Magazine article Mortgage Banking

Strict Courts Create Servicer Headwinds

Magazine article Mortgage Banking

Strict Courts Create Servicer Headwinds

Article excerpt

No one need be reminded that servicing can be a tough business. Recently, this already difficult pursuit was made all the more challenging by a host of new federal and state statutes, rules and regulations designed to aid borrowers and impose myriad requirements on the foreclosure process. These vary of course from state to state, but the wariness expressed here is that judicial interpretation of the statutes may be akin to the messianic, mandating remarkable strictness and thereby leaving not an inch for possible servicer miscues. This is hardly welcome.

While this excursion will not be a review of all statutes in every state, it will mention some New York impositions as an example to highlight the possible peril. Underlying all this is the apparent legislative view that borrowers neither recognize nor understand the consequences of defaulting on a mortgage, thus leaving them at a disadvantage. The remedy of some statutes, therefore, is to require extensive notice provisions so borrowers may presumably rescue themselves from their plight.

Slowing up a foreclosure is unpalatable enough, but lenders' concern has always been that courts might dismiss a foreclosure if there was any degree of non-compliance with any of the dictates. Emerging case law unfortunately confirms the fear.

Typical among the mandates (again, this is in New York) is requiring notice to the borrower in a residential case advising of help available for Homeowners. The text is somewhat extensive, must be presented in certain-size typefaces, must accompany the summons and must be on a different-colored paper--all quite a serpentine production.

In one case in New York (WMC Mortgage Corp. v. Thompson, [2009]), the notice was not appended. When this non-compliance was revealed upon application to appoint a referee (the next foreclosure stage), the lender's counsel asked that the summons be amended from the inception. In other words, "We will send the notice now; consider it sent at the beginning of the case." No, ruled the court, this is a defect that can only be corrected by proper service of the notice with the summons and complaint--case dismissed.

Ignored by the court was extensive case law holding that without demonstrated prejudice, neglect to comply with statute or procedure can be considered ministerial and not fatal. Was prejudice demonstrated here--that is, was the borrower actually denied anything? None was presented. Thus, there was authority for the court to refrain from the draconian result of dismissing the foreclosure for failure to include the notice at the beginning. But it chose not to follow that course.

Even more startling is another case in New York dealing with neglect to append a notice to the foreclosure summons warning that the mortgaged house could be lost and to beware of mortgage scams (First National Bank of Chicago v. Silver, [2010]).

Here, the notice was not given. But the borrower had engaged counsel and answered the complaint, neglecting, however, to assert the lack of this notice as a defense. So the question became, was failure to comply with the notice something that had to be raised as an affirmative defense in an answer, or could it be asserted at any time in the action? In other words, can the defense be waived? "No," said the court. The notice is absolutely mandatory--a condition precedent to foreclosure, implying therefore that it could not be waived. …

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