loss mitigation option would be negotiated. In many of those agreements mortgage servicers would further advance its rights, using the loss mitigation options as an opportunity to include language that removes certain legal rights a borrower may otherwise have. These may typically include a borrower waiving any legal claims or future foreclosure defenses, certain rights to notice, or other requirements for service of process. This quid pro quo generally proves favorable for both parties—the borrower receives some option more favorable than foreclosure and the mortgage servicer has limited its exposure to future potential claims or defenses from a borrower and helps improve foreclosure timelines in the event of a re-default. FEDERAL LAW DOES NOT ALLOW FOR WAIVER OF FEDERAL CLAIMS On July 21, 2010, a provision of the Federal Consumer Credit Protection Act (TILA) took effect that expressly prohibited mortgage servicers of federally related mortgage loans from enabling loan documents or subsequent loss mitigation documents from limiting a consumer from bringing a federal cause of action. 15 USC 1693c(e) (3) provides:
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ALFN ANGLE / PAGE 31
note agreements with waivers that appear to waive rights that may include Federal statutory claims or defenses and provide borrowers who received the broad waiver language with a more limited waiver.” (emphasis added). THE CFPB DOUBLES DOWN In the CFPB’s June 2016 Supervisory Highlights Mortgage Servicing Special Edition, the CFPB again doubled down on its position that general waiver provisions were deceptive. This time, the CFPB addressed the practice of mortgage servicers engaging in waivers of consumer rights in loss mitigation agreements. In that issue the CFPB states:
No waiver of statutory cause of action. No provision of any residential mortgage loan or of any extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer, and no other agreement between the consumer and the creditor relating to the residential mortgage loan or extension of credit referred to in paragraph (1), shall be applied or interpreted so as to bar a consumer from bringing an action in an appropriate district court of the United States, or any other court of competent jurisdiction, pursuant to section 130 [15 USCS § 1640] or any other provision of law, for damages or other relief in connection with any alleged violation of this section, any other provision of this title, or any other Federal law.
THE ROLE OF THE CFPB AND NEW RULE In 2010, Congress created the Consumer Financial Protect Bureau (“CFPB”). In doing so, the CFPB was granted the authority to promulgate and interpret new rules regarding a variety of consumer protection statutes, including Regulation Z (TILA). In its role, the CFPB was charged with the authority to enforce consumer protection laws and hold those liable for violations of such roles.
The Law and subsequent Rule make clear that mortgage servicers who engage in loss mitigation documents that include a waiver of claims that relate to federal law is unenforceable as to that waiver. A reasonable interpretation of this clause means that even if loan workout documents or origination documents contain such a waiver, a borrower can still bring such a claim and the clause will have no effect. The rule also makes clear that so long as a dispute or claim is raised (for example a suit is filed), the parties are still free to settle the claim.
On July 1, 2013 12 CFR 1026.36 took effect, creating special rules for certain home mortgage transactions. Additionally, the Rule prohibited acts or practices and certain requirements for credit secured by a dwelling. Most relevant to this article is 12 CFR 1026.36(h)(2), which ALFN ANGLE / PAGE 32
No waivers of Federal statutory causes of action. A contract or other agreement relating to a consumer credit transaction secured by a dwelling (including a home equity line of credit secured by the consumer's principal dwelling) may not be applied or interpreted to bar a consumer from bringing a claim in court pursuant to any provision of law for damages or other relief in connection with any alleged violation of any Federal law. This prohibition does not limit a consumer and creditor or any assignee from agreeing, after a dispute or claim under the transaction arises, to settle or use arbitration or other non-judicial procedure to resolve that dispute or claim.
POSITION OF CFPB IS THAT SUCH A CLAUSE IS DECEPTIVE While the Law and subsequent Rule provides content regarding the enforceability of such a
clause, neither the law nor rule specifically state that having such a clause violates TILA or Regulation Z. The CFPB, however, has taken it one step further, finding that when loan documents include general waivers of certain legal rights into loan agreements, such a process is deceptive because a borrower may interpret a clause to mean they cannot bring a federal cause of action. In its supervisory capacity, the CFPB has required entities under its authority to remove certain clauses from loan documents. The CFPB clarified its interpretation and made this public in the CFPB Supervisory Highlights Summer 2015 issue. In that issue, the CFPB clarified that inclusion of a general waiver provision in a residential mortgage loan agreement that had a general waiver provision was deceptive. Below is a portion from that issue providing context as to why the CFPB finds such clauses to be deceptive: “[CFPB] Examiners concluded that such a general waiver provision is a deceptive practice because it implies that the borrower is agreeing to a waiver that is unenforceable as to any claims based upon a Federal statute. A reasonable consumer might be misled into believing that by signing the note they had waived all notices or demands in connection with the delivery, acceptance, performance, default or enforcement of the note and would therefore be less likely to assert his or her Federal statutory rights. Supervision directed the supervised entities to cease requiring consumers to sign
“Additionally, [CFPB’s] Supervision has repeatedly identified waivers of consumer rights in loss mitigation agreements. Regulation Z states that a “contract or other agreement relating to a consumer credit transaction secured by a dwelling . . .may not be applied or interpreted to bar a consumer from bringing a claim in court pursuant to any provision of law for damages or other relief in connection with any alleged violation of any Federal law.” Examiners found one or more servicers required borrowers to sign waivers agreeing that they would have no “defenses, set- offs, or counterclaims to the indebtedness of borrowers pursuant to the Loan Document” in order to enter mortgage repayment and loan modification plans. Defenses, set-offs, and counterclaims pertain to a contract or other agreement to a consumer credit transaction secured by a dwelling. As borrowers were likely to read the waiver as barring them from bringing claims — including Federal claims — related to their mortgage, Supervision cited the waiver language as deceptive and directed the servicer(s) to remove it from all loss mitigation agreements.” (emphasis added).
CONTACT THE AU
ADAM WILDE, ESQ
CONCLUSION Though the statute only relates to the enforceability of such a clause, the CFPB’s public position on such clauses is clear that any general waiver provision will be construed against the drafter and for the consumer protection of the borrower. Now more than ever, originators, mortgage servicers, and attorneys advising those in the industry must be extremely cautious when including waiver language in loan documents, drafting any loss mitigation documents or even reviewing loss mitigation agreements. Indeed, the drafter must beware; for the loss mitigation documents are no longer business as usual and extreme thought and caution must be given consideration when drafting or reviewing any waiver clause(s). This should not be interpreted to mean a loan or loss mitigation document cannot include waiver language; it can. If a drafter is going to use waiver language, such a clause must be narrowly tailored in a way that the document makes clear that should a borrower have any claims under federal law, the document does not undermine a borrower’s right to bring such claims. ALFN ANGLE / PAGE 33
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For Legal, Regulatory Compliance, Risk Management & Quality Assurance Professionals February 2016
Mortgage Software Is Only as Efficient as Your Workflow BY JORGE SAURI
T Jorge Sauri
Even premium mortgage software will fail to improve the transaction if it is paired with a conflicting workflow.
with features or even surveying the FinTech landscape. It should begin by looking inward. The key to discovering how technology can improve your organization’s efficiency begins by a thorough understanding of two components of your company’s workflow: it’s internal operations and borrower’s experience.
Generally speaking, the mortgage transaction is a 30-day process. While there are various requirements for different loan products, each mortgage contains the same six stages: pre-qualification, application, verification, processing, underwriting, and closing. Before it is possible to improve your workflow with technology, it is necessary to understand how your company currently operates in each stage of the mortgage transaction. Without evaluating and analyzing your current processes—and thoroughly understanding your opportunities for improvement—it is not possible to know which software features are best for your company. ∆
echnology plays a preeminent role in making the mortgage transaction faster, less expensive and more accurate. But even premium mortgage software will fail to improve the transaction if it is paired with a conflicting workflow. At best, incongruent workflows make great software unimpressive and, at worst, it adds unnecessary steps for employees. Mortgage software is most useful when it not only improves the borrower experience and internal operations, but reduces the labor of all parties involved in the transaction. To accomplish this, however, the software solution must meet the strategic needs of the company and the regulatory requirements put in motion by the Consumer Financial Protection Bureau (CFPB). The full benefits of technology partners are only realized when they complement a financial institution’s strengths, provide reinforcement in their weaknesses and anticipate compliance demands. When seeking new software vendors, your mortgage company should not begin by becoming enamored
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