- Ocwen and Assurant settle with homeowners for $140 million in class action suit, in which the homeowners alleged that Ocwen received kickbacks by inflating premium costs for forced-placed insurance.
- New York’s Appellate Division, First Department, affirmed dismissal of suit against UBS AG for $30 million, brought by Hanwha Life Insurance Co. (a Korean corporation) claiming that NY courts do not have an interest in adjudicating the suit. Hanwha purchased $30 million in credit-linked notes from UBS that turned out to be worthless. It was trying to recover its losses because it relied on UBS’s advice in purchasing the notes.
- CFPB and the Maryland Attorney General filed suit and settlement consent orders against a title company and participants in an alleged illegal mortgage-kickback scheme.
- After the National Credit Union Administration Board (NCUA) filed a complaint against HSBC for failing as trustee of $2 billion in residential mortgage-backed securities trusts, HSBC claims that the regulator lacks standing to represent the trusts and is barred by Delaware’s three-year statute of limitations.
- Wells Fargo and Deutsche Bank moved to dismiss fives suits from BlackRock Inc., Pacific Investment Management Co. and NCUA for allegedly failing to watch over 850 RMBS trusts as the trustees.
Tag Archives: Wells Fargo
Wells Fargo Smackdown
Circuit Judge Elliott of Missouri Circuit Court issued a Judgment in Holm v. Wells Fargo et al. (No. 08CN-CV00944 Jan. 26, 2015) that awarded nearly three million dollars in punitive damages. This is just one of a number of searing judicial opinions that I’ve discussed on the blog. The Court found that
Wells Fargo and its agents expended immeasurable, if not incomprehensible, time and effort to avert reinstatement. The result of Wells Fargo’s egregious conduct was to impose approximately six and one-half years of uncertainty, lost optimism, emotional distress, and paralysis of Plaintiffs’ family.
The evidence established that Wells Fargo’s intentional choice to foreclose arose from its own financial incentives. Dr. Kurt Krueger testified that Wells Fargo had financial incentives to seek reimbursement of its fees at a foreclosure sale. This economic motivation collided with the well-being of David and Crystal Holm, and was clearly contrary to the interests of Freddie Mac. In other words, in this case, a powerful financial company exerted its will over a financially distressed family in Clinton County, Missouri. The result is predictable. Plaintiffs were severely damaged; Wells Fargo took its money and moved on, with complete disregard to the human damage left in its wake.
Defendant Wells Fargo is an experienced servicer of home loans. Wells Fargo knew that its decision to foreclose after reinstatement was accepted would inflict a devastating injury on the Holm family. Wells Fargo’s actions were knowing, intentional, and injurious. (7)
It is not certain that this judgment will be held up on appeal. If it is, it is still worth asking whether the occasional verdict of this magnitude is sufficient to change the behavior of servicers. There have been many efforts to change the incentives that servicers have, but cases such as these make one wonder if there is some deeper problem that has not yet been identified and addressed. One cannot imagine how Wells Fargo employees could have let this go on for so long in this case. But they did.
Mortgage Assignment Mayhem
Judge Drain issued a biting Memorandum of Decision on Debtor’s Objection to Claim of Wells Fargo Bank, NA in the case In re Carrsow-Franklin (No. 10-20010, Jan. 29, 2015). The Court granted the debtor’s claim objection “on the basis that Wells Fargo is not the holder or owner of the note and beneficiary of the deed of trust upon which the claim is based and therefore lacks standing to assert the claim.” (1)
This blog, and many other venues, have documented the Alice in Wonderland world of mortgage assignments in which something is true because the the foreclosing party, like the Red Queen herself, says it is.
Judge Drain adds to the evidence with ALLCAPS, a touch I can’t remember seeing in another judicial opinion that I have blogged about:
Because Wells Fargo does not rely on the Assignment of Mortgage to prove its claim, the foregoing evidence is helpful to the Debtor only indirectly, insofar as it goes to show that the blank indorsement, upon which Wells Fargo is relying, was forged. Nevertheless it does show a general willingness and practice on Wells Fargo’s part to create documentary evidence, after‐the‐fact, when enforcing its claims, WHICH IS EXTRAORDINARY. (17-18, emphasis in the original, footnote omitted)
In retrospect, legal historians will be shocked by the lending industry’s practices which seemed to ignore the law in favor of convenience. MERS, and the practices which arose from it, was an attempt to circumvent clunky laws in favor of efficiency. For many years, many judges went along with this regime. Since the foreclosure crisis began, however, more and more judges are engaging in a more rigorous analysis of the documents in a particular case and the applicable law governing mortgage notes and foreclosures. When these judges find that a transaction does not comply with the relevant law, it is incumbent upon them to deny the relief sought by the foreclosing party as Judge Drain did here.
Monday’s Adjudication Roundup
- S&P agrees to settlement of $58 million for fraudulent ratings on commercial mortgage-backed securities.
- SEC order regarding violations of Section 17(a)(1) of the Securities Act, Section 15E(c)(3) of the Exchange Act, and Exchange Act Rules 17g-2(a)(2)(iii) and 17g-2(a)(6). $6.2 million disgorgement, plus $800,000 prejudgment interest, and $35 million civil money penalty for affirmatively claiming to use one method of rating when it was actually using another method.
- SEC order regarding violations of Section 17(a)(l) of the Securities Act and Exchange Act Rule 17g-2(a)(6). $15 million penalty for publishing “false and misleading article purporting to show that its new credit enhancement levels could withstand Great Depression-era levels of economic stress.”
- SEC order regarding violations of Section 15E(c)(3)(a) of the Exchange Act and Exchange Act Rules 17g-2(a)(2)(iii) and 17g-2(a)(6). $1 million civil money penalty for failure in oversight of residential mortgage-backed securities (RMBS) ratings.
- SEC order regarding a public hearing.
- Following the Consumer Financial Protection Bureau filing a complaint in the District Court for the District of Maryland, JP Morgan and Wells Fargo agreed to pay $37.5 million in penalties for a mortgage-kickback scheme with a title company.
- The Supreme Court heard oral arguments for disparate impact case on January 21st. (Whether disparate impact is a cognizable claim under the Fair Housing Act).
Whitman on Foreclosing on E-Note
Professor Dale Whitman posted a commentary on Good v. Wells Fargo Bank, 18 N.E.3d 618 (Ind. App. 2014) on the Dirt listserv. The case addresses whether a lender foreclosing a mortgage securing an electronic note must provide proof that it had “control” of the note when it filed the foreclosure action. This is an interesting new take on an old issue. Dale’s commentary reads:
By now, everyone is familiar with the requirements of UCC Article 3 with respect to enforcement of negotiable notes. Article 3 requires either proof that the party enforcing the note has possession of the original note, or as an alternative, requires submission of a lost note affidavit. With conventional paper notes, it has become common for courts in judicial foreclosure states to require, as a condition of standing to foreclose, that the note holder or its servicer have had possession of the note on the date the foreclosure complaint or petition was filed. This requirement is problematic if (as is often true) the endorsement on the note is undated. In such cases, the servicer will usually be expected to provide additional proof (commonly in the form of affidavits of employees of the holder and/or servicer) that the note had been delivered to the foreclosing party before the date of filing of the action. See, e.g., Deutsche Bank N.T. v. Beneficial New Mexico, Inc., 335 P.3d 217 (N.M. App. 2014); Boyd v. Wells Fargo Bank, N.A., 143 So.3d 1128 (Fla.App. 2014); U.S. Bank, N.A. v. Faruque, 991 N.Y.S.2d 630 (N.Y.App.Div. 2014).
Suppose, however, that the note was electronic rather than paper. Such notes are enforceable under eSign and UETA, but these statutes modify the concepts of delivery and possession. Because an electronic note can be reproduced as many times as desired, and each copy is indistinguishable from the original, eSign creates the concept of the note as a “transferrable record.” Such records must have the following characteristics:
1. The record must be held within a system in which “a single authoritative copy of the record (the note) exists, which is unique, identifiable, and unalterable.”
2. To have the equivalent of possession of such a note, if it has been transferred, a person must have “control” in the sense that the system for tracking such notes must reliably establish that the person enforcing the note is the one to whom the record was transferred.
3. Finally, if the record has been transferred, the authoritative copy of the record itself must indicate the identity of the person who whom it was most recently transferred.
See 15 U.S.C. sec. 7021.
There are very few cases thus far involving foreclosures of mortgages securing e-notes, and little authority on exactly what the holder must prove in order to properly foreclose. In the Good case Wells Fargo was acting as servicer for Fannie Mae, the holder of an e-note that was registered in the MERS e-registry. (MERS’ role with e-notes is very different than for paper notes. In paper note transactions, MERS does not take possession of the note and has no dealings with it, but in e-note transactions, MERS operates a registry to track who has control of the note.)
Accompanying its foreclosure complaint, Wells filed an affidavit by one of its officers, stating that Wells was the servicer, that it maintained a copy of the note, and that its systems provided controls to assure that each note was maintained accurately and protected against alteration. Finally, it stated that the paper copy it submitted with the foreclosure complaint was a true and correct copy of the original e-note.
Unfortunately for Wells, the court found that this affidavit was woefully inadequate to establish Wells’ standing to foreclose the mortgage. Here is the court’s list of particulars:
1. The affidavit stated that Wells possessed the note, but the court couldn’t tell whether it meant the electronic note or a paper copy.
2. The affidavit did not assert that Wells had “control” of the record, either by maintaining the single authoritative copy itself in its own system, or by being identified as having control of the single authoritative copy in the MERS registry system.
3. In fact, Wells never even mentioned the MERS registry system in its affidavit, even though it is obvious from the facts that the note was being tracked within that system.
Wells tried to repair the damage at trial; an employee of Wells testified that Wells was in control of the note, currently maintained it, and serviced the loan. But the court found that this testimony was “conclusory” (as indeed it was) and was insufficient to establish that Wells had control of the note.
Comment: The court provides an extremely useful road map for counsel representing a servicer in the judicial foreclosure of a e-note. The statute itself provides (in 15 U.S.C. 7021(f)) that the person enforcing the note must provide “reasonable proof” that it was in control of the note, and the court felt this must be detailed information and not merely a bare statement.
While the case involved a judicial foreclosure, one might well ask how the “reasonable proof” requirement would be satisfied in a nonjudicial foreclosure. In about eight states, the courts have held (with paper notes) that their nonjudicial foreclosure statutes do not require any assertion or proof of possession of the note. But it is arguable that, if the note is electronic rather than paper, eSign overrides this conclusion by virtue of its express requirement of “reasonable proof.” And since eSign is a federal statute, it is quite capable of preempting any contrary state legislation. On the other hand, the “reasonable proof” requirement only applies “if requested by a person against which enforcement is sought.” In a nonjudicial foreclosure proceeding, how would the borrower make such a request? These are interesting, but highly speculative questions.
Weaker Reps and Warranties on the Horizon
Inside Mortgage Finance highlighted a DBRS Presale Report for J.P. Morgan Mortgage Trust, Series 2014-IV3. This securitization contains prime jumbo ARMS, some with interest only features. So, these are not plain vanilla mortgages.
The report raises some concerns about loosening standards in the residential mortgage-backed securities market, particularly relating to standards for the representations and warranties that securitizers make to investors in the securities:
Relatively Weak Representations and Warranties Framework. Compared with other post-crisis representations and warranties frameworks, this transaction employs a relatively weak standard, which includes materiality factors, the use of knowledge qualifiers, as well as sunset provisions that allow for certain representations to expire within three to six years after the closing date. The framework is perceived by DBRS to be weak and limiting as compared with the traditional lifetime representations and warranties standard in previous DBRS-rated securitizations. (4)
DBRS noted, however, that there were various mitigating factors. They included:
Representations and warranties for fraud involving multiple parties that collaborated in committing fraud with respect to multiple mortgage loans will not be allowed to sunset.
Underwriting and fraud (other than the above-described fraud) representations and warranties are only allowed to sunset if certain performance tests are satisfied. . . .
Third-party due diligence was conducted on 100% of the pool with satisfactory results, which mitigates the risk of future representations and warranties violations.
Automatic reviews on certain representations are triggered on any loan that becomes 120 days delinquent, any loan that has incurred a cumulative loss or any loan for which the servicers have stopped advancing funds.
Pentalpha Surveillance LLC (Pentalpha Surveillance) acts as breach reviewer (Reviewer) required to review any triggered loans for breaches of representations and warranties in accordance with predetermined procedures and processes. . . .
Notwithstanding the above,DBRS reduced the origination scores, assigned additional penalties and adjusted certain loan attributes based on third-party due diligence results in its analysis which resulted in higher loss expectations. (4-5)
All in all, this does not sound so terrible. But it is worth noting that the tight restrictions in the jumbo RMBS market appears to be loosening up. As the market cycles from fear to greed, as it always does, it is worth keeping track of each step that it takes toward greed. We can always hope to identify early on when it has taken one step too many.
Is Freddie the “Government” When It’s In Conservatorship?
Professor Dale Whitman posted a commentary on Federal Home Loan Mortgage Corp. v. Kelley, 2014 WL 4232687, Michigan Court of Appeals (No. 315082, rev. op., Aug. 26, 2014) on the Dirt listserv:
This is a residential mortgage foreclosure case. The original foreclosure by CMI (CitiMortgage, apparently Freddie Mac’s servicer) was by “advertisement” – i.e., pursuant to the Michigan nonjudicial foreclosure statute. Freddie was the successful bidder at the foreclosure sale. In a subsequent action to evict the borrowers, they raised two defenses.
Their first defense was based on the argument that, even though Freddie Mac was concededly a nongovernmental entity prior to it’s being placed into conservatorship in 2008 (see American Bankers Mortgage Corp v. Fed Home Loan Mortgage Corp, 75 F3d 1401, 1406–1409 (9th Cir. 1996)), it had become a federal agency by virtue of the conservatorship with FHFA as conservator. As such, it was required to comply with Due Process in foreclosing, and the borrowers argued that the Michigan nonjudicial foreclosure procedure did not afford due process.
The court rejected this argument, as has every court that has considered it. The test for federal agency status is found in Lebron v. Nat’l Railroad Passenger Corp, 513 U.S. 374, 377; 115 S Ct 961; 130 L.Ed.2d 902 (1995), which involved Amtrak. Amtrak was found to be a governmental body, in part because the control of the government was permanent. The court noted, however, that FHFA’s control of Freddie, while open-ended and continuing, was not intended to be permanent. Hence, Freddie was not a governmental entity and was not required to conform to Due Process standards in foreclosing mortgages. This may seem overly simplistic, but that’s the way the court analyzed it.
There’s no surprise here. For other cases reaching the same result, see U.S. ex rel. Adams v. Wells Fargo Bank Nat. Ass’n, 2013 WL 6506732 (D. Nev. 2013) (in light of the GSEs’ lack of federal instrumentality status while in conservatorship, homeowners who failed to pay association dues to the GSEs could not be charged with violating the federal False Claims Act); Herron v. Fannie Mae, 857 F. Supp. 2d 87 (D.D.C. 2012) (Fannie Mae, while in conservatorship, is not a federal agency for purposes of a wrongful discharge claim); In re Kapla, 485 B.R. 136 (Bankr. E.D. Mich. 2012), aff’d, 2014 WL 346019 (E.D. Mich. 2014) (Fannie Mae, while in conservatorship, is not a “governmental actor” subject to Due Process Clause for purposes of foreclosure); May v. Wells Fargo Bank, N.A., 2013 WL 3207511 (S.D. Tex. 2013) (same); In re Hermiz, 2013 WL 3353928 (E.D. Mich. 2013) (same, Freddie Mac).
There’s a potential issue that the court didn’t ever reach. Assume that a purely federal agency holds a mortgage, and transfers it to its servicer (a private entity) to foreclose. Does Due Process apply? The agency is still calling the shots, but the private servicer is the party whose name is on the foreclosure. Don’t you think that’s an interesting question?
The borrowers’ second defense was that Michigan statutes require a recorded chain of mortgage assignments in order to foreclose nonjudicially. See Mich. Comp. L. 600.3204(3). In this case the mortgage had been held by ABN-AMRO, which had been merged with CMI (CitiMortgage), the foreclosing entity. No assignment of the mortgage had been recorded in connection with the merger. However, the court was not impressed with this argument either. It noted that the Michigan Supreme Court in Kim v JP Morgan Chase Bank, NA, 493 Mich 98, 115-116; 825 NW2d 329 (2012), had stated
to set aside the foreclosure sale, plaintiffs must show that they were prejudiced by defendant’s failure to comply with MCL 600.3204. To demonstrate such prejudice, they must show they would have been in a better position to preserve their interest in the property absent defendant’s noncompliance with the statute.
The court found that the borrowers were not prejudiced by the failure to record an assignment in connection with the corporate merger, and hence could not set the sale aside.
But this holding raises an interesting issue: When is failure to record a mortgage assignment ever prejudicial to the borrower? One can conceive of such a case, but it’s pretty improbable. Suppose the borrowers want to seek a loan modification, and to do so, check the public records in Michigan to find out to whom their loan has been assigned. However, no assignment is recorded, and when they check with the originating lender, they are stonewalled. Are they prejudiced?
Well, not if it’s a MERS loan, since they can quickly find out who holds the loan by querying the MERS web site. (True, the MERS records might possibly be wrong, but they’re correct in the vast majority of cases.) And then there’s the fact that federal law requires written, mailed notification to the borrowers of both any change in servicing and any sale of the loan itself. If they received these notices (which are mandatory), there’s no prejudice to them in not being able to find the same information in the county real estate records.
So one can postulate a case in which failure to record an assignment is prejudicial to the borrowers, but it’s extremely improbable. The truth is that checking the public records is a terrible way to find out who holds your loan. Moreover, Michigan requires recording of assignments only for a nonjudicial foreclosure; a person with the right to enforce the promissory note can foreclose the mortgage judicially whether there’s a chain of assignments or not.
All in all, the statutory requirement to record a chain of assignments is pretty meaningless to everybody involved – a fact that the Michigan courts recognize implicitly by their requirement that the borrower show prejudice in order to set a foreclosure sale aside on this ground.
