Author Archives: David Reiss

Robo-Signing as Abuse of Process?

Posted on by

Apparently not.  The Florida Supreme Court issued a narrow ruling in Pino v. Bank of New York that a trial court does not have the authority “to grant relief from a voluntary dismissal where the motion alleges fraud on the court in the proceedings but no affirmative relief on behalf of the plaintiff has been obtained from the court.”  (3)

In Pino,the homeowner defendant had sought to have the trial court strike “a notice of voluntary dismissal of the mortgage foreclosure action” and have “the case reinstated in order for the trial court to then dismiss the action with prejudice as a sanction to the mortgage holder for allegedly filing fraudulent documentation regarding ownership of the mortgage note.” (2)

As the court noted, the question before it was very limited.  It indicates that the “case is not about whether a trial court has the authority in an ongoing civil proceeding to impose sanctions on a party who has filed fraudulent documentation with the court.” (2)  That being said, if the judiciary has an epidemic of fraudulent filings in plain sight — foreclosure filings with facially flawed documentation– could it and should it have done more?  If foreclosure mill law firms (and debt collection law firms) realize that they can file flawed papers and either withdraw or correct them later on, where are  defendants, particularly unrepresented ones, left?

The common law already acknowledges the tort of Abuse of Process which awards damages against a party who maliciously and intentionally perverts judicial process.  And yet, the judiciary has taken very few systemic measures to address what has become a dominant business model for foreclosure and debt collection law firms.  So, the Florida Supreme Court is right that it only addressed a limited question under Florida law.  It could have sought to rule more broadly about the judiciary’s inherent authority to protect the process of litigation. (See 33) But it chose not to.

The Court does acknowledge that there are bigger issues at play, as it asked the Florida Civil Procedure Rules Committee to consider whether additional sanctions should be available to courts to address fraudulent pleadings. (43) But it is also time for the courts to deal with the bigger questions.  How should courts deal in particular with robo-signing practices endemic to the 50 states?  How does the rule of law suffer when officers of the court are not required (i) to do due diligence as to their own filings and (ii) to stand by them when they turn out to be fraudulent or materially flawed?  And how can that state of affairs best be remedied?

More on The DoJ’s S&P Lawsuit

Posted on by

Law360 interviewed me and others about the reliance on FIRREA in the Department of Justice’s complaint (story available here).

CFPB Mortgage Disclosure Forms: Test And Verify

Posted on by

The CFPB is requesting comments relating to the collection of “information as part of quantitative research related to residential mortgage loan disclosures.”  (8113) The purpose “of the quantitative testing will be to examine whether the disclosures aid consumers in understanding the terms of the mortgage loan that is the subject of the disclosure.”  (8814)  It is great that the CFPB is testing its tools to ensure that they work as intended.  Government has put a lot of faith in the power of disclosures to help consumers make good financial decisions.  It is important to test whether that faith is deserved.

More on DoJ’s S&P Complaint

Posted on by

I highlighted some of the juicy bits of the complaint a few days ago.  There has been a lot of discussion of the suit and related issues.  Here is my two cents’ worth.

  • FIRREA, an untested enforcement statute, has gone from zero to hero in sixty seconds.  The federal government has had very little experience using the enforcement provisions of FIRREA but commentators have now identified it as a powerful tool to hold financial companies accountable for their misdeeds in the early 2000s.  Time will tell if courts agree that this expansive interpretation will hold up.
  • It is probably no coincidence that the federal government brought the S&P case in California, which is in the 9th Circuit.  Or rather, I should say, it is probably no coincidence that the government did NOT bring it in the 2nd Circuit.  The 2nd Circuit has ruled in favor of the rating agencies even since the events of the financial crisis had become well known, continuing the trend of treating rating agencies as editorialists, albeit terse ones.  Even though Judge Scheindlin (SDNY) has issued a series of rulings against rating agencies, the 2nd Circuit will ultimately rule on any appeals from the cases she hears.  While the 9th Circuit is more of a wild card than other Circuits, there is no doubt that it will go its own way on rating agency liability.
  • It is hard to say whether the federal government is primarily seeking to reform the rating agency industry by bringing this lawsuit (I would assume that similar suits are in the works for Moody’s and Fitch) or whether it is merely seeking to hold it accountable for its alleged bad acts.
  • It is interesting to see how the states are piling on, with lawsuits and investigations in a number of states, including NY.  The rating agencies’ potential liability from all of these suits combined is quite significant — indeed, going-out-of-business significant.
  • And it is scary to realize that for all of the documented flaws in the rating agency industry, no one has come up with a model for the industry that is clearly superior to what we have now.  There is a lot of work to be done.

First Circuit Hears RI Case Involving Hundreds of Foreclosures

Posted on by

The First Circuit has heard oral argument on February 5th in In Re Mortgage Foreclosure Cases.  In that consolidated case, a Rhode Island District Court judge had stayed over 700 foreclosures until a good faith attempt to settle the cases under the auspices of a special master has run its course.  The court issued a memorandum and order denying a motion for a stay pending appeal.

The homeowners claim that the mortgages being foreclosed upon were improperly assigned, but this appeal does not reach the substance of the dispute.

$127 Million LPS Robo-Signing Settlement with 47 A.G.s

Posted on by

The Lender Processing Services, Inc. press release is here.

The $2.5 million Michigan settlement relating to the overall total $127 million settlement can be found here.  In the Michigan settlement, LPS did not admit “any violation of law.” (2)  Nonetheless, there are some interesting admissions, including, that

  • some mortgage loan documents executed by employees of LPS subsidiaries contain “unauthorized signatures, improper notarizations, or attestations of facts not personally known to or verified by the affiant” and some may contain “inaccurate information relating to the identity, location, or legal authority of the signatory, assignee, or beneficiary or to the effective date of the assignment.”  (5)
  • LPS subsidiaries “recorded or caused to be recorded Mortgage Loan Documents with these defects in local land records offices or executed or facilitated execution on behalf of the Servicers knowing some of these Mortgage Loan Documents would be filed in state courts or used to comply with statutory, non-judicial foreclosure processes.”  (5)
  • employees of LPS subsidiaries signed mortgage loan documents in the name of other employees.  (5)

Brad and I discuss the importance of following the letter of the law when dealing with the assignment of mortgage notes in Dirt Lawyers and Dirty REMICs.  It should go without saying that that applies to judicial and non-judicial foreclosure processes as well.  We will be addressing that subject in our forthcoming piece with KeAupini Akina which should be out later this month.

With this latest settlement, only Nevada has an ongoing suit against LPS.

S&P Complaint, Bombshell upon Bombshell!

Posted on by

DoJ’s complaint is chock full of interesting allegations.  Previous critiques of the rating agencies rehashed a handful of embarrassing emails that made their way into an SEC staff report a few years ago (“It could be structured by cows and we would rate it.”).  The complaint has a lot more substantive allegations of conflicts of interest that are rampant in the rating agency industry.

The complaint states that, “In carrying our the scheme to defraud, S&P falsely represented that its credit ratings of RMBS and CDO tranches were objecivie, independent, uninfluenced by any conflicts of interest that might compromise S&P’s analytic judgment, and reflected S&P’s true current opinion regarding the credit risks the rated RMBS and CDO tranches posed to investors.”  (2)

Some highlights from the allegations contained in the complaint:

  • From an S&P strategic plan:  “The primary customers of the CDO group today are the deal arrangers (bankers/intermediaries).  This customer group continues to be responsible for the bast majority of revenue, including all initial deal rating fees paid to S&P.”  (16, emphasis in the original)
  • In response to a new rating process that “required consideration of ‘market insight’ and rating implications and the polling of both ‘3 to 5 investors in the product’ and ‘an appropriate number of issuers and investment bankers for a full 360-market perspective,” an S&P executive wrote,

What do you mean by “market insight” with regard to a proposed criteria change?  What does “rating implication” have to do with the search for truth?  Are you implying that we might actually reject or stifle “superior analytics” for market considerations.?  Inquiring minds need to know.  (40)

  • With echoes of Quattrone’s suggestion to follow his firm’s document retention policy, S&P executives prepared a memorandum that stated that “concerns with the objectivity, integrity, or validity” or rating criteria should not be put in writing unless it was addressed to an S&P attorney which would presumably trigger attorney-client privilege.  (41)
  • An S&P analyst wrote, “We just lost a huge Mizuho RMBS deal to Moody’s due to a huge difference in the required credit support level.”  The analyst continued, “What we found from the arranger was that our support level was at least 10% higher than Moody’s.”  The analyst continued, “Losing one or even several deals due to criteria issues, but this is so significant that it could have an impact on future deals.  There is no way we can get back on this one but we need to address this now in preparation for the future deals.” (44-45)
  • Another analyst wrote, “Remember the dream of being able to defend the model with sound empirical research?  The sort of activity a true quant CoE [the analysts job at the time] should be doing perhaps?  If we are just going to make it up in order to rate deals, then quants are of precious little value.  I still believe that people want the model to be consistent with history, and that the impact of the model will not destroy the business.”  (51)
  • An S&P PowerPoint presentation stated that to come up with Probabilities of Default (PDs) in certain contexts, “we look at our raw data and come up with a statistical best fit.  When this does not meet our business needs, we have to change our parameters ex-post to accommodate.”  The slide continued, “Does this work [for] our rating business?  If it does not, need to tweak PDs.”  (56)

S&P is going to have a tough time harmonizing those statements with the numerous assertions of their objectivity, such as those found in its Code of Practices and Procedures:

  • S&P’s “mission has always remained the same — to provide high-quality, objective, independent, and rigorous analytical information to the marketplace” (28)
  • “Ratings assigned by Ratings Services shall not be affected by an existing or a potential business relationship between Rating Services (or any Non-Ratings Business) and the issuer or any other party, or the non-existence of such relationship.”  (29)

More on this anon.