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Counsel’s Corner: Regulatory Compliance in Today’s Technology-Inundated Mortgage Industry

Alan Weinreb

Alan Weinreb

Alan Weinreb, Founder of the Margolin & Weinreb Law Group, is a New York-based attorney specializing in mortgage foreclosure, bankruptcy, and REO. Weinreb represented the plaintiff in a very significant case recently, which saw a federal court hand down a decision on a traditionally state-level issue: foreclosure actions. According to Weinreb, the outcome could impact future foreclosures across the state—and the nation—for years to come.

What was the gist of your recent case? What was each side arguing? 

We represented a plaintiff in a mortgage foreclosure. The borrowers, of course, had long since defaulted on their payments. It was argued by the borrowers’ attorneys that since New York has a comprehensive statutory framework to protect borrowers in residential cases, and that as a result, the federal court should say, “Even though we can hear a mortgage foreclosure case if it meets the legal requirements to be brought in federal court, we are not going to hear these cases. They should be in state court.” This is called “abstention.” To sum it up, the borrowers filed a motion to dismiss the complaint on abstention grounds.

You see, when homeowners can’t afford a lawyer, there are often law services set up for them at the city or county level to represent them when they get served with foreclosure complaints. A lot of these services are partially funded by the state of New York. In this particular case, these borrowers were represented by Queens County Legal Services. We’re finding that when we bring these cases—including this one—that these particular institutions that represent these defaulting borrowers have a lot of resources available to them. They tend to be very litigious and they immediately step in and say, “Hey, wait a minute. They’re only bringing this case in federal court to avoid having to go through the settlement conference part.” So this was a contested case. Queens County Legal Services represented the borrowers in the hopes of getting the case removed to state court and getting the homeowner a conference and potential loan modification, which would have and could have delayed the foreclosure process by years. 

Why did you decide to take your recent foreclosure case to federal court instead of state court?

We brought this action in federal court instead of New York State Court, as is typically done, because we feel that we can get our cases for our clients through the court system faster and without the delays often found in state courts.

In New York, when you bring a residential mortgage foreclosure case in the state courts, residential borrowers are entitled to settlement conferences and there are procedural safeguards during the foreclosure proceeding that make the case move very slowly. To many lenders and servicers, it seems as if everything is on hold in New York. Your case can’t proceed until you go through this separate settlement conference part they have. That could delay cases for up to a year or more. In reality, we’re looking at three plus years to get a residential foreclosure case through.

In federal court, we can get an unopposed case through around a year, even under a year sometimes, as opposed to two to three years in the state court, down state. 

Why is it so hard to get cases through at the state level?

The state courts are so bogged down with residential mortgage foreclosure cases because they’re the only ones that typically handle these type of foreclosures. The courts are overwhelmed and  understaffed. It takes forever to finish a case, especially when you have to go through these safeguards put in by the FPRLA.

Basically those safeguards are the settlement conference part, requiring the borrower and the lenders to come in and try to negotiate in good faith to get a modification or any other types of loss mitigation.

What were the requirements to get your case tried at the federal level instead?

To get into federal court, we need to have diversity, meaning the citizenship of the plaintiff is different than the citizenship of each and every defendant. Our plaintiff in this case was a Florida company with Florida ownership. They held the note. Because they held the note and they’re in Florida and it’s a New York property with a New York borrower, the citizenships are different. Because the citizenships are different, they’re diverse. Diversity is what you need to get into federal court. The case must also involve a dispute over $75,000.00, which was the case here. 

Can you tell us about the Supreme Court cases the defense used to support its case?

They cited these two Supreme Court cases—Burford v. Sun Oil Co. and Louisiana Power & Light Co. v. City of Thibodaux—both cases that outlined abstention principles. The defense said that because of these cases, the court shouldn’t hear foreclosure cases and the homeowner should have a right to a settlement conference, because of their New York State rights granted to them by state law. 

The court went through those cases and ultimately said that Burford and Sun Oil don’t apply to this case, because the state issues aren’t as clear cut. They said the federal court does not need to abstain and give it back to the state court  or simply refuse to hear the case at all when the state issues are unclear. 

In other words, if New York state’s settlement conferences were run by an administrative agency, then the federal court would abstain. But they’re not. They’re run by the court.

Ultimately, the court decided in your client’s favor. What does that mean for the future of foreclosures in New York? What about other states?

It’s a long overdue confirmation for lenders and servicers that the federal court can, should, and will allow cases that are heard in the state courts 99.9 percent of the time to also be heard in the federal courts. 

This decision will likely have ramifications in other states, too. If a state that has the same or similar procedural safeguards as New York, lawyers, clients, or lenders will look at this case and say, “You know what? We’re going to tell our lawyers to bring these cases in federal court if they have the diversity.”

**Background: New York passed the Foreclosure Prevention and Responsible Lending Act (FPRLA) to provide legal protection and foreclosure prevention opportunities to at-risk homeowners. All state-level foreclosure cases are pursuant to the FPRLA’s protections.

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