By Keri P. Ebeck, Attorney
What is loss mitigation and how does it affect a credit union/lender as the mortgagee? Loss mitigation is a term used to describe loan workouts and negotiations between the homeowner and lender to prevent or rectify default and foreclosure. Typically, loss mitigation encompasses: loan modifications, short sales, forbearance agreements, deeds-in-lieu of foreclosure and any cash-for-keys options.
When a borrower is in default on their mortgage and/or in foreclosure, several states and jurisdictions at the state court level have court sanctioned loss mitigation programs. These programs allow the lender and homeowner to negotiate towards a loss mitigation workout to help the homeowner avoid further default and foreclosure before the lender can proceed with the foreclosure/sheriff’s sale process, but typically these processes create an uncertain amount of delay.
Within the last couple of years, this process has now moved to the federal bankruptcy courts. Unlike many state court programs, where a certain amount of delay is present, the bankruptcy court’s loss mitigation programs are tailored towards recognizing that the borrower/debtor is eligible for loss mitigation, having the lender review the borrower/debtor’s loan to determine within a short period of time whether or not a resolution of either one of the loss mitigation options is approved by the lender, or after thorough review, a borrower/debtor does not meet the requirements of the lenders’ loss mitigation programs. Either way, the bankruptcy court’s ultimate goal is to offer a program within the court process to facilitate a structured, meaningful negotiation but not to cause delay to the overall bankruptcy process.
How do the bankruptcy loss mitigation programs work and how does this affect the individual credit union lenders? Typically, most programs begin with the borrower/debtor filing a notice of request for loss mitigation, after which the bankruptcy court enters an order setting forth the loss mitigation terms and deadlines. These deadlines are: how long parties have to exchange financial information for the loss mitigation review; how long the lender has to review the debtor’s financial information; how long the parties have to negotiate a loss mitigation option; and overall, how long the loss mitigation program shall last in the bankruptcy. For example, in the Western District of Pennsylvania, the entire program from start to finish shall not proceed longer than 90 days from the date of the court’s order. This order also sets forth any status conferences or status reports that need to be filed with the court in an attempt to show the court that both parties are working in good faith.
When looking at the individual requirements of these programs, a credit union or any other lender may have several questions: (1) What financial information is exchanged between the parties? Any financial information that the lender deems relevant (within reason) to review a borrower/debtor for a loan workout. This could include: list of expenses, income, proof of income, tax returns, bank statements and a hardship explanation letter; (2) How is this information exchanged between the parties? Some loss mitigation programs are informal and are done through the normal course of dealing with the borrower’s/debtor’s attorney. Other more involved programs, such as the Western District of Pennsylvania, whose loss mitigation program is run through a loss mitigation portal online, allows both parties to register, access and upload/retrieve documents; (3) Is the lender required to participate in the loss mitigation process? The answer is yes, unless the lender successfully objects to the participation for a valid reason (i.e. loss mitigation review has already been done and/or offered to this borrower/debtor); (4) What happens to the bankruptcy process during this time? The bankruptcy process proceeds as normal and runs simultaneously with the loss mitigation process in order to avoid delay in payment to the creditors. Most, if not all of the loss mitigation programs do not allow motions for relief to be filed during the review process, but otherwise, the bankruptcy proceeds as normal; and (5) Can the bankruptcy court order the lender to offer a loss mitigation option? In short, the answer is no. Under Section 1322 (b)(2) of the Bankruptcy Code, it expressly prevents the court from altering the rights of secured mortgage lenders with claims on the debtor’s principal residence. The court’s purpose is to provide an environment where both parties can work in good faith towards a resolution. The court however, can order the parties to do just that, act in good faith throughout the process.
So the ultimate question is: What should the lender/credit union do if it receives a notice of loss mitigation in one of these jurisdictions? The best advice would be to contact WWR and allow us to walk you through the process and getting the documents needed for the loss mitigation review. Although the process may seem uncomplicated, it does require a strict adherence to the guidelines and deadlines set by the court.
As of today, very few bankruptcy courts have instituted loss mitigation programs such as those in New York, New Jersey, Rhode Island and just recently in the Western District of Pennsylvania. Some bankruptcy courts have an informal, less structured process such as Indiana. To date, there are no loss mitigation programs in Ohio, Michigan, Florida, or Illinois.
As more information and more bankruptcy loss mitigation programs become available, WWR will update the credit unions with this information through its bankruptcy blog wwrbankruptcy.com.
Keri Ebeck is an attorney practicing in the Bankruptcy unit of Weltman, Weinberg & Reis Co., LPA, located in the Pittsburgh office. She can be reached at 412.434.7959 and firstname.lastname@example.org.
Filed under: Fair Debt Collection Practices Act, foreclosure, loss mitigation | Tags: consumer protection, door-knocking, FDCPA, foreclosure, loss mitigation
By: Jennifer M. Monty, Esq.
Statistics show that over 40% of homeowners in foreclosure never speak with their servicer prior to the filing of a foreclosure action. Door-knocking, the practice of sending out a person to the homeowner’s residence to deliver a loss mitigation package, is one way servicers attempt to reach out to borrowers. A recent decision by the United States Court of Appeals for the Seventh Circuit may change servicer’s use of door-knocking or set new standards.
Camille Gburek filed suit against her servicer and a door-knocking company, alleging that both the servicer and door-knocking company violated the Fair Debt Collection Practices Act (“FDCPA”). The FDCPA is a consumer protection statute enacted to protect consumers from abusive, deceptive or unfair debt-collection practices.
At issue in the case were three communications:
1. A letter from the servicer to Gburek offering loss mitigation options and requesting financial information. The letter contained the FDCPA warning language that the letter was an attempt to collect a debt.
2. A letter from the door-knocking company offering loss mitigation options and attempting to open communications between Gburek and the servicer. In the letter, the door-knocking company stated that it was not a debt collector. The door-knocking company provided its phone number to answer any questions.
3. The communication from the servicer to the door-knocking company to enlist their services.
Grubek, through her lawsuit, claimed that all three communications violated the FDCPA. The lawsuit alleged violations for using deceptive means to obtain personal information, communicating directly with Grubek even though she had an attorney, and communicating with the door-knocking company without Grubek’s consent.
The servicer filed a motion to the court that the case be dismissed, claiming that the communications were not attempts to collect a debt, and therefore not subject to the FDCPA. The trial court granted the motion to dismiss, and Grubek appealed. The appellate court overruled the trial court finding that Grubek made sufficient allegations for violations of the FDPCA.
The appellate court focused on several factors. Even though the letters did not include a demand for payment, the court noted that Gburek’s mortgage loan was in default and the servicer’s letter offered to discuss foreclosure alternatives, once she provided financial information. The court held that such a communication was in connection with an attempt to collect a debt. The court viewed the door-knocking company’s letter under the same light—a communication made to induce the debtor to settle a debt. Finally, the court held that the communications between the servicer and the door-knocking company was a communication in connection with the collection of a debt.
The case will now be remanded to the trial court to hear the issues regarding the alleged FDCPA violations.
The use of door knocking companies or programs continues to improve the chances of speaking with a borrower before foreclosure. However, a servicer must be careful when using a door-knocking company. All communications with a homeowner must follow the requirements of the FDPCA. When a homeowner has an attorney, all communications must go through the attorney and not directly with the homeowner. When using an outside company or vendor, particular caution must be taken and any information about the homeowner should not be shared with any third party, without the homeowner’s permission.
If the proper program is developed, door-knocking can be an effective way to reach borrowers. However, if the program violates the FDPCA, the benefits of communicating with the borrower may be overshadowed by litigation.
If you have any questions on this information, please contact Jennifer M. Monty, Esq., an associate focused on litigation & defense within the Real Estate Default Group located in the Cleveland office of Weltman, Weinberg & Reis Co., LPA. Jennifer can be reached at 216.685.1136 or via email at email@example.com.
Filed under: foreclosure, loss mitigation | Tags: foreclosure, HAFA, HAMP, loan modifications, loss mitigation, mortgage
On April 5, 2010, the Home Affordable Foreclosure Alternative (“HAFA”) will go into effect. This new program is the Obama administration’s latest attempt to help homeowners avoid foreclosure.
HAFA is a new program that will allow borrowers to sell their home for less than the mortgage balance, commonly known as a short sale. Borrowers will receive preapproved short sale terms from their lender prior to putting the home on the market. Eligibility is limited to loans which:
- Are on a person’s primary residence
- Are originated before January 1, 2009
- Are delinquent or in imminent danger of default
- Do not exceed $729,750
- Create homeowner hardship
- The Borrower’s total monthly housing payment exceeds 31 percent of gross income
- Are serviced by Fannie Mae, Freddie Mac, or servicers who have voluntarily signed on to the HAMP program
HAFA comes as a response to the Home Affordable Modification Program (“HAMP”). According to government statistics published in January 2010, of the 3 million plus eligible loans, lenders/servicers have offered, started, or placed loans into trial or permanent modifications to 28% of eligible borrowers. HAFA is one response to the remaining borrowers who have not received a modification. Under the new program, when a borrower does not qualify under HAMP, the lender /servicer must offer a short sale in writing to the borrower within 30 days, and the borrower must respond within 14 days. There are monetary incentives for lenders/servicers who participate in the program. The program is set to expire December 31, 2012.
Critics of the program are concerned with the potential for fraud. To combat such fraud, lenders will require the borrowers, realtors, and buyers to sign affidavits that the sale is an arm’s length transaction. Other concerns include investors making low offers to lenders, buying the property and then selling the property on the open market at a higher rate. To avoid this scheme, lenders can require that offers only come from licensed real estate agents.
HAFA brings more change to the growing loss mitigation industry. Lenders and servicers must keep abreast of the various programs, as well as prepare for the upcoming changes. Weltman, Weinberg & Reis Co., L.P.A. will continue to monitor this situation and provide updates with respect to loss mitigation issues.
If you have any questions on this information, please contact Jennifer M. Monty, Esq. or Matthew G. Burg, Esq. Jennifer and Matt are both Associates in the Litigation & Defense department in the Cleveland office of Weltman, Weinberg & Reis Co., L.P.A. Jennifer can be reached at (216) 685-1136 or via e-mail at firstname.lastname@example.org and Matt can be reached at (216) 685-1111 or email@example.com.
This article by Jennifer Monty recently appeared in both Servicing Management News and Mortgage Orb.
By: Jennifer M. Monty, Esquire
Loss mitigation is the new mantra of any servicer. With slumping housing markets and economically depressed customers, loss mitigation offers a solution for everyone.
Skyrocketing real estate owned inventory, vacant properties that are devaluing daily and pressure from the courts are great incentives to offer loss mitigation. Other servicers may see that failing to offer loss mitigation options results in their becoming the pariah in the media’s and courts’ eyes.
Most servicers’ loss mitigation programs are born out of economic necessity and good intentions. Helping a customer stay in his or her home not only benefits the customer, but also transforms a nonperforming loan.
From forbearance agreements to loan modifications, to deeds in lieu or consent judgment entries, the options for loss mitigation vary depending on the customer’s circumstances and financial ability as well as the lender’s loan portfolio. Contested foreclosures provide opportunities for the servicer to offer loss mitigation in lieu of continuing legal fees and potential exposure.
With all the positives of loss mitigation, it seems nearly inconceivable that it would create a new wave of litigation. However, despite a servicer’s good intentions and the benefits to the consumer, loss mitigation can create new litigation battles. With some forethought to compliance issues, the benefits of loss mitigation will still far exceed the threat of litigation.
Federal legislation meant to protect consumers from predatory lending practices or unfair and deceptive acts or practices provides grounds for consumers to challenge a company’s loss mitigation practices. While loss mitigation will ultimately help borrowers, compliance with federal statutes is a must when offering loss mitigation.
Servicing a mortgage falls squarely under the activities governed by the Fair Debt Collection Practices Act (FDCPA). Most often, a servicer is not collecting its own debt, thus a servicer is a “debt collector” under the FDCPA.
The FDCPA requires that debt collectors treat debtors fairly and prohibits certain methods of debt collection. In general, the debts that are covered by the act are consumer debts incurred as a result of transactions for personal, family and/or household purposes. Any home loan, home equity line of credit or mortgage interest in a residential property is included in the FDCPA.
The Federal Trade Commission (FTC) is the government agency that can enforce violations, although consumers have a private right to file suit or a counterclaim alleging violations of the FDCPA.
The ultimate purpose of the FDCPA was to achieve the following three objectives:
- Eliminate abusive debt collection practices by collectors
- Ensure collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and
- Promote consistent state action to protect consumers against debt collection abuses.
The areas where many FDCPA violations occur are those in which there must be a verification or validation of debts. Under the FDCPA, the first written notice to a debtor must occur within five days after the initial contact. The notice must contain:
- The debt,
- The name of the creditor
- Language to the effect that the purpose is to collect debt,
- A statement that unless the consumer, within 30 days after receipt of the notice, disputes the validity of the debt or any portion thereof, debt will be assumed to be valid by the debt collector
- A statement that if the consumer notifies the debt collector in writing within a 30-day period that the debt – or any portion thereof – is disputed, the debt collector will obtain verification of debt or a copy of judgment against the consumer, and a copy of such verification or judgment will be mailed to consumer by the debt collector, and
- A statement that, upon receipt of the consumer’s written request within the 30-day period, the debt collector will provide the consumer with the name and address of original creditor, if different from the current creditor.
Loss mitigation raises the issue of when and how offers can be made to the consumer. Industry trade group and attorney network USFN recently asked the FTC for an advisory opinion on loss mitigation offers. USFN questioned whether the FDCPA prohibits debt collectors from discussing settlement options in the initial or subsequent communications with the debtor.
The FTC opinion stated that discussing settlement options in initial communications is not a per se violation. In 2006, Congress amended the FDCPA to provide that “any collection activities and communication during the 30-day period may not overshadow or be inconsistent with the disclosure of the consumer’s right to dispute the debt.”
Additionally, if loss mitigation options are offered in the initial communication, and the consumer requests validation/verification, that validation/verification must still be provided.
Servicers should also be careful that the language used in the loss mitigation offer does not create confusion for the borrower. The standard that the courts apply when evaluating a consumer’s claim is that of the least sophisticated consumer.
Any offer of loss mitigation must be clear that collection is not stopping, that foreclosure may still be filed or that the account will still be reported as delinquent.
Recent case law also addressed the issue of one-time-only settlement offers. Although the case did not involve foreclosure, one court found that an offer that said it was good only through a certain date and was a one-time-only settlement offer violated the FDCPA.
The court found that one-time-only offers might confuse consumers to believe that, after that time, settlement was not a possibility. Instead, the court recommend language such as, “We are not obligated to renew this offer.”
Additionally, any conditions for loss mitigation must be made clear to the consumer. For example, if the servicer’s requirement for loss mitigation is that the consumer has a job for the last three months, make a yearly income of a specified amount, and be able to put down 10% of the arrears, those conditions should be expressly stated so that the consumer is not confused or misled into believing that he or she will automatically qualify for loss mitigation.
Some servicers attempt more personal communications with default borrowers, such as door knocks or telephone calls. Both of these approaches provide fertile ground for FDPCA violations.
Door-knocking is the practice of sending someone to physically go to the borrower’s home. Depending on what the door knocker does at the home, he or she may be violating the FDCPA.
Even if the servicer hires an outside company that leaves materials or pamphlets stating that they are not debt collectors, it is not the label that matters, but rather the activity performed. Thus, if the door knocker is obtaining identifying information or attempting to collect a debt, such activities may be subject to the FDCPA. This type of activity must be taken with caution to fully comply with all aspects of the FDCPA.
Most servicers do make telephone calls to borrowers who are in default. Recent FDCPA cases suggest that leaving a pre-recorded message without the required FDCPA warning violates the act, as a mere identification of a collection agency by name did not disclose that the caller was a debt collector.
Another case granted summary judgment to a consumer for phone calls made to her cell phone. Although the consumer listed her home, cell and work phone numbers on her loan application, the court found that phone calls made to her cell phone with an auto dialer and prerecorded message, without first obtaining her prior expressed consent, violated the Telecommunications Consumer Protection Act.
A similar argument could be made that dialing a consumer’s cell phone may result in an increased cost to the consumer, which would violate the FDCPA.
Other areas of concern would be hiring third-party appraisers to evaluate properties or hiring real estate agents to gain interior inspections. With both of these options, strict compliance with the FDCPA is required as the servicer is communicating with a third-party regarding a consumer’s debt.
The federal Truth-In-Lending Act (TILA) is a disclosure statute that imposes obligations on creditors when they extend credit to consumers. TILA was originally drafted as a consumer protection act. Its purpose is to promote informed use of credit by requiring creditors to provide meaningful disclosures of credit terms to consumers.
Special early disclosures must be given when a consumer gives the lender an interest in his or her principal residence. These disclosures are in addition to the general disclosures required under TILA. Mortgages and home equity lines of credit require these disclosures. Further disclosures are required on variable-interest loans when the interest rate may increase.
If the required disclosures are not provided, a consumer has additional time to rescind the loan. A consumer has the right to rescind the credit transaction until midnight, three business days after the last of the following events: consummation of the transaction, delivery to the consumer of the notice of the right to rescind, or delivery to the consumer of all material disclosures of the credit terms.
With loss mitigation changing the terms of loans, a question arises whether new TILA disclosures must be provided to the consumer. While a pure modification would not require new disclosures, other situations may.
Pure modifications include only those where the existing note and mortgage remain the same, with some modifications made to the amount and payment schedule. However, if additional funds were advanced, then there would be a modified loan with a new balance in excess of the outstanding loan balance, requiring a TILA disclosure.
Regulation Z, a subpart to TILA, actually defines refinancings. Regulation Z defines when a refinancing occurs as “when an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same consumer. A refinancing is a new transaction requiring new disclosures to the consumer.”
The definition continues, stating that the following are not treated as refinancings:
- A renewal of a single payment with no change in the original terms,
- A reduction in the annual percentage rate with corresponding change in the payment schedule,
- An agreement involving a court proceeding,
- A change in the payment schedule or a change in collateral requirements as a result of the consumer’s default or delinquency, unless the rate is increased or the new amount financed exceeds the unpaid balance plus the earned finance charge and premiums for continuation of insurance, and
- The renewal of option insurance purchased by the consumer and added to an existing transaction, if disclosures relating to the initial purchase were provided as required.
Based on the definitions, if loss mitigation options include loan modifications, new TILA disclosures must be provided if additional monies are lent (look carefully if additional monies are lent to pay for legal costs/fees), if the rate increases or if the old note and mortgage are satisfied. When in doubt as to whether a TILA disclosure should be provided, the safe route is to provide the disclosure.
Common-law claims have routinely been used to thwart foreclosure proceedings. In this heightened foreclosure environment, these claims are still being raised and directed at loss mitigation practices.
A consumer may try to bring a breach-of-contract claim. The consumer would essentially claim that a loss mitigation offer establishes a contract between the consumer and the lender or servicer. When the loss mitigation is not completed, then the contract is breached.
While these claims will create litigation, the consumer will have a hard battle, as the consumer will need to prove that a contract existed.
To prove a contract, the consumer would need to show a meeting of the minds on all terms involved and consideration. On loss mitigation offers, the lender/servicer should be able to show that the offer is merely an offer and does not establish terms on which the lender/servicer and borrower agreed.
The easiest way to defeat these claims is consideration. To claim that a contract exists, the borrower will need to show consideration from all involved. The borrower will need to show that he or she gave something to the lender and that the servicer, in turn, gave something to the borrower.
In some situations, these claims have merit. An example is when a borrower receives a loss mitigation offer that includes language that if he or she makes a payment of $4,000, foreclosure proceedings will not begin. If the borrower then makes that payment, and the lender forecloses anyway, the terms of the contract are breached.
All too often, the servicer may send such a letter, while the lender receives the $4,000 payment. The $4,000 payment may not be sufficient to pay the arrears, and a foreclosure begins. The borrower then files a counterclaim or new matter claiming breach of contract.
To prevent such cases, make sure the lender and servicer both understand the terms of the loss mitigation offer. Promises to stop or avoid foreclosure must be worded carefully. Most courts would see such a payment as good-faith consideration to stop the filing of foreclosure.
Similarly, a consumer may make a claim of fraud or negligent misrepresentation based on a loss mitigation offer.
Like the example above, if the consumer reads the letter as an offer and acts upon it, the consumer may claim that he or she relied on the representations of the lender/servicer. Offers of loss mitigation must be carefully worded to avoid any confusion on behalf of the consumer.
Despite the threat of potential claims involving loss mitigation, the benefits far outweigh the risks. The benefits of loss mitigation will continue to increase, as both consumers and servicers understand the impact of loss mitigation. With careful programs and an eye on compliance, loss mitigation should still be the first option on any defaulted note or mortgage.
Jennifer M. Monty is an Associate in the Litigation & Defense department of the Cleveland office of WWR. She can be reached at (216) 685-1136 or firstname.lastname@example.org.