Default Servicing Best Practices RESPA AND TILA.

Presented by the AFN’s Legal Services Committee William M. LeRoy - Moderator CEO American Legal & Financial Network “AFN” Asha Shravah, Esq. - Panelist Attorney Rosicki, Rosicki & Associates, P.C. Carolyn A. Taylor, Esq. - Panelist Partner Hughes, Watters & Askanase, L.L.P. Matthew C. Abad, Esq. - Panelist Partner Burke, Costanza & Cuppy L.L.P. Michelle Garcia Gilbert, Esq. - Panelist Attorney Kass, Shuler, Solomon, Spector, Foyle & Singer, P.A.  Real Estate Settlement Procedures Act- 1974, more info about residential settlement services, federallyregulated mortgage loan, prevent abuse:  Service ancillary to closing, no kickbacks  Good faith estimate, Standard settlement statement: “HUD”  Notice servicing, assignment by both ends  Jones v. ABN AMRO Mortgage Group, Inc.  Notice servicing, assignment by both ends.  Jones v. ABN AMRO Mortgage Group, Inc., 551 F. Supp. 2d 400 (E.D. Pa. 2008)- Borrowers filed class action against 24 mortgage companies alleging failure to provide notice of “servicing agent,” Snyder Entities which, as loan originator, provided “Equity Slide Down” mortgages to borrowers; failure to credit payments; failure to respond to QWRs; Court ruled no evidence of actual or apparent agency.  Best practice: Establish checklist for providing servicing, assignment changes, both when selling and buying loans.  Escrow, notices.   Chase v. Padgett, 268 B.R. 309 (Bkrtcy. S.D.Fla. 2001): Lender sought payment increase under Plan based upon escrow advance shortages, but failed to give annual notice as required by RESPA; Lender waived escrow deficiencies. Best practices: Continue to provide annual escrow deficiency notices in bankruptcy.  Qualified written requests: info/dispute request, acknowledge w/in 20 days, respond within 60 days.   Mazzei v. The Money Store, 552 F. Supp. 2d 408 (SDNY, 2008)- Lender provided detailed information to pro se borrower in 2d letter, following 1st written acknowledgement; borrower contended RESPA violation due to 25 day timeframe; Court denied relief; Best practice: treat inquires as QWR in abundance of caution, set up internal process to provide 20 day acknowledgement, 60 day response, according to 12 U.S.C. §2605(e).  Truth in Lending Act - 1968: accurate disclosure of cost of consumer credit, implemented by Regulation Z (Federal Reserve Board).     TILA disclosure one of most commonly misunderstood lending documents (Model form provided upon request). Due diligence reviewing originations: borrower’s counsel perspective. Some good faith exceptions: unintentional, preventive process in place. Damages: statutory penalties, actual damages, rescission, injunctions, restitution, criminal prosecution.  Lippner v. Deutsche Bank National Trust Company, 544 F. Supp. 2d 695 (N.D.Ill. 2008)  Borrower sued servicer, assignee for rescission, disclosure: no due date, no payment schedule, only 1 notice to cancel.  Extended rescission period to 3 years.  Servicer not liable.  Court held assignee liable like original lender for TILA violation face of documents: not bona fide purchaser.  Rescission, statutory damages, attorneys fees awarded.  Best practices: review origination documents before buying.  Williams v. Countrywide Home Loans, 504 F.Supp. 2d 176 (S.D.Tex. 2007) After foreclosure sale, Borrower sued lender for TILA, Fair Debt, RESPA violations, based upon no rescission notice.  Time-barred > 3 years after origination, property sold at foreclosure sale  Could have been offset in foreclosure action.  No offset w/statutory damages only.  Actual damages: no facts relied on terms, did not check other money-saving alternatives.  Best practices: Not only review origination documents, implement best foreclosure/bankruptcy practices. In re Sanchez, 372 B.R. 289, 321 (Bankr. S.D. Tex. 2007) (J Bohm)  Bankruptcy filed December 30, 2002 Agreed Stay Order required debtors remain current in postpetition property taxes “unless funds for such insurance and taxes” collected through escrow (4/3/2003) Confirmed plan vests all property of estate in Debtor upon discharge/dismissal (11/25/2003)    Certificate of Default filed payments not made per Stay Order (12/30/2004)  Lender paid delinquent 2001 pre-petition taxes of $ 20,000(e) and added to loan without disclosure (3/2005) Lender sent “Escrow Account Projection for the Coming Year” showing shortage of $ 23, 230.54 and increased payment of $ 3.479.85 (6/2005)  Holding:  Only over secured creditor may assess post petition pre-confirmation charges per 11 U.S.C. § 506(b) Section 506(b) claims must be contractually authorized, disclosed and subject to review for reasonableness   Post-confirmation charges not subject to § 506(b), rather creditor must disclose and establish same are contractually authorized and reasonable by filing a Rule 2016 application Holding:  Unilateral assessment of post-petition charges impacts debtor’s ability to comply with plan and precludes independent review of reasonableness  Advancing taxes without filing evidence of the payment and transfer with the court violates the automatic and Bankruptcy Rule 3001 (e) “To hold otherwise would be to prefer one creditor over others, and deny Chapter 13 debtors the chance for a fresh start…” Best Practices:  Give prior written notice of post-petition tax or insurance default to debtor, debtor attorney and trustee. File notice of protective advance or assessment of contractually authorized charges with court Obtain court approval of advance and charges    File evidence of purchase of pre-petition claim and file notice of transfer per Bankruptcy Rule 3001(e) Campbell v. Countrywide Home Loans, Inc., 2008 WL 3906382 (5th Cir. (Bankr. S.D. Tex.) August 26, 2008 ) Facts:  Countrywide advanced pre-petition and increased the escrow payments post-petition to collect the advance Holding:  Since liability for property taxes in Texas accrues on January 1st of the year, Countrywide violated the automatic stay by increasing the escrow payments post-petition Best Practice:  Include shortage in POC and REMOVE from on-going postpetition payments Campbell v. Countrywide Home Loans, Inc., 2008 WL 3906382 (5th Cir. (Bankr. S.D. Tex.) August 26, 2008 )  Proof of claim included increased post-petition mortgage payment to recoup unpaid escrow amounts rather than past due escrow payments Borrower: failure to include in POC = stay violation Lender: missed escrow payments not pre-petition claim arises when escrow expense paid post-petition due to shortage in escrow account Bankruptcy Court: Attempt to collect pre-petition debt. Willful stay violation    Appellate Court:  No stay violation    Proof Claim may be overstated, contingent, disputed Debtor may object with dispute settled by court RESPA right to increase monthly payment to recoup unpaid escrow payments overridden by Bankruptcy Code In re Rodriguez, 2008 WL 2796478 (Bankr. D.N.J. July 22, 2008)  Proof of Claim included escrow shortage for pre-petition advances Increased post-petition monthly payment for required escrow, shortage contribution and required reserve   Amounts determined by treating escrow account as having zero balance as of petition date Borrowers alleged additional escrow assessment violated stay  Holding:  Recalculation of post-petition escrow payments consistent with loan documents and RESPA Analysis should have begun on effective date of escrow change (considerably reducing monthly shortage contribution)  In re Payne, 2008 WL 1961489 (Bankr. D. Kan. May 6, 2008).     must notify debtor’s of escrow deficiency annually must respond to QWR within 60 day statutory time period servicer ordered to waive escrow deficiency to time of trial must respond even if suit filed during 60 day response time In re Johnson 384 B.R. 763 (Bankr. E.D. Mich. April 9, 2008)   Exemption from sending notice to borrower in bankruptcy relates to annual escrow account statement only Failure to give notice of escrow shortage = grounds to disallow tax/insurance portion of POC Dahl v. Ameriquest Mortgage Company, 2008 WL 259998 (Pa. Super. July 1, 2008)     at closing funds into settlement escrow account for hazard insurance title company not disburse damage to home borrower sued lender, servicer and title agent for RESPA violations Holding:  “Escrow account “ defined under RESPA as one consisting of payments made by borrower and used by lender to pay taxes, insurance and like charges not apply to settlement escrow account created for payment of hazard insurance Holding (cont)  “Servicer” defined by RESPA as one responsible for receiving periodic payments from the borrower Loan contract not require payments into escrow settlement account Payment of taxes and insurance into escrow settlement account incidental to loan closing, rather than part of on-going servicing of loan between borrower and lender   Edwards v. Accredited Home Lenders, Inc., 2008 WL 2950275 (S.D. Ala. July 29, 2008).   § 8(b) prohibits charging of fees other than for services performed Settlement collected excess recording fees and held in escrow before refunding to borrower Standard practice to estimate closing costs, reconcile after closing Borrower alleged agent charging fees for services not performed   Holding:   No RESPA violation No possession or control of funds since held in escrow. Allen v. Am. Gen. Fin., Inc. No. 06-273, 2007 WL 4180145 (Tex. Nov. 28, 2007). Facts:  home equity loan to pay delinquent taxes and lender assured it would “take care of” the taxes Holding:  Not a consumer if only seek “extension of credit”  If objective is “goods and services” and loan provides means of obtaining, borrower qualifies as consumer Best Practice:  Exercise caution when providing “escrow services” to Texas borrowers who may qualify as consumers under the DTPA Porter v. Countywide Home Loans, Inc. 2008 WL 2944670 (S.D. Tex. July 24, 2008)  Flood insurance required at loan origination  Loan assigned to new lender who advised property no longer in flood zone Borrowers let flood insurance lapse Hurricane Katrina flooded home and completely destroyed personal belongings    Borrowers sue for negligence, negligent representation and fraud under DTPA and National Flood Insurance Act (NIFA) Holding:  NFIA requires lender notification that property is in flood zone  Countrywide wrongly informed borrowers flood insurance no longer mandated, a disclosure not required by NFIA Although no private right of action under NFIA, state law negligence claims not precluded DTPA claim dismissed; borrowers not “consumers” “seeking to acquire goods or services by purchase or lease”   U.S. Banks, N.A. v. Hamilton 2008 WL 2610272 (Ky. App. July 3, 2008)  After default judgment entered, home partially destroyed by fire Insurance company interpled funds into court registry ($ 66,172) Lender purchased property at sale for full amount of judgment ($167,233)   Holding (sustained on appeal):  Insurance proceeds in excess of judgment awarded to borrowers “[Lender] could have better protected itself by inquiring whether bid included insurance proceeds or making [its] bid for less than the amount of [its] judgment… [This] mistake in failing to take such protective measures….[resulted in] a windfall for the Hamilton's.” Countrywide Home Loans v. Stewart Title Guaranty Company 2008 WL 2595185 (E.D. Wis. June 27, 2008)  Countrywide refinanced loan held by Five Star Mortgage Service Corp. (Star) Star had refinanced credit line to Associated Associated failed to close credit line and made subsequent advances    Upon borrowers’ defaulted in paying credit line, Associated sued for foreclosure joining alleging its lien was superior to Countrywide’s lien Countrywide neither responded to the foreclosure suit or provided notice of the suit to its insurance carrier    Default judgment entered against Countrywide Countrywide filed suit against insurance carrier for denying belated title policy claim Holding: For Insurer  Wisconsin law requires both late notice (undisputed) and prejudice to relieve insurance defense obligation Insurer argued late notice precluded ability to investigate, evaluate, or settle claim   Court rejected argument that default judgment should not preclude settlement attempts Court previously denied motion to vacate default judgment, insurance carrier had no reason to compromise claim  If you have any further questions that were not addressed in this presentation, or want to contact one of our speakers, please email Matt Bartel, COO of AFN, at mbartel@e-afn.org. 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