Author Archives: David Reiss

Careful When Putting Shoe on Other Foot

Posted on by

Nestor Davidson has posted a very useful article to SSRN, New Formalism in the Aftermath of the Housing Crisis.  The article notes that as “borrower advocates have responded to [the] surge in mortgage distress, they have found success raising a series of largely procedural defenses to foreclosure and mortgage-related claims asserted in bankruptcy.” (391)

Davidson points out that this “renewed formalization in the mortgage distress system is a curious turn in the jurisprudence” because from “the earliest history of mortgage law, lenders have had a tendency to invoke the hard edges of law’s formal clarity, while borrowers have often resorted to equity to obtain a measure of substantive fairness in the face of such strictures.” (392)

What I particularly like about this article is that it takes the broad view on downstream (homeowner foreclosure and bankruptcy) litigation.  Instead of painting a pointillistic portrait of all of this “mortgage distress” litigation (a standing case here, a chain-of-assignment case there), Davidson identifies a pattern of formalistic defenses being raised by homeowners and puts it into historical context.

Davidson warns of the potential unintended consequences of this development: “The borrower push to emphasize formalism in mortgage practice, however understandable, may thus give primacy to the set of judicial tools least amenable to claims of individual substantive justice.” (430)

I don’t think that I agree that this new formalism will bite homeowners in the end.  As Davidson himself acknowledges, “formalism need not be equivalent on both sides  . . ..” (430) But I do agree with his conclusion:

For those concerned about the long-term structural balance between procedural regularity and substantive fairness embodied in the traditional realms of law and equity, the brittleness that the new formalism may be ushering in is worth considering and, perhaps, cause for redoubling efforts to find structural solutions to a crisis that even now continues. (440)

 

 

Can’t Stand It, Just Show Me The Note

Posted on by

The federal District Court for Massachusetts issued a Memorandum and Order in Ross v. Deutsche Bank National Trust Company that has two interesting aspects. First, it follows the 1st Circuit’s recently decided Culhane. Second, it reaffirms that “show me the note!” is alive and well in Massachusetts. The Rosses alleged that Deutsche Bank violated Massachusetts statutory foreclosure scheme.  These alleged violations included: 1. lack of standing and 2. Deutsche Bank did not have “valid title to either the Note or the Mortgage and thus lacks the legal authority to conduct a foreclosure sale of the subject property.” (7-8)

The bottom line on standing:  the Massachusetts Supreme Court (in Eaton v. Fannie Mae), along with the federal District Court of Massachusetts and the First Circuit have been requiring “strict compliance with the regulations governing who has legal standing to foreclose . . ..” (8)

The bottom line on “show me the note:” this court was willing to carefully parse the chain of title to a note and mortgage.  In this case, they had been owned by New Century which was dissolved by a bankruptcy court.  The court found that “the Rosses have stated a plausible claim that the [] assignment from New Century to Deutsche Bank was invalid.” (13) So, while some courts are not so strict about establishing the legal chain of title to a note and mortgage,we now know that this court is.

No News to Report on Preemption

Posted on by

The Fourth Circuit recently reversed a dismissal of a fraud claim in McCauley v. Home Loan Investment  Bank, F.S.B.; Deutsche Bank National Trust Company. The main issue on appeal was whether the Home Owners’ Loan Act preempted the homeowner’s state law  claims arising from a mortgage originated by a federal savings association. While the court affirmed the dismissal of the unconscionability claim as preempted by HOLA, it held that the fraud claim “only incidentally affects lending, it is not preempted by HOLA or its implementing regulation . . ..” (12-13)

As to the unconscionability claim, the court found that McCauley “in essence asks us to impose new, substantive requirements on mortgage lenders.” (10) But as to the fraud claim, the court found that HOLA and its implementing regulation were not intended to “preempt state laws that establish the basic norms that undergird commercial transactions.” (7, citation omitted)  McCauley does not blaze a new path on preemption, but it is consistent with a number of recent decisions that refuse to broadly preempt state consumer protection laws, a welcome trend.

Rule of Law Cuts Both Ways

Posted on by

The New York Appellate Division (2d Dep’t) reversed orders by Justice Schack of New York Supreme Court (Kings County) in HSBC Bank USA, N.A. v. Taher.  Justice Schack became something of a folk hero to many for holding lenders’ feet to fire for their lackadaisical approach to various formal requirements for foreclosures.  But he has been accused of playing fast and loose with the law himself.  Just as many have rightly said that lenders should be made to comply with the law governing foreclosures, those opposing lenders must do the same.  The Appellate Division wrote

Since Emmanuel was decided approximately two months before the Supreme Court improperly directed dismissal of the complaint in the instant action, sua sponte, for lack of standing, we take this opportunity to remind the Justice of his obligation to remain abreast of and be guided by binding precedent. We also caution the Justice that his independent internet investigation of the plaintiff’s standing that included newspaper articles and other materials that fall short of what maybe judicially noticed, and which was conducted without providing notice or an opportunity to be heard by any party (citation omitted) was improper and should not be repeated. (4)

There can be the rule of law without justice, but there can be no justice without the rule of law.

Reiss on Mortgage Insurance Probe, Again

Posted on by

American Banker also ran a story on the settlement, Lenders Likely Next Target in CFPB Reinsurance Kickback Probe (paywall) that includes an interview with me:

WASHINGTON – The Consumer Financial Protection Bureau’s enforcement actions against four large mortgage insurers are likely just the start of efforts against an alleged widespread mortgage insurance kickback scheme that involves several lenders.

pay day loans now

The agency ordered the firms to stop reinsurance deals with mortgage lenders that were purportedly made in return for getting a larger slice of the mortgage insurance pie. It also said the insurance companies must pay a total of $15.4 million in civil money penalties and undergo additional CFPB monitoring.

Yet the paltry size of the fines – combined with additional investigations and ongoing litigation involving borrowers, insurers and big banks alleged to have participated – suggest more enforcement activity is still on the way, including against lenders that were said to have received the reinsurance business. The scheme is estimated by some to have involved as much as $6 billion in kickbacks.

“In the context of the massive amount of mortgage fraud that occurred in this industry, a $15 million penalty seems pretty small,” said David Reiss, a professor at Brooklyn Law School. “But given that further enforcement against the large financial institutions that demanded the kickbacks is possibly still on the horizon, the jury is out on whether this will be an effective set of enforcement actions.”

Reiss on Mortgage Insurance Probe

Posted on by

Law360 interviewed me in Lenders Face Hefty Fines in CFPB Mortgage Insurance Probe (paywall) about the recent $15 million settlement with four mortgage insurers. It reads in part:

The Consumer Financial Protection Bureau’s $15.4 million settlement Thursday with four mortgage insurers is just the first to come out of a probe into an alleged scheme to pay kickbacks to banks in exchange for business, and lenders caught up in the agency’s net are likely to get hit even harder, experts say.

In announcing the settlement, the CFPB made clear that it was looking closely at lenders and their role in the alleged kickback scheme, which the bureau said began in the 1990s. Implied in the CFPB’s statements is that the lenders were at the center of the enterprise, and that could mean that both bank and nonbank lenders could face a far stiffer penalty than the mortgage insurance firms paid, said Brooklyn Law School professor David Reiss.

“In the context of the overall markets that we’re talking about, $15 million is not even a rounding error. If this is for real, it’s going to have to be a larger settlement with the financial institutions that demanded the bribe,” he said.

Stand-Offish

Posted on by

Judge Swain (SDNY) issued a Memorandum Opinion and Order in Rajamin v. Deutsche Bank National Trust Co. in which she followed “the weight of caselaw throughout the country” to effectively hold that “a non-party to a [Pooling and Servicing Agreement lacks standing to assert non-compliance with the PSA as a claim or defense unless the non-party is an intended (not merely incidental) third party beneficiary of the PSA.” (6) The Opinion cites a number of cases to that effect.

aure.biz

KeAupuni Akina, Brad Borden and I will be posting a draft of an article on the “Show Me The Note!” foreclosure defense soon.  There is a real thicket of cases addressing the extent to which homeowners can raise real and evidentiary problems with the loan documents.  The general rule seems to be that courts do not find these problems to be germane to the homeowner’s foreclosure, eviction or bankruptcy proceeding.  There are exceptions, however, such as the Eaton v. Fannie Mae case which held that the Show Me The Note defense would apply prospectively in Massachusetts. But more often than not, courts stick closely to the language of their jurisdiction’s foreclosure statute which tend not to touch upon many issues that arise from the complexities of the securitization process through which these mortgages have traveled.