Eric Houser is the Founder and President of Houser & Allison, APC, a national law firm with 13 offices across the country. He has practiced law for over 30 years and successfully tried cases from Hawaii to Connecticut (and lots of places in between) on behalf of the mortgage industry. His national practice and experience provides a unique insight into recent cases, laws, and trends that impact our industry.
So far in 2017, what do you see as some of the biggest cases coming out of the courts?
For me, it would have to be in the West with the Oskoui v. J.P Morgan Chase Bank, N.A decision from the Ninth Circuit Court of Appeals and the Sundquist v. Bank of America, N. A., decision from a bankruptcy court in California where $46 million was awarded against Bank of America. In both cases, these two federal courts were extremely critical of the servicers going so far as to reference Franz Kafka’s 1925 novel, The Trial, Josef K. and describing the borrower as the “victim of a meaningless bureaucratic labyrinth.” On March 13, 2017, Ninth Circuit Judge Trott referred to the loan modification conduct of defendant loan servicer J.P. Morgan Chase Bank, N.A. as “Kafkaesque.” Less than two weeks later, on March 23, 2017, bankruptcy Judge Klein picked up on this literary reference and proclaimed: “Franz Kafka lives . . . he works at Bank of America.” Both decisions contained dramatic statements, with stinging commentary and negative results. The Sundquist decision should be overturned on appeal, but in either event, the depiction of our industry was not good. Both decisions remind us that all courts, including federal courts, can be aggressive in attacking servicer conduct and lessons need to be learned from each decision.
What lessons did you take away from the Oskoui and Sundquist decisions?
Oskoui teaches loan servicers at least three lessons, first a letter denying modification should include every reason for denial. Second, avoid “will” language and contradictions in trial payment plans. The “will” language gave Oskoui a breach of contract claim. The Ninth Circuit disregarded the later; inconsistent may “consider” language in the same letter. Third, evaluate if the borrower qualifies for modification before sending an application.
Judge Klein’s 100-page Sundquist decision provides additional lessons, namely that servicers and/or counsel always need to check PACER before starting foreclosure and eviction proceedings. Judge Klein found six violations of the automatic stay, all of which could have been prevented. Next, combat borrower testimony in contested proceedings with call logs and call recordings. Judge Klein relied on Sundquist’s journal entries. Call logs and/or recordings may have been able to rebut these entries. Lastly, do not offer loan modifications if denial is inevitable.
Any good news coming out of national case law as it impacts loan servicers?
Yes, in its latest term, the Supreme Court heard two FDCPA cases, Midland Funding LLC v. Johnson and Henson v. Santander Consumer USA, Inc. In Midland, decided May 15, 2017, a majority of the justices found that no violation occurred when a debt collector filed a proof of claim in a bankruptcy case, even though collection was barred by the statute of limitations. In Henson, decided on June 12, 2017, the Supreme Court ruled that the FDCPA did not apply to someone who buys consumer receivables originated by someone else. Before Henson, the circuits were split on whether that entity is deemed a “debt collector” for purposes of the FDCPA. Henson was argued on Judge Gorsuch’s first day on the job. Judge Gorsuch wrote the opinion, a 9-0 decision. Henson is a big case with potentially far-reaching results, especially as applied to loan servicers who purchase loans. Coincidentally, I was in trial on an FDCPA case in Los Angeles when Henson came down. I was able to cite it to the Court. The jury rendered a unanimous verdict in favor of the two servicer clients we were defending. On a related note, the CFPB is in the process of promulgating new rules to govern debt collection. We shall see whether the rules are changed in response to the pending decisions in these two cases.
Another hot issue concerns the Ninth Circuit’s decision in Ho v. ReconTrust Co., N.A. that sending statutorily required non-judicial foreclosure notices is not debt collection activity under the FDCPA, an issue that is in dispute in at least 15 other cases pending before the court. A petition for rehearing en banc has been filed. The court has asked the lender to file a response to the petition. Numerous amicus have appeared.
Leaving aside the case law, have you seen an expansion of HBOR?
No. The Homeowner Bill of Rights statutory schemes remain only in California—my primary residence—and Minnesota—the state that I grew up in. I have been expecting other states to mimic both Minnesota and California, but to date, a state statutory expansion has not incurred. With foreclosure rates back down to prerecession level, such an expansion may no longer be an issue.
Are there specific states where you are seeing hot issues?
New Mexico continues to be a hot bed of litigation for the industry. Tort reform in Texas resulted in many consumer lawyers turning to New Mexico. Most recently, the expansion of the New Mexico Unfair Practices Act (NMUPA) into the loan servicing context is a big development. Borrowers’ counsels are using this to create liability for statements made in the loan mod context where the borrower claims mortgage statements are “false.” The courts are finding these allegations are enough to win on a motion to dismiss at least. The reason this is a big deal is under the NMUPA is that the borrower will be entitled to attorneys’ fees and “treble” damages automatically if they establish liability. There is no need to prove the violation harmed the borrower in any way.
In New York, the statute of limitations for foreclosure continues to be a hot issue. A February 2017 decision by a State Court of Appeals in Wells Fargo Bank, N.A., v. Cohan relied on a provision of New York law to toll the statute of limitations. CPLR section 205(a) allows for a six-month SOL tolling period recommencing an action for the same relief, if an action is dismissed for a procedural defect. In that case, a prior foreclosure action was dismissed as “abandoned” by the court and recommenced after the statute of limitations expired, but within six months of the dismissal. The new action was also commenced by a different plaintiff who was a subsequent assignee of the loan. The court found that because the prior foreclosure action was not voluntarily discontinued, dismissed for lack of jurisdiction, or a final judgment on the merits, the investor was entitled to a six-month tolling of the statute of limitations. Importantly, the court also found that this provision did apply in this case to the subsequent assignee, even though they were not the named plaintiff in the prior action.
Lastly, in Washington and Oregon the Jordan v. Nationstar Mortg., LLC case is definitely a hot topic. In that case, the Washington Supreme Court held that deed of trust language authorizing a lender to secure property preforeclosure is unlawful under Washington law. We have seen one case and anticipate more cases from borrowers in Oregon making the same argument. There isn’t an Oregon decision on this case yet, but Oregon’s statute is nearly identical to Washington’s.