Quiet Title Action ~ What Florida Home Owners Need to Know

14 Wednesday Aug 2013

Posted by BNG in Affirmative Defenses, Appeal, Banks and Lenders, Federal Court, Foreclosure Crisis, Foreclosure Defense, Fraud, Judicial States, Litigation Strategies, Loan Modification, MERS, Mortgage Laws, Non-Judicial States, Pleadings, Pro Se Litigation, State Court, Trial Strategies, Your Legal Rights

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Center for Housing Policy, Florida, Foreclosure, MER, Mortgage Electronic Registration System, RealtyTrac, Securitization, United States

Quiet Title Actions: How to Force the Banks To Prove Up

The Foreclosure Crisis

I. THE FORECLOSURE CRISIS

• ISSUE ONE: Who Owns Your Note?

1. The Securitization Process:
– A. Originator Sells To Nominee (First Sale)
– B. The Nominee Sells To Depositor (Second Sale)
– C. The Depositor Sells to the REMIC Trust
• The REMIC Trust created to hold “pool” of mortgages and sell “shares” in
the REMIC Trust to investors.
• A Trustee is designated to operate the trust (typically a bank).
• The REMIC Trust operates through “Bylaws” and “Pooling and Servicing
Agreements”.
• The Pooling and Servicing Agreement outlines how the income from the
mortgages will be managed and the Servicing Agent who will collect income
and foreclose in the event of default.

The Foreclosure Crisis

• One in every 365 housing units in the United States was branded with a foreclosure notice recorded in December 2011, according to RealtyTrac.com. That means 850,000 Americans got a big lump of coal in their stocking from Uncle Scrooge.
• Over 2,076,764 American homes are now in foreclosure.
• One in every 165 housing units in California (more that twice the national average) received a foreclosure notice in December, for a total of 80,488 properties. In Nevada, the figure was one in every 93 houses.
• USA Today reports that almost 1 in 5 children in Nevada lived or live in owneroccupied homes that were lost to foreclosure or are at risk of being lost. The percentages are 15% in Florida, 14% for Arizona, and 12% for California. That’s about one in eight children in California. Five years into the foreclosure crisis, an estimated 2.3 million children have lived in homes lost to foreclosure.
• RealtyTrac reports that foreclosure and REO (real estate-owned) homes accounted for 24 percent of all residential sales during the fourth quarter of 2011.
• Here in relatively affluent Palm Beach County, homeowners are No. 1 in the state for the average number of loans in foreclosure that are delinquent. It has the fourth highest number of foreclosures, 45,829 with an average delinquency of 623 days.

Florida’s Foreclosure Statistics

• Florida is leading the country in foreclosure rates.
• Florida metro areas dominate the top 25 list for cities with the worst foreclosure rates — including the eight highest in the nation, according to a report released Tuesday.#
• In all, 17 of the top 25 cities with the highest foreclosure rates as of March are Florida cities, according to the Center for Housing Policy, the research arm of the Washington, D.C.-based National Housing Conference. #
• With a 10.9 percent foreclosure rate, Jacksonville is ranked 18th overall, but 14 other Florida cities had higher rates. Miami topped the list with the nation’s highest rate of 18.2 percent. #
• Miami’s conventional mortgage foreclosure rate in March was 14.2 percent, while its subprime rate was 39.1 percent. Jacksonville’s conventional foreclosure rate was 7.8 percent while its subprime rate was 29 percent.
• But given the fact that Florida cities made up 15 of the 25 cities with the highest “serious” mortgage delinquency rates — either behind by 90 days behind or more or now in foreclosure, there could be more foreclosures in the state’s future. And just like on the foreclosure list, Miami was also first, with a delinquency rate of 23.6 percent; and Jacksonville was 18th, with a rate of 15.6 percent.

Who Owns Your House?

• ISSUE ONE: WHO OWNS YOUR HOUSE?
– Promissory Note (the “Note”): Loan Agreement
– Mortgage/Deed of Trust: Power of Sale Document
– Grant Deed: You own until you breach the Promissory Note and
your Lender (or Others) use the Power of Sale Document to
Foreclose
– Before Securitization: Your Lender held your Note was always
the Foreclosing Entity.
– After Securitization: No One Knows Who Owns Your Note

Who Owns Your Note?

ISSUE TWO: Who Owns Your Note?
1. The Securitization Process:
– A. Originator Sells To Nominee (First Sale)
– B. The Nominee Sells To Depositor (Second Sale)
– C. The Depositor Sells to the REMIC Trust
• The REMIC Trust created to hold “pool” of mortgages and sell “shares” in
the REMIC Trust to investors.
• A Trustee is designated to operate the trust (typically a bank).
• The REMIC Trust operates through “Bylaws” and “Pooling and Servicing
Agreements”.
• The Pooling and Servicing Agreement outlines how the income from the
mortgages will be managed and the Servicing Agent who will collect income
and foreclose in the event of default.

• Why Is There a Question?
1. The Securitization Process: No One Knows Who Owns Your
Note
– The Original Lenders Failed to Properly Assign Your Note to
Subsequent Purchasers
– Incompetent Personnel
– No Training: No One Trained to Sell Notes Properly
– Never Occurred Before: Prior to Securitization Didn’t
Transfer or Sell Notes
– Thousands of Assignments Left Blank
– Remic Trusts Never Receive Assignments or Possession of
Notes: Current litigation

2. Mortgage Electronic Registration System, Inc
1. Created by over 44 Financial Institutions in 1998 to Avoid the
Registration of Securitized Mortgages : Saves Millions of
Dollars in Recordation fees;
2. Presently Being Sued in (5) States for Unlawfully failing to pay
Recording Fees on Securitized Mortgage Transactions
• WHAT IS MERS FUNCTION?
– TO CAMOUFLAGE THE SALE OF YOUR LOAN TO MULTIPLE
ENTITIES IN THE SECURITIZATION PROCESS;
– AVOID RECORDING FEES ON EVERY SALE OF YOUR LOAN
TO SUBSEQUENT PURCHASERS.
– ACT AS “BENEFICIARY” OF YOUR DEED OF TRUST OR
“NOMINEE” OF YOUR MORTGAGE

What is MERS?

• “MERS is a mortgage banking ‘utility’ that registers
mortgage loans in a book entry system so that … real
estate loans can be bought, sold and securitized (Similar
to Wall Street’s book entry utility for stocks and bonds is
the Depository Trust and Clearinghouse.”
• MERS is enormous. It originates thousands of loans
daily and is the mortgagee of record for at least 40
million mortgages and other security documents.
• MERS acts as agent for the owner of the note. Its
authority to act should be shown by an agency
agreement. Of course, if the owner is unknown, MERS
cannot show that it is an authorized agent of the owner.

Result: BANKS CAN’T PROVE THEY OWN YOUR LOAN

• The Wall Street Journal Picks Up the Scent
• An article by Nick Timiraos appeared in The Wall Street Journal on June 1, 2011 – “Banks Hit Hurdle to Foreclosures.”
• “Banks trying to foreclose on homeowners are hitting another roadblock,” Timiraos writes, “as some delinquent borrowers are successfully arguing that their mortgage companies can’t prove they own the loans and therefore don’t have the right to foreclose.”
• If you (or I) try to boot a homeowner into the street without any proof that we’re entitled to the property, the cops will lock us up. Stealing is stealing, whether it is somebody’s wallet or their 3-bedroom 2-bath in the suburbs with two dogs and a kid. When a bank tries to steal the bungalow without proof that they have a right to foreclose, it’s a “hurdle” or “another roadblock.”
• Semantics aside, this is good news for all people holding grant deeds. This year, the Journal reports, cases in California, North Carolina, Alabama, Florida, Maine, New York, New Jersey, Texas, Massachusetts and other states have raised questions about whether banks properly demonstrated ownership.
• In some cases, borrowers are showing courts that banks failed to properly assign ownership of mortgages after they were pooled into mortgage-backed securities. In other cases, borrowers say that lenders backdated or fabricated documents to fix those errors.
• “Flawed mortgage-banking processes have potentially infected millions of foreclosures, and the damages against these operations could be significant and take years to materialize,” said Sheila Bair, chairman of
the Federal Deposit Insurance Corp., in testimony to a Senate committee last month.
• In March, an Alabama court said J.P. Morgan Chase & Co. couldn’t foreclose on Phyllis Horace, a delinquent homeowner in Phenix City, Ala., because her loan hadn’t been properly assigned to its owners
– a trust that represents investors – when it was securitized by Bear Stearns Cos. The mortgage assignment showed that the loan hadn’t been transferred to the trust from the subprime lender that originated it.

The Problem With MERS

• Federal bankruptcy courts and state courts have found that MERS and its member banks often confused and misrepresented who owned mortgage notes. In thousands of cases, they apparently lost or mistakenly destroyed loan documents.
• The problems, at MERS and elsewhere, became so severe last fall that many banks temporarily suspended foreclosures.
• Not even the mortgage giant Fannie Mae, an investor in MERS, depends on it these days.
• “We would never rely on it to find ownership,” says Janis Smith, a Fannie Mae spokeswoman, noting it has its own records.
• Apparently with good reason. Alan M. White, a law professor at the Valparaiso University School of Law in Indiana, last year matched MERS’s ownership records against those in the public domain.
• The results were not encouraging. “Fewer than 30 percent of the mortgages had an accurate record in
MERS,” Mr. White says. “I kind of assumed that MERS at least kept an accurate list of current ownership.
They don’t. MERS is going to make solving the foreclosure problem vastly more expensive.”
• The Arkansas Supreme Court ruled last year that MERS could no longer file foreclosure proceedings there, because it does not actually make or service any loans. Last month in Utah, a local judge made the no-lessstriking decision to let a homeowner rip up his mortgage and walk away debt-free. MERS had claimed ownership of the mortgage, but the judge did not recognize its legal standing.
• And, on Long Island, a federal bankruptcy judge ruled in February that MERS could no longer act as an “agent” for the owners of mortgage notes. He acknowledged that his decision could erode the foundation of the mortgage business.
• But this, Judge Robert E Grossman said, was not his fault.
• “This court does not accept the argument that because MERS may be involved with 50 percent of all residential mortgages in the country,” he wrote, “that is reason enough for this court to turn a blind eye to
the fact that this process does not comply with the law.”

Legal Issues

1. SEPARATION OF THE NOTE AND THE DEED
• In the case of MERS, the Note and the Deed of Trust are held by separate entities. This can pose a unique problem dependent upon the court. The prevailing case law illustrates the issue:
• “The Deed of Trust is a mere incident of the debt it secures and an assignment of the debt carries with it the security instrument. Therefore, a Deed Of Trust is inseparable from the debt and always abides with the debt. It has no market or ascertainable value apart from the obligation it secures.
• A Deed of Trust has no assignable quality independent of the debt, it may not be assigned or transferred apart from the debt, and an attempt to assign the Deed Of Trust without a transfer of the debt is without effect. “
• This very “simple” statement poses major issues. To easily understand, if the Deed of Trust and the Note are not together with the same entity, then there can be no enforcement of the Note. The Deed of Trust enforces the Note. It provides the capability for the lender to foreclose on a property. If the Deed is separate from the Note, then enforcement, i.e. foreclosure cannot occur.
The following ruling summarizes this nicely.
• In Saxon vs Hillery, CA, Dec 2008, Contra Costa County Superior Court, an action by Saxon to foreclose on a property by lawsuit was dismissed due to lack of legal standing. This was because the Note and the Deed of Trust were “owned” by separate entities. The Court ruled that when the Note and Deed of Trust were separated, the enforceability of the Note was negated until rejoined.

2. MERS IS A NOMINEE AND NOT THE HOLDER OF THE NOTE
• The question now becomes as to whether a Note Endorsed in Blank and transferred to different entities does allow for foreclosure. If MERS is the foreclosing authority but has no entitlement to payment of the money, how could they foreclose? This is especially true if the true beneficiary
is not known. Why do I raise the question of who the true beneficiary is?
• THE MERS WEBSITE STATES…..
• “On MERS loans, MERS will show as the beneficiary of record. Foreclosures should be commenced in the name of MERS. To effectuate this process, MERS has allowed each servicer to choose a select number of its own employees to act as officers for MERS.
Through this process, appropriate documents may be executed at the servicer’s site on behalf of MERS by the same servicing employee that signs foreclosure documents for non-MERS loans. Until the time of sale, the foreclosure is handled in same manner as non-MERS foreclosures. At the time of sale, if the property reverts, the Trustee’s Deed Upon Sale will follow
a different procedure. Since MERS acts as nominee for the true beneficiary, it is important that the Trustee’s Deed Upon Sale be made in the name of the true beneficiary and not MERS. Your title company or MERS officer can easily determine the true beneficiary. Title companies have indicated that they will insure subsequent title when these procedures are followed.”

3. MERS IS THE NOMINEE AND NOT THE BENEFICIARY
• To further reinforce that MERS is not the true beneficiary of the loan, one need only look at the following Nevada Bankruptcy case, Hawkins, Case No. BK-S-07-13593-LBR (Bankr.Nev. 3/31/2009) (Bankr.Nev., 2009) – “A “beneficiary” is defined as “one designated to benefit from an appointment, disposition, or assignment . . . or to receive something as a result of
a legal arrangement or instrument.” BLACK’S LAW DICTIONARY 165 (8th ed. 2004). But it is obvious from the MERS’ “Terms and Conditions” that MERS is not a beneficiary as it has no rights whatsoever to any payments, to any servicing rights, or to any of the properties secured by the loans. To reverse an old adage, if it doesn’t walk like a duck, talk like a duck, and quack like a duck, then it’s not a duck.”
• When the initial Deed of Trust is made out in the name of MERS as Nominee for the Beneficiary and the Note is made to AB Lender, there should be no issues with MERS acting as an Agent for AB Lender. Hawkins even recognizes this as fact.
• The issue does arise when the Note transfers possession. Though the Deed of Trust states “beneficiary and/or successors”, the question can arise as to who the successor is, and whether Agency is any longer in effect. MERS makes the argument that the successor Trustee is a MERS
member and therefore Agency is still effective, and there does appear to be merit to the argument on the face of it.The original Note Holder, AB Lender, no longer holds the note, nor is entitled to payment. Therefore, that Agency relationship is terminated. However, the Note is endorsed in blank, and no Assignment has been made to any other entity, so who is the true
beneficiary? And without the Assignment of the Note, is the Agency relationship intact?

4. MERS FORECLOSURE PROCEDURES
• There, you have it. Direct from the MERS website. They admit that they
name people to sign documents in the name of MERS. Often, these are
Title Company employees or others that have no knowledge of the actual
loan and whether it is in default or not.
• Even worse, MERS admits that they are not the true beneficiary of the loan.
In fact, it is likely that MERS has no knowledge of the true beneficiary of the
loan for whom they are representing in an “Agency” relationship. They
admit to this when they say “Your title company or MERS officer can
easily determine the true beneficiary.
• Why are the Courts Accepting MERS as a Nominee or Agent of the
“Lenders”? The “beneficiary” term is erroneous. Even MERS states it
is not a “beneficiary”.
• If so, MERS cannot assign deeds of trust or mortgages to third parties
legally.

• ISSUE THREE: Does MERS have the Right to Participate in Your
Foreclosure?
– NO. According to the Majority of Federal Court Opinions and Every State Supreme Court decision which has addressed this Issue: Oregon and Washington Supreme Ct Decisions Pending
– Every Attorney General who has examined the legality of MERS has determined it is illegal business enterprise: New York; Delaware; Oregon, Washington, Idaho; with more to come.
_ Declared Unlawful Business Organization : ( In re: Agard, No. 10-77338, 2011 Bankr. LEXIS 488, at 58-59 (Bankr. E.D.N.Y. Feb 10, 2011)
_ In California, the federal court determined that MERS has to have a written contract with the new noteholder in order to have the authority to appoint or assign the beneficial interest in the note sufficient to foreclose (In re: Vargas: US Dist Ct, Central Dist of Calif; Case No LA 08-107036-SB).
– Judge Michael Simon of the Oregon Federal Court has found that MERS cannot assign its beneficiary status in a deed of trust to a third party for foreclosure purposes due to the fact that MERS does not under Oregon law have the legal authority to do so (James, et al v Reconstruct Trust, et al: US Dist Ct. Case No: 3:11-cv-00324-ST).

Solutions

QUIET TITLE ACTIONS: Definition
• quiet title action n. a lawsuit to establish a party’s title to real property
against anyone and everyone, and thus “quiet” any challenges or claims to
the title. Such a suit usually arises when there is some question about clear
title, there exists some recorded problem (such as an old lease or failure to
clear title after payment of a mortgage), an error in description which casts
doubt on the amount of property owned, or an easement used for years
without a recorded description. An action for quiet title requires description
of the property to be “quieted,” naming as defendants anyone who might
have an interest (including descendants—known or unknown—of prior
owners), and the factual and legal basis for the claim of title. Notice
must be given to all potentially interested parties, including known and
unknown, by publication. If the court is convinced title is in the plaintiff (the
plaintiff owns the title), a quiet title judgment will be granted which can be
recorded and thus provide legal “good title.“

• QUIET TITLE ACTIONS:
– Purpose: Require All Adverse Claims to Title to Prove to the Court the
Worthiness of Their Claim:
– Mortgages/Deeds Of Trust:
• Who is the Owner of Your Note? Prove It
• Who is the Beneficiary of Your Deed of Trust/Mortgage? The Owner of the
Note
• Who has the Legal Right to Foreclose?
– ONLY THE OWNER OF THE NOTE IS A TRUE BENEFICIARY
– ONLY THE BENEFICIARY OF THE MORTGAGE OR DEED OF
TRUST OR ITS LEGAL REPRESENTATIVE CAN FORECLOSE
– MERS IS NOT A BENEFICIARY-According to its own Website
– MERS IS NOT A LEGAL REPRESENTATIVE OF ANY REMIC TRUST
» No Contract
» At Best MERS has a Contractual Relationship with Original Lender

• FLORIDA QUIET TITLE STATUTES-Civil Practice and Procedure
• 65.061 Quieting title; additional remedy.—
• (1) JURISDICTION.–Chancery courts have jurisdiction of actions by any person or corporation claiming legal or equitable title to any land…. and shall determine the title of plaintiff and may enter judgment quieting the title and awarding possession to the party entitled thereto….
• (2) GROUNDS.–When a person or corporation not the rightful owner of land has any conveyance or other evidence of title thereto, or asserts any claim, or pretends to have any right or title thereto, any person or corporation is the true and equitable owner of land the record title to which is not in the person or corporation because of the defective execution of any deed or mortgage because of the omission of a seal thereon, the lack of witnesses, or any defect or omission in the wording of the acknowledgment of a party or parties thereto, when the person or corporation claims title thereto by the defective instrument and the defective instrument was apparently made and delivered by the grantor to convey or mortgage the real estate and was recorded in the county where the land lies which may cast a cloud on the title of the real owner….
• (4) JUDGMENT.–If it appears that plaintiff has legal title to the land or is the equitable owner thereof based on one or more of the grounds mentioned in subsection (2), or if a default is entered against defendant (in which case no evidence need be taken), the court shall enter judgment removing the alleged cloud from the title to the land and forever quieting the title in plaintiff and those claiming under him or her since the commencement of the action and adjudging plaintiff to have a good fee simple title to said land or the interest thereby cleared of cloud.

DECLARATORY RELIEF
• WHO OWNS THE NOTE? WHO IS ENTITLED TO FORECLOSE?
• FEDERAL RULES OF CIVIL PROCEDURE: RULE 57. DECLARATORY JUDGMENT
• 28 U.S.C. §2201. Rules 38 and 39 govern a demand for a jury trial. The existence of another adequate remedy does not preclude a declaratory judgment that is otherwise appropriate. The court may order a speedy hearing of a declaratory-judgment action.
• The fact that a declaratory judgment may be granted “whether or not further relief is or could be prayed” indicates that declaratory relief is alternative or cumulative and not exclusive or extraordinary. A declaratory judgment is appropriate when it will “terminate the controversy” giving rise to the proceeding. Inasmuch as it often involves only an issue of law
on undisputed or relatively undisputed facts, it operates frequently as a summary proceeding, justifying docketing the case for early hearing as on a motion, as provided for in California (Code Civ.Proc. (Deering, 1937) §1062a), Michigan (3 Comp.Laws (1929) §13904), and Kentucky
(Codes (Carroll, 1932) Civ.Pract. §639a–3).
• The “controversy” must necessarily be “of a justiciable nature, thus excluding an advisory decree upon a hypothetical state of facts.” Ashwander v. Tennessee Valley Authority, 297 U.S. 288, 325, 56 S.Ct. 466, 473, 80 L.Ed. 688, 699 (1936). The existence or nonexistence of any right, duty, power, liability, privilege, disability, or immunity or of any fact upon which such legal relations depend, or of a status, may be declared.

• WRONGFUL FORECLOSURE:
• What is a Wrongful Foreclosure Action?
• A wrongful foreclosure action typically occurs when the lender starts a
judicial foreclosure action when it simply has no legal cause. Wrongful
foreclosure actions are also brought when the service providers accept
partial payments after initiation of the wrongful foreclosure process, and
then continue on w i t h the f o r e c l o s u r e process. These
predatory lending strategies, as well as other forms of misleading
homeowners, are illegal.
• The borrower is the one that files a wrongful disclosure action with the court against the service provider, the holder of the note and if it is a non-judicial foreclosure, against the trustee complaining that there was an illegal, fraudulent or willfully oppressive sale of property under a power of sale contained in a mortgage or deed or court judicial proceeding. The borrower can also allege emotional distress and ask for punitive damages in a wrongful foreclosure action.

• FRAUD CLAIMS
• Mortgage Payments: Have you been paying mortgage payments to the
wrong financial institution?
• JP Morgan Chase: Bought “Assets” of WAMU from FDIC in 2008
– All Mortgage Loans from 2003-2008 were already sold to REMIC Trusts
– What Did Chase Bank Buy? Servicing Contracts?
– Can Chase Bank Foreclose on Notes It Does Not Own?
• One West Bank: Bought “Assets” of IndyMac from FDIC in 2008
– All Mortgage Loans from 2003-2008 were already sold to REMIC Trusts
– What did One West Bank Buy? Servicing Contracts?
– Can One West Foreclose on Notes It Does Not Own?
• Bank of America: Bought “Servicing Contracts” from Countrywide in 2008
– All Mortgage Loans from 2003-2008 were already sold to REMIC Trusts
– What Did Bank of America Buy? Servicing Contracts
– Can Bank of America Foreclose on Notes It Does Not Own?

• QUIET TITLE LITIGATION:
– Potential Outcomes:
• Actual Quiet Title: Removal of All Liens, Encumbrances,
Mortgages:
• Principal Reduction: Mediation or Arbitration Resulting in
Substantial Reduction in Your Mortgage Balance
• Damage Claims against Financial Institutions: Punitive Damages?
• TROS and Injunctions: Stopping the Foreclosure Process
• Did Default Insurance Pay Off My Mortgage
• Declaratory Relief:
– Who Do I Pay My Mortgage To?
– Who Can Foreclose on My House?

Credit Rehabilitation
• Credit Rehabilitation
• The Fair Credit Reporting Act (FCRA) gives you the right to contact credit bureaus directly and dispute items on your credit reports. You can dispute any and all items that are inaccurate, untimely, misleading, biased, incomplete or unverifiable (questionable items). If the bureaus cannot verify that the information on their reports is indeed correct, then those items must be deleted.
• PeabodyLaw has created the “Mortgage Audit Plan”:
– Obtain a Securitization Audit from Audit Pros, Inc.
– Peabody Law will utilize the results of your Securitization Audit to file a
court action seeking a court order removing all negative credit reporting
items from your credit history based upon the findings of the audit.
– Upon receipt of Court Judgment rendering the nullification of unlawful
and erroneous credit references, Peabody Law will send a Demand
Letter with the Judgment attachment to each Credit Reporting Agency
demanding retraction and removal of all negative credit references
relating to mortgage payments, foreclosures, short sales, etc.

For a Complete Pro Se “Do It Yourself” Foreclosure Defense Kit With Well Drafted Pleadings and Step By Step Guide For Saving Your Home Visit: http://www.fightforeclosure.net

How Homeoweners Can Use Various Forms of Mortgage Fraud Schemes For Wrongful Foreclosure Defense

12 Monday Aug 2013

Posted by BNG in Affirmative Defenses, Appeal, Banks and Lenders, Federal Court, Foreclosure Defense, Fraud, Judicial States, Litigation Strategies, Loan Modification, Non-Judicial States, Notary, Note - Deed of Trust - Mortgage, Pleadings, Pro Se Litigation, Scam Artists, Title Companies, Your Legal Rights

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Business, Finance, Financial Services, Loan origination, mortgage, Mortgage fraud, Mortgage loan, United States

Over the past few years, mortgage fraud continues to result in significant losses for both financial institutions and homeowners.

Mortgage fraud has continued to increase over the past few years. Declining economic conditions, liberal underwriting standards, and declining housing values contributed to the increased level of fraud. Market participants are perpetrating mortgage fraud by modifying old schemes, such as property flip, builder-bailout, and short sale fraud, as well as employing newer schemes, such as buy and bail, reverse mortgage fraud, loan modification and refinance fraud, and mortgage servicing fraud.

It is imperative that homeowners understand the nature of the various schemes involving mortgage frauds as this will help you to build rock solid defense when fighting your wrongful foreclosure to save your home.

Various individuals participate in mortgage fraud schemes. The following list consists of common participants in such schemes.

Appraiser                                Processor
Borrower                              Real Estate Agent
Buyer                                       Seller
Closing/Settlement Agent    Title Agent
Loan Servicer Underwriter
Originator    Warehouse Lender

BASIC MORTGAGE TRANSACTIONS

Basic mortgage transactions are generally the same whether the purpose of the loan is to purchase a property, refinance an existing loan, or obtain a loan against a property that is unencumbered and may be offered through one of the channels described below:

Retail

In retail transactions, the borrower makes an application directly with a financial institution loan officer. These mortgage transactions are the most basic and involve the fewest number of third parties, which may include appraisers and closing agents. Usually, the application package consisting of financial information, credit report, a collateral valuation report such as an appraisal or evaluation, title information, and various other credit-related documents, is compiled and forwarded to an underwriter for a credit decision. Upon approval, the financial institution then releases funds to a closing agent, who disburses funds to the various parties. The loan package is returned to the financial institution and reviewed for quality and accuracy. The loan is either held on the financial institution’s books or sold into the secondary market. Retail originations only include loans closed in the financial institution’s name.

Broker Origination

A broker-originated loan is similar to the retail transaction, except that the borrower makes an application with a mortgage broker. A broker is a firm or individual, acting on behalf of either the financial institution or the borrower, who matches a borrower’s financing needs with an institution’s mortgage origination programs. Brokers are compensated by receiving a commission expressed as a percentage of the total loan amount (e.g., 1 percent origination fee) from the borrower or through a yield-spread premium from the lender when the loan closes.

Brokers have played a critical role in the wholesale loan origination process and have significant influence on the total loan transaction. Brokers have served as the point of contact for the borrower and the lender, and coordinated the involvement of other parties to complete the transaction. A broker can perform some or most of the loan processing functions including, but not limited to, taking loan applications; ordering credit and title reports; verifying a borrower’s income and employment; etc.

Once the broker has gathered the necessary information, the application is submitted along with supporting documentation to one or more financial institutions for underwriting. The financial institution’s underwriter reviews the information and makes a credit decision. The financial institution also may perform pre-funding quality assurance activities, such as re-verification of income and employment.

A copy of the loan approval package, with documents prepared in the name of the financial institution, is then returned to the broker. Once the loan has closed, the completed package should be returned directly to the financial institution. Again, the financial institution may review the loan for quality and either retain the loan in its own portfolio or sell it.

Mortgage Loan Purchased from a Correspondent

In this transaction, the borrower applies for and closes a loan with a correspondent of the financial institution, which can be a mortgage company, another depository institution, finance company, or credit union service organization. The correspondent can close the loan with internally-generated funds in its own name or with funds borrowed from a warehouse lender. Without the capacity or desire to hold the loan in its own portfolio, the correspondent sells the loan to a financial institution. The purchasing financial institution is frequently not involved in the origination aspects of the transaction, and relies upon the correspondent to comply with the financial institution’s approved underwriting, documentation, and loan delivery standards. The purchasing financial institution may perform a quality control review prior to purchase. Also, the purchasing financial institution must review the appraisal or evaluation report and determine conformity with the Agencies’ appraisal standards, regulations, and supervisory guidance, as well as the financial institution’s requirements.

The loan can be booked in the financial institution’s own portfolio or sold.

In “delegated underwriting” relationships, the financial institution grants approval to the correspondent to process, underwrite, and close loans according to the financial institution’s processing and underwriting requirements. Proper due diligence, internal controls, approvals, quality control audits, and ongoing monitoring are warranted for these higher-risk relationships.

Each of the Agencies has issued detailed guidance on a financial institution’s management of its arrangements with third parties, including brokers, and associated risk. Examiners are encouraged to review and consider the guidance issued by their Agency in evaluating broker arrangements. Additionally, the Secure and Fair Enforcement Mortgage Licensing Act of 2008 (S.A.F.E. Act) requires licensing and/or registration for all residential mortgage loan originators. The system is also used for state-licensed mortgage companies. More information is available at the website at http://www.stateregulatoryregistry.org and contains comprehensive licensing, registration, enforcement action that is expected to be made available to the public through the website in the near future.

COMMON MORTGAGE FRAUD SCHEMES

This post defines schemes as the big picture or secret plan of action used to perpetrate a fraud. There are a variety of “schemes” by which mortgage fraud can take place. These schemes can involve individuals inside the financial institution or third parties. Various combinations of these schemes may be implemented in a single fraud. The descriptions provided below are examples of traditional and emerging schemes that are used to facilitate mortgage fraud. Click on the link for each fraud scheme to learn more about that particular scheme.

Builder Bailout

This scheme is used when a builder, who has unsold units in a tract, subdivision, or condominium complex, employs various fraudulent schemes to sell the remaining properties.

Buy and Bail

Chunking

Chunking occurs when a third party convinces an uninformed borrower to invest in a property (or properties), with no money down and with the third party acting as the borrower’s agent. The third party is also typically the owner of the property or part of a larger group organizing the scheme. Without the borrower’s knowledge, the third party submits loan applications to multiple financial institutions for various properties. The third party retains the loan proceeds, leaving the borrower with multiple loans that cannot be repaid. The financial institutions are forced to foreclose on the properties.

Double Selling

Double selling occurs when a mortgage loan originator accepts a legitimate application and documentation from a buyer, reproduces or copies the loan file, and sends the loan package to separate warehouse lenders to each fund the loan.

Equity Skimming

Equity skimming is the use of a fraudulent appraisal that over-values a property, creating phantom equity, which is subsequently stripped out through various schemes.

Fictitious Loan

A fictitious loan is the fabrication of loan documents or use of a real person’s information to apply for a loan which the applicant typically has no intention of paying. A fictitious loan can be perpetrated by an insider of the financial institution or by external parties such as loan originators, real estate agents, title companies, and/or appraisers.

Loan Modification and Refinance Fraud

This scheme occurs when a borrower submits false income information and/or false credit reports to persuade the financial institution to modify or refinance the loan on more favorable terms.

Mortgage Servicing Fraud

This fraud is perpetrated by the loan servicer and generally involves the diversion or misuse of loan payments, proceeds from loan prepayments, and/or escrow funds for the benefit of the service provider.

Phantom Sale

This scheme generally involves an individual or individuals who falsely transfer title to a property or properties and fraudulently obtain funds via mortgage loans or sales to third parties.

Property Flip Fraud

A fraudulent property flip is a scheme in which individuals, businesses, and/or straw borrowers, buy and sell properties among themselves to artificially inflate the value of the property.

Reverse Mortgage Fraud

Reverse Mortgage Fraud involves a scheme using a reverse mortgage loan to defraud a financial institution by stripping legitimate or fictitious equity from the collateral property.

Short Sale Fraud

Fraud occurs in a short sale when a borrower purposely withholds mortgage payments, forcing the loan into default, so that an accomplice can submit a “straw” short-sale offer at a purchase price less than the borrower’s loan balance. Sometimes the borrower is truly having financial difficulty and is approached by a fraudster to commit the scheme. In all cases, a fraud is committed if the financial institution is misled into approving the short-sale offer, when the price is not reasonable and/or when conflicts of interest are not properly disclosed.

Two additional fraud schemes, which are briefly addressed below, are debt elimination and foreclosure rescue schemes. While these schemes are typically not perpetrated directly on financial institutions, and therefore not expanded upon to the same degree as the above-mentioned schemes, the end result of the scheme can have a negative impact on the financial institution.

DEBT ELIMINATION SCHEME

Debt elimination schemes are illegal schemes that offer to eliminate a borrower’s debt for an up-front fee. The organizers of these schemes create phony legal documents based on the borrower’s loan(s) for presentment to the borrower’s financial institution or other lending institution in an attempt to falsely satisfy the loans.

The threat this fraud scheme presents to a financial institution is the borrower’s cessation of loan payments. Financial institutions may find that the use of the false documents complicates the collection process and may temporarily prevent any final action against the borrower.

FORECLOSURE RESCUE SCHEME

Foreclosure rescue schemes prey upon homeowners in financial distress or facing foreclosure, with the promise to help save their home. There are multiple variations of this scheme, often charging up-front fees and/or convincing the homeowner to deed the property to the fraudster, with the premise that the homeowner can rent or buy the property back once the individual’s credit has improved. The goal of the fraudster is to collect fees or mortgage payments that are intended for the lender, but are not delivered, usually resulting in the loan going into default and ultimately foreclosure, causing loss to the financial institution.

COMMON MECHANISMS OF MORTGAGE FRAUD SCHEMES

This post defines mechanism as the process by which fraud is perpetrated. A single mortgage fraud scheme can often include one or more mechanisms and may involve collusion between two or more individuals working in unison to implement a fraud. Click on the links to learn more about that particular mechanism. The following is a list of common mechanisms used to perpetrate mortgage fraud schemes:

Asset Rental: Cash or other assets are temporarily placed in the borrower’s account/possession in order to qualify for a mortgage loan. The borrower usually pays a “rental” fee for the temporary “use” of the assets.

Fake Down Payment: In order to meet loan-to-value requirements, a fake down payment through fictitious, forged, falsified, or altered documents is used to mislead the lender.

Fraudulent Appraisal: Appraisal fraud can occur when an appraiser, for various reasons, falsifies information on an appraisal or falsely provides an inaccurate valuation on the appraisal with the intent to mislead a third party.

Fraudulent Documentation: Fraudulent documentation consists of any forged, falsified, incomplete, or altered document that the financial institution relied upon in making a credit decision.

Fraudulent Use of Shell Company: A business entity that typically has no physical presence, has nominal assets, and generates little or no income is a shell company. Shell companies in themselves are not illegal and may be formed by individuals or business for legitimate purposes. However, due to lack of transparency regarding beneficial ownership, ease of formation, and inconsistent reporting requirements from state to state, shell companies have become a preferred vehicle for financial fraud schemes.

Identify Theft: Identity theft can be defined as assuming the use of another person’s personal information (e.g., name, SSN, credit card number, etc.) without the person’s knowledge and the fraudulent use of such knowledge to obtain credit.

Straw/Nominee Borrower: An individual used to serve as a cover for a questionable loan transaction.

EXAMPLES OF MORTGAGE FRAUD SCHEMES

– – – – Builder Bailout – – – –

A builder bailout occurs when a builder, who has unsold units in a tract, subdivision, or condominium complex, employs various fraudulent schemes to sell the remaining properties. In stressed economic or financial conditions, a builder may be pressured to liquidate remaining inventory to cover financial obligations. To sell the remaining properties, the builder may use a variety of tools including, but not limited to, hidden down payment assistance or excessive seller concessions to elevate the sales price. As a result of the scheme, the unsuspecting financial institution is often left with a loan secured by inflated collateral value and the “real” loan-to-value is greater than 100 percent.

Examples:

– A builder convinces buyers to purchase property by offering to pay excessive incentives that are undisclosed to the lender, including down payments, “no money down promotions”, and/or closing cost assistance.

– In an effort to attract participants, a builder promises to manage properties as rentals and absorb any negative cash flow for the first 12 to 18 months.

– A builder forms one or more companies to purchase the builder’s inventory at inflated market values. The affiliated company finances 100 percent of the purchase amount and funnels the excess cash back to the builder. This scheme falsely inflates the property value, clouds the builder’s true ability to move the inventory, and disguises the fact that the builder is ultimately responsible for repayment of the loan.

– A builder forms a mortgage origination affiliate to originate fraudulent loans. The loan files contain credit discrepancies, fraudulent appraisals, and/or erroneous certificates of occupancy and completion.

– When the builder can no longer lure investors/speculators, the builder may employ straw buyers to purchase the properties.

Red Flags

A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant; however, multiple red flags may indicate an operating environment that is conducive to fraud.
• Excessive or unsubstantiated down payment.
• Unexplained large or multiple deposits reflected on deposit account statements.
• Borrower states that the property will be owner-occupied, but the property is located in a market dominated by investment properties or second homes (beach properties, duplexes, apartment buildings).
• Use of gift funds or grant funds.
• The HUD-1 shows disbursements from the builder’s (as seller) funds to persons or entities not reflected as lien-holders or vendors on the title commitment.
• Robust condominium sales in a slow market.
• All comparable properties are from the same project.
• Many loans to one applicant (credit report).
• No-money-down sales pitch (noted in marketing brochures or website).
• Reference to secondary financing on purchase contract, but not on the loan application.

• Parties to the transaction appear affiliated based on file documentation (personally/professionally).
• Incentives that include pre-paid condominium fees, principal and interest payments for a year, buy-down, free furniture, automobiles, parking spaces, boat slips, etc.

Companion Frauds

• Straw/Nominee Borrower

• Documentation Fraud (associated with income and assets)

• Fraudulent Appraisal

– – – – Buy and Bail – – – –

This scheme typically involves a borrower who is current on a mortgage loan, but the value of the house has fallen below the amount owed. The borrower continues to make loan payments, while applying for a purchase money mortgage loan on a similar but less expensive house because its value has declined. Alternatively, the borrower currently has good credit, but pending events are such that the borrower will soon be unable to afford monthly payments on the existing loan (e.g. loan term adjustments, job loss, debt accumulation, etc.) or qualify for a new loan. In either case, after the new property has been obtained, the borrower “walks” or “bails” on the first loan.

Examples:

A self-employed child-care service provider is living in a house purchased for $500,000 two years ago that is now worth approximately $350,000. Monthly payments on the adjustable rate mortgage loan are $3,000. In a few months the payments will adjust upward, as a result of the rate change, to $3,700, an amount the homeowner cannot afford. The homeowner finds a home selling for $200,000 and obtains a loan on that property by falsely claiming to rent the existing property. After moving into the second house, the borrower defaults on the initial mortgage loan.

Red Flags

A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant; however, multiple red flags may indicate an operating environment that is conducive to fraud.
• Second home is substantially less in value and/or loan amount than the existing home.
• Borrower has minimal or no equity.
• Borrower is a first-time landlord (renting out the original property).
• Limited documentation is available to validate lease terms with the purported tenant.
• Purported tenant has a pre-existing relationship with the homeowner.

• Rental agreement appears suspect or projected rental cash flows appear unreasonable.
• Borrower defaults on the original mortgage loan shortly after purchasing a second property (only likely to be detected if the same lender holds both mortgages and loans).

Companion Fraud

• Fraudulent Documentation

– – – – Chunking – – – –

A third party convinces an uninformed borrower to invest in a property (or properties), with no money down, with the third party acting as the borrower’s agent. The third party is also typically the owner of the property, or is part of a larger group organizing the scheme. Without the borrower’s knowledge, the third party submits loan applications on the borrower’s behalf to multiple financial institutions for various properties. These applications are submitted as owner-occupied or as an investment property with a falsified lease. The scheme usually requires the assistance of an appraiser, broker, and/or title company representative to ensure that the third party, as agent for the borrower, does not have to bring any money to the multiple closings. The third party retains the loan proceeds, leaving the borrower with multiple loans that cannot be repaid. The financial institutions are forced to foreclose on the properties and suffer sizable losses.

Examples:

A borrower attended a seminar that outlined how to get rich by investing in real estate with no money down. A third party, a presenter at the seminar, encouraged the borrower to invest in three real estate properties. Under the third party’s guidance, the borrower completed the required application and provided documentation for the loans. The borrower was unaware that the third party owned numerous properties in the name of a Limited Liability Company and submitted applications on not just the three properties known to the borrower, but on a total of 15 different properties. Each application was sent to a different lender, and all were scheduled to close within a one-week timeframe. The borrower attended three of the closings with a different representative of the LLC as the seller. The third party then acted as an agent for the borrower, with power of attorney, at the other 12 closings. The borrower ended up with 15 mortgage loans instead of the three for which he had knowledge, and the lenders were stuck with loans to a borrower without the ability to repay the debts and were forced to foreclose on the properties.

Fraudsters approached nominees (straw borrowers) and enticed the nominees into allowing the fraudsters to apply for mortgage loans in the nominees’ names in order to buy houses. The fraudsters paid the nominees a small amount for allowing the fraudsters to use the nominees’ names to apply for the mortgage loans. The fraudsters completed the loan application paperwork with falsified information in order for the nominees to qualify for the loans. The fraudsters then received inflated property appraisals and obtained two mortgages on each home, one for the purchase price and another for the balance of the appraisal value.

According to the fraudster, the nominee will have no involvement beyond the mortgage application and the fraudster will manage the properties, find tenants, collect monthly payments, and pay the mortgage loans. The tenants, with insufficient credit, are placed in the homes under proposed lease/option-to-buy contracts. The fraudster fails to make a majority of the nominee’s mortgage loan payments, causing many of the mortgage loans to go into default. In some instances, the fraudster steals the tenants’ deposit money. Ultimately, lenders foreclose on the properties.

Red Flags

A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant; however, multiple red flags may indicate an operating environment that is conducive to fraud.
• Multiple mortgage applications by one borrower.
• Credit report that reflects numerous mortgage inquiries.
• Out-of-state borrower.
• Seller that is a corporation or LLC.
• Seller that owns property for a short period of time.
• Previous transfer price that is much lower than current contract price.
• Incomplete lease agreements.
• Payoffs from seller’s funds to non-lien holders and vendors on the title commitment.

Companion Frauds

• Fraudulent Documentation

• Fraudulent Appraisal
• Identity Theft
• Property Flip Fraud
• Double Selling

– – – – Double Selling – – – –

A mortgage loan originator accepts a legitimate application and related documentation from a borrower, reproduces or copies the loan file, and sends the loan package to separate warehouse lenders to each fund the same loan. In some instances, double selling is self-perpetuating because, to keep the scheme going, different loans must be substituted for the ones on which documents cannot be provided. Under this scheme, the broker has to make payments to the investor who received the copied documents or first payment default occurs.

Examples:

– A borrower colluded with a mortgage broker to use the borrower’s property as collateral for numerous home equity lines of credit (HELOCs) at different financial institutions. The scheme was executed by closing on multiple HELOCs in a short period of time to take advantage of the delay in recording the mortgages. In addition, the mortgage broker misrepresented the borrower’s financial information in order to increase the borrower’s debt capacity. The property with less than $125,000 in equity was used to obtain over $1 million in credit from several financial institutions.

– A mortgage company used a group of financial institutions (referred to as warehouse lenders) to temporarily fund mortgage loans, which were then sold to another group of financial institutions as long-term investments. The scheme was accomplished by reselling the same loans to multiple investors. Accumulated losses associated with this scheme were in the millions of dollars.

Red Flags

• Discrepancies between underwriting and closing instructions.
• Outstanding trailing documents (e.g., executed note, deed, truth-in-lending, settlement statement, etc.)
• Missing or illegible insured closing letter in the name of the originator from the title company.
• Recent and numerous changes in the wiring instructions.
• Incorrectly named insured and loss payee on the hazard insurance policy.
• Missing mortgage insurance or guaranty, certificate of eligibility.
• Missing purchase commitment from investor – investor lock.

Companion Frauds

• Fraudulent Documentation
• Identity Theft

– – – – Equity Skimming – – – –

The use of a fraudulent appraisal, unrecorded liens or other means to create phantom equity, which is subsequently stripped out through either of the following methods:

Purchase Money Transaction

An inflated appraisal and sales contract allows the purchaser to obtain property with little or no down payment. The parties agree to raise the selling price to cover the buyer’s closing costs and/or down payment, or to obtain cash back at closing. As a result, the loan amount is higher than what the house is worth, effectively skimming all of the phantom equity out of the property.

Cash-Out Refinance Transaction

In the case of a refinance, the inflated appraisal or lack of recordation allows the borrower to extract cash in an amount greater than the actual value of the property.

Examples:

– A good example of an equity skimming scheme required a two-step process. In the first step, a loan officer and real estate agent colluded to purchase houses using false information on applications to qualify for loans. The second stage required the collusion of an appraiser to overstate the value allowing equity to be skimmed through the cash-out refinance process. Once no more equity could be extracted, the houses were allowed to go into foreclosure.

– A skimmer/purchaser convinces a property seller to provide a second mortgage loan with payments to begin later, perhaps in 6-12 months. During this period, the skimmer makes no payments on either the first or the second mortgage loan. In situations where the second mortgage is unrecorded, the skimmer will obtain a home equity or closed-end second mortgage, causing a loss to the issuing financial institution. By the time the seller realizes that they will not receive payments, the first mortgagee has begun foreclosure proceedings.

Red Flags

A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant; however, multiple red flags may indicate an operating environment that is conducive to fraud.
• Borrower receiving cash back at closing in a purchase transaction.
• Title to property recently transferred.
• Cash-out refinance shortly after the property has been purchased (reference application, appraisal, and title commitment).
• Purpose for cash-out is not well documented.

Companion Frauds

• Fraudulent Appraisal
• Fraudulent Documentation (employment and income)

– – – – Fictitious Loan – – – –

Examples:

A mortgage broker created loan applications by using names, addresses, and phone numbers out of the telephone book. These loans were subsequently funded by various financial institutions. As the loans were fabricated and no properties existed, the loans went into default and were charged off.

Red Flags

A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant; however, multiple red flags may indicate an operating environment that is conducive to fraud.
• Signatures are not consistent throughout the file.
• No real estate agent is employed.
• SSN was recently issued, or there is a death claim filed under SSN.
• Format of the passport number is not consistent with country of issuance.
• Employment and/or address on credit report do not match borrower’s application or there is an absence of credit history.
• Credit history is inconsistent with the borrower’s age.
• Returned mortgage loan payment coupons and/or monthly statements.
• Early payment default.

Companion Frauds
• Straw/Nominee Borrower
• Fraudulent Documentation
• Fraudulent Appraisal

– – – – Loan Modification and Refinance Fraud – – – –

Borrower submits false income information and/or false credit reports to persuade a financial institution to modify or refinance a loan on more favorable terms.

With respect to any mortgage loan, a loan modification is a revision to the contractual payment terms of the related of the related mortgage note, agreed to by the servicer and borrower, including, without limitation, the following:

1. Capitalization of any amounts owed by adding such amount to the outstanding principal balance.
2. Extension of the maturity.
3. Change in amortization schedule.
4. Reduction or other revision to the mortgage note interest rate.
5. Extension of the fixed-rate payment period of any adjustable rate mortgage loan.
6. Reduction or other revision to the note interest rate index, gross margin, initial or periodic interest rate cap, or maximum or minimum rate of any adjustable rate mortgage loan.
7. Forgiveness of any amount of interest and/or principal owed by the related borrower.
8. Forgiveness of any principal and/or interest advances that are reimbursed to the servicer from the securitization trust.

9. Forgiveness of any escrow advances of taxes and insurance and/or any other servicing advances that are reimbursed to the servicer from the securitization trust.
10. Forbearance of principal whereby the servicer “moves” a certain interest free portion of the principal to the “back-end” of the loan, lowering the amortizing balance and the monthly payment.

Refinancing is the process of paying off an existing loan by taking a new loan and using the same property as security. A homeowner may refinance for the following legitimate reasons:
• In a declining interest rate environment a refinance generally will lower monthly payments.
• In a rising interest rate environment a refinance to a fixed rate loan from an adjustable rate loan will generally allow the borrower to lock in the lower rate for the life of the loan.
• In a period of rising home prices the refinance allows the borrower to withdraw equity.

Examples:

– Two years after the origination of a mortgage loan, a borrower contacted the lender, claiming a need to modify the loan. In an attempt to deceive the lender into modifying the loan, the borrower stopped making loan payments. The borrower’s original loan application indicated that the borrower earned $7,500 per month; however, the borrower subsequently claimed income of only $1,200 per month. While evaluating the need for the modification, the bank reviewed the borrower’s credit report and determined that the customer’s supposed annual income of $14,400, was insufficient in comparison to the reported $40,000 per year servicing other debt, which was current. The bank stopped the modification process, as the borrower had intentionally understated income in an attempt to defraud the financial institution.

– A borrower contacted the lender claiming a reduction in income and trouble with making loan payments. The borrower provided the lender with a copy of his most recent tax return, which showed an adjusted gross income (AGI) of $45,000, down from the previous year’s $96,897. The borrower signed Form 4506-T, authorizing the lender to access tax returns filed with the IRS. In reviewing the tax information obtained from the IRS, the lender found that the borrower had recently amended the most recent return, lowering the AGI from $105,670 to $45,000. In this scenario, the borrower had purposely amended the return to reflect a lower AGI, possibly with the intent of amending it a second time to reflect the true amount of income.

– A borrower requests a loan modification for a property that he claims to occupy. Based on the various facts provided to the lender, it appears that the borrower is eligible for a modification. When underwriting the modification, the lender verifies the borrower’s income with the IRS. During the verification process, the lender recognizes two potential problems with the information provided. The address on the tax return is different than the address of the house collateralizing the loan, and the return reflects rental income from real property. After additional investigation, the lender concludes that the customer was trying to modify the loan on rental property and not on the primary residence.

Red Flags

A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant; however, multiple red flags may indicate an operating environment that is conducive to fraud.
• Borrower states that the property is his primary residence and is therefore owner-occupied but the mailing address and telephone number are not for the subject property (e.g., property is located in North Carolina; mailing address and telephone number are in New York).
• Vague and/or unrealistic hardship (“the national economy”).
• No documented resolution of hardship.
• No or limited financial analysis in file.
• No employment/income verification.
• Credit Report inconsistent with borrower’s stated hardship.

• Financial reports that reflect low delinquencies that are inconsistent with local economic conditions or the bank’s loan portfolio composition.

Companion Frauds

• Fraudulent Documentation
• Fraudulent Appraisal (refinance)

– – – – Mortgage Servicing Fraud – – – –

Mortgage servicing typically includes, but is not limited to, billing the borrower; collecting principal, interest, and escrow payments; management of escrow accounts; disbursing funds from the escrow account to pay taxes and insurance premiums; and forwarding funds to an owner or investor (if the loan has been sold in the secondary market). A mortgage service provider is typically paid on a fee basis. Mortgage servicing can be performed by a financial institution or outsourced to a third party servicer or sub-servicer.

Mortgage servicing fraud generally involves the diversion or misuse of principal and interest payments, loan prepayments, and/or escrow funds for the benefit of the service provider. Mortgage servicing fraud can take many forms, including the following:

• A mortgage servicer sells a loan it services, but fails to forward funds to the owner of the loan following the sale. The servicer continues to make principal and interest payments on the loan so the owner is not aware that the loan had been sold.

• A mortgage servicer diverts escrow payments for taxes and insurance for its own use. This action would jeopardize a financial institution’s collateral protection.

• A mortgage servicer that fails to forward principal and interest payments to an institution that holds the note and mortgage, could report that loan as past due for a short period of time, and then use proceeds from other loans to bring that loan current. This would be similar to a lapping scheme involving accounts receivable. Deliberately failing to post payments in a timely manner causes late fees to increase which directly elevates the servicers’ income.

• A mortgage servicer makes payments on loans originated for or on behalf of a financial institution as a means to avoid repurchase pursuant to first payment default provisions.

Examples:

– Several insiders of a mortgage company fraudulently sold serviced loans belonging to other financial institutions and kept the proceeds. An insider modified data in the servicing system to make it appear the loans were still being serviced and were current.

– Two executive officers of a mortgage company took out personal mortgage loans in their names which were subsequently sold to an investor, with servicing retained by the mortgage company. The executives did not make any payments on their loans and suppressed delinquency reporting to the investor, allowing them to “live free” for a period of time until the investor performed a servicing audit and discovered the fraud.

Red Flags

• Failure of the financial institution to perform an on-site review of the servicer (loan documents, servicing records, etc.)
• A review of remittance reports provided to the financial institution by servicer finds a:
o Lack of detail within the remittance reports (principal reduction, interest paid, late fees charged and paid).
o Remittance reports that fail to reconcile with bank records.
• A review of delinquency reports provided to the financial institution by the servicer finds a:
o Lack of detail within delinquency reports.
o High volume of delinquent loans.
• A review of portfolio reports provided to the financial institution by the servicer finds a:
o Lack of detail within portfolio reports (listing of loans owned by the financial institution being serviced by the servicer including current balance).
o Portfolio reports that fail to reconcile with bank records.
• Annual review reveals detrimental information or deteriorating financial condition of the servicer.
• County records indicating lien holders are unknown to the financial institution.
• Excessive delay in a servicer’s remittance of principal and interest payments, escrow payments, or prepayments.
• Cancellation or reductions in coverage on servicer’s insurance policies, including errors and omissions policies.
• Failure of the servicer to maintain copies of original payment documents (e.g., loan payment checks) verifying borrower as the source of payments.
• Excessive errors related to payment calculations on adjustable rate loans or escrow calculations.

Companion Fraud
• Fraudulent Documentation

– – – – Phantom Sale – – – –

Phantom sales typically involve an individual or individuals who falsely transfer title to a property or properties and fraudulently obtain funds via mortgage loans or sales to third parties.

Examples:

– The perpetrator identifies an apparently abandoned or vacant property and records a fictitious quit claim deed to transfer the property into the perpetrator’s name. Once the perpetrator has recorded the necessary document, he has several options:

• Apply for and execute a loan secured by the property. He pockets the loan proceeds and disappears.
• Transfer the property to a co-conspirator. The new owner applies for a loan, splits the proceeds with the original perpetrator, and both disappear with the money.
• Transfer the property to a false name, apply for a loan in the false name, pocket the proceeds and disappear.
• Sell the property to an uninvolved third party, pocket the proceeds, and disappear.

In the first three scenarios the financial institution is left with a mortgage loan that has no payment source and is collateralized by fraudulently obtained property. This results in a 100 percent loss to the financial institution once the fraud is exposed. In the last example, both the purchaser and financial institution are defrauded.

Red Flags

• Title search reveals a recent ownership transfer via quit claim deed.
• Ownership transfers via quit claim deeds in an area where such is not normal.
• Quit claim deed owner is not from subject area.
• Quit claim deed owner is unrelated to former owner.

• Quick sale to third party after quit claim deed owner acquires property.

Companion Frauds

• Fraudulent Appraisal
• Identity Theft
• Straw/Nominee Borrower

– – – – Property Flip Fraud – – – –

A fraudulent property flip is a scheme in which individuals, businesses, and/or straw borrowers buy and sell properties amongst themselves, normally within a short time frame, to artificially inflate the value of the properties. This scheme is designed to extract as much cash as possible from the property, and the loan proceeds are often used for purposes not stated on the application.

There are a number of variations of the fraudulent property flip, some of which are more prevalent than others depending on the current economic conditions. Some schemes occur in geographic areas experiencing significant property value appreciation or in stagnant markets, where properties have been on the market for extended periods of time. An essential party in this scheme is a complicit appraiser, who fraudulently provides an inflated opinion of the property’s market value. The following are two variations of fraudulent property flips:

• A buyer purchases a property at market value and on the same day sells the property, at an inflated price in excess of the true market value to a straw buyer who has been paid to act as a buyer. The financial institution lending to the straw buyer typically is unaware of the prior purchase by the fraudster earlier that same day.

• A seller, whose property has been on the market for an extended period of time, is approached by a buyer/borrower who makes an offer on the property that is substantially higher than the market value. A financial institution funds the loan based on a fraudulent appraisal that inflates the value of the property. In some cases, the inflated value is supported by non-existent home improvements that were to be made. For example, a seller lists a property for $250,000 and a buyer/borrower offers $299,000. At closing, the seller receives the net proceeds of $250,000 on the original asking price of the home and the surplus of $49,000 is disbursed to the fraudsters through a payoff from the seller’s funds on the HUD-1 Settlement Statement at closing.

Examples:

– A group of individuals was organized by a real estate agent to flip properties. Each participant acquired a property with 100 percent financing, prior to the real estate market peak. The properties were then sold repeatedly amongst the individuals and /or their spouses to increase the market value. Title to some of the properties is held in trusts, obscuring ownership.

However, once the group obtained the requisite amount of cash, the loans were allowed to go into default. The participants split the loan proceeds in excess of the true market value for perpetrating the scheme.

Red Flags

• Property listed for extended period of time and sells for higher than list price.

• Property has been transferred or sold within the last six months.
• The property is advertised as “For Sale by Owner”.
• Value of the property has notably increased with no improvements or improvements are insufficient to justify the increase.
• Borrower has limited capacity to repay (e.g., high debt-to-income ratio)
• The property seller is not the owner of record.
• Purchase is disguised as refinances to circumvent down payment.
• Seller is an entity/corporation.
• Power of attorney used without explanation.
• Borrower owns excessive amount of real estate.
• Similarities on multiple applications received from a specific seller or broker.
• Notes in loan file suggest borrower pushed for a quick closing.
• Appraiser is not on list of approved appraisers.
• Appraisal was ordered by a party to the transaction or before the sales contract, or appraisal is a fax.
• Borrower named on the appraisal is different from applicant.
• Appreciation is noted in an area with stable or declining real estate prices.

• Comparables on the appraisal are unusual.
• Inconsistencies in VOE or VOD.
• Violation of the lender’s closing instructions.
• Same individuals involved as buyers and/or sellers in multiple transactions, which may be noted on the deed, title abstract, or other real estate documents found in file.
• Unusual credits or disbursements on settlement statements or discrepancies between the HUD-1 and escrow instructions.
• First payment default on loan.

Companion Frauds
• Fraudulent Appraisal
• Fraudulent Documentation
• Identity Theft
• Straw/Nominee Borrower

– – – – Reverse Mortgage Fraud – – – –

The rapid growth in and changes to the reverse mortgage market have created a lucrative environment for fraudulent activities. The vast majority of reverse mortgage loans are offered through HUD and are FHA-insured; the products are commonly referred to as Home Equity Conversion Mortgages (HECMs). According to data maintained by HUD and other sources, the reverse mortgage loan market increased over the last 5 years from approximately “$5.4 billion a year to more than $17.3 billion in 2008.”4
In addition, recent legislation increased the dollar amount of HECMs to $625,000, and purchase money transactions became effective in 2009. The primary requirements imposed by HUD are that the borrower has attained age 62 and that the collateral value supports the loan amount. There is no requirement to have owned the property for any minimum amount of time, and the loans do not require monthly repayment. Therefore, the loans are primarily underwritten based on the age of the youngest borrower and value of the home being used as collateral.

Reverse mortgage fraud is a scheme where legitimate or fictitious equity is stripped from the collateral. The lump-sum cash-out option will yield the greatest amount of loan proceeds, and likely will be where most fraud occurs. However, fraud may occur in other reverse mortgage loan products. For example, under the term program, where a borrower receives equal monthly payments for a fixed period of time, older borrowers will receive higher payments due to a shorter payment stream, creating a direct incentive to falsify age. Due to the structure of the HECMs, there are no warnings, such as past-due status or default, to raise suspicions, and possibly limit losses, as repayment is only required upon the borrower moving out of the property; upon death; default of property taxes or hazard insurance; or the property is in unreasonable disrepair.

Examples:

Property title is transferred into the perpetrator’s name and quickly re-titled into a straw buyer’s name. A lump-sum cash-out reverse mortgage loan is obtained and is premised on collusion of an appraiser who provides an “as if” renovated appraised value to fraudulently increase the market value. The perpetrator also places fictitious liens on the property to divert loan proceeds to himself.

Red Flags
A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant; however, multiple red flags may indicate an operating environment that is conducive to fraud.

• No notes in loan file pertaining to how the proceeds will be used, or notes indicate that proceeds will be used for unspecified monthly living expenses, but the loan is a lump-sum cash-out option.
• File notes indicate that the borrower does not exhibit any knowledge of the property, such as location, number of rooms, etc.
• The property title may have been “abandoned” by the local government and then transferred into the perpetrator’s name. The property may then be re-titled into the borrower’s name via either a warranty deed or a quit claim deed.
• Files contain notices that property taxes are delinquent, indicating default under the terms.
• Files contain notices that property insurance has lapsed, indicating default under the terms.
• Loan file information shows mail as returned to sender, possibly indicating the “owner” is no longer occupying the property and did not provide a forwarding address. An event of default occurs, when the owner no longer lives in the property.
• The title search (if performed) showed that the property title recently transferred to the borrower’s name, following a very short ownership by the seller, indicating the possibility of a flip transaction.
• Lender search of public records for either assessed value or sales prices show that the neighborhood is valued at substantially less than the subject property.
• Problems with the appraisal report may include:

– The report was prepared for a third party and not ordered by the financial institution.

– Comparable properties are not in the same neighborhood.

– Prior sales history is inconsistent with title search results.

• Refer to Fraudulent Appraisal for further details on potential appraisal fraud red flags.

Companion Frauds

• Fraudulent Appraisal
• Fraudulent Documentation
• Property Flip Fraud

– – – – Short Sale Fraud – – – –

A short sale is a sale of real estate in which the proceeds from the sale are less than the balance owed on the loan. The borrower may claim to have financial hardship and offers to sell the property so the financial institution will not have to foreclose. The financial institution and all interested parties, including other lien holders and any mortgage insurer, must approve the transaction. Some institutions may be motivated to approve a short sale because it is faster, results in a smaller loss than the prospect of a foreclosure, and does not increase the level of Other Real Estate Owned. Depending on the settlement and the state where the property is located, the deficiency balance may be forgiven by the financial institution.

Not all short sales are fraudulent. However, fraud occurs when a borrower withholds mortgage loan payments, forcing the loan into default so that an accomplice can submit a “straw” short-sale offer at a purchase price less than the borrower’s loan balance. Sometimes the borrower is truly having financial difficulty and is approached by a fraudster to commit the scheme. In all cases, a fraud is committed if the financial institution is misled into approving the short-sale offer when the price is not reasonable and/or when conflicts of interest are not properly disclosed.

Examples:

– A fraudster uses a straw buyer to purchase a home for the purpose of defaulting on the mortgage loan. The straw buyer makes no payments on the loan and the property goes into default. Prior to foreclosure the fraudster makes an offer to purchase the property from the lender in a short sale agreement below market value. The lender agrees without knowing that the short sale was premeditated.

Red Flags

• Sudden default with no workout discussions and immediate request for short sale.
• Loan file documentation suggests ambiguous or conflicting reasons for default.
• Mortgage loan delinquency is inconsistent with the borrower’s spending, savings, and other credit patterns as indicated in the credit report.
• Short-sale offer is from a related party, which is sometimes not disclosed, or straw buyer.
• Short-sale offering price is less than current market value.
• HUD-1 Settlement statement shows cash-back at closing to the delinquent borrower, or other disbursements that have not been expressly approved by the servicer (sometimes disguised as “repairs” or other payouts).
• Fraudulent appraisal to support below market price.
• Seller intentionally lowers value of property by causing excessive, but cosmetic, damage or hiding dead animals to produce offensive odors. Adjustment to value is exaggerated downward even though costs for rehabilitation are low.
• Seller feigns financial hardship and hides assets – large volume of assets on original loan application have dissipated without explanation.
• County records show that the property was flipped soon after short sale with a higher price.
• County records show ownership is transferred back to the seller after short sale.
• Site visit or registered mail is not returned indicates seller continues to reside in the property.
• Real estate agent is in collusion with seller and withholds competitive/higher offers.
• Unusually high commission is paid to real estate agent.

Companion Fraud
• Fraudulent Documentation

*********** Fraud Mechanisms **********

Asset Rental

Asset rental is the rental of bank deposits or other assets, which are temporarily placed in a borrower’s account, in order for a borrower to qualify for a loan. The borrower usually pays some fee, such as a rental fee, for the temporary “use” of the asset. Asset rental programs have been generally described as tools to help borrowers whose financial condition poses a roadblock to being approved for a loan. Most often, the rental involves deposits or credit histories. Asset rental is a tool that can be used to commit mortgage fraud.

Deposit rental is a means to inflate an individual’s assets. An individual typically pays an origination fee of 5 percent of the amount of the deposit to be rented and a monthly fee of 1 percent to 1¾ percent of the deposit amount. The rented deposit can be owned by a third party that purports to be a financial institution or adds the borrower’s name to a real deposit account without granting access. The third party agrees to verify the deposit to any party authorized by the borrower. Written statements and verifications of deposit are available for an extra fee.

Credit histories are rented in an effort to raise an individual’s credit score. An individual typically pays a fee and is added to another individual’s credit card account as a non-user. The borrower has no access to or use of the credit card but benefits from the actual credit card holder’s timely payments.

In addition to asset rental, some companies also have advertised verification of employment and income services. Individuals fill out a form listing annual and monthly income and sources. Upon receipt of fees, the company verifies income and employment to lenders or others as authorized by the borrower.

Examples:

– A borrower would like to purchase a $450,000 house. Unfortunately, his $71,000 bookkeeper salary and $13,000 in a savings account do not meet the underwriting standards for the amount of the loan. The borrower, however, is certain that his salary will continue to increase at a minimum of 10 percent per year.

The borrower rented a $40,000 deposit account, for a fee of $2,000; the loan application reflected the $40,000 account as an asset. In addition, the borrower expected a raise the following year to $78,000, and enlisted an entity to verify that salary amount. The $78,000 was shown on the loan application as his current income. The loan file contained a verification of deposit for the $40,000 account, a verification of employment form verifying his job as an accountant, and a verification of income form for his $78,000 salary.

Red Flags

• Verification of Deposit (VOD), Verification of Employment (VOE) and Verification of Income (VOI) from a common source that is not the employer or the financial institution where the deposit is held.

• Information on credit report that is not consistent with information on VODs, VOEs and VOIs.
• Even numbers only appearing on the VODs and VOIs. Discrepancies between the deposit account establishment date and the date the borrower says it was established in the loan application process.

Fake Down Payment

In order to meet loan-to-value requirements, a fake down payment through fictitious, forged, falsified, or altered documents is used to mislead the lender. Collusion with a third party, such as a broker, closing agent, appraiser, etc. often exists to raise the purchase price and make it appear that the buyer is making a down payment to cover the difference between the purchase price and proposed loan. A fake down payment reduces the financial institution’s collateral position and in some cases, a financial institution may be financing over 100 percent of the purchase. Without the fake down payment, the financial institution would not have otherwise made the loan.

Examples:

A borrower wants to purchase property but does not have the money for a down payment. He offers the seller more than the asking price to give the appearance that the buyer is putting money down in order to get the loan. The seller agrees to amend the contract to reflect the increased price. The increase in sales price is not disbursed to the seller. Instead, a false payoff from the seller’s funds is reflected on the HUD-1 Settlement Statement when in reality, the seller provides the funds to the borrower for the down payment.

– A third party broker has a borrower interested in a loan to finance the purchase of a home. The borrower does not have sufficient funds available to meet the lender’s LTV requirements. Therefore, the broker loans the borrower $10,000 to use as a down payment, and the funds are represented to be a gift from family. The borrower and broker then enter into a loan agreement. The loan is to be secured by a lien against the house. Approximately ten days after closing of the purchase transaction, the broker records the second lien against the house to secure the down payment loan.

Red Flags

• Source of funds for down payment cannot be verified.
• Down payment appears to be accumulated suddenly instead of over time.
• Deposit is a rented account (refer to asset rental) or has a round dollar balance.
• Down payment source is held in a non-financial institution such as an escrow trust account, title company, etc.
• Market value of property is inflated.
• Property sells above asking price even though on the market for an extended period of time.

Fraudulent Appraisal

Appraisal fraud can occur when an appraiser for various reasons falsifies information on an appraisal or falsely provides an inaccurate valuation on the appraisal with the intent to mislead a third party. In addition, appraisal fraud occurs when a person falsely represents himself as a State-licensed or State-certified appraiser or uses the identity of an appraiser as his own.

One common form of appraisal fraud relies on overvalued or undervalued property values, also known as artificial inflation/deflation using one or more valuation approaches. A buyer and a real estate professional will use a willing appraiser to artificially modify the value of a property. The property’s false inflated value can be used to secure a second mortgage, place the property on the market at a greatly inflated price, or secure an initial mortgage loan that will be defaulted upon at a later time. An undervalued appraisal can be used to assist in a short sale or loan modification fraud scheme.

Examples:

– A couple obtains financing for the purchase of their first house, contingent upon the house value. The couple plan to use the $8,000 tax credit for the down payment and closing costs and only have nominal cash available, so there is no possibility that the couple could cover the difference if the house doesn’t appraise. The couple’s loan officer arranges for an appraisal of the property, but sends the appraiser the standardized form with the final market value section completed. The appraiser wants to continue his relationship with the mortgage broker, so he agrees to develop an appraisal report to support the value provided. The property is compared to properties outside of the general area where the subject house is located. Without knowledge of that area, it appears, to anyone reviewing the appraisal report, that the comparable properties provide support for the value. However, no adjustments have been made for the facts that the comparable properties are newer, larger, in better condition, and in a better location than the subject property.

– A house being appraised has materially less square footage than the comparable properties. To boost the square footage of the subject property, the appraiser doubles the square footage of the unheated out-building, that is used for lawn equipment, and adds that square footage to the square footage of the house. No adjustments are made to the comparable properties, since now the subject and comparable properties have similar square footage. A review of the square footage of the house and out-building clearly shows that the appraiser intentionally misrepresented the property value.

Red Flags

There are various red flag indicators that can be used to identify the possibility of appraisal fraud. The identification of red flags could suggest individual fraud activities or more complex fraud schemes. Such red flag indicators for appraisal fraud are subdivided into categories below:

Appraisal Engagement Letter/Appraisal Ordering

• There is no appraisal engagement letter in file or the appraisal does not correspond to the engagement letter.
• The appraisal was ordered or provided by the buyer, seller, or an unidentified third party to the transaction rather than the financial institution or its agent.
• The appraisal was order by the financial institution loan production staff rather than from an independent office within the institution.

The Appraiser/Appraiser Compensation

• Appraiser was not located in reasonable proximity of the subject property and it is unclear that the appraiser has appropriate knowledge of the local market.
• Appraiser licensing/certification information is missing or appraiser information is clouded in some way.
• Appraisal fee is based on market value of subject property.
• Appraiser has had enforcement action taken against him or is not otherwise eligible to perform appraisals for federally related transactions (www.ASC.gov).

Property Comparables

• Comparable properties are materially different from subject property.
• Comparable properties are outside a reasonable radius of the subject property (except for rural properties).
• Comparable property sales are stale without an explanation.
• Appraiser makes large value adjustments to comparable properties without adequate explanation.
• Recent and multiple sales for subject and/or comparables are shown in the appraisal without adequate explanation as to the circumstances.

Appraisal Information and Narrative

• The market value in the appraisal report is lower than purchase price.
• Listing rather than sales information was used to determine value.
• Evidence of appraisal tampering (e.g., different font style, handwritten changes).
• Refinance transaction shows property recently listed “for sale”.
• Market rent is significantly less than rent amounts indicated on lease agreement.
• Income approach is not used on a tenant-occupied, or rented single-family dwelling.
• Significant appreciation or devaluation in short period of time.
• Appraisal indicates transaction is a refinance when it is a purchase.
• Appraised value is contingent upon property improvements or curing of property defects.
• Abnormal capitalization or discount rates without explanation.
• Appraisal dated before loan application date.
• Significant variances in property value among the Cost, Income, and Sales approach.
• Appraisal excludes one or more valuation approaches when such an approach is pivotal to the loan underwriting decision.
• Owner is someone other than seller shown on sales contract.
• Unusual or frequent prior sales are listed for subject and/or comparables without adequate explanation.
• Occupant noted as “tenant” or “unknown” for owner-occupied refinances.

Appraisal Photographs and Mapping (Comparable and Subject)

• Photos missing, non-viewable, or blurry.

• A “For Rent” or “For Sale” sign shows in the photos of the subject property for an owner-occupied refinance.
• Photos do not match property description.
• Photo background image is inconsistent with the date or season of the appraisal.
• Photos of subject property taken from odd angles to mask unfavorable conditions.
• Negative valuation factors are not disclosed in appraisal (e.g., commercial property next door, railroad tracks, or another structure on premises).
• Photos for the subject property and comparables appear to be from different photo source (e.g., internet photos).
• Appraisal maps showing location of subject and comparables is either absent or shows wide geographical separation from subject property.

Other Appraisal Information

• Documentation in loan file suggests a re-appraisal due to appraisal results or the stated value of subject property without an explanation.
• Loan file contains more than one recent appraisal with significant variance in value without an explanation.
• House number of property in photo does not match the subject property address.
• A fax or an electronic version of the appraisal is used in lieu of the original containing signature and certification of appraiser.
• The appraisal was not reviewed prior to loan funding or appraisal was reviewed by loan production rather than an independent office within the institution.

Fraudulent Documentation

Documentation fraud occurs when any document relied upon by the financial institution to make a credit decision, is forged, falsified, or altered. Fraud can also occur if proper due diligence and verification practices are not consistently applied. Similarly, obtaining documents to satisfy a checklist is not the same as having verified the authenticity of the document.

Documentation Types

1. Sales Contract

Sales contracts may be falsified to reflect higher sales prices. These higher sales prices are intended to produce higher comparables for appraisal purposes and result in artificially inflated values. The inflated values result in a higher loan amount than would otherwise be justified. Additionally, falsified seller identity may be used to perpetrate frauds, such as transferring property via falsified deeds or listing property for sale that the seller does not legally own. The identity of the buyer and/or seller may also be falsified in order to disguise a flip transaction or the use of a straw borrower.

Red Flags

• Borrower is not listed as purchaser on the sales contract.
• Seller listed on contract is not the owner listed on title or appraisal.
• All parties did not sign the sales contract and/or addendum.
• Sales contract is not dated or dated after other file documents (unless it is a pre-qualification.)
• Sales contract is received at the last minute or has been changed from the previously submitted contract.

2. Loan Application

Parts of or the entire application may be falsified.

Red Flags

• Application states purpose is for refinance, but the credit report and/or tax records do not indicate the borrower owns the property.
• Purchase amount of the property differs from the sales contract.
• Borrower claims the property will be owner-occupied, when the intent is for investment/rental purposes.
• Application shows all assets, but liabilities are inconsistent with those reported on the credit report.
• Assets are inconsistent with job position and income.
• Omission of some or all properties owned by the borrower in the real estate section of the application.
• Borrower declarations are inconsistent with credit report.
• Debt-to-Income ratios are exactly at maximum approval limits
• Misrepresentation of employment and income.

3. Credit Report

The credit report contains significant information reflective of the borrower’s ability and desire to repay debt obligations. Credit reports are sometimes altered so that a borrower can meet specific loan requirements. For example, credit scores can be changed (increased) through scanning and alteration of information.

Red Flags

• The absence of credit history indicating the possible use of an alias and/or multiple social security numbers.
• Borrower recently pays many or all accounts in full, possibly indicating an undisclosed debt consolidation loan.
• Indebtedness disclosed on the application differs from the credit report.
• The length of time trade lines were opened is inconsistent with the buyer’s age.
• The borrower claims substantial income but only has credit experience with finance companies.
• All trade lines opened at the same time with no explanation.
• Recent inquiries from other mortgage lenders are noted.
• AKA (also known as) or DBA (doing business as) are indicated.

4. Driver’s License

Government issued driver’s licenses can be partially verified through entities that can identify whether the licensing number sequence complies with the state’s system. However, state issued identification cards do not always have the same quality.

Red Flags

• No hologram.
• No photograph.
• Name, address, physical characteristics do not match.
• Expired driver’s license.
• Illegible driver’s license.

5. Social Security Number

The first five digits of a Social Security Number (SSN) signify the state and the date range in which it was issued. SSNs should be compared to numbers associated with deceased taxpayers. Identity alerts are also a useful tool if accessed via the credit reporting system.

Red Flags

• Credit report alert states that SSN has not been issued.
• Credit report alert states that SSN is on the master death index.
• Format and digits are not correct.
• Improper color and weight of the social security card.
• Highly unlikely series of digits (999-99-9999 or 123-45-6789).

• Ink smudges, poorly aligned, and odd fonts.

6. Bank Statement

Deposit account statements may include legitimate financial institution names and addresses, but can be fraudulently modified to include falsified telephone numbers that are answered by a party to the scheme.

Red Flags

• Altered copies.
• Missing pages.
• Application information (name and address) does not match the account holders.
• Inconsistency in the color of original bank statements.

7. Deposit Verification (VOD)

A party to the scheme may verify deposits held at a depository institution, even though no such financial institution, account, or deposits in that name exist.

Red Flags

• The VOD is completed on the same day it is ordered.
• Deletions or cross outs exist on the VOD.
• No date stamp receipt affixed to the VOD by the depository to indicate the date of receipt.
• The buyer has no deposit accounts, but a VOD is in the file.
• The deposit account is not in the borrower’s name or is a joint account with a third party.
• The borrower’s account balance at the financial institution is insufficient to close the transaction.
• The deposit account is new or has a round dollar balance.
• The closing check is drawn on a different financial institution.
• An illegible signature exists with no further identification provided.
• Significant balance changes are noted in depository accounts during the two months prior to the date of verification.
• The checking account’s average two-month balance exactly equals the present balance.
• Funds for the down payment are only on deposit for a short period.
• An IRA is shown as a source of down payment funds.
• Account balances are inconsistent with application information.
• The down payment source is held in a non-depository “depository,” such as an escrow trust account, title company, etc.
• An escrow receipt is used as verification which may have been from a personal check not yet cleared or a check returned due to insufficient funds.
• The VOD is not folded indicating it may have been hand carried.
• The VOD is not on original financial institution letterhead or a recognized form.

8. Employment Verification (VOE)

Fake employment verification can be used by those who collude in mortgage fraud. This is usually associated with an organized scheme.

Red Flags

• The seller and applicant have similar names.
• Borrower’s employer does not know borrower or borrower was terminated from employment prior to the closing date.
• The VOE is not on original letterhead or a standard Federal National Mortgage Association (FNMA)/Federal Home Loan Mortgage Corporation (FHLMC) form.
• The VOE is completed the same day it is ordered, indicating it may have been hand-carried or completed before the initial application date.
• An illegible signature exists with no further identification provided.
• The employer uses only a mail drop or post office box address.
• The business entity is not in good standing with the State or registered with applicable regulatory agencies.
• An overlap exists with current and prior employment.
• Excessive praise is noted in the remarks section of response.
• Round dollar amounts are used in year-to-date or past earnings.
• Income is not commensurate with stated employment, years of experience, or type of employment.
• Income is primarily commission based, although borrower claims he is a salaried employee.
• The borrower’s interest in the property is not reasonable given its distance from the place of employment.
• The borrower has a recent large increase in income or started a new job.
• Faxes are used in lieu of originals documents.
• CPA letter is used to validate employment.
• Leases are used to evidence additional income.

9. W-2 Statement or Paystub

Off-the-shelf software and internet sites make the creation of fake W-2 statements and paystubs relatively easy.

Red Flags

• Borrower income is inconsistent with type of employment.
• Social security number on W2 or paystub is invalid, differs from loan application, or has been recently issued.
• Name misspelled.
• Variances in employment data with other file documentation.
• Commission-type position with “base” salary only (and vice versa).
• Round dollar amounts for year-to-date or prior year’s earnings.
• Numbers that appear to be “squeezed in”.
• Document alterations, such as white-outs or cross-outs or inconsistent fonts.
• Not computer-generated, especially from large employer.
• W-2 is typed, but paystubs are computer-generated.
• Check numbers do not increase chronologically.
• Amounts withheld for Social Security, Medicare and other government programs are inconsistent with the level required.
• Debts reflected as deduction from pay (credit union loans, etc.) not disclosed on application.
• Year-to-date totals do not total accurately from paycheck to paycheck.
• An employer identification number that is not in the XX-XXXXXXX (two digits, hyphen, seven digits) format, or is not all numeric.
• Employer and employee names or addresses are inaccurate.

• Income reflected on W-2 statements is different than income reported on mortgage loan application, VOE, and tax returns.
• Federal Insurance Contribution Act (FICA) and Medicare wages/taxes and local taxes, where applicable, exceed ceilings/set percentages.
• Copy submitted is not “Employee’s Copy” (Copy C).

10. Tax Return/Amended Tax Return

Fake tax returns may be provided to the underwriter as the borrower believes that no verification will occur. In other instances, amendments to tax returns may be made to further the scheme, regardless of whether the income amount increases or decreases.

Red Flags

• Address and/or profession do not agree with other information submitted on the mortgage loan application.
• Type of handwriting varies within return.
• Evidence of “white-out” or other alterations.
• Unemployment compensation reported, but no gap in employment is disclosed.
• Estimated tax payments by self-employed borrower (Schedule SE required); or self-employment tax claimed, but self-employment not disclosed.
• Tax returns are not signed/dated by borrower.
• IRS Form 1040 – Schedule A:

– Real estate taxes and/or mortgage loan interest is paid but no property is owned, or vice versa.

– Tax preparation fee is deducted, yet prior year’s return is prepared by borrower.

– Minimal or no deductions for a high-income borrower.

• IRS Form 1040 – Schedule B:

– Borrower with substantial cash in the bank shows little or no related interest income.

– No dividends are earned on stocks owned.

– Amount or source of income does not agree with the information submitted on the mortgage loan application.

• IRS Form 1040 – Schedule C:

– Business code is inconsistent with type of business.

– Gross income does not agree with total income on Form 1099s.

– No “cost of goods sold” on retail or similar type of business.

– Borrower takes a depreciation deduction for investment real estate not disclosed, or vice versa.

– Borrower shows interest expense but no related loan, such as a business loan with personal liability.

– No deductions for taxes and licenses.

– Wages are paid, but no tax expense is claimed.

– Wages are paid, but there is no employer identification number.

– Salaries paid are inconsistent with the type of business.

– Business expenses are inconsistent with type of business (e.g., truck driver with no vehicle expense).

– Income significantly higher than previous years.

• IRS Form 1040 – Schedule E:

– Additional properties are listed, but not shown on the mortgage loan application.

– Mortgage loan interest is deducted but no mortgage is disclosed.

– Borrower shows partnership income (may be liable as a general partner for partnership’s debts).

11. Deed

Quit Claim and Warranty Deeds may be used by someone who is transferring the property’s title, but is not the owner or the owners’ representative. The purpose of such transactions is to sell the property outright or to refinance the debt in a cash-out transaction to collect loan proceeds. A fake Power of Attorney may be used as authorizing the deed transfer.

Red Flags

• Recent ownership transfer or multiple transfers in a short period of time via quit claim or warranty deed.
• Representative not local or from out of state.
• Deeds involving individuals not party to the transactions.
• Deeds where parties share common names/hyphenated names, suggesting family relationships.
• Obvious errors, such as misspelled names, or other items.

12. Title or Escrow Company/Title Commitment

Fraudulent loan schemes may involve the use of a fake title company or may involve an employee of the title company. The company appears to provide legitimate documentation, which was possibly stolen from a legitimate title company (such as a falsified closing protection letter). Employees of legitimate title companies may be part of a scheme, where they either fabricate title commitments or delete information that would help identify fraudulent activity, such as flipping.

Red Flags

• The seller either is not on the title or is not the same as shown on the appraisal or sales contract.
• The seller owned the property for a short time with cash out on sale.

• The buyer had a pre-existing financial interest in the property.
• The chain of title includes the buyer, real estate agent, or broker.
• The title insurance or opinion was prepared for and/or mailed to a party other than the lender.
• Income tax or similar liens are noted against the borrower on refinances.
• Non-lien holders are shown on HUD-l.
• The title policy is not issued on the property with the lien or on the whole property.
• Faxed documents are used rather than originals or certified copies.
• Title commitment and final title policy reflect two different title insurers.
• Closing instructions are not followed.
• Delinquent property tax exists and does not appear on the title commitment.
• A notice of default is recorded and does not appear on the title commitment.

13. Business License

Business licenses may be fabricated to show that a supposed self-employed borrower owns a business. In this instance, the borrower owns no such business. Others may actually formally incorporate with the state office to conceal the fact that no such business operates.

Red Flags

• No physical address (P.O. Box only) or physical address belongs to mail box rental company. Various search engines can help determine if disclosed physical address belongs to mail box rental.
• No telephone number or email address.
• No state franchise or other required annual filings.

14. Notary stamps

Notary stamps may be stolen and used in fraudulent transactions. In addition, notaries may be participants in furthering a scheme and receive funds for their participation. While e-notary will prevent stealing of physical stamps, it will not necessarily eliminate the coercion of notaries. Also, the fact that e-notary does not require the log to be downloaded daily to an impartial party that maintains a database of transactions, can allow for information to be changed after-the-fact. This would be the equivalent of changing the hand-written log.

Red Flags

• Seal is not embossed.
• Seal appears to be photocopied, rather than original.
• Notary is either related to or has a business relationship with a party to the transaction.

15. Power of Attorney

Powers of Attorney (POA) are legal documents authorizing another party to act on the first party’s behalf. POAs can be Limited, General, or Durable. Durable POAs have the longest duration, as they cease upon the death of the authorizing person, whereas General POAs cease upon a pre-established date, competency, or incapacitation. Limited POAs are identified with a specific timeframe or certain acts. Documents can be easily fabricated to show that one party has a legal right to enter into financial transactions on behalf of another. POAs may or may not be filed with the appropriate governmental office.

Red Flags

• A General or Durable POA is dated at approximately the same date as the transaction.
• Person, who supposedly authorized the Limited or General POA, is unaware of the document.
• In those areas where all POAs are recorded documents, the document is not recorded.
• The POA is not prepared by an attorney, but by using off-the-shelf software.
• POA is used in cash-out refinances or reverse mortgage loans.

16. HUD-1 Settlement Statement

The HUD-1 settlement statement is an accounting of the transaction from both the borrower’s and seller’s standpoint. This form is often falsified to withhold information from the lender, or there are often two distinctly different HUD-1 forms in fraudulent transactions.

Red Flags

• Borrower receives cash-back at closing.
• Payoff of non-lien holders typically reflected as marketing fees, payment for repairs, or renovations.
• Existence of multiple, different HUD-1’s.
• Items paid outside of closing (outside of normal appraisal and credit report fees).
• Overpayment of fees and commissions to realtor, broker, etc.
• Signatures on the HUD-1 do not match other signatures throughout the file.

Fraudulent Use of a Shell Company

A shell company is a business entity that typically has no physical presence, has nominal assets, and generates little or no income. Shell companies in themselves are not illegal and may be formed by individuals or businesses for legitimate purposes. However, due to lack of transparency regarding beneficial ownership, ease of formation, and inconsistent reporting requirements from state to state, shell companies have become a preferred vehicle for financial fraud schemes.

Both the U.S. Government Accountability Office (GAO) and FinCEN have reported on shell companies and their role in facilitating criminal activity. These reports have focused on limited liability corporations (LLCs) due to their dominance and growth in popularity. However, any type of business entity can be a shell company. To further obscure ownership and activity, there are numerous businesses that can provide a shell company with a registered agent and mail forwarding service, or offer nominee services, such as nominee officers, directors, shareholders, or nominee bank signatory. Other businesses sell established shell companies for the purpose of giving the appearance of longevity of a business, and a history of creditworthiness which may be required when obtaining leases, credit, or bank loans.

Examples:

– Several individuals with the intent of committing fraud formed a shell company as a way of disguising their identities. The individuals purchased properties in the name of the shell company and at the same time recruited straw borrowers to purchase the properties from the shell company at inflated prices. Owners of the shell company provided the straw borrowers with fake documents in order to qualify for the loans. The shell company owners profited from the difference between the original purchase price and the mortgage loan proceeds, less the fee paid to the straw borrower. The straw borrower defaulted on the loan, forcing the financial institutions to foreclose on the houses.

Red Flags

• Entity has no telephone number or email address.
• No physical address (P.O. Box only) or physical address belongs to mail box rental company.
• No company logo.
• No website, if one would be expected.
• No domestic address/contact if a foreign company.
• Newly-formed entity.
• Registered agent recently changed.
• Transacting businesses share the same address; provide only a registered agent’s address; or other address inconsistencies.
• Unusual cash withdrawals from business accounts.

Identity Theft

Identity theft can be defined as assuming the use of another person’s personal information (e.g., name, SSN, credit card number, etc.) without the person’s knowledge and the fraudulent use of such knowledge to obtain credit. Perpetrators commit identity theft to execute schemes using fake documents and false information to obtain mortgage loans. These individuals obtain someone’s legitimate personal information through various means, (e.g., obituaries, mail theft, pretext calling, employment or credit applications, computer hacking, trash retrieval, etc.) With this information, they are able to impersonate homebuyers and sellers using actual, verifiable identities that give the mortgage transactions the appearance of legitimacy.

Examples:

– A university student database, which included social security numbers and other personal identifying information, is compromised by a computer hacker. The investigation revealed that the hacker subsequently sold the personal identification information to a third party, who then proceeds to submit falsified mortgage loan applications to numerous financial institutions which resulted in approximately $5 million in losses to the financial institutions. Law enforcement stated that the third party, in collusion with a notary, appraiser, and other industry insiders, used the student information to purchase homes owned by the third party and other collaborators at highly inflated prices. In addition to identity theft, the loan files also included misrepresentations of employment, falsified down payments, and inflated appraisals.

Red Flags

A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant; however, multiple red flags may indicate an operating environment that is conducive to fraud.
• Credit report contains a fraud alert or consumer-driven freeze on their credit report, which means no credit reports can be pulled until the consumer lifts the freeze.
• Credit report indicates that the social security number was not yet issued.
• Recently-opened accounts.
• Employment and residence history on the credit report and application do not match.
• Copy of driver’s license does not match profile on the application.
• Recently issued SSN.
• Current address on the application does not match other documents in the file (e.g., bank statements, W-2’s, utility bills, etc.)
• Additional red flags may be found in the FCRA under Appendix J of 12 CFR 41 (Subpart J – Identity Red Flags)

Straw Borrower / Nominee Borrower

A straw (nominee) borrower is an individual used to intentionally disguise the true beneficiary of the loan proceeds. Straws can be willing participants in the transaction or victims whose identity is being used without their knowledge. Often a willing straw borrower does not think the transaction is dishonest because they believe the recipient of the loan proceeds will make the payments. Reasons why a beneficiary of the loan proceeds may use a straw borrower are because the beneficiary:

• Does not qualify for the mortgage loan,
• Has no intent to occupy the property as a primary residence, or
• Is not eligible for a particular loan program.

Also straw borrower activities are commonly used with family members who step in for the purchase or refinance when the true home owner (family member) does not qualify for a loan.

Examples:

– A couple wanted to buy a home but did not qualify because their debt ratio was much too high. They also had very little cash to use as a down payment. To “help” them, one of their parents applied for the loan and was approved for a 97 percent LTV product. The couple moved into the house, and could not make the monthly payments. The servicer called the straw borrower, who informed the servicer that he did not live in the home and that his daughter and son-in-law were supposed to be making the payments. Despite, being contractually obligated, the straw borrower parent refused to bring the loan current. The lender was forced to foreclose and took a loss on the sale of the REO.

– A fraud ring acquired 25 properties, all of which were in various stages of disrepair. Some were even uninhabitable and slated for condemnation by the city. The ring then recruited individuals through their church, clubs, and other associations to each buy a property sight unseen. Each borrower was told they would not need to live in the property, and each borrower was also promised payment of $7500. The fraud ring arranged for inflated appraisals to be performed by promising the appraiser the job of appraising all 25 properties. The applications were submitted to several different lenders with numerous misrepresentations surrounding not only the true property values, but occupancy intent, borrower employment, income, and assets as well. The loans closed and resulted in first payment defaults, as the straw borrowers were told that their properties were passive investments that would not require any monthly payments due to tenants already being in the properties. A handful of the straw borrowers did receive their $7500 as promised, but most did not. Upon receiving collection calls, the straw borrowers determined they had been misled. The lenders ultimately foreclosed on the properties, discovered the true condition of the properties, and suffered losses upon the sale of the REO.

Red Flags

• The application is unsigned or undated.
• Borrower’s income is inconsistent with job or position.
• A quit claim deed was used either right before or soon after the loan was closed.
• Investment property is represented as owner-occupied on loan application.
• Loan documents show someone signed on the borrower’s behalf.
• Names were added to the purchase contract.
• Sale involves a relative or related party.
• No sales agent or realtor was involved.
• The name and address of borrower on credit report does not correspond with information on the loan application.
• Appraisal irregularities exist regarding property valuation and documentation. (See Fraudulent Appraisal.)
• Power of attorney was used in place of borrower.
• Good assets, but “gifting” was used as all or part of down payment.
• Repository alerts on credit report.

Glossary:

Appraisal Management Company (AMC): A business entity that administers a network of certified and licensed appraisers to fulfill real estate appraisal assignments on behalf of mortgage lending institutions and other entities. The company recruits, qualifies, verifies licensing, and negotiates fees and service-level expectations with a network of third-party appraisers. It also provides administrative duties like order entry and assignment, tracking and status updates, pre-delivery quality control, and preliminary and hard copy report delivery. Furthermore, the AMC oversees ongoing quality control, accounts payable and receivable, market value dispute resolution, warranty administration, and record retention.

Appraiser: One who is expected to perform valuation services competently and in a manner that is independent, impartial, and objective.

Borrower: One who receives funds in the form of a loan with the obligation of repaying the loan in full with interest. The borrower may be purchasing property, refinancing an existing mortgage loan, or borrowing against the equity of the property for other purposes.

Buyer: A buyer is a person who is acquiring property.

Closing: The culmination of any RE transaction in which the interested parties or their representatives meet to execute documents, exchange funds, and transfer title to a property.

Closing Costs: Moneys expended by a party in completing a RE transaction, over and above the purchase price, including: legal fees, taxes, origination fees, discount points, mortgage insurance premium, interest adjustments, registration fees, appraisal fees, title insurance premium, etc.

Closing/Settlement/Escrow Agent: An individual or company that oversees the consummation of a mortgage transaction at which the note and other legal documents are signed and the loan proceeds are disbursed. Title companies, attorneys, settlement agents, and escrow agents can perform this service. Local RE law may dictate the party conducting the closing.

Concessions: Benefits or discounts given by the seller or landlord of a property to help close a sale or lease. Common concessions include absorption of moving expenses, space remodeling, upgrades (also called “build-outs”), and reduced rent for the initial term of the lease.

Collusion: An agreement, usually secretive, which occurs between two or more persons to deceive, mislead, or defraud others of their legal rights, or to obtain an objective forbidden by law, typically involving fraud or gaining an unfair advantage.

Correspondent: A mortgage originator who underwrites and/or sells mortgage loans to other mortgage bankers or financial institutions.

Credit Report Fraud Alert: A notation at the bottom of a credit report indicating that some items of identification, i.e., Social Security number, address, etc., are associated with past fraudulent activities. For example, an address may be flagged because the previous occupant allegedly used the property for financial misbehavior. Each credit reporting agency has different names for these alerts: TransUnion – HAWK Alerts, Experian – Fraud Shield, and Equifax – Safescan.
Deed: The document by which title to real property is transferred or conveyed from one party to another. (See Quitclaim Deed and Warranty Deed.)

Deed of Trust: A type of security instrument in which the borrower conveys title to real property to a third party (trustee) to be held in trust as security for the lender, with the provision that the trustee shall re convey the title upon the payment of the debt. Conversely, the third party will sell the land and pay the debt in the event of default by the borrower. (See Mortgage.)

Developer: A person or entity, who prepares raw land for building sites, constructs buildings, creates residential subdivisions or commercial centers, rehabilitates existing buildings, or performs similar activities.

eNotary: An electronic notary that may include the use of a digital seal to notarize digital documents. (See also Notary.)

Escrow Instructions: Instructions prepared by a lender and/or underwriter to direct the progression of a mortgage closing transaction from start to finish.

Evaluation: A valuation required by the Agencies’ appraisal regulations for certain transactions that are exempt from the regulations.

Federal Home Loan Mortgage Corporation (Freddie Mac): Commonly used name for the Federal Home Loan Mortgage Corporation (FHLMC), a government sponsored entity that provides a secondary market for conforming conventional residential mortgage loans by purchasing them from primary lenders.

Federal Housing Administration (FHA): A federal agency established to advance homeownership opportunities. The FHA provides mortgage insurance to approved lending institutions.

Federal National Mortgage Association (Fannie Mae): A government sponsored entity that, as a secondary mortgage loan institution, is the largest single holder of residential mortgage loans in the United States. Fannie Mae primarily buys conforming conventional residential loans from primary lenders.

Federally related transaction: Means any real estate-related financial transactions entered into after the effective date hereof that:
(1) The FDIC or any regulated institution engages in or contracts for; and
(2) Requires the services of an appraiser.

Foreclosure: A legal proceeding following a default by a borrower in which real estate secured by a mortgage or deed of trust is sold to satisfy the underlying debt. Foreclosure statutes are enacted by state government.

Form 1003: The standardized loan application form used in residential mortgage loan transactions.

Form 4506T: An IRS form that taxpayers execute to authorize the IRS to release past tax returns to a third party. Many lenders require mortgage loan applicants to execute this form in order to verify income.

Fraud: A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to their detriment.

Government National Mortgage Association (Ginnie Mae): A government-owned corporation that provides sources of funds for residential mortgage loans, insured or guaranteed by the FHA or VA.

HUD-l Form: A standardized form prescribed by the Department of Housing and Urban Development that provides an itemization listing of funds paid at closing. Items that appear on the statement include RE commissions, loan fees, points, taxes, initial escrow amounts, and other parties receiving distributions. The HUD-l statement is also known as the “closing statement” or “settlement sheet.”

Lapping: A fraud that involves stealing one customer’s payment and then crediting that customer’s account with a subsequent customer’s payment.

Loan Servicer: A loan servicer is a public or private entity or individual engaged to collect and process payments on mortgage loans.

Loan-to-Value Ratio (LTV): Relationship of loan amount to collateral value, expressed as a percentage.

Market Value: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

Modification Agreement: A document that evidences a change in the terms of a mortgage loan, without refinancing the loan. Commonly, changes are made to the interest rate, repayment terms, guarantors, or property securing the loan.

Mortgage: A lien on the property that secures a loan. The borrower is the mortgagor; the lender is the mortgagee.

Mortgage Banker: An individual or firm that originates, purchases, sells, and/or services loans secured by mortgages on real property.

Mortgage Broker: An individual or firm that receives a commission for matching borrowers with lenders. Mortgage brokers typically do not fund the loans they help originate.

Mortgage Fraud: A knowing misrepresentation of the truth or concealment of a material fact in a mortgage loan application to induce another to approve the granting of a mortgage loan. For the purpose of this paper, mortgage fraud refers solely to fraudulent schemes pertaining to residential mortgage loans.

Nominee Loan: A loan made to one individual in which the proceeds of the loan benefit another individual without the knowledge of the lender.

Notary: A person who certifies the authenticity of required signatures on a document, by signing and stamping the document. (See also eNotary.)

Originator: The individual or entity that gathers application data from the borrower. Alternatively, a person or entity, such as a loan officer, broker, or correspondent, who assists a borrower with the loan application.

Power-of-Attorney: A legal document that authorizes a person to act on another’s behalf. A power-of-attorney can grant complete authority or can be limited to certain acts (closing on a property) or timeframes (from date granted until a termination date). A durable power-of-attorney continues until the grantor’s death.

Pretext Calling: A scheme associated with identity theft in which a fraudster, pretending to represent a legitimate entity, calls an unsuspecting party seeking personal identification data, such as social security numbers, passwords, or other forms of account information. The fraudster then uses this information to assume the identity of the unsuspecting victim. Among other things, the fraudster can obtain a mortgage loan in the name of the unsuspecting victim.

Processor: The processor is an individual who assembles all the necessary documents to be included in the loan package.

Quitclaim Deed: A deed that transfers without warranty whatever interest or title, if any, a grantor may have at the time the conveyance is made. A grantor need not have an interest in the property to execute a quitclaim deed.

Real Estate Agent: An individual or firm that receives a commission for representing the buyer or seller, in a RE purchase transaction.

Reverse Mortgage: A reverse mortgage loan converts the equity in the home into cash. Unlike a traditional loan, no repayment is required until the borrower no longer uses the house as a principal residence. To be eligible under FHA’s program, Home Equity Conversion Mortgage (HECM), the homeowner must be at least 62 years old, and live in the house. The program was expanded in 2009 so that HECMs can be used to purchase a primary residence.

Secure and Fair Enforcement Mortgage Licensing Act of 2008 (S.A.F.E. Act): Legislation designed to enhance consumer protection and reduce fraud by encouraging states to establish minimum standards for the licensing and registration of state-licensed mortgage loan originators and for the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators to establish and maintain a nationwide mortgage licensing system and registry for the residential mortgage industry. The S.A.F.E. Act further requires the federal agencies to establish similar requirements for the registration of depository institution loan originators.

Secondary Market: The buying and selling of existing mortgage loans, usually as part of a “pool” of loans.

Seller: Person offering to sell a piece of real estate.

Short Sale: Sale of the mortgaged property at a price that nets less than the total amount due on the mortgage loan. Servicers and borrowers negotiate repayment programs, forbearance, and/or forgiveness for any remaining deficiency on the debt to lessen the adverse impact on borrowers’ credit records.

Straw Buyer/Borrower: A person used to buy property or borrow against property in order to conceal the actual owner. The straw buyer does not intend to occupy the property or make payments and often deeds the property to the other individual immediately after closing. The straw buyer is usually compensated for use of his identity.

Third Party: The parties necessary to execute a residential mortgage transaction other than a financial institution and a legitimate borrower. Third parties include, but are not limited to, mortgage brokers, correspondents, RE appraisers, and settlement agents.

Title Agent: The title agent is a person or firm that is authorized on behalf of a title insurer to conduct a title search and issue a title insurance report or title insurance policy.

Title Company/Abstract Company: Entity that researches recorded ownership of and liens filed against real property and then issues a title insurance policy guaranteeing the lien position of the lender or provides a title opinion. Some states also require an attorney opinion supported by an abstract.

Title Insurance: An insurance policy that indemnifies the lien position of a lender against losses associated with property interests not disclosed in the title opinion. The borrower can also obtain this coverage by purchasing a separate policy.

Title Opinion/Commitment/Binder: An examination of public records, laws, and court decisions to ensure that no one except the seller has a valid claim to the property, and to disclose past and current facts regarding ownership of the subject property.

Underwriting: The credit decision-making process which can be automated, manual or a combination of both. In an automated process, application information is entered into a decision-making model that makes a credit determination based on pre-determined criteria. In a manual process an individual underwriter, usually an employee of the financial institution, makes the credit decision after evaluating all of the information in the loan package, including the credit report, appraisal, and verifications of deposit, income, and employment. Financial institutions often use a combination of both, with the automated decision representing one element of the overall credit decision. In each case, the decision may include stipulations or conditions that must be met before the loan can close.

Verification of Deposit (VOD): Written document sent to the borrower’s depository institution to confirm the existence of a down payment or cash reserves.

Verification of Employment (VOE): Written document sent to the borrower’s employer to confirm employment/income. Employment is often reconfirmed by calling the employer prior to funding.

Verification of Income (VOI): Written documentation supporting the borrower’s income level and income stream.

Warehouse Lender: A short-term lender for mortgage bankers. Using mortgage loans as collateral, the warehouse lender provides interim financing until the loans are sold to a permanent investor.

Warehouse (Loan): In mortgage lending, warehouse loans are loans that are funded and awaiting sale or delivery to an investor.

Warehouse Financing: Short-term borrowing of funds by a mortgage banker based on the collateral of warehoused loans. This form of interim financing is used until the warehoused loans are sold to a permanent investor.

Warranty Deed: A deed warranting that the grantor has a title free and clear of all encumbrances and will defend the grantee against all claims against the property.

For More Information How Your Can Use Well Structured Litigation Pleadings Designed Around These Fraudulent Schemes In Order To Effectively Challenge Your Wrongful Foreclosure and Successfully Save Your “American Dream” Home Visit: http://www.fightforeclosure.net

A Guide To Borrowers On Laws and Regulations that Govern Mortgage Lending and Servicing

10 Saturday Aug 2013

Posted by BNG in Affirmative Defenses, Appeal, Banks and Lenders, Mortgage Laws, Pro Se Litigation, Your Legal Rights

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Fannie Mae, Fannie Mae/Freddie Mac, Federal Housing Administration, FHA, Freddie Mac, Mortgage loan, United States, United States Department of Housing and Urban Development

There are nine (9) major laws and regulation pertinent to mortgage lending and servicing.

Office of the Comptroller of Currency’s Guidelines for Residential Mortgage Lending Practices 2005; 12 CFR Part 30 Appendix C

Most importantly, the OCC’s regulations provide for the implementation of standards by lenders to prevent abusive, predatory, unfair and deceptive lending practices. Lenders should avoid certain unfavorable loan terms and sparingly use other terms that are unfriendly to consumers. They should also avoid consumer confusion.

Federal Reserve Board’s Proposed Statement on Subprime Lending 2007; 72 FR 10533

Regulations were proposed by a number of different agencies in order to compel the industry to educate consumers on the ramifications of loan terms (like ARMs and balloon payments), so that consumers will not be shocked by any financial terms or compromised in their ability to pay.

FHA/HUD LAWS AND REGULATIONS ON DEFAULT LOAN SERVICING/LOSS MITIGATION

HUD regulations require mortgage servicers to report all FHA mortgages that go into default within 30 days of default. HUD also has a procedure in place for loss mitigation, a process in which a lender helps a borrower who’s delinquent in loan payments. In an FHA mortgage, the FHA will reimburse the lender for certain costs if the borrower meets the guidelines, such as the length of time that the borrower has owned the home and the like. Loss mitigation plans include receiving a special forbearance (where the borrower pays a lower payment or stops payments for a period of time), a partial claim (where a borrower can get an interest free loan from HUD to bring his payments up to date) and mortgage modification (where the life of the loan is lengthened so that the borrower can make smaller payments each month).

Federally Related Mortgage Loans.

Federally related mortgage loans are loans that are made by federally insured depository lenders (unless for temporary financing), HUD-related loans, and loans intended to be sold on the secondary mortgage market to Fannie Mae or Freddie Mac or to creditors who make or invest over one million dollars a year in residential secured loans.

Veterans Administration -Insured Home Loan Servicing Handbook.

The Handbook is a manual that contains servicing guidelines for loans guaranteed by the Veterans Administration. Regulates access by the borrower to the servicer, the fees that the servicer can charge and caps the amount of the charges, servicing transfers, and procedures for collection actions.

Fannie Mae/Freddie Mac and Private Label Loan Servicing.

Fannie Mae (Federal National Mortgage Association) is a federally-chartered
enterprise owned by private investors. Fannie Mae purchase mortgage-backed securities on the secondary mortgage market with the goal of providing funds so that lenders can afford to offer low cost loans. Freddie Mac (Federal Home Loan Mortgage Corporation) is a federally-chartered corporation that purchases home loans, securitizes them and sells them to investors with the goal of helping to keep the cost of a mortgage low. Fannie Mae and Freddie Mac use private companies to service the loans that they purchase.

Homeownership Counseling Act; 12 U.S.C. §1701x

The Homeownership Counseling Act requires that lenders give information about available counseling resources to qualifying homeowners who fail to pay any amount due. Homeowners who qualify are those whose loan is secured by their primary residence, those whose loan is not assisted by the Farmers Home Administration, and those who are not expected to be able to make up a deficiency in a reasonable amount of time due to an unexpected loss or reduction of employment income by the homeowner or someone who contributes to the household income. The notice must provide information about any of the lender’s counseling services (if any) and a list of HUD-approved non-profit homeownership counseling organizations or HUD’s toll free number where the department will provide a list of such organizations.

Foreclosure Prevention: Comptroller of the Currency Report 2007

The Foreclosure Prevention report details how the lending industry is reacting to the foreclosure epidemic and details why lenders should want to prevent foreclosures, how to contact borrowers, what are the regulatory risks of foreclosure prevention, and the barriers that have impeded foreclosure prevention.

Service Members Civil Relief Act (SCRA); 50 U.S.C. §§ 501-506

Purpose. SCRA provides special protections for active duty military personnel and their dependents.

Scope. The Act applies to active duty members of the Army, Navy, Marine Corps, Air Force and Coast Guard, the commissioned corps of the National Oceanic and Atmospheric Administration and the Public Health Service, members of the National Guard who have been called to active service by
the President or Defense Secretary for more than thirty consecutive days in order to respond to a national emergency, reservists ordered to report for military service, persons ordered to report under the Military Selective Service Act and United States citizens serving with the allied forces.

Protections. The Act places limitations on foreclosures of the real property owned by active duty service members, protects service members from default judgments, tolling of the statute of limitations, reduces the interest rate on pre-active duty loans to six percent, places restrictions on eviction from rental property and gives the right to terminate vehicle and residential leases.

For More Information on How You Can Use Well Drafted Pleadings With These Set of Laws For Litigation Against Your Lender In order To Save Your Home From Wrongful Foreclosure Visit http://www.fightforeclosure.net

How Pro Se Foreclosure Defense Litigants Can Effectively Defend & Save Their Homes

25 Thursday Jul 2013

Posted by BNG in Affirmative Defenses, Appeal, Case Laws, Case Study, Discovery Strategies, Federal Court, Foreclosure Defense, Judicial States, Legal Research, Litigation Strategies, MERS, Mortgage Laws, Non-Judicial States, Note - Deed of Trust - Mortgage, Pleadings, Pro Se Litigation, State Court, Trial Strategies, Your Legal Rights

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Courts of New York, HSBC Bank USA, Law, Mortgage loan, New York, Plaintiff, Pro se legal representation in the United States, standing, United States

I General Answer Issues

• Be sure to raise lack of standing as a defense in the homeowner’s answer if the plaintiff’s ownership of the note and mortgage is questionable. Standing/capacity to sue may be waived if not raised in the answer.

• Late Answers:

• Pro se homeowners often do not file answers and do not seek attorneys until they receive notice of the settlement conference. In these circumstances, homeowner attorneys should serve and file a late answer. If the plaintiff rejects the answer, file a motion to compel acceptance of the late answer.

• A court may permit a defendant to file a late answer “upon a showing of reasonable excuse for delay or default.” CPLR § 3012(d); Cirillo v.Macy’s, Inc., 61 A.D.3d 538, 540, 877 N.Y.S.2d 281, 283 (1st Dep’t 2009).

• Mortgagor’s belief that foreclosure action was stayed during ongoing settlement negotiations with mortgagee was reasonable excuse for filing late answer. HSBC Bank USA, N.A. v. Cayo, 2011, 34 Misc.3d 850, 934 N.Y.S.2d 792.

• Courts have routinely permitted service of a late answer where the delay was not willful, the defendant has meritorious defenses, and service of the answer does not unfairly prejudice the plaintiff. See, e.g., Nickell v. Pathmark Stores, Inc., 44 A.D.3d 631, 632, 843 N.Y.S.2d 177, 178 (2d Dep’t 2007); Jolkovsky v. Legeman, 32 A.D.3d 418, 419, 819 N.Y.S.2d 561, 562 (2d Dep’t 2006); Watson v. Pollacchi, 32 A.D.3d 565, 565-66, 819 N.Y.S.2d 612, 613 (3d Dep’t 2006); Nason v. Fisher, 309 A.D.2d 526, 526, 765 N.Y.S.2d 32, 33 (1st Dep’t 2003)

• Allowance of a late answer is consistent with New York’s strong public policy in favor of a determination of controversies on the merits. See, e.g., Jones v. 414 Equities LLC, 57 A.D.3d 65, 81, 866 N.Y.S.2d 165, 178 (1st Dep’t 2008);Hosten v. Oladapo, 52 A.D.3d 658, 658-59, 858 N.Y.S.2d 915, 916 (2d Dep’t 2008); Kaiser v. Delaney, 255 A.D.2d 362, 362, 679N.Y.S.2d 686, 687 (2d Dep’t 1998).

Where the defendant has answered but not asserted a standing defense, a motion for leave to amend to assert a standing defense should be granted if such amendment causes no prejudice to plaintiff. U.S. Bank Natl. Assn. v. Sharif, 89 A.D.3d 723, 933 N.Y.S.2d 293, 2011 N.Y. Slip Op. 07835 (2d Dep’t Nov. 1, 2011) (motions for leave to amend should be freely granted absent prejudice or surprise from the delay in seeking leave; reversing denial of leave and holding that trial court should have dismissed for lack of standing upon plaintiff’s failure to submit either written assignment of note or evidence of physical delivery).

• New York law permits reciprocal attorney’s fees for homeowner’s attorney in defending against foreclosure on residential mortgages: RPL § 282.

II. Affirmative Defenses and Counter Claims

A. Standing and Capacity To Sue

• Many documents needed to establish standing were “robo-signed”

• Sloppiness in assigning mortgages to mortgage securitization trusts often makes it difficult for plaintiff trusts (or servicers) to establish standing.

1. The Difference Between Standing and Capacity to Sue

a. Standing Is Jurisdictional

• U.S. Constitution Article III – Case and Controversy Requirement

• Siegel on New York Practice: “It is the law’s policy to allow only an aggrieved person to bring a lawsuit. One not affected by anything a would-be defendant has done or threatens to do ordinarily has no business suing, and a suit of that kind can be dismissed at the threshold for want of jurisdiction without reaching the merits. When one without the requisite grievance does bring suit, and it’s dismissed, the plaintiff is described as lacking “standing to sue” and the dismissal as one for lack of subject matter jurisdiction.”

• “Standing to sue is critical to the proper functioning of the judicial system. It is a threshold issue. If standing is denied, the pathway to the courthouse is blocked. The plaintiff who has standing, however, may cross the threshold and seek judicial redress….The rules governing standing help courts separate the tangible from the abstract or speculative injury, and the genuinely aggrieved from the judicial dilettante or amorphous claimant.” Saratoga County Chamber of Commerce, Inc. v. Pataki, 100 N.Y. 801, 766 N.Y.S.2d 654, 798 N.E.2d 1047 (2003)

• New York courts have treated standing as a common law concept, in contrast to federal approach, where it rests on constitutional and prudential grounds. New York case law tends to blend standing with capacity to sue.

b. Capacity to Sue v. Standing

• Capacity to sue goes to the litigant’s status, i.e., its power to appear and bring its grievance before the court. For example, a foreign corporation or LLC may not bring an action unless it is registered with the Secretary of State; minors lack legal capacity, etc.

• Standing requires an inquiry into whether the litigant has an interest in the claim at issue that the law will recognize as a sufficient predicate for determining the issue at the litigant’s request. Is the relief sought in the case properly sought by this plaintiff?

2. Standing in a Foreclosure Case

• Foreclosing plaintiff must own the note and the mortgage at the inception of the action. Deutsche Bank National Trust Co. v. Barnett, 88, A.D. 3d 636, 931 N.Y.S. 2d 630, 2011 WL 4600619 (2d Dep’t Oct. 4, 2011); Kluge v. Fugazy ,145 A.D. 2d 537, 536 N.Y. S. 2d 92 (2d Dep’t 1988)

• Note: represents contractual debt obligation Mortgage: represents collateral security for debt

• Assignment of the mortgage without assignment of the debt, i.e. the note, is a nullity.

• Assignment must be complete before foreclosure is commenced

• Assignment can be by written assignment or by physical delivery of note and mortgage.

• An indorsed note (to the plaintiff or in blank) is not sufficient: the plaintiff must prove physical delivery before the foreclosure was commenced.

• If a written assignment involved and has a date, the execution date generally controls.

• Back dated assignment are ineffective absent proof of prior physical delivery. Wells Fargo v. Marchione, 69 A.D. 3d 204, 887 N.Y. S. 2d 615 (2d Dep’t 2009)

3. Common Assignment Red Flags in Foreclosure Cases

Assignments that jump over links in the chain of title, including timing.

• Suspicious or contradictory endorsements and allonges.

• Assignments from MERS as nominee

• Robo-signing of assignment documents

• Mortgage-Backed Securities Investment Vehicles: Pooling and Servicing Agreements and non-compliance with trust closing dates and other terms

4. MERS and Standing

• Second Department: assignment from MERS when MERS is designated merely as nominee of lender, and never owned note, is ineffective to confer standing on its assignee.

Bank of New York v. Silverberg, 86 A.D. 3d 274, 926 N.Y.S. 2d 532 (2d Dep’t 2011). See also In re Lippold, 2011 WL 3890540 (SDNY Bkrtcy 2011)(MERS, as assignor, could not legally assign the note as prior holder of note and mortgage only conferred legal rights with respect to the mortgage); In re Agard, 444 B.R. 231 (SDNY Bkrtcy 2011) (mortgage naming MERS as nominee did not authorize it to assign)

• Issues concerning who executes assignments on behalf of MERS (plaintiff’s counsel, robo-signing servicer employees?)

5. Waiver of Standing Defenses

• CPLR 3211(e) only provides that capacity to sue is waived; no mention of standing.

• Wells Fargo Bank v. Mastropaolo, 42 A.D. 3d 239, 837 N.Y.S. 2d 247 (2d Dep’t 2007); HSBC v. Dammond, 59 A.D. 3d 679, 875 N.Y.S. 2d 490, 875 N.Y. S. 2d 490, (2d Dep’t 2009); Countrywide v. Delphonse, 64 A.D. 3d 624, 883 N.Y. S. 2d 135 (2d Dep’t 2009).

• Cf. Security Pacific Nat’l Bank v. Evans, 31 A.D. 2d 278, 820 N.Y.S. 2d 2 (1stDep’t 2006) (plaintiff lender commenced action after merging with anotherbank; lack of legal capacity waived; not an issue of standing)

• Some trial courts have held there is no waiver of standing defense where plaintiff had not appeared or answered altogether. Deutsche Bank v. McRae, 894 N.Y. S. 2d 720 (Allegheny Cty. 2010); Citigroup v. Bowling, 25 Misc. 3d 1244A, 906 N.Y. S. 2d 778 (Kings Cty. 2009).

6.Leave to Amend Answer to Assert Standing Defense

U. S. Bank, Natl. Assn. v. Sharif, 89 A.D. 3d 723,933 N.Y.S. 2d 293, 2011 NY Slip Op 07835 (2d Dep’t Nov. 1, 2011) (reversing denial of leave to amend to assert standing and denial of motion to dismiss for lack of standing where plaintiff demonstrated no prejudice and failed to establish its standing to foreclose). Aurora v. Thomas, 70 A.D. 3d 986, 897 N.Y.S.2d 140 (2d Dep’t 2010) (affirming grant of motion for leave to amend to assert standing and capacity to sue, finding no waiver where documents relied upon were revealed during discovery); HSBC v. Enobakhare, 2010 Slip Op 31925 (U) (Richmond Cty. 2010) (granting motion for leave to amend answer; amended answer could assert defenses that were arguably waived by failure to assert originally)

• Deutsche Bank v. Ramotar, 30 Misc. 3d 1208(A), 2011 WL 66041 (Kings Cty. 2011) (denying summary judgment and order of reference, granting defendant who had previously answered pro se leave to file amended answer asserting standing and robo-signing defenses)

7. Standing as a Meritorious Defense to Vacate Default Judgments/Plaintiff’s Motions for Default/Summary Judgment/Order of Reference and Absence of Standing

• Prima facie case in a foreclosure case requires showing of ownership of note and mortgage. Campaign v. Barba, 23 A.D. 3d 327, 805 N.Y.S. 86 ( 2d Dep’t 2005)

• Distinction between moving to dismiss for lack of standing when defense has arguably been waived and opposition to plaintiff’s motion for summary judgment and order of reference for failure to establish ownership of note (prima facie case)

8. Sua Sponte Dismissals on Standing Grounds/Robo-signing Concerns

• Financial Freedom v. Slinkosky, 28 Misc. 3d 1209(a) (Suffolk Cty. 2010) (denying summary judgment where plaintiff failed to submit note and mortgage and failed to demonstrate standing) HSBC Bank USA, N.A. v Taher, NY Slip Op 51208(U) (Sup. Ct. Kings Cty., July 1, 2011) (denying order of reference, making detailed analysis of robo-signed assignments and affidavits of merit and amounts due, questioning employment histories of individuals who signed papers on behalf of different entities, determining that plaintiff lacked standing to foreclose because, among other reasons, assignment of mortgage from MERS as nominee, which never owned note, was ineffective, and dismissing with prejudice. In light of frivolous motion for order of reference by HSBC and its counsel, court scheduled hearing on sanctions and ordered chief executive officer of HSBC to personally appear at hearing)

9. Standing as Meritorious Defense (for leave to file untimely answer or to vacate default)

• Deutsche Bank National Trust Co. v. Ibaiyo, 20910-08 (Queens Ct. 2009) (meritorious defense criteria for CPLR § 3012 motion to extend defendant’s time to answer)

• Maspeth Federal Av. & Loan Ass’n v. McGown, 77 A.D. 3d 890, 909 N.Y. S. 2d 642 (2d Dep’t 2010) (trial court has considerable discretion on applications to vacate default and extend time to answer when determining existence of meritorious defense and reasonable excuse for default)

10. True Capacity to Sue Issues

• BCL §1372 (prohibits lawsuits by foreign corporations not authorized to do business in NY)

• Exception for foreign banking corporations via BCL § 103(a) and Banking Law § 200(4).

• Sutton Funding LLC v. Parris, 24 Misc. 3d 889, 878 N.Y.S.2d 610 (Kings Cty. 2009) (dismissing foreclosure where plaintiff was not a foreign bank and was not authorized to do business in NY)

B. Federal Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692-1692p

1. Scope of FDCPA Coverage

a. Who is covered

• Applies to debt collectors. § 1692a(6)

• Debt collector is any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts

• For §1692f(6) purposes it also includes any business the principal purpose of which is the enforcement of security interests.

• Or, any person who regularly collects, directly or indirectly, debts owed or due or asserted to be owed or due another.

• Includes debt buyers

• Includes attorneys who regularly collect consumer debts.

• There used to be an exemption for attorneys collecting on behalf of and in the name of a client. In 1986, Congress repealed this exemption.

b. Who is not covered

• Original creditors. § 1692a(6)(F)(ii)

• It does include any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts. § 1692a(6)

• Creditors employees or agents collecting in the name of the creditor. § §692a(6)(A)

• State and federal officials performing their duties, such as the IRS or U.S. Dept. of Education. § 1692a(6)(C)

• Persons collecting debts not in default, such as some servicers. §1692a(6)(F)(iii)

• Process servers. §1692a(6)(D)

• At least one court has held that they are covered if they are engaging in sewer service Mel Harris v. Sykes, 757 F.Supp.2d 413 (2010)

c. What transactions are covered Consumer debts

• Consumer is defined in § 1692a(3) as “any natural person obligated or allegedly obligated to pay any debt”

• Does not apply to artificial entities, such as corporations Debts are defined in § 1692a(5) as any obligation of a consumer to pay money

• underlying transaction must be for money, property, insurance, or services

• must be primarily for personal, family or household purposes

• no business debts or fines Communications – § 1692a(2)

• Means the conveying of information regarding a debt directly or indirectly to any person through any medium

• Also applies to statements and activities during the course of litigation. Heintz v. Jenkins , 514 U.S. 291 (1995)

• Recent amendments to FDCPA clarify that a legal pleading

cannot be considered an “initial communication” under FDCPA.

• Note that this is a narrow amendment; other provisions of FDCPA still apply.

2. Substantive Consumer Protections

• Cease communications. § 1692c

• Dispute/verification. § 1692g

• Notice within 5 days of initial communication

• Right to dispute within 30 days of receiving notice

• Once debt collector receives dispute in writing, must stop all debt collection activity (including filing a lawsuit) until it provides “verification” of the debt.

• NOTE: Local NYC law expands these dispute rights. Under local law, consumers can request verification at any time. NYC Admin Code § 20-493.2.

• Verification must include (1) copy of the contract or other agreement creating the obligation to pay (2) copy of final account statement (3) an accounting itemizing the total amount do, specifying principal, interest, and other charges.

For each additional charge, the debt collection must state the date and basis for the charge. See § 2-190 of the Rules of the City of New York.

3. Prohibited Activities

• Communications. §§1692b & 1692c

• Contacting consumer after consumer sends cease communication letter

• Contacting consumer who is represented by counsel

• Contacting third parties about a consumer’s debt

• Contacting consumer at work if debt collector has reason to know that consumer’s employer prohibits such communication

• Common scenario: Debt collector can’t reach consumer, so calls consumer’s neighbor/family member/employer and leaves telephone number and message for the consumer to call back about an important matter. This is a violation.

• Harassment or Abuse. § 1692d

• Debt collector may not engage in conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with collection of debt

• Includes: threats of violence, use of profanity, repeated telephone calls for purpose of harassment, calling without disclosure of identity (e.g. threats to repossess property)

• False or Misleading Representations. § 1692e

• False representation of character, amount, or legal status of any debt (e.g., suing for more interest and fees than is actually owed)

• Threat to take any action that cannot legally be taken or is not intended to be taken

• Implying that consumer could be arrested or children taken away for nonpayment of debt

• Pretending to be attorney, marshal

• Making false or inaccurate reports to credit reporting agencies

• Unfair Practices. § 1692f

• Using unfair or unconscionable means to collect a debt

• Collection of any amount (including interest and fees) that is not actually owed

• Threatening to take or repossess property (a) without the right; (b) without the intent; (c) if property is exempt

4. FDCPA Litigation and Remedies

a. Statute of limitations

• one year from the date on which the violation occurs – § 1692k(d)

• No continuing violations doctrine

b. Jurisdiction

• May bring in either state or federal court

• May also bring as a counterclaim in a debt collection suit

c. Construction

• Strict liability statute – proof of the debt collector’s intent is not required

• intent is a factor that can be used when calculating damages

• Courts apply a “least sophisticated consumer” standard to analyze violations

d. Remedies

• Up to $1000 statutory damages

• A majority of courts hold that capped at $1,000 per action no matter how many violations are joined in the lawsuit

• Per Plaintiff

• Sometimes per Defendant, depending on the violation

• Factors used by courts in determining statutory awards:

• Intent to commit the violation or evade the protections

• Repetition of the violations

• Timely correction of the violations

• Multiple consumers affected by the violations

• Prior violations by the collector for similar acts

• Actual damages

• Attorney’s fees

• Declaratory relief

• No Injunctive relief

C. NYS Banking Law Defenses

1. Banking Law § 6-l

• Applies to loans made after April 1, 2003.

• Covers “high – cost home loans”: a first lien residential mortgage loan, not exceeding conforming loan size for a comparable dwelling as established by the Federal National Mortgage Association in which (1) the APR exceeds eight percentage points over the yield on Treasury securities having comparable periods of maturity; or (2) total points and fees exceed 5% of the total loan amount, excluding certain bona fide discount points if total loan is $50,000 or more.

• Prohibits, inter alia, (1) lending without regard to a borrower’s ability to repay; (2) points and fees in excess of 3% of the loan; (3) loan flipping; (4) kickbacks to mortgage brokers; (5) points and fees when lender refinances its own high-cost loan; (6) balloon payments, negative amortization, and default interest rates.

• Provides private right of action with 6-year statute of limitations (from origination); actual and statutory damages; attorney fees; possible rescission of the loan.

• Intentional violation may result in voiding of the loan.

2. Banking Law § 6-m

• Covers “sub-prime home loan”: a loan where the fully indexed APR for the first-lien loan exceeds by more than 1.75, or for a subordinate loan by more than 3.75, the average commitment rate for loans in the northeast region with a comparable duration as published in the Freddie Mac Primary Mortgage Market Survey (PMMS) in the week prior to the week in which the lender received a completed loan application.

• Lenders must take reasonable steps to verify that the borrower has the ability to repay the loan, including taxes and insurance.

• Prohibitions similar to those in Banking Law §6-l.

• Lenders must disclose charges for taxes and insurance and must escrow such payments after July 1, 2010.

If you are ready to take the battle to these interlopers, in order to defend and save the home that is rightfully yours, visit http://www.fightforeclosure.net

Pro Se Guide To Civil Litigation

16 Tuesday Jul 2013

Posted by BNG in Appeal, Discovery Strategies, Federal Court, Foreclosure Defense, Litigation Strategies, Pleadings, Pro Se Litigation, Trial Strategies, Your Legal Rights

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Civil Procedure Outline

I. The Adversarial System

A. Four Lessons

1. Doctrine

a. Formal rules of litigation (FRCP)

2. Strategy

a. Practical considerations (time, money principle)

3. Theory

a. Different frameworks for understanding the civil litigation system

4. Skills

a. Actual practice (drafting a complaint, answer, negotiation)

B. Theories of Adjudication − FRCP 1: Rules shall be construed and administered to secure the just, speedy and inexpensive determination of every action. FRCP 1 does not provide much guidance. Therefore, the three theories below are applied

1. Fair Fight

a. Judge is passive referee that simply follows and enforces the rules

b. The only interests are those party to the litigation.

c. Mitchell v. A&K − Truck on the premises

2. Justice Between the Parties

a. Judge is active and corrects for disparities between the parties

b. Only interests are those party to the litigation

c. Conley − Black workers’ complaint lacks sufficiency but is accepted because need discovery

3. Greater Good

a. Judge is active and considers larger interests of society

b. Takes into account third parties (other interest than just those before the court)

c. Band’s Refuse − Judge called own witnesses and introduced own evidence

II. Initiating the Lawsuit

A. Plaintiff’s Claim (Complaint)

1. Process

a. File − FRCP 3: Action is started by filing the complaint with the court

b. Serve − Complaint is given to the opposing party or parties

2. Rules for assessing a complaint

a. FRCP 8(a) − A pleading which sets forth a claim for relief shall contain

· 8(a)(1) − A short plain statement of the grounds upon with the court’s jurisdictions depends, unless the court already has jurisdiction and the claim needs no new grounds for jurisdiction to support it;

· 8(a)(2) − Short, plain statement of a claim showing pleader is entitled to relief; and

§ Flaws to avoid

§ Missing an element

i. Concerns include

· Δ cannot answer

· Notice to the court

· Flush out meritless claims

§ Negating an element

§ Establishing an affirmative defense

· When flawed − Subject to motion to dismiss

§ Particularity

§ Beyond reasonable doubt that plaintiff can prove no set of facts to establish claim Connely = Mere possibility

§ Particular enough that can draw fair inference
Sutliff = fair inference

· 8(a)(3) − a demand for judgment for the relief the pleader seeks; relief in the alternative or of several different types may be demanded

b. Background rules

· Allegations taken as true

· Allegations considered on their face (no evidence) Mitchell v. A&K

· No legal argument Sutliff

3. Notice Pleading − level of detail or specificity

a. FRCP 12(b)(6) − complaint should not be dismissed for failure to state a claim unless it appears beyond a doubt that plaintiff can prove no set of facts in support of claim

i. Mere possibility
Complaint should not be dismissed for failure to state a claim unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief

1. Conely v. Gibson − Black union members sue for discrimination, defendant moves to dismiss for failure to state a claim, court holds for plaintiff

ii. Fair inference
Complaint must contain either direct allegations on every material point necessary to sustain a recovery or allegations from which an inference fairly may be drawn that evidence of material points will be introduced at trialSutliff v. Donovan

iii. Specific facts
Not good law Gillispie

b. FRCP 12(e) – Request for the Π to give a more definite statement of the allegations in the complaint

i. Board of Harbor Commissioners
Facts: Oil discharged into waterway. Unclear who did it. D moves for more definite statement in order to frame an appropriate response pursuant to Rule 7. Court held for P.
Rule: Leans toward the fair inference standard. Information is specific enough b/c all of the elements are addressed.
(If P gives more definite statement that is still not specific enough can follow up with motion to dismiss)

c. FRCP 12(f) − Motion to strike redundant, immaterial, impertinent and scandalous matter

4. Policy considerations for determining whether the complaint is specific enough (background policy considerations for borderline cases)

a. Sufficient notice to the D

b. Allows investigation

c. Provides early assessment of the merits

d. Prevents a fishing expedition

e. Who has access to the additional info

f. Harm is worthy of the litigation

5. Pleading in the alternative

a. FRCP 8(e)(2): A party may set forth 2 or more statements of claim or defense alternately or hypothetically

i. If by the nature of the circumstance the P would not know which allegations are right

ii. Lack of knowledge – pleading in alternative is OK

iii. If facts should be known – pleading in the alternative not OK

iv. Can only collect on one of the claims

b. McCormick v Kopmann (Car Crash Case)
Facts: McCormick dies in head on collision. Wife sues (1) bar owner (Huls) for over-serving alcohol and (2) driver (Koppman) for crossing over the center line, causing the collision with her husband. Koppmann moves to dismiss b/c of contradicting allegations. Denied.
Rule: Pleading in the alternative is allowed where the P lacks knowledge about the key facts in good faith
Policy: Look at the models of adjudication

i. Justice between the parties − Should not be able to plead in the alternative if she knows the truth

ii. Fair fight − Should be able to use the evidence b/c it could be used against her

6. Heightened Pleading Standard

a. FRCP 9(b)– In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge and other condition of the mind of a person may be averred generally

i. Strong inference standard

b. PSLRA(Private Securities Litigation & Reform Act) − State with particularity facts giving rise to a strong inference that D acted with required state of mind

i. 2nd Circuit – Strong Inference Standard (majority approach)

· P must show motive and opportunity to commit fraud

ii. 9th Circuit – Great Detail Standard

· P must plead with great detail for deliberately reckless OR conscious misconduct (allegations in detail of who, what, when, where, how)

c. Background policies for general particularity and heightened pleading

i. Giving notice to the D and the court

ii. Sometime giving the court the ability to assess the merits

iii. Preventing fishing expeditions

iv. Being attentive to who has the factual information

d. Ross v. Robins (Faulty Birth Control Case) – 2nd Circuit
Facts: Ross purchases shares of Robins. Robins did not report safety and efficiency problems with the Dalkon Shield, but knew about them. After FDA made a public disclosure of the problem, stock prices fell. D moves to dismiss under 12(b)(6) for failure to comply with 9(b). Move to dismiss granted. P appeals.
Rule: Cases involving the Private Securities & Litigation Reform Act must meet a heightened pleading standard. . . strong inference standard.

e. Cash Energy v. Weiner (Environmental Cleanup Case)
NOT GOOD LAW
Facts: Cash Energy engaged in storage and/or transfer of chemical solvents on a site adjacent to Weiner’s property. Weiner believes his land has been contaminated as a result of this activity. D moves to dismiss under 12(b)(6) for failure to comply with 9(b). Court grants motion to dismiss. P appeals.
Rule: Court holds cases involving CERCLA to heightened pleading standard, but this is not the law.

f. Leathermann v.Tarrant County (Drug Bust Case)
GOOD LAW
Facts: Tarrant Co. obtains search warrants. Homeowners claimed assault. Rule: Rule 9(b) only applies to cases involving fraud, mistake or PSLRA. Rule 8(a)(2) still stands otherwise. Cash Energy is NOT the law. Rely on Leatherman.

7. Voluntary dismissal

a. FRCP 41(a)(1) − P can dismiss the case unilaterally as long as it is before service of an answer or a motion for summary judgment. If after the answer or motion, must have stipulation of both parties.

b. FRCP 41(a)(2) − If parties are not in agreement, will need dismissal by order of the court

i. First time dismissed without prejudice

ii. Second time dismissed with prejudice

iii. If court doesn’t otherwise say, it is dismissed without prejudice.

c. Reasons for voluntary dismissal

i. To file in another jurisdiction (don’t like the judge)

ii. A way to avoid sanctions under Rule 11

iii. If judge may grant a motion to dismiss under Rule 12, might want to pre-empt the ruling

iv. The SOL may be running so just decide to go away quietly

B. Defendant’s Response

1. RULE 12 MOTIONS

a. Rule 12(a) − Timing to file responsive pleading

i. 12(a)(1)(A) − Answer complaint w/in 20 days

ii. 12(a)(4)(A) − After filing and serving 12(b)(6) motion, wait to hear back from court

iii. 12(a)(4)(A) − 12(b)(6) denied then must answer within 10 days

iv. 12(a)(4)(A) − If court postpones ruling on 12(b)(6), must answer withing 10 days

v. If court grants motion to dismiss do not need to answer

vi. 12(a)(1)(A) − Grants leave to amend, court will specify timing

vii. 12(a)(4)(A) − If court denies motion to strike then must answer within 10 days

viii. 12(a)(4)(B) − If court grants motion to strike then must answer within 10 days

Timing under 12(a)	Within 20 days	Within 10 days	Never
Answer complaint	12(a)(1)(A)
File and serve a 12(b)(6) motion			12(a)(4)(A) wait for court to rule
12(b)(6) motion is denied		12(a)(4)(A)
Court postpones ruling on 12(b)(6) motion		12(a)(4)(A) after notice by court
12(b)(6) motion is granted			Never
Grants leave to amend		12(a)(1)(A) Once P has amended, court will specify timing
Denies 12(e) motion for more definite statement		12(a)(4)(A)
Grants 12(e) motion for more definite statement		12(a)(4)(B) after P fixes complaint

b. Rule 12(b)
(b)(1) − Court lacks jurisdiction over the subject matter of the suit
(b)(2) − Court lacks proper jurisdiction over D
(b)(3) − Court is not the proper location for the suit; improper venue
(b)(4) − Insufficiency of process
(b)(5) − Insufficiency of service of process
(b)(6) − Failure to state a claim upon which relief may be granted

i. Motion to dismiss flaws

1. Missing an element

2. Negating an element

3. Establishing an affirmative defense

ii. Use Conely and Sutliff standards to assess whether 12(b)(6) should be granted

iii. Court is limited to the four corners of the complaint and must take all of the allegations as true

(b)(7) − Failure to join a party

c. Rule 12(c) − Motion for judgment on the pleadings (after the complaint and answer are done)

i. Vehicle for the D to answer

ii. For failure to state a claim

iii. Motion by the P if the Δ admits all of the relevant allegations

iv. Can be just like motion to dismiss for failure to state a claim, but is normally after the answer; same analysis

v. Must be brought forward without undue delay

d. Rule 12(e) − Motion for a more definite statement

i. Usually used b/c unintelligible, not for want of detail

ii. If you understand what the P is saying but want more detail, some courts grant the motion; others don’t (e.g. US v. Board of Harbors)

e. Rule 12(f) − Motion to strike

f. Rule 12(g) − All then available Rule 12 motions must be consolidated into one pleading. All defenses not brought are waived except as under 12(h)

g. Rule 12(h): Waiver or preservation of certain defenses

i. 12(h)(1) − Disfavored defenses

· Lack of personal jurisdiction – 12(b)(2)

· Improper venue – 12(b)(3)

· Insufficiency of process – 12(b)(4)

· Insufficiency of service of process – 12(b)(5)

ii. 12(h)(2) − Favored defenses

· Failure to state claim upon which relief can be granted – 12(b)(6)

· Failure to join a party – 12(b)(7)

iii. 12(h)(3) − Most favored defenses

· Lack of subject matter jurisdiction – 12(b)(1)

Rule	Rule Explanation	Defenses	Timing
12(b)(1)	Lack of subj matter jurisdiction	Most favored 12(g), 12(h)(3)	Bring at any time
12(b)(6)	Failure to state a claim upon which relief can be granted	Favored 12(g), 12(h)(2)	Can be made in any pleading or by motion for judgment on the pleadings or at trial on merits
12(b)(7)	Failure to join a party	Favored 12(g), 12(h)(2)	Can be made in any pleading or by motion for judgment on the pleadings or at trial on merits
12(b)(2)	Lack of personal jurisdiction	Disfavored 12(g), 12(h)(1)	Will be waived forever if you did not bring it with other Rule 12 motions
12(b)(3)	Improper venue	Disfavored 12(g), 12(h)(1)	Will be waived forever if you did not bring it with other Rule 12 motions
12(b)(4)	Insufficiency or process	Disfavored 12(g), 12(h)(1)	Will be waived forever if you did not bring it with other Rule 12 motions
12(b)(5)	Insufficiency of service or process	Disfavored 12(g), 12(h)(1)	Will be waived forever if you did not bring it with other Rule 12 motions

2. DEFAULT

a. FRCP 55(a) − Default entry by the clerk when the Δ has failed to respond

b. FRCP 55(b) − Default judgment by
(b)(1) − Clerk if the award amount is certain; have to give 3 days notice
(b)(2) − Court, P must show damages

c. FRCP 55(c) − Setting aside entry of default for good cause shown; if judgment has been entered, may likewise set aside under Rule 60(b)

d. FRCP 60(b) − relevant grounds for setting aside default judgment would be mistake, inadvertence, excusable neglect, surprise; this is more likely to not be set aside because it is that much more in the process

e. Three factors courts use to evaluate setting aside (Shepard Claims)

i. Non-defaulting party will not be prejudiced

· Witnesses, evidence, SOL

ii. Defaulting party has meritorious defense

iii. No culpable conduct by defaulting party

· If no prejudice and has meritorious defense, then culpable conduct must be willful for default to the set aside

f. Shepard v. Darrah
Facts: Shepard (independent claims adjuster) alleges that Darrah (insurance broker) failed to pay him for services rendered. After delivery of the complaint Darrah’s attorney misses filing date for answer due to confusion about extension
Rule: Default judgment will be set aside if P is not prejudiced, D has a meritorious defense and the conduct was not willful

3. ANSWER

a. Admitting or Denying

i. Admit an allegation as true

ii. Deny

iii. Lack knowledge or information sufficient to form a belief

iv. Hybrid- give more particular responses, combo of above

b. Rules

i. FRCP 8(b) − D shall respond to each averment by either (1) admit, (2) deny or (3) lack of knowledge or information sufficient to form a belief

· LKISFB is treated as a denial

· If it is found that you have sufficient knowledge or info, then LKISFB is treated as an admission (David v. Crompton & Knowles)

ii. FRCP 8(d) − Failure to deny – All averments are taken as admitted when not denied. All averment to which no responsive pleading is required or permitted shall be taken as denied or avoided

iii. FRCP 10(b) − Form of pleadings. Each claim or defense should be in a separate numbered paragraph; one allegation per paragraph

c. Purpose of the answer

i. Respond to the allegations

ii. Assert defenses

iii. Provide any counter or cross claims

d. David v. Crompton & Knowles
Facts: David was injured by a shredding machine in a factory. Δ says they don’t have sufficient knowledge to respond an allegation, then want to move to amend the answer to a denial. Motion to amend denied.
Rule: If you claim lack of knowledge and are found to have knowledge, could have acquired the knowledge (“Should have known”) or the info was within your control (“Only one who could have known”), then you have improperly used lack of knowledge answer and your answer will be deemed admitted instead of denied.

e. Affirmative Defenses (shield)

i. FRCP 8(c) − Affirmative Defenses (list is not exhaustive)

· D must include in answer, answer to amended complaint, or motion to dismiss or lose them FRCP 12(h)(1)

· D must raise the issue and the D must prove it

· SOL is a common affirmative defense

· 15(a) says you may amend an answer to insert affirmative defense

f. Counter Claim and Cross Claim (sword)

i. FRCP 13(a) − Compulsory Counterclaims must be brought or lost

· Must arise from same T&O weigh following factors

§ Logical relationship between the claims for them to be compulsory (liberal view)

§ Substantially the same evidence/facts – If the same evidence would substantially dispose of the issues raised by the opposing claims then the counterclaims are compulsory; if not, then they are permissive

§ Substantially same law applies

ii. FRCP 13(b) − Permissive Counterclaims may be brought but do not have to; different T&O

iii. FRCP 13(g) − Cross-Claim against Co-Party may be brought if same T&O as any of claims or counter-claims

iv. Purpose

· Judicial efficiency − same jury, same case load

· Consistency − Courts could rule differently on the same case or issue if raised at different times in different courts

· Destroys P’s image

Type of Claim	Against	Same T&O	Different T&O
Counter	Opposing Party	Compulsory 13(a) Must be brought	Permissive 13(b) May be brought
Cross	Co-party	13(g) May be brought	13(g) Cannot bring

v. Wigglesworth v. Teamster’s Union
Facts: During union meetings, Wigglesworth was prevented from exercising his free speech rights. After the complaint was filed, Wigglesworth holds a press conference at which he accused the union of being mafia run and that certain union elections had been fixed. Δ files counterclaim. Δ files motion to dismiss under 12(b)(1). Motion to dismiss granted.
Rule: Test for same Transaction and Occurrence:
Logical relationship between the claims for them to be compulsory (liberal view)
Substantially the same evidence/facts – If the same evidence would substantially dispose of the issues raised by the opposing claims, then the counterclaims are compulsory; if not, then they are permissive
Substantially same law applies
NOTE: All of the above factors do not need to be met for there to be same transaction and occurrence

C. Amended Pleadings

1. Process for amending

a. FRCP 15(a) − Party allowed to amend once as of right

i. Before a responsive pleading is served or

ii. If no responsive pleading is permitted, the party may amend within 20 days after it is served

Otherwise may only amend by:

(1) leave of the court or

(2) stipulation of the parties.

Leave shall be freely given as justice so requires

b. FRCP 15(b) − When issues not raised in the pleadings are tried by express or implied consent of both parties, they shall be treated as if they are part of the pleadings. Amended pleading allowed, but not required

c. If a disfavored Rule 12 motion is not brought in the answer, you can still amend the answer to include this Rule 12 motion so long as it is in the 20 day period

2. Standard for the court to allow a party to amend

a. Leave to amend will be given freely when justice so requires

3. Factors the court will take into account in denying leave to amend:

a. Undue delay

b. Bad faith

c. Prejudice to the opposing party

4. Relation back of an amended pleading

a. FRCP 15(c) − Relation back of amendment

i. 15(c)(2) − Relation back of a claim – amending to add a new claim when the statute of limitations has run from the original service of the pleading, must be same T&O (T&O test as above)

ii. 15(c)(3) − Relation back of a party − changing a party’s name or adding a party

· Change the D or the name of the D

· Name T&O (T&O test as above)

· Timing of notice – date of filing of original complaint + 120 days (Rule 4(m))

· Form of notice

§ Can be informal, just need to notify the party

· D is aware that but for a mistake of identity, he would have been named

§ Some jurisdictions say ignorance is not a mistake

iii. Swartz v. Gold Dust Casino
Facts: Swartz falls down stairs at the Gold Dust Casino. She alleges that the stair were thread bare, worn and slippery. Also, the stair violates the building code. Π files and serves a complaint against Gold Dust and Does I through V for negligence. Δ answers by denying the allegations. After discovery and interrogatories, Π discovered the true identity of Doe I and requests leave to amend their complaint. Δ files motion for summary judgment. Judge denies the motion for summary judgment. Motion for leave to amend is granted. Amended complaint is filed and served upon John Cavanaugh. Δ Cavanaugh raises 2-year statute of limitations as an affirmative defense in answer to amended complaint and moves for judgment on the pleadings.
Rule: Meets requirements for relation back

· Changing the party or changing the name of the party − Yes, Doe I becomes Cavanaugh

· Same transaction and occurrence − Yes, same day, same woman, same stairs (facts and evidence are the same); they are both negligence claims (doesn’t have to be the exact same claim)

· Timing of the notice − Notice (not filing) within 120 days of the filing of the complaint; ONLY NOTICE OF THE COMPLAINT IS REQUIRED, NOT FILING

· Form of notice − Cavanaugh got the amended complaint in the motion for leave to amend, also companies are so overlapped it is reasonable to assume that Cavanaugh would have known of the action

· But for a mistake about identity − Cavanaugh knew but for a mistake of identity that they would have been sued
Cavanaugh would argue wasn’t a mistake, it was ignorance

iv. David v. Crompton & Knowles
Rule: Meets the requirements for relation back

· Change the defendant − Yes, change Crompton to Hunter

· Same T&O − Yes, same accident, law, etc.

· Timing of notice − Maybe, Hunter is a division of Crompton (overlap of corporate entities)

· Form of notice − yes

· But for a mistake − Hunter would recognize that they would be on the hook for the machine; David thought Crompton was the manufacture. Maybe a mistake about ownership rights, not who is the manufacturer

D. Rule 11

1. FRCP 11(a) − Failure to sign a pleading, written motion or other written paper

2. FRCP 11(b) − In representations to the court attorney is certifying that he has made a reasonable inquiry and that to the best of his knowledge, information and belief

a. No improper purpose

b. Claims, defenses or other legal contentions are supported by existing law or by a non-frivolous argument for the extension of existing law

c. Allegations have evidentiary support

d. Denials of factual contentions are warranted on the evidence or are reasonably based on a lack of information or belief

3. FRCP 11(c) − Sanctions

4. FRCP 11(d) − Rule 11 sanctions do not apply to discovery (Rules 26-37)

5. Rule 11 Sanctions Process – 11(b)

a. Basis under 11(b)(1)-(4)

i. 11(b)(1) − Improper purpose, including delay

ii. 11(b)(2) − No basis in existing law
(two components, only have to meet one)

· Subjective − must believe had legal argument

· Objective − must actually have legal argument

iii. 11(b)(3) − No basis in evidence for the allegation or assertion

iv. 11(b)(4) − No basis in evidence for the denial

v. Creates standards/duty

vi. Notwithstanding your good faith if knowledge or information was not reasonably researched, subject to sanctions

b. Initiating Process − by motion or by court (no safe harbor when court initiates)

i. Serve motion on party who then has 21 days to correct problem or motion is filed in court

ii. Motion has to describe conduct

iii. Motion has to be separate from any other motion

c. Decision Process

i. Court has to give party chance to respond

ii. Describe conduct explicitly

iii. Describe basis for sanctions

d. Discretion

i. Can violate the basis and not be sanctioned

e. Type of Sanctions

i. Designed to deter not to compensate, because court was using as cost shifting mechanism

ii. Only strong enough sanction to deter conduct

iii. Court can refer to state bar, or to go to school, reprimand

iv. A represented party can be sanctioned

· Not monetary if basis is 11(b)(2) because client is not expected to know the law

v. Attorney’s fees and costs only available on motion

f. Target

i. Attorney

ii. Firm

iii. Party

Identify the action

Basis for sanction

Initiation

Decision

Process

Discretion

Types of Sanctions

Target of Sanction

Signing

11(a): Failure to sign paper

Notify party, court

N/A

Shall. 11(a)

No other option

Strike

N/A

Signing, filing, submitting, or later advocating position with…

-improper purpose (b)(1)

-no basis in law (b)(2)

-no basis in evidence for allegation or assertion (b)(3)

-no basis in evidence for denial (b)(4)

Sanctioned if frivolous either:

-subjectively (belief) or

-objectively (no reasonable inquiry; frivolous legal argument) 11(b)

Party’s motion:

-serve 21 days before filing (safe harbor)

-describe conduct

-only if not corrected

-not combine with other motion 11(c)(1)(A)

Court:

-order to show cause (OSC)

-describe conduct at issue 11(c)(1)(B)

Notice and opportunity to respond 11(c)

Order:

-describe conduct

-explain basis for sanction 11(c)(3)

May. 11(c) Can use discretion

Goal: Deter, not compensate 11(c)(2)

Options:

-nonmonetary directive (go to classes)

-monetary fine to court

pay other side’s attorney’s fees or costs 11(c)(2)

Restrictions:

-represented party not pay money under (b)(2). 11(c)(2)(A)

-attorney’s fees and costs only if on motion. 11(c)(2)

-no monetary sanction on court’s initiative unless OSC before voluntary dismissal or settlement. 11(c)(2)(B)

Party, attorney, law firm, or combination. 11(c)

6. Zuk
Facts: Zuk, psychologist, had EPPI record therapy sessions for rental. Writes books that has transcripts from session and gets copyright. Zuk furloughed (fired). Zuk requests copies of the tapes. EPPI ignores the requests. Requests them again 1994. Requests are denied.
Rule:

DISCOVERY

III. Discovery

A. Analyze

1. Proper use of device

a. Must be described with reasonable particularity

2. Responsive

a. Did the party ask for it?

3. Relevance − Rule 26(b)(1)

a. Reasonably calculated to lead to discovery of admissible evidence pertaining to claim or defense

i. Merits

ii. Background

iii. Impeach/Corroborate

iv. Clues

Ø If relevant to claim or defense do not need to make showing

Ø If relevant to subject matter, burden of proof shifts to party seeking discovery (need court order and good cause shown)

4. Protected

a. Privacy − Rule 26(c)

i. Annoyance, embarrassment

ii. Undue burden or expense − Rule 26(b)(2)

· Other means, source for same information

· Already been ample opportunity for discovery

· Rule 26(b)(2)(iii)

§ How much is it in controversy

§ What are parties’ resources

§ Needs of case

§ How relevant

§ What are important issues

§ Are there alternative sources of information

§ Consider models of adjudication

iii. Trade secrets − Rule 26(c)(7)

· Economic detriment

· Secret not generally known

· Injury has to be clearly defined, serious injury

· Competitive disadvantage

· Balance between harm of disclosure and necessity to litigation

b. Protective Order − Rule 26(c)

5. Privilege

a. Elements

i. With client (or prospective client)

· Upjohn − Modified control group test which stated that only those in corporation who are in a position to control or even take a substantial part in decision about any action which the corporation may take upon advice of attorney

§ Modification to protect parties (lower and mid-level employees) who disclose and in corporation will need lower level employees to disclose in order to find out what happened

ii. Legal advice

iii. Legal advisor

iv. Relate to advice

v. In confidence

6. Product − Rule 26(b)(3)

a. Prepared in anticipation of litigation or for trial

b. By or for another party, or by of for that other party’s representative (including attorney)

· Party may obtain discovery of ORDINARY WORK PRODUCT (but not opinion work product) if:

i. Substantial need

ii. Party cannot get the substantial equivalent without undue hardship

· In ordering discovery of such materials, court shall protect against disclosure of mental impressions, conclusions, opinions or legal theories of attorney or other representative (OPINION WORK PRODUCT)

§ Courts generally abide by this and protect against disclosure of opinion work product

§ 9th Circuit (minority view) − Allows discovery of opinion work product if (1) pivotal issue and (2) compelling need (not applied to attorney opinion work product)

v Must list in privilege log

B. Discovery Devices

1. Initial Disclosures − Rule 26(a)(1)

a. 26(a)(1)(A) − Party must disclose (provide or describe) what she is going to use to support her claim or defense (do not have to provide that which is harmful at this stage)

i. Potential witnesses (name, address, telephone)

ii. Documents

iii. Damages

iv. Insurance

2. Depositions − Rule 30

a. Testimony under oath that is recorded

b. Reasonable notice

c. Limited to 10 depositions

d. One day, seven hours per depositions

e. Only get to depose person once

f. Third parties can be deposed (special rules apply)

g. Rule 30(b)(6) − Describe in reasonable terms the category of person you want to depose, other side must provide the person that fits that category

h. Objections to form

i. Compound

ii. Confusing/Unintelligible

iii. Vague or ambiguous

iv. Misleading

v. Asked and answered

vi. Argumentative

vii. Mischaracterized witness testimony/Assumes facts not in evidence

· If objections not made at deposition, waive right for answer not to be admitted into evidence later

· Even after objection witness may answer, objections only serve to make answer inadmissible later

· Rule 30(d)(1)

§ Instruct not to answer

§ Privilege

§ Protective order in place or going to seek one

§ Any objection must be state concisely, speaking objections not permitted

3. Request for production (RFPs) − Rule 34

a. Describe a category with reasonable particularity

b. 30 days to respond (written response including objections)

c. Rule 34(b) − Produce those documents that are in producing party’s protection, control or custody (as kept or in categories, but not scrambled)

d. Rule 26(b)(5) − Privilege or work product

i. Materials that are attorney-client privilege

ii. Work product in preparation of litigation

· Privilege log − Must create a log of those items that are privileged, describe in general terms with objection

4. Interrogatories (Rogs) − Rule 33

a. Limited to 25 in number including subparts

b. 30 days to respond

i. Written answers by attorney and signed off by party

ii. Obligation to answer if reasonably obtainable

· Rule 33(d) − If have to look through a large amount of records can just give other party records in lieu of answering (shift burden to requesting party)

c. Contention interrogatories − Identify every fact (or all evidence) that supports your contention that X

i. Most courts will not allow early on

ii. Used to prove negative (to prove other side has no evidence of X)

5. Exams − Rule 35

a. Parties or those in care, custody or control of party (read narrowly)

b. Must be “in controversy”

c. Good cause shown

d. Must have stipulation by parties or court order

6. Request for admission (RFAs) − Rule 36

a. Extension of pleadings

C. Limitations on discovery

1. Rule 26(b)(2)(iii) − Undue burden

a. Outweighs likely benefits

b. Needs of case

c. Amount in controversy

d. Parties’ resources

e. Importance of the issue at stake

f. Importance of proposed discovery in resolving the issue

SUMMARY JUDGMENT

IV. Summary Judgment

A. Rule 56(a)

1. Claimant can move 20 days after commencement of action or after opposing party moves for summary judgment

B. Rule 56(b)

1. Defending party can move for summary judgment at any time

C. Rule 56(c)

1. Motion must be served at least 10 days before hearing (most courts require at least 21 days)

2. Standard − Summary judgment shall be granted if moving party makes showing that there is no genuine issue as to any material fact

a. What is fact at issue and why is it material?

i. Material if relevant to an element or affirmative defense

b. Is there a genuine issue about it?

i. Is it plausible that could come out either way?

· Adickes v. S.H. Kress & Co.

§ Key fact − Was there police officer in store?

§ Material to whether there was a conspiracy

§ D did not come up with enough evidence to initiate

§ D cannot do nothing in moving for SJ, must make some kind of showing (vague as to what this requires)

· Celotex v. Catrett

§ Key fact − Was P exposed to D’s product?

§ Material to causation

§ Rather than showing through affirmative evidence, D made showing that absence of evidence on other side (contention interrogatories often used)

§ Absence of evidence − Courts are split on moving party’s burden

Ø Point out there is no evidence (just state)

Ø Point to evidence in record to show lack of evidence

D. Rule 56(f)

1. Not enough chance for discovery on issue (premature)

E. Burden of production − Whether party has sufficient evidence to go to trial

F. Burden of persuasion − Which party must convince trier of fact

G. Party with burden of proof moves

1. Every reasonable jury would conclude that it is more likely than not that moving party is right

2. Ex. − Every reasonable jury would conclude that it is more likely than not that Jacques threw the rock

a. Required to make initial showing

b. Only if initial showing is strongly supported does opposing party have to respond

i. Burden of opposing party is to provide enough evidence to undermine moving party’s evidence sufficiently such that a reasonable jury could conclude that moving party is not more likely than not right

H. Party who does not have burden of proof moves

1. No reasonable jury would conclude that more likely than not that party opposing summary judgment is right

2. Ex. − No reasonable jury would conclude that it is more likely than not that Jacques threw the rock

a. Initial showing − Logically would make sense not to require initial showing, but if this were the case could be used as a weapon too easily

· Celotex − Ambiguous which of two standard applies

o Either merely point out that other side has no evidence

o Or must do discovery to show that other side has no evidence

i. Burden of opposing party is to provide enough evidence that a reasonable jury could conclude that it is more likely than not right

ii. Note that since party opposing summary judgment will have burden of persuasion at trial, if moving party has met its burden, simply attacking the moving party’s evidence will not suffice to survive summary judgment

For More information How You Can Use Some of These Pro Se Civil Litigation Guidelines To Effectively Challenge and Successfully Win Your Wrongful Foreclosure and Save Your Home Visit http://www.fightforeclosure.net

What Homeowners Needs To Know About MERS

03 Wednesday Jul 2013

Posted by BNG in Affirmative Defenses, Appeal, Federal Court, Foreclosure Defense, Fraud, Litigation Strategies, MERS, Non-Judicial States, Pleadings, Securitization, Trial Strategies

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Lien, MERS, Mortgage Electronic Registration System, Mortgage law, Mortgage loan, Promissory note, Real property, United States

In 1993, key residential mortgage lending industry participants1 gathered in order to bring then current developments in technology to the forefront in the establishment of a central, electronic registry for tracking interests in mortgage loans, thereby facilitating the transfer, acquisition and identification of those interests for custodians, servicers, investors and other participants in the industry. The goal was to eliminate the need and administrative expense for paper assignments of various mortgage-related rights as much as possible. The result of these efforts was the creation of the Mortgage Electronic Registration System, known as the MERS® System.2

Prior to the development of the MERS® System, when an interest in a mortgage loan was transferred, the parties would often change the mortgagee by assigning and recording the security instrument in the land records.3 Mortgage loans were frequently originated in the name of one lender and then transferred to aggregators, which might transfer contractual servicing rights to still another party. In each case, an assignment was recorded so that the purchaser or servicer would appear in the land records4 so that they would receive service of process and other legal notices as the lienholder in the public land records. To complicate matters further, when the servicing remained with the seller, the seller often remained mortgagee of record. If servicing changed hands, the land records were updated only if the new servicer wanted to receive service of process.5 This process could take a long time to complete—up to six months for a modest loan portfolio. County recorder offices struggled to manage the volume of filings, which threatened the integrity of the land title recordation system and jeopardized the ability of consumers to obtain residential mortgage loans. Error rates as high as 33% were common, with assignments recorded in the wrong sequence or missing altogether—clouding title to properties.6

The founders of the MERS® System intended for it to be a system that was open and available to mortgage industry participants, applying information technology to reduce costs and streamline the process, similar to implementation by the securities industry of book entry systems.

The stated benefits of the initially proposed MERS® System concept7 were:

a. Elimination of the need for subsequent assignments of the mortgage lien following closing of a loan.

b. Significant simplification of the loan tracking process.

c. Improvement of the lien release process.

d. Assistance in fraud reduction.

e. Simplification of procedures for delivering legal notices to mortgagees by providing an accurate database of beneficial owners of mortgage rights.

f. Cost reduction through voluntary immobilization of the mortgage note.8

The MERS® System was put into effect with the organization of Mortgage Electronic Registration Systems, Inc. (“MERS Inc.”), which serves as “mortgagee”, “grantee” or “beneficiary” (depending on state law; we will use the term “mortgagee” to refer to all three) in the security instrument, as nominee for the original lender and subsequent beneficial owners of the secured note. MERS Inc. is a wholly owned subsidiary of MERSCORP Holdings, Inc. (“MERSCORP Holdings”), which is owned by certain member financial institutions that utilize its services. The industry leaders, having worked hard to develop and achieve these laudable and practical goals, clearly had no idea what would befall the residential mortgage industry, nor how their motives and intentions would be twisted and vilified by critics in the current economic downturn.9

The Principles of MERS

The principles behind the MERS® System were derived from similar principles governing the establishment and function of the book entry registration and transfer system for securities established by The Depository Trust Company (“DTC”). Like the MERS® System, DTC is a member-owned institution that was created for the benefit of broker-dealer participants to facilitate transfers of securities in the securities markets. The benefits to the efficiency of securities transfers brought about by DTC have been clearly demonstrated and widely accepted.10 Much as “Cede & Co.” (the nominee holder of title to securities for DTC) does for beneficial owners of securities in the securities markets, MERS Inc. acts as the nominee of the lender (and its successors and assigns), who are beneficial owners of mortgage loans in the mortgage industry. In so doing, MERS Inc. becomes the mortgagee or beneficiary of record for the related mortgages and/or deeds of trust, for the benefit of the lender participants in the MERS® System.

To understand how the MERS® System operates, it is important to clarify the basic elements of a mortgage loan, which typically consists of two documents: (i) a promissory note between the lender and the borrower that sets forth the terms of the loan and establishes the obligation of the borrower to repay the loan secured by real property; and, (ii) a security instrument, which may be called a “mortgage,” “deed of trust” or a “security deed” (depending on state law; we will use the term “mortgage” to refer to all three), evidencing the pledge of the purchased or refinanced property as collateral or security for the loan. The mortgage is recorded in the real property records in order to provide public notice to third parties of the security interest encumbering the property. Sometimes the terms “note” and “mortgage” have been used interchangeably, resulting in confusion. They represent two different documents with separate but interrelated functions. For that reason, as discussed below and based on long-standing case law and regulations, it is not necessary that both documents be in the name of the same person or entity.

It is also important to understand what the MERS® System is and what it is not. Under the MERS® System, MERS Inc. and its parent, MERSCORP Holdings, serve two distinct functions. First, MERSCORP Holdings owns, operates and maintains the MERS® System, which is an electronic database or registry of mortgage loans that tracks changes in servicing rights and beneficial ownership interests in residential mortgage loans. Second, MERS Inc. serves as the mortgagee or beneficiary of record, or holder of the mortgage lien, in the public land records for the benefit of its members.

MERS Inc. claims no right to retain payments made on the promissory notes. It is not a mortgage banker. MERS Inc. does not take applications, underwrite loans, make decisions on whether to extend credit, collect mortgage payments, hold escrows for taxes and insurance or provide any loan servicing functions. MERS Inc. does not lend money or acquire the right to receive payments on mortgage loans. MERS Inc. does not receive compensation from consumers, just fees from its members.11

The bifurcation of roles and parties was not instituted by MERS Inc., rather it has a long history in mortgage finance and other developing commercial operations and in fact has been incorporated into state laws and regulations as will be discussed below.12 Where the mortgage (or an assignment thereof) names MERS Inc. as the mortgagee (or assignee of the mortgagee), then MERS Inc. has legal title13 to the real estate interest serving as collateral for the repayment of the loan, and the owner(s) of the note owns the beneficial interest in the loan secured by the mortgage. In such capacity, MERS Inc. remains the mortgagee of record, and pursuant to its contractual agreements with its members who are owners of the notes or servicers acting on behalf of the owners, any transfer of ownership or servicing must be communicated to the MERS® System to enable it to track such changes in order to provide the owner and servicer with filings and communications that MERS Inc. receives in its capacity as mortgagee of record. The borrower deals with the loan servicer—not MERS Inc.—in all matters of payment, modification or default on the loan.

In mortgage (non-deed of trust) states, the operative document defining MERS Inc.’s rights and functions is the mortgage. MERS Inc. is neither a party to, nor named in, the promissory note. Representative language can be found in a typical form of mortgage naming MERS Inc. as the original mortgagee14, which identifies three parties: the borrower, the lender and MERS Inc. MERS Inc. is further described as a separate corporation that is acting as mortgagee solely as a nominee for lender and lender’s successors and assigns. Under the mortgage, the borrower mortgages, grants and conveys to MERS Inc. (solely as nominee for lender and lender’s successors and assigns) and to the successors and assigns of MERS Inc., the property described therein. Furthermore, the mortgage includes an acknowledgment from the borrower that MERS Inc. holds only legal title15 to the interests granted by the borrower, but if necessary to comply with law or custom, MERS Inc. (as nominee for lender and lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the rights to foreclose and sell the mortgaged property; and to take any action required of the lender, including, but not limited to, releasing and canceling the mortgage. Thus, the express language of the mortgage instrument authorizes MERS Inc. to act on behalf of the lender in serving as the legal titleholder and exercising any of the rights granted to the lender thereunder.

In deed of trust states, the operative document defining MERS Inc.’s rights and functions is the deed of trust. Representative language can be found in a typical form of deed of trust naming MERS Inc. as the original beneficiary16, which identifies four parties: the borrower, the lender, the trustee and MERS Inc. MERS Inc. is described as a separate corporation that is acting solely as a nominee for lender and lender’s successors and assigns. In addition, MERS Inc. and the successors and assigns of MERS Inc. are further designated as the beneficiary of the deed of trust (solely as nominee for lender and lender’s successors and assigns). Under the deed of trust, the borrower grants and conveys to the trustee, in trust, with power of sale, the property described therein. Furthermore, the deed of trust includes an acknowledgment from the borrower that MERS Inc. holds only legal title to the interests granted by the borrower, but if necessary to comply with law or custom, MERS Inc. (as nominee for lender and lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the rights to foreclose and sell the property; and to take any action required of the lender, including, but not limited to, releasing and canceling the deed of trust. Thus, the express language of the deed of trust also authorizes MERS Inc. to act on behalf of the lender in serving as the legal titleholder and exercising any of the rights granted to the lender thereunder.

The Myths of MERS

In this section, we will address some of the more prevalent myths surrounding the MERS® System that have been perpetuated by various MERS’ critics and we will explain the facts and legal analysis that clarify and dispel such myths.

MYTH: The MERS® System is fraudulent and illegal.

FACT: The MERS® System is based upon sound legal principles and its legal validity has been upheld by a vast majority of the courts.17 The MERS® System relies on established principles of real property law, the law of negotiable instruments, and basic contract law that will be discussed herein.18 Rules governing security interests in personal property under the Uniform Commercial Code (UCC) also support the legal model for the MERS® System.19 Courts have long recognized the validity of using a nominee or agent as mortgagee as may appear in the mortgage instrument for recording purposes on behalf of the note owner.20 Agency relationships may be established by private contract, and common law principles of principal and agent shall supplement the rules governing secured transactions pursuant to UCC §1-103(b). Under Article 9 of the UCC, it is not necessary to record a mortgage assignment when the mortgage note is transferred or sold.21 Moreover, under real estate law, legal title can remain in a mortgagee (such as MERS Inc.) without invalidating the security instrument even though another party owns or holds the related promissory note.22 Significantly, the original recorded mortgage remains in place and provides sufficient notice of the lien to third parties, which is the primary purpose of such lien recording provisions.23

State legislatures have also recognized the validity and appropriateness of the MERS® System. For example, as a result of questions raised about the MERS® System, the Minnesota Legislature passed an amendment to the Minnesota Recording Act that expressly permits nominees to record “[a]n assignment, satisfaction, release, or power of attorney to foreclose.”24 The amendment, frequently called “the MERS statute,” went into effect on August 1, 2004.25

The Minnesota “MERS statute” provides that:

“An assignment, satisfaction, release, or power of attorney to foreclose is entitled to be recorded in the office of the county recorder or filed with the registrar of titles and is sufficient to assign, satisfy, release, or authorize the foreclosure of a mortgage if:

(1) a mortgage is granted to a mortgagee as nominee or agent for a third party identified in the mortgage, and the third party’s successors and assigns;

(2) a subsequent assignment, satisfaction, release of the mortgage, or power of attorney to foreclose the mortgage, is executed by the mortgagee or the third party, its successors or assigns; and

(3) the assignment, satisfaction, release, or power of attorney to foreclose is in recordable form.”26

In addition, under the Texas Property Code, the definition of “mortgagee” expressly includes a “book entry system,” which is defined as a national book entry system for registering a beneficial interest in a security instrument that acts as a nominee for the grantee, beneficiary, owner, or holder of the security instrument and its successors and assigns. 27 The definition of “book entry system” has been construed by several Texas courts to specifically include the MERS® System.28

MYTH: MERS Inc. lacks authority to act as mortgagee/beneficiary of record.

FACT: The authority of MERS Inc. to act as mortgagee/beneficiary of record is delegated by MERS’ members pursuant to well-established principles of property and agency law. Under general agency law, an agent has authority to act on behalf of its principal where the principal “manifests assent” to the agent “that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests or otherwise consents to so act.”29 Under the terms of the FNMA/FHLMC Uniform Security Instrument form of mortgage, MERS Inc. has the right to exercise any or all rights of the lender and its successors and assigns, including, but not limited to, the rights to foreclose and sell the mortgaged property, and to take any action required of the lender including, but not limited to, releasing and canceling the mortgage. Courts throughout the country have recognized that a lender who holds the beneficial interest in a loan may lawfully designate MERS Inc. as its nominee to hold legal title to the mortgage and serve as mortgagee of record, and have routinely enforced the provisions of mortgages in which MERS Inc. is named the mortgagee of record.30

MYTH: MERS Inc. does not have standing or authority to foreclose or seek relief from an automatic stay in bankruptcy.31

FACT: The concept of standing means that a party must have a legal interest or claim or the right to seek judicial enforcement of an obligation or action for relief in order to initiate a lawsuit or proceed in a legal action. Numerous courts have considered whether MERS Inc. is a real party in interest with standing to foreclose on a property or to move for relief from the automatic stay in bankruptcy (which prohibits creditors from pursuing any remedies upon a debtor’s bankruptcy filing). MERS Inc. has such interest and authority both (1) by express contractual terms, and (2) by law. First, the form of mortgage that appoints MERS as mortgagee and the MERS member agreement each grants MERS Inc. the authority to take action on behalf of a lender and its successors and assigns, including the enforcement of the rights and remedies under the mortgage. Specifically, the express language of a typical mortgage (where MERS Inc. is the mortgagee) provides that “if necessary to comply with law or custom, MERS Inc. (as nominee for lender and lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the [mortgaged property]; and to take any action required of lender including, but not limited to, releasing and canceling this [mortgage].” Second, Section 5.4(c) of the Restatement (Third) of Property (Mortgages) specifically provides that “[a] mortgage may be enforced only by, or on behalf of, a person who is entitled to enforce the obligation the mortgage secures”.32 Courts throughout the country have routinely and consistently held that MERS Inc. has both standing and authority to foreclose and seek relief on behalf of the beneficial owners of mortgage loans.33 The court in In re Huggins identified four reasons why MERS Inc. has standing to seek relief from an automatic stay in bankruptcy. “First, MERS is acting as nominee for [the noteholder], which holds the note . . . second, MERS is the record mortgagee under the Mortgage with the powers expressly set forth therein, including the power of sale . . . third, the Massachusetts foreclosure statute expressly authorizes the exercise of sale powers by a mortgagee, or person authorized to sell, precisely the position occupied by MERS . . . finally, a denial of MERS foreclosure right as mortgagee would lead to anomalous and perhaps inequitable results, to wit, if MERS cannot foreclose though named as mortgagee, then either [the noteholder] can foreclose though not named as a mortgagee or no one can foreclose, outcomes not reasonably or demonstrably intended by the parties.”34

However, there are also several minority decisions that, in some form, have taken issue with MERS Inc.’s authority to foreclose.35 None of them, to our knowledge, has invalidated a mortgage for which MERS is the nominee, and none of these decisions has challenged MERS Holdings’ ability to operate as a central system to track changes in the ownership and servicing of loans. Several decisions adverse to MERS Inc. have been reversed upon appeal, vacated or clarified by other court decisions.36

Notwithstanding the foregoing, in July 2011, MERS revised its Rules of Membership to prohibit the initiation of foreclosures in the name of MERS Inc. Under the revised rule37, MERS members are required to cause MERS Inc., through a MERS signing officer, to execute an assignment of the mortgage lien from MERS Inc. to the servicer, investor or a third party, prior to the initiation of a foreclosure proceeding or the commencement of an action for relief of an automatic stay in bankruptcy.

MYTH: The MERS® System creates an impermissible “split” between the mortgage and the note.

FACT: There is no “split” between the mortgage and the note because MERS Inc. holds the mortgage as mortgagee and nominee or agent for the Lender and its successors and assigns.38 MERS Inc. only appears in the security instrument and acts as a mortgagee of record in a nominee or agency capacity for the beneficial owner of the note.39

While litigants and critics continue to raise the issue that the use of MERS Inc. results in a purported impermissible split of the note from the mortgage, thereby rendering both unenforceable, their arguments have been consistently rejected by the courts. For example, in a recent Ninth Circuit case, Cervantes v. Countrywide Home Loans Inc., et al.,40 the plaintiff class alleged conspiracies by their respective lenders and others to use MERS Inc. to commit fraud as a sham beneficiary, among other things. The court found that plaintiffs failed to identify any representations made about the MERS® System and its role in their loans that were false and material; none of the plaintiffs’ allegations indicated that they were misinformed either about MERS Inc.’s role as a beneficiary or the possibility that their loans would be resold and tracked through the MERS® System; and they failed to show that the designation of MERS Inc. as beneficiary caused them any injury by, for example, affecting the terms of their loans, their ability to repay the loans or their obligations as borrowers.41 The court reviewed the express language of the documents the borrowers signed containing the substance of disclosure explained above and found that by executing the documents the plaintiffs agreed to the terms and were on notice of their content.42 “[T]he notes and deeds [mortgages] are not irreparably split: the split only renders the mortgage unenforceable if MERS or the trustee, as nominal holders of the deeds, are not agents of the lenders.”43 This distinction goes to the crux of the argument and the MERS critics. If a debt represented by a note is secured by collateral, then such collateral may not be separated from the note; although it may be held in the name of a different party as nominee or agent for the owner of the note; that is, the security follows the debt and in fact is released upon payment in full of such debt. MERS Inc. does not contend it acts in any capacity other than as mortgagee holding as agent or nominee for the lender. In a similar vein, recently a multi-district litigation (MDL) case involving MERS Inc. in Arizona was dismissed, citing in part the plaintiffs’ express agreement in the mortgages that MERS Inc. is the lienholder of record as agent for the lender and its assigns.44

The use of an agent to hold legal title in the mortgage while another holds a beneficial interest in the mortgage loan has a long history in the residential housing industry. For example, starting in the 1930s, mortgage lenders would originate and sell mortgage loans to investors under the Federal Housing Administration’s (“FHA”) insured loan program. The originating lenders would service and hold the mortgage loans, as mortgagee of record on behalf of the beneficial owners, whose names were not recorded in the county land records. Prior to the advent of residential mortgage securitization in the 1960s, it was common for two or more savings and loan associations to acquire a portfolio of mortgage loans and take participation interests therein. The participated mortgage loans were typically serviced by a mortgage loan servicer, as mortgagee of record on behalf of the various participants, whose names were also not recorded in the county land records. With the development of residential mortgage securitization in the late 1960s and early 1970s, Ginnie Mae, under its guarantee agreement, became the equitable owner of pooled loans while the originator or aggregator of the loans either remained or became the mortgagee of record and serviced the loans as an independent contractor for the benefit of investors in the Ginnie Mae mortgage-backed securities.45 Fannie Mae and Freddie Mac followed suit using a similar model.

In addition, the Restatement (Third) of Property (Mortgages) confirms that an agent may be used to enforce a mortgage on behalf of a note owner and even instructs that “[c]ourts should be vigorous in seeking to find such [an agency] relationship, since the result is otherwise likely to be a windfall for the mortgagor and the frustration of [the note owner’s] expectation of security.”46

Moreover, even the U.S. Bankruptcy Code accounts for this bifurcated structure by making it clear that a mortgage that is recorded in the name of a servicer that becomes a debtor in bankruptcy while it holds bare legal title to the mortgage does not become an asset of that servicer/debtor’s bankruptcy estate: “property in which a debtor holds . . . only legal title and not an equitable interest, such as a mortgage secured by real property, or an interest in such mortgage, sold by the debtor but as to which the debtor retains legal title to service or supervise . . . becomes property of the estate . . . only to the extent of the debtor’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.”47

MYTH: A transfer of the note requires a corresponding assignment of the mortgage.

FACT: A transfer of the mortgage note does not require a corresponding assignment of the mortgage. Under the MERS® System, MERS Inc. is named in the mortgage as nominee for the lender and its successors and assigns. The UCC, which has been adopted, with slight variations, by all 50 states, governs the transfer or sale of notes (whether they are determined to be negotiable or non-negotiable).48 However, the recordation of mortgages and requirements for their enforcement are governed by real estate law. This bifurcation of applicable law does not render their application mutually exclusive; rather, both the UCC and applicable real estate law in the respective jurisdiction must be complied with in order to have an enforceable note representing an obligation to pay, and an enforceable lien on the real property that is collateral for the note.

Under the UCC, a note sale or transfer is effective and enforceable upon meeting three criteria: (i) the buyer giving value, (ii) to a seller with rights in the note and (iii) execution of a security or purchase agreement that either describes the note or is accompanied by possession of the note.49

Once the note is sold or transferred such that the conveyance is enforceable or “attaches” as described above, there is a corresponding automatic transfer of the seller’s interest in the mortgage to the buyer. Section 9.203(g) of the UCC states “The attachment of a security interest [which includes the right of a buyer of the note] in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage or other lien.”50 These UCC rules do not address priorities of the security interest in the underlying property, enforcement of the mortgage, or the impact of filing or non-filing.51 Those issues are governed by the real estate law of the jurisdiction in which the property is located. But it is clear that under the UCC, the transfer or sale of the note includes conveyance of seller’s interest in the underlying mortgage.52 In order for the buyer of the note to be comfortable about its ability to foreclose or take any other necessary steps to realize on the collateral, it must have a contractual relationship with the mortgagee of record. Under the MERS® System, that contractual relationship exists, and MERS Inc. has been granted the right and authority to act on behalf of the owner(s) of the note as well as the servicer of the note. The roles are outlined by contract among the parties which specifies their duties and responsibilities under both the UCC framework as well as the real property recordation system.

MYTH: The MERS® System makes it harder for home owners to identify the servicer and beneficial owners of their mortgage loans.

FACT: The MERS® System actually makes it easier for home owners to identify the servicer and beneficial owner of loans that are registered on the MERS® System. The servicer is the party primarily responsible for negotiating loan modifications and conducting foreclosure proceedings. If a mortgage loan has been securitized, the “owner” of the mortgage loan will typically be a trust, which under the terms of the related pooling and servicing agreement, has delegated all loan servicing authority to the servicer. Consequently, the servicer is the crucial contact for homeowners seeking to modify or renegotiate the terms of their loans due to financial hardships, and the identity of the servicer is readily available to troubled borrowers if their mortgage loan is registered with the MERS® System. The MERS® System maintains a toll-free number (888.679.6377) and an Internet website (www.mers-servicerid.org) that enable borrowers to identify the servicer, and in most cases, the beneficial owner of their mortgage loan, if their mortgage loan is registered on the MERS® System.53 New servicers and beneficial owners of a loan are required to identify themselves on the MERS® System within days of the actual transfer of interests.

In addition, homeowners have other statutorily-mandated access to such information. Under the Real Estate Settlement Procedures Act (RESPA)54, mortgage loan servicers are required to notify borrowers when the servicing of their loan changes, and under recent changes to the Truth in Lending Act (TILA)55, transferees of mortgage loans are now required to notify borrowers when the ownership of their mortgage loan changes. This seems axiomatic since otherwise the borrower would not know where to send payments. Furthermore, the Dodd–Frank Wall Street Reform and Consumer Protection Act56 amended RESPA to require mortgage loan servicers to respond to qualified written requests from borrowers for the identity and address of the owner, or assignee, of their loan within ten business days after receipt thereof.57 These legislative and regulatory provisions validate and preserve the goals and intent of the original MERS system concept.

MYTH: MERS signing officers lack authority to act on behalf of MERS Inc.

FACT: MERS Inc. is a Delaware corporation and its actions are governed by its bylaws and the Delaware General Corporation Law (DGCL). Under the DGCL, there is no requirement that an officer of a corporation be an employee of that corporation.58 In addition, under the DGCL, there is no requirement that individuals serving as officers of a corporation be employed or compensated by that corporation.

Under Delaware law, a corporation may by board resolution appoint officers to carry out the corporation’s business.59 In addition, Section 142(a) of the DGCL provides that “any number of offices may be held by the same person unless the certificate of incorporation or bylaws otherwise provide.”

Since MERS Inc. has no employees, a majority of the actions taken by MERS Inc. in its capacity as mortgagee under mortgages and/or deeds of trust are taken by designated officers commonly referred to as “certifying or signing officers.” The signing officers are generally officers of MERS’ members that are responsible for carrying out servicing functions on behalf of such MERS members.

The MERS Inc. signing officers are appointed pursuant to a corporate resolution, duly adopted pursuant to authority granted by the Board of Directors of MERS Inc. Pursuant to the corporate resolution, these signing officers are appointed as assistant secretaries, assistant vice presidents and vice presidents of MERS Inc. and their authority is limited to: (1) executing lien releases, (2) executing mortgage assignments, (3) executing foreclosure documents, (4) executing proofs of claims and other bankruptcy related documents (e.g., motions for relief of the automatic stay), (5) executing modification and subordination agreements needed for refinancing activities, (6) endorsing over checks made payable to MERS Inc. (in error) by borrowers, (7) taking such other actions and executing documents necessary to fulfill the MERS member’s servicing duties, and (8) taking such ministerial actions and, in such ministerial capacity, executing and delivering all such instruments and documents as the officer(s) of MERS Inc. deem necessary or appropriate in order to effectuate fully the purpose of each and all of the foregoing powers, in each case only with respect to the loan owned by the related member.60 In order to be eligible for appointment as a signing officer of MERS Inc., a person must demonstrate a basic knowledge of the MERS® System and pass an annual certifying examination administered by MERSCORP Holdings.

We are not aware of any relevant case law that would suggest that the MERS Inc. business model of appointing signing officers is either inappropriate or illegal. In fact, several courts have upheld the MERS Inc. signing officer business model.61

The propriety of the MERS Inc. signing officer business model has also been upheld in an ethics opinion from the New York State Bar Association62 which found that no conflict of interest exists in violation of New York state bar professional conduct rules when an attorney serves as an officer of the mortgagee of record/assignor for the purpose of executing a mortgage assignment and also represents the assignee in the prosecution of the subsequent foreclosure action.

Courts have consistently upheld the authority of MERS Inc., in its capacity as mortgagee, to assign mortgages.63 When plaintiffs have challenged the authority of MERS Inc. signing officers to execute assignments in connection with foreclosure or bankruptcy proceedings, courts have consistently found that such plaintiffs lack standing to challenge such assignments because they are not parties thereto and are not the intended beneficiaries thereof.64 Significantly, such plaintiffs have failed to articulate any correlation between the alleged lack of authority and a resulting harm to the plaintiff occasioned thereby.

MYTH: The MERS® System creates a cloud on real estate titles.

FACT: The servicer (acting on behalf of the beneficial owner(s) of the note) is the entity responsible for initiating and completing foreclosure actions and, as such, the servicer (not MERS Inc.) is the entity that is responsible for assuring that mortgage assignments and mortgage notes are properly assigned to the real party in interest (i.e., the servicer or the note owner) prior to the commencement of foreclosure proceedings. MERS® System members have a substantial interest in providing accurate and current information because they rely on the MERS® System to obtain current information about note owners and servicers, as well as to obtain or receive legal notices served on MERS Inc. as mortgagee of record.65 Using MERS Inc. as the mortgagee of record actually reduces the possibility of missed or incorrect assignments that would create an unclear “chain of title” as to who is the actual mortgagee or beneficiary of the security instrument. When MERS Inc. serves as mortgagee, the recorded chain of title to the mortgage starts with MERS Inc. at origination and ends with MERS Inc. when it either releases the lien or assigns the lien to another entity.66 The MERS® System also streamlines the lien release process, reducing research time and recording fees.

MYTH: The MERS® System usurps the function of local recording officials to track changes in ownership of real property.

FACT: The land records have never been an authoritative source for who owns beneficial interests in and servicing rights to mortgages.67 The primary purpose of land records was not to track mortgage loan ownership rights, but to provide public notice of liens filed against the property in order to protect the lienholder (and not the debtor).68 A mortgage and any assignment of mortgage is typically recorded to protect the lienholder, and is generally not required by the county; rather there are incentives to record and disincentives for not recording.69 When a loan is registered on the MERS® System, the MERS member is required to record the mortgage (or assignment of mortgage) in the name of MERS Inc., at the loan owner’s expense, in the appropriate recording office.70 Thus, the public is placed on notice that MERS Inc. is the mortgagee of record for the benefit of its members, and MERS Inc., in its capacity as lienholder, holds a perfected security interest in the real property that is valid against other lenders, judgment creditors or potential purchasers of the mortgaged property. More importantly, the role of the MERS® System is not to record or track changes in ownership of real property; rather the MERS® System tracks non-recordable contract interests in servicing rights and ownership of promissory notes secured by the related property for the benefit of MERS Inc. members. Consequently, the land records system continues to perform the services of recording ownership changes without usurpation by MERS Inc., and MERS Inc. performs the functions its members designed and created, both of which facilitate real estate ownership and financing by fulfilling their separate but interrelated roles.

One court considering the allegation of usurpation of a government function concluded: “Since the law does not require payment of a recording fee when new assignments are not recorded, and since the public is not using the ‘MERS private recording system’ to determine the true nature of encumbrances upon real estate, MERS is not usurping any governmental authority or power.”71

MYTH: The MERS® System is a revenue evasion tool that deprives counties of needed revenues.

FACT: Recording fees are paid upon filing the original mortgage naming MERS Inc. as mortgagee. The MERS® System merely reduces the need to pay additional recording fees associated with subsequent transfers of mortgage loans or mortgage loan servicing rights among MERS members. Avoidance of these fees (which is not illegal) does not constitute revenue evasion. Fees are paid in exchange for a service. If the service is not required or necessary, then there is no “lost” revenue.72 As even one of the most vocal critics of MERS acknowledges, the real property records have become voluminous and difficult and expensive to search.73 Many county recording offices have not kept up with advances in technology or efficiency as other industries have, and simply were unable to efficiently and effectively handle the increasing volume of mortgage transactions as access to capital markets gave more consumers the ability to buy homes. Thus spawned the innovations and creativity of the private market and the development of the MERS® System. However, it is also important to note that the transaction volume for which county recorders would receive a fee should not decrease due to the use of the MERS® System from pre-securitization levels. MERS facilitates transfers of the note from originator to aggregator to depositor to trust—a minimum of three transfers in a short period of time—that did not occur prior to the development of the securitization market. A new mortgage or a release of mortgage must still be recorded any time that the borrower refinances or pays off her mortgage. Therefore, filing fees will still be paid for the several ongoing transactions requiring a filing in the public records. In a recent case brought against MERS Inc. by a county to recover damages for alleged intentional failure to record assignments and claiming unjust enrichment and civil conspiracy, the District Court held that, “There is simply no requirement to record assignments under Iowa law. To the extent the County’s claims rely on such a requirement, they fail to state a claim upon which relief can be granted.”74

MYTH: The MERS® System created or enabled securitization.

FACT: Securitization existed long before the development of the MERS® System. The earliest securitized transactions date back to the early 1970s and were the sales of pooled mortgage loans by the Government National Mortgage Association (Ginnie Mae). These transactions were followed by the Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae) in the early 1980s. The MERS® System did not originate until the mid-1990s. It is true that the MERS® System has facilitated the ease and efficiency with which securitization transactions are conducted, and this has been positive for bringing affordable financing options to more people. Securitization itself is not an evil to be vilified or destroyed. As Treasury Secretary Timothy Geithner said in announcing the Term Asset-Backed Securities Loan Facility (TALF) in February 2009, “No financial recovery plan will be successful unless it helps restart securitization markets for sound loans made to consumers and businesses.”75

The Merits of MERS

To hear some commentators characterize the MERS® System,76 one might think that it is a nefarious scheme of the financial oligarchy to obfuscate real property records, deprive tax-paying citizens of knowledge concerning the ownership of their mortgage loans and divest overburdened county recorders of direly needed revenue from recording fees. That is simply not the case. The MERS® System is a perfectly legal and valid system for the electronic registration and tracking of beneficial ownership of mortgage loans and servicing rights. It was created by some of the leading participants in the mortgage industry77 for the purpose of facilitating the operation of the secondary mortgage market. It has substantially increased the efficiency of mortgage loan transfers within the secondary mortgage market, and has played a significant role in establishing the U.S. housing market, despite recent troubles, as the envy of the free market world.78

Since its inception in 1995, the MERS® System has become a critical component of the American mortgage finance industry.79 More than 74 million mortgages have been recorded in the name of MERS Inc., of which 27 million are currently active. The MERS® System has streamlined the way residential and commercial mortgage loans are sold, traded and securitized by eliminating the need to prepare and record separate assignments of the mortgage lien. By doing so, the MERS® System has saved consumers, investors, and the mortgage industry millions of dollars each year in recording fees and related costs as well as reduced the problems and errors associated with multiple filings, and reduced delays in transactions.80

In addition to providing an electronic registration and tracking system to track conveyances of mortgage loans and servicing rights in the secondary market, the MERS® System creates accountability and transparency, helps reduce recordation costs (which may ultimately benefit the borrower), reduces the risk of errors in recordkeeping, eliminates breaks in the chain of title and makes it easier to keep track of liens as loans are sold to other investors.81 In addition, the MERS® System fills an information void that county recorders cannot provide—the identity of the current servicer and beneficial owner of the mortgage loan. Furthermore, the current and easily accessible information on the MERS® System assists homeowners, lenders and title insurers in arranging for consolidations, loan modifications, payoff statements, deeds in lieu of foreclosure, short sales and releases.

The MERS Mortgage Identification Number, or “MIN”, which assigns a unique identifying number to each loan for the life of the loan, and the MERS® System have been fully integrated into the U.S. mortgage loan industry, and together they are the single most important existing tools for tracking loan level data in the home loan process.82 Through its use of MIN, the MERS® System helps:

Identify for homeowners the servicer and, in most cases, the beneficial owner of their mortgage loans;
Investors and credit rating agencies analyze the credit quality of mortgaged-backed securities;
Regulators monitoring compliance with the law;
Public agencies track housing and economic trends;
Local governments identify the parties responsible for maintaining vacant properties in connection with neighborhood preservation efforts;83
Keep distressed borrowers in their homes by speeding up the modification process; and
Law enforcement officials fight fraud by tracking down criminals who attempt to obtain multiple loans secured by the same property.

Conclusion

While the recent recession brought one of the worst economic calamities experienced in several generations, it is disingenuous to attribute its cause, even in part, to a process and structure designed to facilitate efficiency and home ownership and bring about modernization long overdue in the mortgage finance industry, particularly one that had been modeled after a similar system successfully implemented by DTC in the securities industry. Homeowners who are facing foreclosure for failure to pay their respective mortgage loans may present a sympathetic cause, but the fact of the matter is that many participants in the residential mortgage process share in the blame for an overheated and unsustainable market. But none of this should overshadow the legitimate benefits brought to the mortgage industry by the MERS® System.

In sum, through thousands of lawsuits, many of which were held to be without merit, MERS Inc. has established that the process and structure of the MERS® System are based upon sound legal principles. Mistakes have been made, and improvements to the process have been implemented to ensure that the MERS® System will continue to serve and advance the goal of providing efficient and effective mortgage tracking. But those detractors who allege deceptive practices, flawed systems, and conspiracies have been, and will continue to be, proven without merit. In some cases, they seem to be more interested in obfuscating the issue of a lender pursuing its rightful claim to collateral upon default of a loan rather than bringing transparency or improvement to a process that, while not perfect, functioned fairly well. In those areas where deficiencies have been discovered or improvements identified, MERS Inc. and its members have been quick to respond. We would all do well to learn the lessons from the recent fiscal calamity and work to bring about prudent and appropriate changes to rebuild a vibrant and transparent mortgage finance market that continues to include, and benefit from, the MERS® System.

1. Participants included the Mortgage Bankers Association (MBA), the Federal National Mortgage Association (Fannie Mae), the Government National Mortgage Association (Ginnie Mae), the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA).

2. See Phyllis K. Slesinger & Daniel McLaughlin, Mortgage Electronic Registration System, 31 Idaho Law Review 805 (1995).

3. Allen H. Jones, Setting the Record Straight on MERS, MORTGAGE BANKING 34 (May 2011).

4. Slesinger & Mclaughlin, supra note 2, at 809.

5. Jones, supra note 3 at 36.

6. R.K. Arnold, Yes, There is Life on MERS, 11 PROB. & PROP. 33, 34 (1997); Jones, supra note 3, at 36.

7. Slesinger & Mclaughlin, supra note 2, at 817.

8. Id. Under the initial MERS concept, the mortgage note would be immobilized through the development of standardized document custodian eligibility requirements or ratings to increase confidence in any particular custodian. Due to resistance by mortgage loan servicers, this aspect of the MERS concept was eliminated.

9. See Christopher L. Peterson, Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory, 53 William and Mary Law Review 1 (October 2011); see also, Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 University of Cincinnati Law Review 4 (Summer 2010); David. E. Woolley and Lisa D. Herzog, MERS: The Unreported Effects of Lost Chain of Title on Real Property Owners, 8 Hastings Business Law Journal, 365 (Summer 2012).

10. According to its website (www.dtcc.com/about/business), DTC provides custody and asset servicing for more than 3.6 million securities issues from the United States and 121 other countries and territories, valued at US$36.5 trillion. In 2010, DTC settled nearly US$1.66 quadrillion in securities transactions.

11. See Mortgage Electronic Registration Systems, Inc. v. Nebraska Department of Banking and Finance, 704 N.W.2d 784, 787 (Neb. Oct. 21, 2005).

12. See infra notes 24-28 and accompanying text.

13. As described below, in deed of trust states, the trustee technically holds legal title to the property, in trust, and MERS Inc. is named as beneficiary in the deed of trust, in a nominee capacity for the owner of the note. For purposes of this discussion, it is important to understand that one party may hold legal title to a mortgage while another party owns the beneficial interest therein. See infra note 15 and notes 38-47 and accompanying text.

14. A sample form of the FNMA/FHLMC Uniform Instrument with MERS as original mortgagee is available on the FHLMC’s website at http://www.freddiemac.com/uniform/unifmers.html.

15. According to BLACK’S LAW DICTIONARY (9th ed. 2009), “legal title” is “a [form of] title that evidences apparent authority but does not necessarily signify full and complete title or beneficial interest” in property. This differs from equitable title, or beneficial ownership, which gives the holder thereof the right to the use and economic benefit of the property.

16. A sample form of the FNMA/FHLMC Uniform Instrument with MERS as original beneficiary is available on the FHLMC’s website at http://www.freddiemac.com/uniform/unifmers.html.

17. See, e.g., MERSCORP, Inc. v. Romaine, 861 N.E.2d 81 (N.Y. 2006) (N.Y. court of appeals found that recording MERS instruments did not violate New York recording statutes and ordered the county clerk to accept MERS mortgages, MERS assignments and other MERS instruments); Jackson v. Mortgage Electronic Registration System, Inc., 770 N.W.2d 487 (Minn. 2009) (court held that case law establishes that a party can hold legal title to the security instrument without owning the promissory note; the cases demonstrate that an assignment of only the promissory note, which carries with it an equitable assignment of the security instrument, is not an assignment of legal title that must be recorded for purposes of a foreclosure [under the Minnesota statutory foreclosure scheme]); In re Mortgage Electronic Registration Systems (MERS) Litigation, 744 F. Supp. 2d 1018, 1029 (D. Ariz. 2010) (court dismissed plaintiff’s claims alleging that the MERS system was fraudulent and that the MERS system facilitated fraudulent activity); In re Tucker, 441 B.R. 638 (Bankr. W.D. Mo. 2010) (finding that the language of the deed of trust clearly authorized MERS to act on behalf of the lender in serving as the legal title holder); Cervantes v. Countrywide Home Loans Inc., et. al., 656 F.3d 1034 (9th Cir. 2011) (court upheld that MERS is a legitimate system for tracking transfers of home mortgage loans and that MERS’ interposition as record title holder to the deed of trust does not invalidate the transaction); Taylor v. Deutsche Bank Nat’l Trust Co., 44 So. 3d 618 (Fla. 5th DCCA 2010) (found that the mortgage granted to MERS legal status as mortgagee, which MERS could assign to the foreclosing bank under the UCC); Mortgage Elec. Registration Sys., Inc. v. Bellestri, 2010 WL 2720802 (E.D. Mo. 2010) (finding that Bellistri’s failure to provide notice to MERS violated MERS’ constitutional due process rights); Deutsche Bank Natl. Trust Co. v. Traxler, 2010-Ohio-3940 (court recognized MERS’ authority to assign mortgage when designated as both nominee and mortgagee); Fuller v. Mortgage Elec. Registration Sys. Inc., United States District Court, Middle District of Florida, Jacksonville Division (Case No. 3:11-cv-1153-J-20MCR) (June 27, 2012) (court found that “MERS has not committed an unlawful act, or a lawful act by unlawful means” and that “the Florida courts have consistently affirmed the use of MERS as the designated mortgagee of record and the principle that MERS may serve as mortgagee or as nominee for the lender and the lender’s successors and assigns.”); Smith v. Saxon Mortgage, 446 Fed. Appx. 239 (11th Cir. 2011) (appellate court found that district court correctly held that the Security Deed granted MERS the power of sale and the authority to assign the security deed); Volkes v. BAC Home Loans Servicing LP f/k/a Countrywide Home Loans Servicing, LP, 2012 WL 642673 (appellate court found that district court correctly held that the MERS assignment was valid).

18. Clark and Clark, MERS Under Attack: Perspective on Recent Decisions from Kansas and Minnesota, CLARKS’ SECURED TRANSACTIONS MONTHLY, February 2010, at p.2.

19. Id.

20. Id. at 2, citing In re Cushman Bakery, 526 F.2d 23 (1st Cir. 1975), cert. denied, 425 U.S. 937 (1976). See also, Residential Funding Co., v. Saurman, 490 Mich. 909; 805 N.W.2d 183 (Mich. 2011) (“It has never been necessary that the mortgage should be given directly to the beneficiaries. The security is always made in trust to secure obligations, and the trust and the beneficial interest need not be in the same hands. The choice of a mortgagee is a matter of convenience.”) (quoting Adams v. Niemann, 46 Mich. 135, 137 (Mich. 1881)); Jackson v. MERS, Inc., 770 N.W.2d 487 (Minn. 2009) (“A party can hold legal title to the security instrument without holding an interest in the promissory note.”); Boruchoff v. Ayvasian, 323 Mass. 1, 10 (Mass. 1948) (“[W]here a mortgage and the obligation secured thereby are held by different persons, the mortgage is regarded as an incident to the obligation, and, therefore, held in trust for the benefit of the owner of the obligation.”); First Nat’l Bank v. Nat’l Grain Corp., 131 A. 404, 406-07 (Conn. 1925) (“[A] mortgage may be held for the security of the real creditor, whether he is the party named as mortgagee or some other party, for the provisions of a mortgage are not necessarily personal to the mortgagee named. The real party in interest may be an assignee of the mortgagee or someone subrogated to his rights under the mortgage, or even a third person not answering either of these descriptions.”); Commercial Germania Trust and Sav. Bank v. White, 81 SO. 753, 754 (La. 1919) (“a mortgagor may make a mortgage in favor of a nominal . . . mortgagee”); Ogden State Bank v. Barker, 40 P. 769, 769 (Utah 1895) (“The mere fact that the mortgagee was not the real owner of the notes, but was simply a trustee or agent for the owners, does not affect the validity of the mortgage.”); Lawrenceville Cement Co. v. Parker, 15 N.Y.S. 577, 578 (Sup.Ct. 1891) (holding that bank official could hold mortgage, as mortgagee, for bank, which held the underlying promissory note).

21. See §9-203(g) of the UCC, which codifies the common law principle that the “mortgage follows the note.” In addition, by analogy, §9-310(c) of the UCC provides that if a secured party assigns a perfected security interest, an Article 9 filing is not required to continue the perfected status of the security interest against creditors from the original debtor. The original filing provides sufficient notice of the lien.

22. See infra notes 38-47 and accompanying text.

23. See Clark and Clark, supra note 18, at p. 3; Plymouth County, Iowa v. Merscorp, Inc. et. al. (Case No. C-12-4022-MWB) (U.S. Dist. Ct., No. Dist. of Iowa, Western Div.) (Aug. 21, 2012) (there is no statute in Iowa that requires the recording of mortgages or assignments of mortgages, but the failure to record will render the mortgage or assignment void in favor of subsequent purchasers and existing creditors who are without notice). See also infra note 68 and accompanying text.

24. Act of Apr. 6, 2004, ch. 153, §2, 2004 Minn. Laws 76, 76-77 (codified at Minn. Stat. §507.413 (2008)).

25. Id.

26. Minn. Stat. §507.413(a).

27. See Tex. Prop. Code §§51.0001(4) and 51.0001(1).

28. See e.g., Richardson v. CitiMortgage, 2010 WL 4818556 (E.D.Tex. Nov. 22, 2010).

29. RESTATEMENT (THIRD) OF AGENCY §1.01 (2006).

30. See, e.g., Romaine, 861 N.E.2d 81, 97 (MERS is a “proper mortgagee” and MERS Mortgages are “proper conveyance[s]’ for purposes of the recording statute.”); Deutsche Bank National Trust Co. v. Pietranico, 928 N.Y.S.2d 818 (Sup. Ct. Suffolk Cty. 2011) (The mortgage “expressly grants MERS the right to act on behalf of the lender as required by law and custom, including, but not limited to, the right to foreclose and sell the property and the right to take any action required of the Lender such as releasing and canceling the mortgage.”); U.S. Bank N.A. v. Flynn, 897 N.Y.S.2d 855, 857 (Sup. Ct. Suffolk Cty. 2010) (“MERS is acting as the nominee of the owner of the note and mortgage in which MERS is additionally designated as the mortgagee of record.”); Trent v. Mortg. Elec. Reg. Sys., Inc., 288 F. Appx. 571 (11th Cir. 2008) (“[MERS] is the mortgagee.”); In re MERS Litig., 744 F. Supp. 2d 1018, 1027 (D. Ariz. 2010) (“”[F]rom the very language of the deeds of trust, to which Plaintiffs agreed in entering into their home loan transaction, MERS is still acting as the nominee for the current holder of the promissory note . . . Nevada case law universally holds that [MERS security instruments] are enforceable.”); Calif. ex. rel. Bates v. Mortg. Elec. Reg. Sys., 2011 WL 892646, at *3 (E.D. Cal. Mar. 11, 2011) (The mortgage is “recorded in the public land records, making MERS the mortgagee of record.”); In re Tucker, 441 B.R. 638, 645 (Bankr. W.D. Mo. 2010) (“The language of the recorded Deed of Trust clearly authorizes MERS to act on behalf of the Lender in serving as the legal title holder to the beneficial interest under the Deed of Trust and exercising any of the rights granted to the Lender thereunder.”); Wade v. Meridias Cap., Inc., 2011 WL 997161, at *2 (D. Utah Mar. 17, 2011) (“MERS was appointed as the beneficiary and nominee for the Lender and its successors and assigns and granted power to act in their stead.”); Ciardi v. Lending Co., 2010 WL 2079735, at *3 (D. Ariz. May 24, 2010) (“To the extent Plaintiffs rely on a theory that the beneficiary must have an interest in the actual note, Plaintiffs have failed to cite any law so requiring.”).

31. As of July 22, 2011, MERS formally amended and implemented its Rules of Membership to provide that members are no longer authorized to initiate foreclosures in the name of MERS Inc. and an assignment of the mortgage from MERS Inc. to the foreclosing party must be recorded (informally suspended in February 2011).

32. Supra note 29 (emphasis added).

33. See, e.g., Eaton v. Federal National Mortgage Association, SJC-11041, 2012 WL 2349008 (Mass. June 22, 2012) (In order to exercise the statutory power of sale in Massachusetts, a mortgagee must either be the holder of the underlying promissory note or be acting under the authority of the note holder; physical possession of the mortgage note is not required in order to foreclose); Residential Funding Co. v. Saurman, 490 Mich. 909; 805 N.W.2d 183 (2011) (MERS Inc. is the owner of an interest in the indebtedness secured by the mortgage for purposes of Michigan statutory requirements and may thus conduct nonjudicial foreclosures by advertisement); Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149, at 1156-57 (Cal. Ct. App. 2011) (The court concluded that even if there was a legal basis for an action to determine if MERS had the authority to initiate foreclosure, the language in the deed of trust granted MERS authority to initiate a nonjudicial foreclosure); Payette v. Mortgage Elec. Registration Sys., Inc., No. PC-2009-5875 (R.I. Supp. Ct. Aug. 22, 2011) (As a matter of contract, the mortgage signed by plaintiffs recognized MERS’ rights to act as nominee for IndyMac and for IndyMac’s “successors and assigns”); In re Mortgage Elect. Registration Sys., Inc. (MERS) Litig., No. 2:09-md-2119, 2010 WL 4038788, at *8 (D. Ariz. Sept. 30, 2010) (“Plaintiffs have not cited any legal authority where the naming of MERS . . . was cause to enjoin a non-judicial foreclosure as wrongful.”); Commonwealth Property Advocates, LLC v. Mortgage Elect. Registration Sys., Inc., Nos. 10-4182, 10-4193, 10-4215, 2011 WL 6739431, at *7 (10th Cir. Dec. 23, 2011) (affirming that MERS may foreclose as nominee for lender and its successors and assigns); Trent v. Mortg. Elec. Reg. Sys., Inc., 288 Fed. Appx. 571, 572 (11th Cir. 2008) (“Under the mortgage contracts, [MERS] has the legal right to foreclose on the debtors’ property. [MERS] is the mortgagee.”); Johnson v. Mortg. Elec. Reg. Sys., Inc., 252 Fed. Appx. 293, 294 (11th Cir. 2007) (affirming summary judgment to MERS on foreclosure of plaintiff’s property); Nicholson v. OneWest Bank, 2010 WL 2732325, at *4 (N.D. Ga. April 20, 2010) (“[T]he nominee of the lender has the ability to foreclose on a debtor’s property even if such nominee does not have a beneficial interest in the note secured by the mortgage.”); Orzoff v. Mortgage Elec. Registration Sys., 2009 WL 4643229, at *9-10 (D. Nev. March 26, 2009) (“This Court has previously determined that MERS does have such standing [to participate in foreclosure proceedings, and] . . . Courts around the country have held the same.”); Swanson v. EMC Mort. Corp., Case No. CV F 09-1507 LJO DLB (E.D. Cal. Oct. 29, 2009) (“MERS correctly notes that as [deed of trust] beneficiary, MERS is empowered to commence foreclosure proceedings . . .”); In re: Sina, No. A06-200, 2006 WL 2729544, at *2 (Minn. App., Sept. 26, 2006) (“Because MERS is the record assignee of the mortgage, we conclude that MERS had standing to foreclose); Silvas v. GMAC Mortgage, LLC, No. CV-09-265-PHX-GMS, 2009 WL 4573234, at *8 (D. Ariz. Jan. 5, 2010) (MERS empowered to foreclose where MERS is designated on deed of trust as beneficiary); Diessner v. Mortgage Elec. Registration Sys., 618 F. Supp. 2d 1184, 1187-91 (D. Ariz. 2009) (MERS and trustee under deed of trust are authorized to institute non-judicial foreclosure proceeding); Reynoso v. Paul Financial, LLC, No. 09-3225 SC, 2009 WL 3833298, at *2 (N.D. Cal. Nov. 16, 2009) (naming of MERS as initial beneficiary under deed of trust, as nominee for the lender, and the subsequent transfer of the deed of trust from MERS to a transferee was effective and did not hinder transferee’s right to foreclose); Blau v. America’s Servicing Co., No. CV-08-773, 2009 WL 3174823, at *8 (D. Ariz. Sept. 29, 2009) (MERS authorized under deed of trust to act on behalf of lender and transfer its interests); Farahani v. Cal-Western Recon. Corp., No. 09-194, 2009 WL 1309732, at *2-3 (N.D. Cal. May, 2009) (MERS authorized to pursue non-judicial foreclosure action); Vazquez v. Aurora Loan Servs., No 2:08-cv-01800-RCJRJJ, 2009 WL 1076807, at *1 (D. Nev. Apr. 20, 2009) (loan documents sufficiently demonstrate MERS’ standing “with respect to the loan and the foreclosure”); Pfannenstiel v. Mortgage Elect. Registration Sys., Inc., No. CIV S-08-2609, 2009 WL 347716, at *4 (E.D. Cal. Feb. 11, 2009) (dismissing plaintiff ’s claim that MERS lacked authority to foreclose); Trent v. Mortg. Elec. Reg. Sys., Inc., 288 Fed. Appx. 571, 572 (11th Cir. 2008) (MERS “has the legal right to foreclose on the debtors’ property” and “is the mortgagee”); Peyton v. Recontrust Co., No. TC021868, Notice of Ruling, at 2 (Cal. Super. Ct. County of Los Angeles S. Cent. Dist. Oct. 15, 2008) (MERS may foreclose under California law); Johnson v. Mortgage Elect. Registration Sys., Inc., 252 Fed. Appx. 293, 294 (11th Cir. 2007) (summary judgment for MERS on its action for foreclosure of plaintiff ’s property); In re Smith, 366 B.R. 149, 151 (Bankr. D. Colo. 2007) (MERS has standing to conduct foreclosure on behalf of the beneficiary); Mortgage Elect. Registration Sys., Inc. v. Revoredo, 955 So.2d 33, 34 (Fla. Dist. Ct. App. 2007) (“Because, however, it is apparent – and we so hold – that no substantive rights, obligations or defenses are affected by use of the MERS device, there is no reason why mere form should overcome the salutary substance of permitting the use of this commercially effective means of business.”); Mortgage Elect. Registration Sys., Inc. v. Ventura, CV054003168S, 2006 WL 1230265, at *1 (Conn. Super. Apr. 20, 2006) (MERS is proper party in foreclosure); King v. American Mortgage Network, et. al., Case No. 1:09-CV-125 TS (D. Utah, Aug. 16, 2010) (court, interpreting the language of the deed of trust, held that MERS had the authority to initiate foreclosure proceedings, appoint a trustee and foreclosure and sell the mortgaged property); Mortgage Elec. Registration Sys., Inc. v. Coakley, 41 A.D.3d 674 (NY App. 2007) (court held that MERS had right to foreclose pursuant to the clear and unequivocal terms of the mortgage instrument).

34. 357 B.R. 180, 183 (Bank. D.Mass. 2006).

35. See Niday v. GMAC Mortgage, LLC, Case No. A147430 (Or. Ct. App., Jul. 18, 2012) (appellate court held that, in connection with a non-judicial foreclosure, Oregon law requires a beneficiary of a trust deed to be a party to whom the underlying loan repayment obligations is owed) (Editor’s Note: as of the date of this article, the Niday case is on appeal to the Oregon Supreme Court); Mortgage Elec. Registration Sys., Inc. v. Graham, 44 Kan. App. 2d 547, 229 P.3d 420 (Kan. App. 2010) (having suffered no injury, MERS lacked standing to bring a foreclosure action); Mortgage Elec. Registration Sys., Inc. v. Saunders, 2 A.3d 289, 297 (Me. 2010) (finding that MERS could not enforce the note and that the substitution of Deutsche Bank for MERS was proper); In re Box, No. 10-20086, 2010 WL 2228289, at *5 (Bankr W.D. Mo. June 3, 2010) (finding that MERS, as beneficiary and nominee under the deed of trust lacked authority to assign the mortgage note because it never “held” the note itself); In re Hawkins, No. BK-S-07-13593-LBR, 2009 WL 901766, at *3 (Bankr. D. Nev. Mar. 31, 2009) (finding that MERS was not a true “beneficiary” under a deed of trust, that, under the UCC, MERS was not entitled to enforce the note, and that “[i]n order to foreclose, MERS must establish there has been a sufficient transfer of both the note and deed of trust, or that it has authority under state law to act for the note’s holder”); Bain v. Metropolitan Mortgage Group, Inc. et. al. and Selkowitz v. Litton Loan Servicing, LP et. al. (No. 86206-1) (Wash. August 16, 2012). The Washington Supreme Court held that MERS Inc. is not a lawful beneficiary under the Washington Deed of Trust Act because it is not “the holder of the instrument or document evidencing the obligations secured by the deed of trust” as required thereunder; that is, if MERS Inc. never held the note, then it is not a lawful beneficiary. However, in response to MERS Inc.’s argument that lenders and their assigns may name it as their agent, the court stated, “That is likely true and nothing in this opinion should be construed to suggest that an agent cannot represent the holder of a note. Washington law, and the deed of trust act itself, approves of the use of agents.” No doubt that point will be made forcefully when the lower court proceeding resumes.

36. See, e.g., Residential Funding Corporation v. Saurman, 292 Mich. App. 321, 807 N.W.2d 412 (Mich. Ct. App. Apr. 21, 2011) (court held that MERS did not meet the requirements to non-judicially foreclose by advertisement because MERS did not own an “interest in the indebtedness” as required by the foreclosure statute), rev’d, 490 Mich. 909, 805 N.W.2d 183 (Mich., 2011); Mortgage Electronic Registration Systems Inc. v. George Azize, et. al., NO. 2D05-4544 (Fla. App. 2 Dist. Sept. 19, 2005) (trial court held that MERS was not a proper party to bring a foreclosure action), rev’d, 965 So.2d 151 (Fla. App. 2 Dist. Feb. 21, 2007); Mortgage Electronic Registration Systems Inc. v. Oscar Revoredo, et. al., NO. 3D05-2572 (Fla. App. 3 Dist. Nov. 4, 2005) (trial court held that MERS must establish ownership of the note in order to have standing to foreclose), rev’d, 955 So.2d 33 (Fla. App. 3 Dist. Mar 14, 2007); U.S. Bank National Association v. Salazar, 448 B.R. 814 (S.D. Ca. Apr. 12, 2011) (bankruptcy court concluded a foreclosure sale was void because MERS, as record deed of trust beneficiary, failed to record a deed of trust assignment to U.S. Bank prior to the foreclosure sale and U.S. Bank was identified on the trustee’s deed as the “foreclosing beneficiary”), rev’d, 470 B.R. 557 (Bankr. S.D. Cal. Mar. 15, 2012); In re Agard, 444 B.R. 231 (Bankr. E.D.N.Y. Feb 10, 2011) (bankruptcy court found that the language of the mortgage document itself and MERS role as mortgagee did not provide MERS with the authority to “effectuate a valid assignment of mortgage”), vacated in part by Agard v. Select Portfolio Servicing, Inc., 2012 WL 1043690 (E.D.N.Y. Mar. 28, 2012); see also, U.S. Bank v. Howie, infra note 43 (interpreting the Kansas Supreme Court’s decision in Landmark Nat’l Bank v. Kesler).

37. See MERSCORP, Inc. Rules of Membership, Rule 8 – Required Assignments for Foreclosure and Bankruptcy, Section 1(e).

38. See RESTATEMENT (THIRD) PROPERTY (MORTGAGES), §5.4, comment e (1997). See also Residential Funding Co. v. Saurman, 490 Mich. 909; 805 N.W.2d 183 (2011) (Michigan Supreme Court held that a mortgage and note are to be construed together and that “the trust and the beneficial interest need not be in the same hands . . . The choice of mortgagee is a matter of convenience.”); Horvath v. Bank of New York, N.A., et al., No. 1:09-cv-1129, Dkt No. 38 (E.D. Va. Jan. 29, 2010) (aff’d., 4th Cir., No. 10-1528, May 19, 2011) (court held that “the ‘split’ of [Plaintiff’s] promissory notes from the deeds of trust does not render the deeds of trust unenforceable. The deeds of trust continue to grant a promissory note holder security . . .”).

39. See Joyce Palomar, 3 Patton & Palomar on Land Titles §5.67.50 (3d ed. 2009) (“[C]ourts have accepted MERS as reconciling modern lending practices with traditional real property law” and “recognize the entity serving as nominee or agent as the record holder of the encumbrance.”).

40. 656 F.3d 1034 (9th Cir. 2011).

41. Id. at 1042.

42. Id.

43. Id. at 1044, citing Landmark Nat’l Bank v. Kesler, 216 P.3d 158, 167 (Kan. 2009). See also, U.S. Bank v. Howie, No. 106,415 (Kans. App. June 8, 2012) in which an appellate court interpreted the Kansas Supreme Court’s decision in Landmark as supporting MERS Inc.’s role as agent of the lender under the plain language of the mortgage. The Howie court further held that because MERS Inc. was acting as agent of the lender, the mortgage and the note were never severed and the lender, as present holder of both the note and mortgage, was entitled to foreclose on the mortgage. Some people misunderstand the term “unenforceable” as confirming fraudulent or illegal behavior on the part of the lender. But this is not necessarily the case. A mortgage may be declared unenforceable due to a mistake or unanticipated occurrence without fault by the lender, with the inequitable result that the lender/creditor who lent money to the borrower secured by a mortgaged property would be unable to foreclose and realize on its collateral.

44. In re MERS Litigation, 744 F. Supp. 2d 1018 (D. Ariz. 2010); see also Martinez v. Mortgage Elec. Registration Sys., Inc. (In re Martinez), 444 B.R. 192 (Bankr. D. Kan. 2011) (the court found that the language in the mortgage, the MERS membership agreement, and the affidavit of MERS’ treasurer, were sufficient to establish that MERS was clearly acting as an agent for Countrywide at all relevant times while holding the mortgage; the mortgage and the note were never split and remained enforceable); Drake v. Citizens Bank of Effingham (In re Corley), 447 B.R. 375 (Bankr. S.D. Ga. 2011) (the note and the mortgage were not split; they were executed together at inception and remain linked via the language in the documents that contemplate the agency relationship formed by the designation of MERS as nominee).

45. See, e.g., Consol. Mortg. & Fin. Corp. v. Landrieu, 493 F. Supp. 1284, 1286-87 (D. D.C. 1980) (discussing the Mortgage Backed Securities Program and Ginnie Mae’s role).

46. Supra note 38.

47. See U.S. Bankruptcy Code, 11 U.S.C. §541(d).

48. See UCC §§9.109(b); 3.102 and 3.201-204.

49. See UCC §9.203. For a thorough review of the issues under the UCC discussing rights of the “owner” of a note, the party entitled to enforce the note, transfer of the note, and the impact of transfer on the underlying mortgage, see Report of the Permanent Editorial Board for the Uniform Commercial Code ― Application of the Uniform Commercial Code to Selected Issues Relating to Mortgage Notes (Nov. 14, 2011), Amer. Law Institute and National Conf. on Uniform State Laws.

50. UCC §9.203(g) (emphasis added); See also UCC §9.308(e), providing the same rule for perfection.

51. See Official Comment 6 to UCC §9.308.

52. For an excellent discussion and survey of relevant state case law on this issue, see Transfer and Assignment of Residential Mortgage Loans in the Secondary Market, ASF White Paper Series (November 16, 2011) at http://www.americansecuritization.com/uploadedFiles/ASF_White_Paper_11_16_10.pdf.

53. Although the disclosure of the identity of the note owner is optional, 97% of the over 3,000 MERS® System members make such disclosure.

54. See 24 C.F.R. §3500.21(d).

55. See 12 C.F.R. §226.39.

56. Pub.L. 111-203, H.R. 4173.

57. See 12 U.S.C. §2605(k) (1) (D).

58. See Haft v. Dart Group Corp., 841 F. Supp. 549, 572 (D.Del. 1993).

59. Del. Code. Ann. Title 8, Sections 122 and 142.

60. Exercise of authority granted under clauses (3) and (4) is subject to rule changes effective July 22, 2011, limiting the member’s ability to initiate foreclosures and make filings in bankruptcy proceedings in the name of MERS Inc.

61. See Bain v. Metro Mortg. Grp., 2010 WL 891585, at *6 (W.D. Wash. Mar. 11, 2010) (holding that MERS’s designation of Members’ employees as “vice president” and “assistant vice president” was not deceptive within the meaning of the Washington State Consumer Protection Act). See also Jackman v. Hasty, 2011 WL 5599075, at *3 (N.D. Ga., Nov. 15, 2011) (Defendants “were appointed as agents of MERS by a corporate resolution . . . According to the resolution, [Defendants] have authority to, among other things, “[a]ssign the lien of any mortgage loan registered on the MERS® System’ . . . and “[e]xecute any and all documents necessary to foreclose upon the property securing any mortgage loan registered on the MERS® System’ . . . The evidence thus shows that Defendants . . . although not employees of MERS, were duly appointed agents of MERS who had authority to assign the Security Deed to LaSalle on behalf of MERS. LaSalle thus had legal authority to foreclose on the Property.”); Ocwen Loan Servicing LLC v. Kroening, 2011 WL 5130357, at *5 (D. Ill. Oct. 28, 2011) (“The assignment was executed for MERS by Scott Anderson. Anderson is an employee of Ocwen, but was designated by Corporate Resolution as an assistant secretary and vice president of MERS, and as such had the authority to assign any mortgage naming MERS as the mortgagee.”).

62. New York State Bar Association, Committee on Professional Ethics, Formal Opinion #847 (12/21/2010).

63. See, e.g., Davis v. U.S. Bank Nat’l Ass’n, 2012 WL 642544 (Nev. Feb. 24, 2012); Bertrand v. SunTrust Mortgage, Inc., 2011 WL 1113421, at *4 (D. Or. Mar. 23, 2011) (stating that the language in the Deed of Trust “grants MERS the power to initiate foreclosure and to assign its beneficial interest . . .”); Wade v. Meridias Cap., Inc., 2011 WL 997161, at *2 (D. Utah Mar. 17, 2011) (“Under the plan terms of the Trust Deed, . . . MERS was appointed as the beneficiary and nominee for the Lender and its successors and assigns and granted power to act in their stead, including making assignments and instituting foreclosure.”) (emphasis in original); Germon v. BAC Home Loans Servicing, L.P., 2011 WL 719591, at *2 (S.D. Cal. Feb. 22, 2011) (stating that under the Deed of Trust “MERS had the legal right to initiate nonjudicial foreclosures and could assign such right.”); Saxon Mortg Servs., Inc. v. Coakley, 921 N.Y.S.2d. 552, 553 (App. Div. 2011) (rejecting foreclosure defendant’s contention that MERS’s assignment of mortgage was improper); Perry v. Nat’l Default Serv’g Corp., 2010 WL 3325623, at *4 (N.D. Cal. Aug. 20, 2010) (observing that numerous courts have held that “MERS had the right to assign its beneficial interest to a third party.”); Rogan v. CitiMortgage, Inc. (In re Jessup), 2010 WL 2926050, at *3 (Bankr. E.D. Ky. July 22, 2010) (MERS had authority to execute an assignment as nominee of lender because “the language in the Lender’s own instrument is sufficient to identify MERS as such.”); GMAC Mortg., LLC v. Reynolds, 2010 WL 7746836, at *2 (Mass. Land Ct. Nov. 30, 2010) (“MERS, as mortgagee of record, has the authority to assign the mortgage.”); In re Relka, 2009 WL 5149262, at *4-5 (Bankr. D. Wyo. Dec. 22, 2009) (The Deed of Trust granted MERS “the right to assign the mortgage.”); Taylor v. Deutsche Bank Nat. Trust Co., 44 So. 3d 618, 623 (Fla. 5th DCCA 2010) (The mortgage granted MERS the “explicit and agreed upon authority to make . . . an assignment.”).

64. See, e.g., Williams v. U.S. Bank Nat’l Ass’n, 2011 WL 2293260 at *1 (E.D. Mich. June 9, 2011) (“To the extent Plaintiffs challenge any assignment from MERS to U.S. Bank, Plaintiffs lack standing to do so because they were not a party to those assignments.”); Bridge v. Aames Capital Corp., 2010 WL 3834059, at *3 (N.D. Ohio Sept. 29, 2010) (“Courts have routinely found that a debtor may not challenge an assignment between an assignor and assignee”); Livonia Prop. Holdings, LLC, 717 F. Supp. 2d 724, 735 (E.D. Mich. 2010) (“Borrower disputes the validity of the assignment [of mortgage] documents. But, as a non-party to those documents, it lacks standing to attack them.”).

65. Jones, supra note 3, at 36.

66. Jones, supra note 3, at 36, 38.

67. Id.

68. See Amoskeag Bank v. Chagnon, 572 A2d 1153, 1155 (N.H. 1990) (“The purpose then of the recording statutes…is to provide notice to the public of a conveyance of or encumbrance on real estate.”); Corpus v. Arriaga, 294 S.W.3d 629, 635 (Tex. App. 2009) (“The purpose of recording statutes in Texas is to give notice to persons of the existence of the instrument.”); Burnett v. County of Bergen, 968 A.2d 1151 (N.J. 2009) (“The very purpose of recording and filing [assignments of mortgages, deeds, discharges of mortgages, and other public records] is to place the world on notice of their contents.”).

69. See Fuller v. Mortgage Electronic Registration Systems, Inc., (U.S. Dist. Ct., Middle District of Fla.,Jacksonville Div.) (Case No. 3:11–CV–1153–J–20MCR) (June 27, 2012) at p. 3, fn. 1.

70. MERSCORP Holdings, Inc. Rules of Membership, Rule 2 – Registration on the MERS System, Section 5(a).

71. See Fuller, supra note 69, at pp. 18-19.

72. Joe Murin, MERS: Myths, Misconceptions and Realities, July 22, 2010 (available at http://mortgagenewsdaily.com/channels/voiceofhousing/164078.aspx); see also Fuller, supra note 69 and accompanying text.

73. Peterson, Foreclosures and MERS, supra note 9 at 1365-66.

74. Plymouth County, supra note 23 at p. 17.

75. Remarks of Treasury Secretary Timothy Geithner Introducing the Financial Stability Plan, February 10, 2009 (available at http://www.treasury.gov/press-center/press-releases/Pages/tg18.aspx).

76. See Christopher L. Peterson articles, supra note 9.

77. MERS’ principal owners are the Mortgage Bankers Association, Fannie Mae, Freddie Mac, Bank of America, JPMorgan Chase Bank, HSBC, CitiMortgage, GMAC, American Land Title Association and Wells Fargo Bank.

78.See, http://www.aei.org/article/economics/financial-services/housing-finance/housing-affordability-us-is-the-envy-of-the-developed-world; see also http://absalonproject.com/wp-content/uploads/2010/12/Harvard-Lea-110v5.pdf.

79. Jones, supra note 3, at 40.

80. For an excellent discussion of the background, issues and certain case law developments regarding the MERS® System, see Beau Phillips, MERS: The Mortgage Electronic Registration System, 63 Consumer Fin. L.Q. Rep. 262 (Fall Winter 2009).

81. Murin, supra note 72.

82. Id.

83. Over 600 government institutions (cities, municipalities and states) utilize the MERS System free of charge to locate property preservation contacts for loans registered on the MERS System.

How Robo Signing Violations Can Help Homeowners Save Their Homes

30 Sunday Jun 2013

Posted by BNG in Discovery Strategies, Federal Court, Foreclosure Defense, Fraud, Judicial States, Litigation Strategies, Non-Judicial States, Notary, Trial Strategies

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Business, Court, Foreclosure, Mortgage law, Mortgage loan, Mortgage servicer, Real estate, United States

The Foreclosure process often involves affidavits, which are documents in which someone attests to a set of facts. Foreclosure affidavits typically involve the mortgage servicer confirming that the foreclosure is valid specifically, that the servicer or mortgage holder has a right to foreclose because the mortgagee has defaulted on the mortgage.

Foreclosure Process and Affidavits

Often, mortgage servicers looking to foreclose ask the court for what is called summary judgment, which means they want the court to rule in their favor without need for a trial based on clear evidence that the foreclosure is in order. To show the court that it should order foreclosure, the servicer or mortgage older typically submits affidavits and other proof (such as the mortgage note) showing who in fact owns the mortgage in question. Foreclosure affidavits also include statements about the status of the mortgage account, such as payment history, what is currently owed, when it went into default and how far behind the mortgagee is.

If the borrower does not contest the foreclosure, many foreclosure cases end at this point, with the judge granting summary judgment for the mortgage servicer. This allows the foreclosure to be executed and the property to be sold.

“Robo-signing” and Foreclosure Affidavits

Affidavits are documents submitted to the court in which a person attests to personal knowledge as to what is contained. This means that the person signing a foreclosure affidavit should have verified all information he or she is stating to be true.

The term “robo-signing” has been coined to describe rapid fire signing of foreclosure affidavits without adequately verifying the truth of what the affidavits state. Mortgage servicers who process very high volumes of mortgages in quick succession have been accused of robo-signing to speed up the foreclosure process.

In cases where the mortgage servicer did not review underlying documentation, foreclosure affidavits signed by the servicer may be challenged as inadequate to prove that foreclosure should occur. In some states, foreclosure affidavits must include copies of all documentation on which the affidavits rely. In these states, failure to include such documentation could also be challenged.

Challenging Foreclosure Affidavits

Typically, the mortgagee can challenge the foreclosure affidavits at the point when the bank or mortgage servicer has requested summary judgment. Citing robo-signing to challenge mortgage affidavits is one way to possible stave off summary judgment. Another way to challenge the affidavits is to challenge any inaccurate information about the mortgage and payment history contained in the affidavits.

Though foreclosure affidavits are often perfectly accurate, sometimes they may contain bad information. One example might be if the affidavits state an inaccurate amount owed or payment history. Often, mortgages have been sold many times, with information as to payment potentially lost in the shuffle. Other times, fees may have been attached to the account improperly.

What Happens Next?

Showing that a mortgage servicer’s foreclosure affidavits are inadequate does not resolve the underlying dispute about the property and whether it will be foreclosed. Lenders and mortgage servicers typically rely on affidavits in order to gain summary judgment in foreclosure actions.

In cases where the affidavits are successfully challenged or found lacking by the court, the borrower may not have won a final victory, but has staved off a final decision. Such borrowers then may face the lender or servicer at trial to resolve whether the property, in fact, may be foreclosed and sold.

To Learn How You Can Effectively Use Solid Arguments Such As Robo Signing To Challenge Your Wrongful Foreclosure Visit: http://www.fightforeclosure.net

How to Effectively and Strategically Challenge and Win Your Wrongful Foreclosure Against Your Bank or Lender

18 Saturday May 2013

Posted by BNG in Affirmative Defenses, Foreclosure Defense, Judicial States, Loan Modification, Non-Judicial States, Your Legal Rights

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California, Foreclosure, Mortgage loan, Real Estate Settlement Procedures Act, RESPA, TILA, Trustee, United States

The key factors in making sound decision as to how to fight your foreclosure are based on whether your State has a Judicial or non-judicial foreclosure process.

It is vital to determine your strengths and weaknesses in order to know whether to use OFFENSIVE or DEFENSIVE tactics and strategies.

First of all you have non-judicial and judicial foreclosure states. Non-judicial basically means that instead of signing a conventional mortgage and note, you signed a document that says you give up your right to a judicial proceeding. So the pretender lender or lender simply instructs the Trustee to sell the property, giving you some notice. Of course the question of who is the lender, what is a beneficiary under a deed of trust, what is a creditor and who owns the loan NOW (if anyone) are all issues that come into play in litigation.

In a non-judicial state you generally are required to bring the matter to court by filing a lawsuit. In states like California, the fore-closers usually do an end run around you by filing an unlawful detainer as soon as they can in a court of lower jurisdiction which by law cannot hear your claims regarding the illegality of the mortgage or foreclosure.

In a judicial state the foreclosure must be the one who files suit and you have considerably more power to resist the attempt to foreclose.

These are the stage process:

Stage 1: No notice of default has been sent.

In this case you want to get a forensic analysis that is as complete as humanly possible TILA, RESPA, securitization, title, chain of custody, predatory loan practices, fraud, fabricated documents, forged documents etc. I call this the FOUR WALL ANALYSIS, meaning they have no way to get out of the mess they created. Then you want a QWR (Qualified Written Request) and DVL (Debt Validation Letter along with complaints to various Federal and State agencies. If they fail to respond or fail to answer your questions you file a suit against the party who received the QWR, the party who originated the loan (even if they are out of business), and John Does 1-1000 being the owners of mortgage backed bonds that are evidence of the investors ownership in the pool of mortgages, of which yours is one. The suit is simple, it seeks to stop the servicer from receiving any payments, install a receiver over the servicer’s accounts, order them to answer the simple question as to Who is my creditor and how do I get a full accounting FROM THE CREDITOR? Alternative counts would be quiet title and damages under TILA, RESPA, SEC, etc.

Tactically you want to present the forensic declaration and simply say that you have retained an expert witness who states in his declaration that the creditor does not include any of the parties disclosed to you thus far. This [prevents you from satisfying the Federal mandate to attempt modification or settlement of the loan. You’ve asked (QWR and DVL) and they won’t tell. DON’T GET INTO INTRICATE ARGUMENTS CONCERNING SECURITIZATION UNTIL IT IS NECESSARY TO DO SO WHICH SHOULD BE AFTER A FEW HEARINGS ON MOTIONS TO COMPEL THEM TO ANSWER.

IN OTHER WORDS YOU ARE SIMPLY TELLING THE JUDGE THAT YOUR EXPERT HAS PRESENTED FACTS AND OPINION THAT CONTRADICT AND VARY FROM THE REPRESENTATIONS OF COUNSEL AND THE PARTIES WHO HAVE BEEN DISCLOSED TO YOU THUS FAR.

YOU WANT TO KNOW WHO THE OTHER PARTIES ARE, IF ANY, AND WHAT MONEY EXCHANGED HANDS WITH RESPECT TO YOUR LOAN. YOU WANT EVIDENCE, NOT REPRESENTATIONS OF COUNSEL. YOU WANT DISCOVERY OR AN ORDER TO ANSWER THE QWR OR DVL. YOU WANT AN EVIDENTIARY HEARING IF IT IS NECESSARY.

Avoid legal argument and go straight for discovery saying that you want to be able to approach the creditor, whoever it is, and in order to do that you have a Federal Statutory right (RESPA) to the name of a person, a telephone number and an address of the creditor i.e., the one who is now minus money as a result of the funding of the loan. You’ve asked, they won’t answer.

Contemporaneously you want to get a temporary restraining order preventing them from taking any further action with respect to transferring, executing documents, transferring money, or collecting money until they have satisfied your demand for information and you have certified compliance with the court. Depending upon your circumstances you can offer to tender the monthly payment into the court registry or simply leave that out.

You can also file a bankruptcy petition especially if you are delinquent in payments or are about to become delinquent.

STAGE 2: Notice of Default Received

Believe it or not this is where the errors begin by the pretender lenders. You want to challenge authority, authenticity, the amount claimed due, the signatory, the notary, the loan number and anything else that is appropriate. Then go back to stage 1 and follow that track. In order to effectively do this you need to have that forensic analysis and I don’t mean the TILA Audit that is offered by so many companies using off the shelf software. You could probably buy the software yourself for less money than you pay those companies. I emphasize again that you need a FOUR WALL ANALYSIS.

Stage 3 Non-Judicial State, Notice of Sale received:

State statutes usually give you a tiny window of opportunity to contest the sale and the statute usually contains exact provisions on how you can do that or else your objection doesn’t count. At this point you need to secure the services of competent, knowledgeable, experienced legal counsel professionals who have been fighting with these pretender lenders for a while. Anything less and you are likely to be sorely disappointed unless you landed, by luck of the draw, one of the increasing number of judges you are demonstrating their understanding and anger at this fraud.

Stage 4: Judicial State: Served with Process:

You must answer usually within 20 days. Failure to do so, along with your affirmative defenses and counterclaims, could result in a default followed by a default judgment followed by a Final Judgment of Foreclosure. See above steps.

Stage 5: Sale already occurred

You obviously need to reverse that situation. Usually the allegation is that the sale should be vacated because of fraud on the court (judicial) or fraudulent abuse of non-judicial process. This is a motion or Petitioner but it must be accompanied by a lawsuit, properly served and noticed to the other side. You probably need to name the purchaser at sale, and ask for a TRO (Temporary Restraining Order) that stops them from moving the property or the money around any further until your questions are answered (see above). At the risk of sounding like a broken record, you need a good forensic analyst and a good lawyer.

Stage 6: Eviction (Unlawful Detainer Filed or Judgment entered:

Same as Stage 5.

What are some examples of financial injury due to errors, misrepresentations, or other deficiencies in the foreclosure process?

Listed below are examples of situations that may have led to financial injury. This list does not include all situations.

The mortgage balance amount at the time of the foreclosure action was more than you actually owed.

You were doing everything the modification agreement required, but the foreclosure sale still happened.

The foreclosure action occurred while you were protected by bankruptcy.
You requested assistance/modification, submitted complete documents on time, and were waiting for a decision when the foreclosure sale occurred.

Fees charged or mortgage payments were inaccurately calculated, processed, or applied.

The foreclosure action occurred on a mortgage that was obtained before active duty military service began and while on active duty, or within 9 months after the active duty ended and the service member did not waive his/her rights under the Service Members Civil Relief Act.

If you are ready to take the battle to these interlopers, in order to reclaim the home that is rightfully yours, visit http://www.fightforeclosure.net

Litigating Trial Loan Modification Against Your Bank or Lender

17 Friday May 2013

Posted by BNG in Banks and Lenders, Foreclosure Defense, Litigation Strategies, Loan Modification, Your Legal Rights

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Foreclosure, HAMP, Home Affordable Modification Program, Loan servicing, Mortgage loan, Mortgage modification, United States, Wells Fargo

If you find yourself wondering whether you can litigate your Trial Loan Modification which your Bank/Lender failed to make permanent, you are not alone. Many homeowners all across the nation found themselves in similar situation. This question has arisen many times lately, and still we do not have a confirmed answer. But nonetheless it can be litigated because the trial loan modification is afterall a contract, and every contract can be enforced. This goes back to the first year law school class of contract. It means offer, acceptance, consideration and execution. Here, it has all the elements of contract formation. All the judicial remedies of a contract are available in this litigation also. Why not? A lender cannot be compelled to modify a contract unless they had taken governmental bailout money and there are federal guidelines about foreclosure and the requirements one has to meet. We are talking about folks who had gotten trial loan modification and the banks is reneging on it. Here, someone signed, accepted the trial loan modification and sent quite few payments in executing the offer, and did their part of the bargain.

In the recent past, NCLS has brought four class action suits on behalf of Massachusetts residents to challenge the failure of Wells Fargo Bank, Bank of America , J.P. Morgan Chase Bank and IndyMac Mortgage Servicers/OneWest Bank to honor their agreements with borrowers to modify mortgages and prevent foreclosures under the United States Treasury’s Home Affordable Modification Program (”HAMP”). The complaints are filed with the United States District Court for the District of Massachusetts and assert claims for breach of contract, breach of the implied covenant of good faith and fair dealing and promissory estoppel under Massachusetts common law arising from the financial institution’s alleged failure to keep its promises to modify eligible loans to prevent foreclosures against homeowners who have lived up to their end of the bargain as required by HAMP.

Here are some of the complaints filed for such litigation.

Complaint NO. 1
http://www.nclc.org/issues/cocounseling/content/hamp-BosqueWFComplaint.pdf

Complaint No. 2
http://www.nclc.org/issues/cocounseling/content/hamp-Johnson-BOA-Complaint.pdf
Complaint No. 4
http://www.nclc.org/issues/cocounseling/content/hamp-DurmicJPMorganChase-Complaint.pdf

Complaint No. 4
http://www.nclc.org/issues/cocounseling/content/hamp-Reyes-OneWest-Complaint.pdf

If you are not getting your permanent loan modification with your Bank or Lender, you can contact your congressman or regulatory agencies using the sample letter below.

Regulatory Agency

123 Someplace

Some Where In USA

Dear Regulatory Agency

I am writing to you as a homeowner in foreclosure and wish to draw your attention to issues regarding mortgage loan modification, including the Making Homes Affordable program. The prevailing loan modification policies imposed by government entities and loan servicers expose homeowners to substantial risks in a system designed to generate additional profits to loan servicers and others who reap financial rewards in the foreclosure process, at the expense of consumers.

1. The prohibition against partial payments imposed by many loan servicers quickly forces many homeowners into expensive and unnecessary foreclosure proceedings. A loan servicer may decline a mortgage payment check that is $20 less than the full amount due, with full knowledge – and presumably hope – that it may soon result in thousands of extra dollars in profit should the homeowner later be forced into foreclosure. Such policies are calculated to increase profits to loan servicers, their attorneys and other entities that benefit in the foreclosure process.
2. The notorious “Three Month Trial Period” offered by many loan servicers is fraught with many jeopardizing the homeowners who accept such offers.
a. As loan servicers repeatedly extend the trial period, three months may become a year or two.
b. More than half of all trial periods are cancelled by the loan servicer, most of the time despite the fact the homeowner made timely payments.
c. During this period, foreclosure proceedings remain pending, which permits loan servicers to demand an auction date for the sale of the house, even in cases where the homeowner has fully complied with the Trial Period.
d. No warranty, pledge or agreement is made by the loan servicer upon initiation of the trial period. Servicers are under no obligation to do anything other than re-review the loan modification application. This provides ample incentive to loan servicers to prolong the trial period and revive foreclosure proceedings, after gaining many thousands more dollars from hapless homeowners who were led to believe the trial period would end in a timely manner, including an approval of their loan modification.
e. No details are revealed in advance to homeowners by loan servicers regarding the vaguely-possible, future successful loan modification. Many distressed homeowners have completed the trial period only to receive a loan modification that is financially questionable, such as an ARM mortgage.
f. Further, many loan servicers are misrepresenting the “Three Month Trial” to homeowners as a HAMP product, when in fact the only loan modification available to such homeowners is one of the loan servicer’s own creation and often designed to maximize the potential for default and thus, servicer profits.
3. In many cases, homeowners are awaiting loan modification review while simultaneously in foreclosure. As loan servicers are notoriously slow to both review such applications and respond to homeowner inquiries, auction dates are often set before the loan modification application has been approved or denied. No auction date should be set before a loan modification application has been approved or denied.
4. Many loan servicers require that homeowners not attempt to sell their homes while undergoing a loan modification review. For homeowners already in foreclosure, this policy places them significantly at risk of losing their homes and/or equity in the event the loan modification is denied or has not been approved before the auction date imposed by a court.
a. Homeowners participating in the trial period are also prohibited from placing their homes on the market, which as described above can be a lengthy process, again exposing them to the risk of losing their homes and/or equity.
b. When facing or defending themselves in a foreclosure or while undergoing the often lengthy process of loan modification, a homeowner’s right to sell the property themselves must not be infringed upon in order to generate additional profit to loan servicers. These policies effectively remove a distressed homeowner’s last recourse to mitigate their losses.

In summary, distressed homeowners are inadequately protected under these predatory policies. To more fairly balance the needs of loan servicers and the protection of homeowners, these policies should be implemented and enforced by the appropriate regulatory agencies:

1. Loan servicers should accept and properly apply partial payments of overdue mortgage accounts.
2. Efforts must be made and enforced to ensure that homeowners are able to reliably reach and/or obtain responses to their inquiries of loan servicers.
3. Loan modifications must be reviewed in a timely manner, preferably with a pre-defined time limit.
4. “Three Month Trial Periods” should be accurately identified to homeowners as to whether or not the trial period is related to a HAMP loan modification or the loan servicer’s in-house loan modification.
5. “Three Month Trial Periods” should not be extended, except upon homeowner’s request.
6. Pending foreclosure cases should be promptly dismissed upon the initiation of any loan modification “Trial Period.”
7. Truth-in-Lending Disclosures and all other such disclosures and settlement statements currently required of mortgage lenders should be provided to homeowners before the initiation of any “Trial Period.” This would allow homeowners to make an informed decision regarding the financial suitability of the future loan modification, while still allowing loan servicers to rescind such agreements upon the failure of the homeowner to successfully complete the “Trial Period.”
8. In a pending foreclosure proceeding, no auction date should be set before a loan modification application has been approved or denied.
9. The right of a homeowner to sell the property should not be restricted during foreclosure or loan modification review.
10. All regulations and laws applying to consumer loans, such as RESPA and TILA, must also fairly apply to loan modifications. If first mortgage and refinanced mortgages are subject to such regulations, why are loan modifications not?

Please look into this matter at your earliest convenience.

Thank you in advance for your prompt attention to this important urgent matter.

Sincerely,

John/Jane Doe

After contacting the regulatory agencies or your congressman, if you are not getting the attention or permanent loan modification you feel you deserve, you can visit www.fightforeclosure.net to get your foreclosure litigation package and effectively pursue your next Cause of Action in order to get your Trial Loan Modification Offer, permanently modified.

Foreclosure Deficiency Judgment Nevada Mortgage Laws

17 Friday May 2013

Posted by BNG in Non-Judicial States

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Business, Debt, Deficiency judgment, Florida, Foreclosure, Nevada, Uniform Commercial Code, United States

NEVADA MORTGAGE LAWS:
In this session, we are going to discuss in somewhat greater details the Nevada Mortgage Laws and how to handle the looming foreclosure crisis which has made state of Nevada in the highest ranks in USA. Once we are educated in these laws, our next step should be how to fight and fight back vehemently because banks are not changing their ways and tactics. An educated borrower is the best defense against foreclosure and its aftermath.

NRS 40.430 Action for recovery of debt secured by mortgage or other lien; “action” defined.
Nevada has only One Action Law for the recovery of any debt, or for the enforcement of any right secured by a mortgage or other lien upon real estate. That action must be in accordance with the provisions of NRS 40.430 to 40.459, inclusive. In that action, the judgment must be rendered for the amount found due the plaintiff, and the court, by its decree or judgment, may direct a sale of the encumbered property, or such part thereof as is necessary, and apply the proceeds of the sale as provided in NRS 40.462.

What is One Action Rule of Nevada?
This section must be construed to permit a secured creditor to realize upon the collateral for a debt or other obligation agreed upon by the debtor and creditor when the debt or other obligation was incurred. A sale directed by the court pursuant to subsection 1 must be conducted in the same manner as the sale of real property upon execution, by the sheriff of the county in which the encumbered land is situated, and if the encumbered land is situated in two or more counties, the court shall direct the sheriff of one of the counties to conduct the sale with like proceedings and effect as if the whole of the encumbered land were situated in that county.

What this One Action Rule Does Not Include?
(a) To appoint a receiver for, or obtain possession of, any real or personal collateral for the debt or as provided in NRS 32.015.(b) To enforce a security interest in, or the assignment of, any rents, issues, profits or other income of any real or personal property.
(c) To enforce a mortgage or other lien upon any real or personal collateral located outside of the State which does not, except as required under the laws of that jurisdiction, result in a personal judgment against the debtor.
(d) For the recovery of damages arising from the commission of a tort, including a recovery under NRS 40.750, or the recovery of any declaratory or equitable relief.
(e) For the exercise of a power of sale pursuant to NRS 107.080.
(f) For the exercise of any right or remedy authorized by chapter 104 of NRS or by the Uniform Commercial Code as enacted in any other state.
(g) For the exercise of any right to set off, or to enforce a pledge in, a deposit account pursuant to a written agreement or pledge.
(h) To draw under a letter of credit.
(i) To enforce an agreement with a surety or guarantor if enforcement of the mortgage or other lien has been automatically stayed pursuant to 11 U.S.C. § 362 or pursuant to an order of a federal bankruptcy court under any other provision of the United States Bankruptcy Code for not less than 120 days following the mailing of notice to the surety or guarantor pursuant to subsection 1 of NRS 107.095.
(j) To collect any debt, or enforce any right, secured by a mortgage or other lien on real property if the property has been sold to a person other than the creditor to satisfy, in whole or in part, a debt or other right secured by a senior mortgage or other senior lien on the property.
(k) Relating to any proceeding in bankruptcy, including the filing of a proof of claim, seeking relief from an automatic stay and any other action to determine the amount or validity of a debt.
(l) For filing a claim pursuant to chapter 147 of NRS or to enforce such a claim which has been disallowed.
(m) Which does not include the collection of the debt or realization of the collateral securing the debt.
(n) Pursuant to NRS 40.507 or 40.508.
(o) Which is exempted from the provisions of this section by specific statute.
(p) To recover costs of suit, costs and expenses of sale, attorneys’ fees and other incidental relief in connection with any action authorized by this subsection.

How Mortgage is Defined Under Nevada Laws?
NRS 40.433 “Mortgage or other lien” defined. A “mortgage or other lien” includes a deed of trust, but does not include a lien which arises pursuant to chapter 108 of NRS, pursuant to an assessment under chapter 116, 117, 119A or 278A of NRS or pursuant to a judgment or decree of any court of competent jurisdiction.

The Judicial Proceedings Are An Affirmative Defense
1. The commencement of or participation in a judicial proceeding in violation of NRS 40.430 does not forfeit any of the rights of a secured creditor in any real or personal collateral, or impair the ability of the creditor to realize upon any real or personal collateral, if the judicial proceeding is:
(a) Stayed or dismissed before entry of a final judgment; or
(b) Converted into an action which does not violate NRS 40.430.
2. If the provisions of NRS 40.430 are timely interposed as an affirmative defense in such a judicial proceeding, upon the motion of any party to the proceeding the court shall:
(a) Dismiss the proceeding without prejudice; or
(b) Grant a continuance and order the amendment of the pleadings to convert the proceeding into an action which does not violate NRS 40.430.
3. The failure to interpose, before the entry of a final judgment, the provisions of NRS 40.430 as an affirmative defense in such a proceeding waives the defense in that proceeding. Such a failure does not affect the validity of the final judgment, but entry of the final judgment releases and discharges the mortgage or other lien.
4. As used in this section, “final judgment” means a judgment which imposes personal liability on the debtor for the payment of money and which may be appealed under the Nevada Rules of Appellate Procedure.

How Surplus Money is Distributed?
NRS 40.440 Disposition of surplus money. If there is surplus money remaining after payment of the amount due on the mortgage or other lien, with costs, the court may cause the same to be paid to the person entitled to it pursuant to NRS 40.462, and in the meantime may direct it to be deposited in court.

FORECLOSURE SALES AND DEFICIENCY JUDGMENTS
I have been asked about deficiency judgment many times. In Nevada, the time period for filing a deficiency judgment by your lender is only 6 months. Recently the Nevada legislature also reduced the time period to six months of any HELOC or second trust deed. Now, these folks cannot file any deficiency judgment if the right has been accrued more than six months. Also, if a collection agency buys any of these loans, they cannot collect more than what they paid for.However, they can file this deficiency judgment and can enforce it later against you. This is a concise summary of all of the laws of deficiency judgment. Please read carefully and seek the help of a licensed attorney before doing anything or filing any action.

What is an Indebtedness?
NRS 40.451 “Indebtedness” defined. “indebtedness” means the principal balance of the obligation secured by a mortgage or other lien on real property, together with all interest accrued and unpaid prior to the time of foreclosure sale, all costs and fees of such a sale, all advances made with respect to the property by the beneficiary, and all other amounts secured by the mortgage or other lien on the real property in favor of the person seeking the deficiency judgment. Such amount constituting a lien is limited to the amount of the consideration paid by the lienholder.

NRS 40.453 Waiver of rights in documents relating to sale of real property against public policy and unenforceable; exception. Except as otherwise provided in NRS 40.495:
1. It is hereby declared by the Legislature to be against public policy for any document relating to the sale of real property to contain any provision whereby a mortgagor or the grantor of a deed of trust or a guarantor or surety of the indebtedness secured thereby, waives any right secured to him by the laws of this state.
2. A court shall not enforce any such provision.

How Deficiency Judgment is Awarded?
NRS 40.455 Deficiency judgment: Award to judgment creditor or beneficiary of deed of trust.
1. Upon application of the judgment creditor or the beneficiary of the deed of trust within 6 months after the date of the foreclosure sale or the trustee’s sale held pursuant to NRS 107.080, respectively, and after the required hearing, the court shall award a deficiency judgment to the judgment creditor or the beneficiary of the deed of trust if it appears from the sheriff’s return or the recital of consideration in the trustee’s deed that there is a deficiency of the proceeds of the sale and a balance remaining due to the judgment creditor or the beneficiary of the deed of trust, respectively.
2. If the indebtedness is secured by more than one parcel of real property, more than one interest in the real property or more than one mortgage or deed of trust, the 6-month period begins to run after the date of the foreclosure sale or trustee’s sale of the last parcel or other interest in the real property securing the indebtedness, but in no event may the application be filed more than 2 years after the initial foreclosure sale or trustee’s sale.

What is the Procedure for a Hearing of a Deficiency Judgment in Nevada? NRS 40.457 1.

Before awarding a deficiency judgment under NRS 40.455, the court shall hold a hearing and shall take evidence presented by either party concerning the fair market value of the property sold as of the date of foreclosure sale or trustee’s sale. Notice of such hearing shall be served upon all defendants who have appeared in the action and against whom a deficiency judgment is sought, or upon their attorneys of record, at least 15 days before the date set for hearing.

2. Upon application of any party made at least 10 days before the date set for the hearing the court shall, or upon its own motion the court may, appoint an appraiser to appraise the property sold as of the date of foreclosure sale or trustee’s sale. Such appraiser shall file with the clerk his appraisal, which is admissible in evidence. The appraiser shall take an oath that he has truly, honestly and impartially appraised the property to the best of his knowledge and ability. Any appraiser so appointed may be called and examined as a witness by any party or by the court. The court shall fix a reasonable compensation for the appraiser, but his fee shall not exceed similar fees for similar services in the county where the encumbered land is situated.
NRS 40.459 Limitations on amount of money judgment. After the hearing, the court shall award a money judgment against the debtor, guarantor or surety who is personally liable for the debt. The court shall not render judgment for more than:

1. The amount by which the amount of the indebtedness which was secured exceeds the fair market value of the property sold at the time of the sale, with interest from the date of the sale; or
2. The amount which is the difference between the amount for which the property was actually sold and the amount of the indebtedness which was secured, with interest from the date of sale, whichever is the lesser amount.

NRS 40.462 Distribution of proceeds of foreclosure sale.
1. Except as otherwise provided by specific statute, this section governs the distribution of the proceeds of a foreclosure sale. The provisions of NRS 40.455, 40.457 and 40.459 do not affect the right to receive those proceeds, which vests at the time of the foreclosure sale. The purchase of any interest in the property at the foreclosure sale, and the subsequent disposition of the property, does not affect the right of the purchaser to the distribution of proceeds pursuant to paragraph (c) of subsection 2 of this section, or to obtain a deficiency judgment pursuant to NRS 40.455, 40.457 and 40.459.
2. The proceeds of a foreclosure sale must be distributed in the following order of priority:
(a) Payment of the reasonable expenses of taking possession, maintaining, protecting and leasing the property, the costs and fees of the foreclosure sale, including reasonable trustee’s fees, applicable taxes and the cost of title insurance and, to the extent provided in the legally enforceable terms of the mortgage or lien, any advances, reasonable attorney’s fees and other legal expenses incurred by the foreclosing creditor and the person conducting the foreclosure sale.
(b) Satisfaction of the obligation being enforced by the foreclosure sale.
(c) Satisfaction of obligations secured by any junior mortgages or liens on the property, in their order of priority.
(d) Payment of the balance of the proceeds, if any, to the debtor or his successor in interest.
If there are conflicting claims to any portion of the proceeds, the person conducting the foreclosure sale is not required to distribute that portion of the proceeds until the validity of the conflicting claims is determined through inter-pleader or otherwise to his satisfaction.
3. A person who claims a right to receive the proceeds of a foreclosure sale pursuant to paragraph (c) of subsection 2 must, upon the written demand of the person conducting the foreclosure sale, provide:
(a) Proof of the obligation upon which he claims his right to the proceeds; and
(b) Proof of his interest in the mortgage or lien, unless that proof appears in the official records of a county in which the property is located.
Such a demand is effective upon personal delivery or upon mailing by registered or certified mail, return receipt requested, to the last known address of the claimant. Failure of a claimant to provide the required proof within 15 days after the effective date of the demand waives his right to receive those proceeds.
4. As used in this section, “foreclosure sale” means the sale of real property to enforce an obligation secured by a mortgage or lien on the property, including the exercise of a trustee’s power of sale pursuant to NRS 107.080.
NRS 40.463 Agreement for assistance in recovering proceeds of foreclosure sale due to debtor or successor in interest; requirements for enforceable agreement; fee must be reasonable.
1. Except as otherwise provided in this section, a debtor or his successor in interest may enter into an agreement with a third party that provides for the third party to assist in the recovery of any balance of the proceeds of a foreclosure sale due to the debtor or his successor in interest pursuant to paragraph (d) of subsection 2 of NRS 40.462.
2. An agreement pursuant to subsection 1:
(a) Must:
(1) Be in writing;
(2) Be signed by the debtor or his successor in interest; and
(3) Contain an acknowledgment of the signature of the debtor or his successor in interest by a notary public; and
(b) May not be entered into less than 30 days after the date on which the foreclosure sale was conducted.
3. Any agreement entered into pursuant to this section that does not comply with subsection 2 is void and unenforceable.
4. Any fee charged by a third party for services provided pursuant to an agreement entered into pursuant to this section must be reasonable. A fee that exceeds $2,500, excluding attorney’s fees and costs, is presumed to be unreasonable. A court shall not enforce an obligation to pay any unreasonable fee, but may require a debtor to pay a reasonable fee that is less than the amount set forth in the agreement.
5. A third party may apply to the court for permission to charge a fee that exceeds $2,500. Any third party applying to the court pursuant to this subsection has the burden of establishing to the court that the fee is reasonable.
6. This section does not preclude a debtor or his successor in interest from contesting the reasonableness of any fee set forth in an agreement entered into pursuant to this section.
7. As used in this section:
(a) “Creditor” means a person due an obligation being enforced by a foreclosure sale conducted pursuant to NRS 40.451 to 40.463, inclusive.
(b) “Debtor” means a person, or the successor in interest of a person, who owes an obligation being enforced by a foreclosure sale conducted pursuant to NRS 40.451 to 40.463, inclusive.
(c) “Third party” means a person who is neither the debtor nor the creditor of a particular obligation being enforced by a foreclosure sale conducted pursuant to NRS 40.451 to 40.463, inclusive.

RIGHTS OF GUARANTOR, SURETY OR OBLIGOR IN REAL PROPERTY

NRS 40.465 “Indebtedness” defined. As used in NRS 40.475, 40.485 and 40.495, “indebtedness” means the principal balance of the obligation, together with all accrued and unpaid interest, and those costs, fees, advances and other amounts secured by the mortgage or lien upon real property.
NRS 40.475 Remedy against mortgagor or grantor; assignment of creditor’s rights to guarantor, surety or obligor. Upon full satisfaction by a guarantor, surety or other obligor, other than the mortgagor or grantor of a deed of trust, of the indebtedness secured by a mortgage or lien upon real property, the paying guarantor, surety or other obligor is entitled to enforce every remedy which the creditor then has against the mortgagor or grantor of the mortgage or lien upon real property, and is entitled to an assignment from the creditor of all of the rights which the creditor then has by way of security for the performance of the indebtedness.
NRS 40.485 Interest in proceeds of secured indebtedness upon partial satisfaction of indebtedness. Immediately upon partial satisfaction by a guarantor, surety or other obligor, other than the mortgagor or grantor of a deed of trust, of the indebtedness secured by a mortgage or lien upon real property, the paying guarantor, surety or other obligor automatically, by operation of law and without further action, receives an interest in the proceeds of the indebtedness secured by the mortgage or lien to the extent of the partial satisfaction, subject only to the creditor’s prior right to recover the balance of the indebtedness owed by the mortgagor or grantor.

NRS 40.495 Waiver of rights; separate action to enforce obligation; available defenses.
1. The provisions of NRS 40.475 and 40.485 may be waived by the guarantor, surety or other obligor only after default.
2. Except as otherwise provided in subsection 4, a guarantor, surety or other obligor, other than the mortgagor or grantor of a deed of trust, may waive the provisions of NRS 40.430. If a guarantor, surety or other obligor waives the provisions of NRS 40.430, an action for the enforcement of that person’s obligation to pay, satisfy or purchase all or part of an indebtedness or obligation secured by a mortgage or lien upon real property may be maintained separately and independently from:
(a) An action on the debt;
(b) The exercise of any power of sale;
(c) Any action to foreclose or otherwise enforce a mortgage or lien and the indebtedness or obligations secured thereby; and
(d) Any other proceeding against a mortgagor or grantor of a deed of trust.
3. If the obligee maintains an action to foreclose or otherwise enforce a mortgage or lien and the indebtedness or obligations secured thereby, the guarantor, surety or other obligor may assert any legal or equitable defenses provided pursuant to the provisions of NRS 40.451 to 40.463, inclusive.
4. The provisions of NRS 40.430 may not be waived by a guarantor, surety or other obligor if the mortgage or lien:
(a) Secures an indebtedness for which the principal balance of the obligation was never greater than $500,000;
(b) Secures an indebtedness to a seller of real property for which the obligation was originally extended to the seller for any portion of the purchase price;
(c) Is secured by real property which is used primarily for the production of farm products as of the date the mortgage or lien upon the real property is created; or
(d) Is secured by real property upon which:
(1) The owner maintains his principal residence;
(2) There is not more than one residential structure; and
(3) Not more than four families reside.

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