Thursday, June 24, 2010

FYI: Morgan Stanley Settles "Subprime Securitizer" Dispute with MA AG for $102M

Pursuant to the settlement, Morgan will provide pay $58 million to more than 1000 Massachusetts homeowners, $23 million to the Massachusetts Pension Fund for investment losses, and $19.5 million in taxpayer money to the Commonwealth’s General Fund.

As a result of a lengthy investigation, the Attorney General’s Office alleged that Morgan entered the subprime arena in Massachusetts by offering funding to retail lenders that specialized in loans to less-qualified borrowers.  Morgan provided billions of dollars to subprime lender New Century Mortgage, which alleged used Morgan funds to target lower-income borrowers and to supposedly lure them into loans that "consumers predictably could not afford to pay."  The MA AG claimed that the loans often were "unsustainable because of payment shock or poor underwriting," and that "borrowers would have to refinance in the short term or face foreclosure."  Some Morgan Stanley investment bankers allegedly referred to New Century as Morgan’s “partner” in the subprime lending business.

In addition to the $102 million in financial compensation, the settlement also requires Morgan to change its business practices going forward and to provide information and materials needed in the Attorney General’s ongoing investigation of the subprime securitization marketplace.

Today’s settlement is the latest in a series of actions brought by the Attorney General’s Office in response to the economic and lending crisis.  AG Coakley’s Office has been a national leader in bringing actions on behalf of homeowners and taxpayers against companies relating to their role in the subprime marketplace, including Goldman Sachs, Fremont, and Option One (see our updates, below).

Allegations in the Assurance of Discontinuance (attached) include that Morgan provided warehouse lending to New Century, and after New Century made the loans, Morgan would place the loans into a securitization pool, and then act as the underwriter selling investments backed by the subprime loans in the pool.

As part of this securitization process, Morgan employed third party due diligence providers to review the quality of New Century’s loans.  During this review, Morgan allegedly learned:

  • New Century allegedly repeatedly violated the Massachusetts Division of Banks’ “borrower best interest” standard when it made subprime loans, and thus made loans that violated Massachusetts law.
  • New Century allegedly calculated the Debt to Income (DTI) ratio for borrowers based only on the initial “teaser rate” for the loans, rather than the fully indexed interest rate that would kick in after the teaser period expired.  When calculated using the fully indexed rate, almost 40% of the loans failed Morgan’s own internal underwriting standards for whether the borrower could pay them.
  • The large majority of New Century loans supposedly failed the basic test of their own underwriting guidelines and could only be approved as “exception” loans, which required the presence of “compensating factors.”  Sample reviews by Morgan vendors showed that many of these loans violated the guidelines in several different ways, and about one-third of the randomly sampled loans lacked compensating factors to justify the extension of credit.
  • Appraisals used by New Century to value the collateral backing the loans (the homes) allegedly were often significantly different from BPOs that Morgan obtained to check New Century’s figures.  
  • New Century originated a large number of “stated income loans.”  In fact, a Morgan employee allegedly noted that New Century overused stated income loans to the point of abuse.

All of these due diligence discoveries underscored the riskiness and/or uncertainty relating to New Century’s loans and whether borrowers would be able to pay them back.  According to the MA AG, it is illegal under Massachusetts law to make loans without reasonably assessing a borrower’s ability to pay the loan according to its terms.    

In late 2005 and early 2006, Morgan began rejecting greater numbers of New Century loans as a result of the due diligence findings.  After New Century suggested it would shift its business elsewhere, Morgan allegedly began again to include a wider range of New Century loans in its purchase pools.  A Morgan Stanley senior banker allegedly purchased loans that Morgan’s own internal due diligence team initially rejected, and Morgan allegedly waived vendor concerns regarding a substantial number of the New Century loans identified as having material problems. 

Moreover, as New Century finally spiraled towards bankruptcy, its risky lending practices exposed to the public, Morgan Stanley continued to lend money to the subprime originator even when other banks would no longer provide New Century with cash.  During early March 2007, Morgan Stanley provided millions of dollars that the AG claims "New Century used directly to finance a last round of unsustainable predatory loans in Massachusetts." 

Throughout 2006 and the first half 2007,  Morgan continued to securitize New Century’s predatory subprime loans, and sold investments to two Massachusetts state entities—the Massachusetts Pension Reserves Investment Trust (PRIT) and the Massachusetts Municipal Depository Trust (MMDT).  According to the AG, this "led to state funds being used to fuel predatory subprime lending, and to significant losses for PRIT and the MMDT."

Under the terms of today’s settlement, Morgan will make the following payments and conduct reforms:

  • Pay $58 Million in principal reduction and related relief to over 1000 Massachusetts subprime borrowers
  • $19.5 Million payment to the Commonwealth
  • $23.4 Million to PRIT and the MMDT
  • $2 Million to non-profit groups throughout the Commonwealth to assist victims of subprime foreclosure
  • Not fund unfair subprime loans in Massachusetts
  • Make additional disclosures to Massachusetts investors regarding its future subprime securitizations
  • Provide documents and information to the Attorney General’s Office in its ongoing review of industry subprime securitization practices.
 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

 


From: Ralph T. Wutscher [mailto:rwutscher@krw-llp.com]
Sent: Tuesday, May 12, 2009 11:28 AM
To: Ralph T. Wutscher
Subject: FYI: Goldman Settles "Subprime Securitizer" Dispute with MA AG for $50M

Attorney General Martha Coakley’s Office announced that it has reached a $50M settlement agreement with Goldman Sachs & Company, including substantial principal write-downs and refinancing options for loans owned by Goldman and/or serviced by Litton.  Copies of the settlement agreement, and a diagram explaining the write-down process on 1st and 2nd lien loans, are attached.
 
The Attorney General’s Office has been investigating the role of investment banks in the origination and securitization of subprime loans in Massachusetts.  In order to resolve any potential claims stemming from the Attorney General’s investigation, Goldman has agreed to provide loan restructuring valued at approximately $50 million to Massachusetts subprime borrowers.  The loan restructuring program is designed to enable borrowers to replace problem loans with new, more affordable loans that take into account the current value of their properties. Goldman has also agreed to make a $10 million payment to the Commonwealth, and will continue to cooperate with the Attorney General in her ongoing investigation of industry practices. 

Under the settlement, Goldman has agreed to significant principal write-downs to allow Massachusetts homeowners to refinance or sell their homes. For homeowners with loans held by Goldman entities, Goldman has agreed to reduce the principal of first mortgages by up to 25-35% and second mortgages by 50% or more.  Borrowers whose first mortgage is significantly delinquent will be required to make a reasonable monthly loan payment while seeking refinancing or until they sell their home. If after six months, a borrower is still unable to find financing or sell his or her home, Goldman will reduce the principal owed on the existing loan to assist the borrower. Additionally, for loans not currently held by Goldman, but which are serviced by Goldman’s affiliated servicing company, Litton Loan Servicing LP, Goldman has agreed to assist qualified borrowers with finding refinancing options and other alternatives to foreclosure.  

The Attorney General’s Office states that it began its investigation into the securitization of subprime loans in December 2007, and that it has focused on a variety of industry practices involved in the issuance and securitization of subprime loans to Massachusetts consumers.  The MA AG's Office also states that it is investigating whether securitizers may have:

  • facilitated the origination of "unfair" loans under Massachusetts law;
  • failed to ascertain whether loans purchased from originators complied with the originators' stated  underwriting guidelines;
  • failed to take sufficient steps to avoid placing problem loans in securitization pools;
  • been aware of allegedly unfair or problem loans;
  • failed to correct inaccurate information in securitization trustee reports concerning repurchases of loans; and
  • failed to make available to potential investors certain information concerning allegedly unfair or problem loans, including information obtained during loan diligence and the pre-securitization process, as well as information concerning their practices in making repurchase claims relating to loans both in and out of securitizations.

The Goldman settlement and the Attorney General’s investigation into securitizers reflect the latest aspect of the Office’s comprehensive enforcement approach to combating subprime lending and the foreclosure crisis.  This latest inquiry concerns the role of securitizers—those who bundled mortgage loans and sold them as mortgage-backed securities or other investment vehicles.   

The Attorney General’s Office has sued Fremont Investment & Loan, as well as Option One and its parent H&R Block, alleging unfair, deceptive and predatory lending practices, and obtained preliminary injunctions against those companies.  (See our prior updates below.)  The Office also promulgated new consumer protection regulations, effective in January 2008, governing mortgage lenders and brokers. 

For a map of Massachusetts illustrating locations of loans covered by this agreement, please see:

http://www.mass.gov/Cago/docs/press/2009_05_11_goldman_map.pdf

Let me know if you have any questions.  Thanks.

 

Ralph T. Wutscher
Kahrl Wutscher LLP
105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kahrlwutscherllp.com

http://www.krw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

 


From: Ralph T. Wutscher [mailto:rwutscher@krw-llp.com]
Sent: Thursday, December 11, 2008 7:18 PM
To: Ralph T. Wutscher
Subject: FYI: MA Sup Ct Affirms Lower Court's Injunction in AG Litigation Against Fremont

The Supreme Judicial Court of Massachusetts affirmed the lower court's grant of a preliminary injunction against the company formerly known as Fremont Investment & Loan.  A copy of the opinion is attached.
 
As discussed in our prior updates below, Fremont appealed a preliminary injunction in favor of the Massachusetts Attorney General that restricts Fremont's ability to foreclose on residential mortgage loans with certain features the judge described a "presumptively unfair." 
 
The Massachusetts high court disagreed with Fremont's argument that:  (1) the lower court retroactively and in an ex post facto fashion applied new rules or standards for defining what is "unfair" under Massachusetts's UDAP statute;  (2) the lower court improperly expended the reach of the state's "predatory lending" statute to reach loans not covered by that statute;  (3) the lower court improperly ignored that the loans at issue were permissible, valid and legal when made; and  (4) the lower court improperly ignored the effects of its ruling on mortgage loan pricing and the availability of credit when considering public policy implications.
 

Let me know if you have any questions.  Thanks.

 

Ralph T. Wutscher
Kahrl Wutscher LLP
105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@krw-llp.com

http://www.krw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

 


From: Ralph T. Wutscher [mailto:rwutscher@krw-llp.com]
Sent: Tuesday, December 02, 2008 11:38 AM
To: Ralph T. Wutscher
Subject: FYI: Court Rules in MA AG Litigation Against Option One

The Massachusetts Attorney General brought an action against Option One Mortgage Corporation and its affiliates similar to that which she brought against Fremont (see our updates below).  The same court granted the Attorney General's motion for a preliminary injunction in the Option One litigation.  A copy of the opinion is attached.

 

Referencing its earlier Fremont decision, the court held as follows:

 

In this Court's Fremont Decision, the Court found that it is an unfair act in violation of G. L. c. 93 A, section 2 for lender to issue an adjustable rate home mortgage loan secured by the borrower's principal dwelling that the lender reasonably should expect the borrower would be unable to afford to pay or be able to refinance once the introductory period ends unless the fair market value of the home has increased at the close of the introductory period. In that decision, the Court characterized this as structural unfairness. In this decision, this Court characterizes it as reckless disregard of the risk of foreclosure.

 

However, in its Option One decision, the court changed the criteria for structural unfairness.  Here, the court lowered the introductory rate criterion from 3% to 2%, explaining the revision as follows:

 

In blunter terms, most mortgage loans that fell into delinquency were so carelessly underwritten that the borrower could not afford them even before the payment shock kicked in. Therefore, this Court will revise the second criterion by including all loans with an introductory or "teaser" rate for the initial period that is at least 2 percent lower than the fully indexed rate, and will eliminate this criterion entirely for all loans with a debt-to-income ratio of 55 percent or above.

 

The court also lowered the loan-to-value criterion from 100 percent to 97 percent, with the following explanation:

 

…for all practical purposes, a loan meeting the other three criteria with a loan-to-value ratio of 97 percent will only be able to be refinanced by a loan with a loan-to-value ratio equal to or greater than 100 percent, which will almost certainly not be available to a lender with a 50 percent debt-to-income ratio. Therefore, this Court provides the fourth criterion to require a loan-to-value ratio of 97 percent or a substantial prepayment penalty or a prepayment penalty that extends beyond the introductory period.

 

As with Fremont, the court did not find any evidence of pervasive deception or other wrongdoing on the part of the defendants in the Option One litigation.  Nevertheless, it again found that the Attorney General was likely to prevail at trial on the issue of structural unfairness, and consequently, granted the Attorney General's motion for a preliminary injunction.  Likewise, the Court's preliminary injunction imposed the same review procedure as in the Fremont decision. 

 

Apparently, the court revised the criteria set forth in the Fremont decision upon being informed that only a very small fraction of loans in dispute would have met all four of the criteria imposed against Fremont.  The court felt compelled to change the criteria in order to enjoin the foreclosure of a greater population of loans.

 

Let me know if you have any questions.  Thanks.

 

Ralph T. Wutscher
Kahrl Wutscher LLP
105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@krw-llp.com

http://www.krw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 


 


From: Ralph T. Wutscher [mailto:rwutscher@rw-llp.com]
Sent: Monday, August 04, 2008 7:12 PM
To: Ralph T. Wutscher
Subject: FYI: MA Sup Ct Requests Amicus Briefs in AG vs. Fremont Litigation

The Supreme Court of Massachusetts announced that it is soliciting amicus briefs in Fremont's appeal of the appellate court's and trial court's decisions.  (See our updates below).
 
Amicus submissions are due on or before September 22, 2008.
 
Let me know if you have any questions.  Thanks.
 
 
Ralph T. Wutscher
Roberts Wutscher, LLP
105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 
Fax:  (866) 581-9302
Mobile:  (312) 493-0874
RWutscher@rw-llp.com
http://www.rw-llp.com
 
NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.
 


From: Ralph T. Wutscher [mailto:rwutscher@rw-llp.com]
Sent: Thursday, May 08, 2008 6:05 PM
To: Ralph T. Wutscher (rwutscher@rw-llp.com)
Subject: FYI: MA App Ct Upholds Prelimin Injunction on Foreclosures of Certain "Presumptively Unfair" Loans

A Massachusetts appellate court judge upheld the preliminary injunction entered against Fremont Investment and Loan, preventing Fremont from initiating or advancing foreclosures on loans that are deemed "presumptively unfair" without prior approval from the court.  A copy of the appellate opinion is attached.
 
The appellate court noted that "[i]t has long been understood that a factor to be considered in determining whether a practice should be deemed unfair is whether it is 'within at least the penumbra of some common-law, statutory, or other established concept of unfairness." 
 
Moreover, the court also noted that "[t]he fact that particular conduct is permitted by statute or by common law principles should be considered, but it is not dispositive on the question of unfairness."  According to the appellate court, because the loan terms at issue (see our update below) were not explicitly authorized under state or federal law, Fremont could not qualify for the exemption under the Massachusetts UDAP statute for conduct permitted under state or federal law.
 
The appellate decision here was rendered by a single appellate court justice, under an "abuse of discretion" standard of review.  Fremont was granted leave to move for full panel review by May 15, 2008.
 
Let me know if you have any questions.  Thanks.
 
Ralph T. Wutscher
Roberts Wutscher, LLP
10 S. LaSalle Street, Suite 3500
Chicago, Illinois  60603
(312) 551-9320  Direct Dial
(866) 581-9302  Facsimile
(312) 493-0874  Mobile
RWutscher@rw-llp.com
http://www.rw-llp.com
 
NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.


From: Ralph T. Wutscher [mailto:rwutscher@rw-llp.com]
Sent: Wednesday, February 27, 2008 5:11 PM
To: Ralph T. Wutscher
Subject: FYI: MA Judge Preliminarily Enjoins Foreclosures on Certain "Presumptively Unfair" Loans

The Massachusetts Attorney General obtained a preliminary injunction in a case against Fremont General and Fremont Investment and Loan, preliminarily enjoining Fremont from initiating or advancing foreclosures on loans that are “presumptively unfair.”  A copy of the order is attached.
 
The court held that a loan is “presumptively unfair” if it possesses the following characteristics:
  • The loan is an adjustable rate mortgages with an introductory period of three years or less:
  • The loan has an introductory or “teaser” interest rate that is at least three percent lower than the fully-indexed rate;
  • The borrower has a debt-to-income ratio that would have exceeded 50% (not based on stated-income application representations, but upon other evidence of income)calculated using the fully-indexed rate; and
  • Fremont extended 100% financing or the loan has a substantial prepayment penalty or penalty that lasts beyond the introductory period.

Under the terms of the injunction, Fremont must provide the Attorney General’s Office with at least a 30-day notice of all foreclosures it intends to initiate for the approximately 2,200 loans that Fremont still owns and services, and allow the Attorney General an opportunity to object to the foreclosure going forward.  If Fremont has issued a loan that is considered “presumptively unfair,” and the borrower occupies the property as his or her principal dwelling, the Attorney General has 45-days to object to the foreclosure. 

 After the notice and objection process, Fremont may only proceed with a foreclosure to which the Attorney General objects if Fremont files a request with the Court, and the Court reviews the matter and agrees that a foreclose is appropriate.  In considering whether to allow the foreclosure, the court will consider, among other factors, whether the loan is unfair and whether Fremont has taken reasonable steps to work out the loan and avoid foreclosure.  The preliminary injunction does not release borrowers from their monthly mortgage obligations. 

Importantly, the court stated that the evidence showed that Fremont was the victim of misrepresentations on stated-income loan applications, and did not encourage or tolerate such misrepresentations.  Specifically, there was no evidence that:  (1) Fremont knew of any of the alleged misrepresentations of income on the 50 or 60 stated-income loans at issue; or   (2) Fremont recklessly supervised its brokers by continuing to do business with them after Fremont learned that the brokers had a pattern or practice of inflating the borrower's income on loan applications.  Likewise, the court also found no evidence that Fremont had ever misrepresented the terms of the loan to any borrower.

However, even though there was no indication that any of the loans were "high cost mortgage loans" under Massachusetts law, the court found that the Attorney General's theory of "unfairness" fell under the "penumbra" of the interests sought to be protected under the Massachusetts high-cost mortgage loan statute.
 
Also, the court emphasized that "borrowers who have received presumptively unfair loans from Fremont should not interpret this preliminary injunction to mean that they have been released from their obligation to repay these loans.  Borrowers share with Fremont the responsibility for having entered into a mortgage loan they cannot repay.  The spirit of this decision is simply that Fremont, having [allegedly] helped borrowers get into this mess, now must take reasonable steps to help them get out of it."
 
Let me know if you have any questions, or would like to discuss.  Thanks.
 
Ralph T. Wutscher
Roberts Wutscher, LLP
10 S. LaSalle Street, Suite 3500
Chicago, Illinois  60603
(312) 551-9320  Direct Dial
(866) 581-9302  Facsimile
(312) 493-0874  Mobile
RWutscher@rw-llp.com
http://www.rw-llp.com
 
NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

Wednesday, June 23, 2010

FYI: MA Bankr Ct Rules In Favor of Mtg Loan Investor that TILA/MCCDA Claims May Be "Waived"

The U.S. Bankruptcy Court for the District of Massachusetts, Eastern Division, recently held that: (1) a debtor failed to state a claim under the Massachusetts Consumer Credit Cost Disclosure Act (“CCCDA”) based on an alleged inaccuracy in the disclosure of an interest rate reduction feature contingent upon future timely payments; and (2) the debtor waived his CCCDA claims against a mortgage lender and its successors and assigns by signing and subsequently defaulting on a loan modification agreement which included specific waiver language.  A copy of the opinion is attached.

After a debtor filed his Chapter 13 bankruptcy petition, the mortgage loan on his primary residence became the subject of a significant amount of litigation.  The debtor first opposed the loan servicer’s motion for relief from stay, and the parties eventually entered a modification agreement as to the loan.  The modification agreement included a release provision pursuant to which the debtor agreed that by executing the modification he "irrevocably waived and relinquished" any claims of any kind related to the loan documents in existence at the time of the modification, whether known or not known, against all prior and subsequent parties or predecessors in interest to both the loan servicer and the loan investor. 

The debtor redefaulted by falling behind on his modified payments.  He then sent a notice of rescission and shortly thereafter filed the instant adversary action against the loan investor for rescission of the mortgage loan under the CCCDA.  The debtor sought rescission of the loan in part on the grounds that the APR disclosure provided at the closing of the loan was inaccurate because it was calculated presuming the borrower would eventually qualify for an interest rate reduction feature that would kick in only after the debtor made twenty-two timely payments, that this presumption was not clearly and conspicuously disclosed, and that the presumption was not statistically likely to come aboutThe bankruptcy court granted the investor’s motion to dismiss the adversary claim.  The debtor appealed and the district court remanded the matter back to the bankruptcy court for reconsideration.

On remand, the investor filed a motion for summary judgment to be consolidated with its prior motion to dismiss.  The investor argued in its summary judgment motion that (1) the debtor should be judicially estopped from asserting any loan origination claims because he failed to assert those claims earlier in his bankruptcy schedules; and (2) that the debtor waived his claims against the investor through the release provision of the modification agreement.  This opinion followed.

The bankruptcy court first addressed the motion to dismiss, finding that the FRB's Official Staff Commentary to Regulation Z is silent as to whether a lender can factor an assumption of timely payments into an APR calculation at the time of assumption and ultimately holding that the debtor failed to state a claim under the CCCDA because the TIL disclosure was “based upon what the regulations required,” and the debtor was wrongfully attempting to re-characterize a time-barred predatory lending claim as a rescission claim in recoupment under the CCCDA.

The court next looked to the judicial estoppel claim made by the investor in its motion for summary judgment, finding that the investor “failed to satisfy one of the mandatory conditions …of judicial estoppel,” namely, that the party “succeeded in the prior proceeding.”  In this matter no relief, such as a discharge, had been granted in the prior proceeding, such that application of judicial estoppel was not appropriate.

The bankruptcy court did, however, rule that the debtor had waived his CCCDA claim through his execution of the loan modification agreement.  The bankruptcy court agreed with the investor’s contention that the waiver provision under TILA, 12 C.F.R. § 226.23(e)(1), which provides that a consumer may waive his or her right to rescind if the extension of credit is a bona fide personal financial emergency, applies only to the initial three-day rescission period and does not any extended period arising from the failure to provide material disclosures. 

Further, the bankruptcy court found that, contrary to the debtor’s assertions, it is possible to waive the right of rescission after the expiration of the initial rescission period but before the underlying claim is raised.  The bankruptcy court reviewed the few cases on this issue and disagreed with those cases that applied a hyper-technical standard with respect to TILA violations, which has been rejected by the First Circuit.  The bankruptcy court applied the First Circuit’s “totality of circumstances” approach to determining the validity of waivers as "knowing and voluntary," ultimately finding that in this matter the debtor’s “possession of the loan documents put him on inquiry notice of his purported CCCDA claims.”  The bankruptcy court also found that the language in the release at issue referencing claims arising in connection with the “making, closing, administration collection, or the enforcement … of the loan documents,” was clear and conspicuous and should have compelled the debtor, who was notably represented by counsel, to investigate the possibilities of such claims.

Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

 
 

Tuesday, June 22, 2010

FYI: 1st Cir Reduces In re Nosek Sanction to $5k

In the now infamous In re Nosek action, the U.S. Court of Appeals for the First Circuit recently held that a sanction imposed under Bankruptcy Rule 9011 against the mortgage loan servicer in the amount of $250,000 was unreasonable where the mortgage loan servicer incorrectly stated in a filing that it was the holder of the note.  A copy of the opinion is attached.

 

Ameriquest originated a loan to the borrower in this action, which it then assigned to an asset securitization trust for which Norwest Bank acted as trustee.  When the borrower defaulted, Norwest filed a foreclosure action that was eventually stayed by the borrower’s bankruptcy.  In the bankruptcy action, Ameriquest filed a proof of claim in its own name and moved for relief from the stay.  Ameriquest’s motion incorrectly stated that it was the “holder of the first mortgage” on the debtor’s property when, in fact, Norwest was the holder. 

 

When the mistake was revealed by a later filing, the bankruptcy court, sua sponte, imposed a fine of $650,000 in Rule 9011 sanctions against Ameriquest, Norwest and Ameriquest’s counsel.  Ameriquest appealed to challenge the $250,000 in sanctions that were assessed against Ameriquest individually.

 

Ameriquest admitted that it violated Rule 9011 but contended that the sanctions were unreasonable.  The First Circuit agreed with Ameriquest, finding the sanctions excessive. 

 

First, the appellate court held that, “nothing indicates that Ameriquest’s claim that it was the holder of the mortgage was a deliberate falsehood or intended in any way to mislead the court.” 

 

In addition to being neither intentional nor self-serving, the First Circuit also held that, “the bankruptcy court has not identified any actual prejudice from the inaccurate claim.”  The First Circuit determined that while the mistake by Ameriquest could have been consequential in some cases, in this matter the false statement had no effect in this case. 

 

The First Circuit therefore reduced the $250,000 sanction to $5,000 after taking into account legal fees incurred on appeal. 

 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

 

FYI: 3rd Cir Reverses Lower Court's Decision to Vacate Class Settlement in FACTA Truncation Case

In a FACTA credit card receipt truncation case, the U.S. Court of Appeals for the Third Circuit recently reversed a district court’s decision to vacate an order approving a class action settlement agreement based on the Credit and Debit Card Receipt Clarification Act of 2007, holding that: (1) a class action settlement can be binding on the parties even before final judicial approval; (2) a strong public policy exists in class action suits favoring settlement of disputes; and (3) changes in the law after a settlement is reached do not provide ground for rescission of a settlement.  A copy of the opinion is attached.

Plaintiffs filed a class action lawsuit against Verizon Wireless (“Verizon”), claiming that it violated FACTA by printing receipts that displayed more than the last five digits of a buyer’s credit or debit card and/or the expiration date of the credit or debit card.  The parties completed mediation and reached a settlement, and the district court entered a preliminary order approving the settlement.  Shortly thereafter, Congress passed the Credit and Debit Card Receipt Clarification Act of 2007 (the “Clarification Act”), which amended FACTA and eliminated the plaintiffs’ cause of action.  The district court then granted a motion by Verizon to vacate the order approving the settlement and entered judgment on the pleadings in favor of Verizon.  This appeal followed.

In a 2-1 decision reversing the district court, the 3rd Circuit focused on the following reasoning:

First, the Court explained that under Federal Rule of Civil Procedure 23(e), a district court acts as a fiduciary, protecting the unnamed members of the class, but the requirement that a district court approve a class action settlement does not affect the binding nature of the parties’ underlying agreement, and in this matter the settlement reached was a binding and enforceable contract, regardless of district court approval. 

Second, the Court found that the district court’s decision “ran afoul of the strong presumption in favor of voluntary settlement agreements,” explaining that there is a “strong judicial policy in favor of class action settlement.” 

Finally, the Court found that the Clarification Act did not moot the settlement agreement of the parties, holding that “changes in the law after settlement do not affect the validity of the agreement.”  In so holding, the court reasoned that “[l]ike a decision to forgo an appeal, the decision to settle a case is a considered one,” and that a court’s role is not to “relieve a party of that decision because hindsight reveals that its decision was, given later changes in the law, probably wrong.”  The majority thus disagreed with the dissent’s opinion that the Clarification Act rendered the settlement agreement moot.

Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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Monday, June 21, 2010

FYI: Illinois to Enact Statewide HAMP Compliance Requirement; Local/County Mediation Requirements Starting

The Illinois legislature passed an amendment to its foreclosure statute allowing a borrower to undo a foreclosure sale if the borrower proves s/he applied for a HAMP loan modification, and that the property was nevertheless sold in material violation of the HAMP program guidelines.  Copies of the amendment and bill status are attached.  Illinois Governor Pat Quinn is expected to sign the legislation into law shortly, and the amendments should become effective on January 1, 2011.

Separately, two Illinois counties also are implementing mandatory foreclosure mediation programs.

Foreclosure Mediation Program - Cook County, IL (Chicago area)

The Cook County Mortgage Foreclosure Mediation Program provides free assistance to Cook County homeowners in foreclosure.  A copy of the Fact Sheet for the program is attached.  Although the program officially started in April of 2010, implementation is beginning now.

In order to qualify, the borrowers must:  (1) be residents of Cook County, Illinois; (2) have received a foreclosure summons from the Cook County Court; and  (3) live in the building in foreclosure – which may be a single-family home, single-family condominium or apartment building with four or fewer units. 

The qualified borrowers are directed to call the toll-free help line to schedule a free meeting with a housing counselorAfter meeting with a housing counselor, homeowners will have the opportunity to meet with an on-site attorney to discuss the housing counselor’s recommendations and prepare for a court date that will determine whether the foreclosure case can be mediated with the lender.

Program assistance is provided by the Chicago Bar Foundation, Illinois Housing Development Authority, The Chicago Community Trust, The Center for Conflict Resolution, the Chicago Legal Clinic and Chicago Volunteer Legal Services.

Foreclosure Mediation Program - Will County, IL (Joliet area, southwest of Chicago)

Similarly, the Will County mortgage foreclosure mediation program provides free assistance to Will County homeowners in foreclosure.  A copy of the announcement for the program is attached.  The program was announced on June 7, 2010, and is being set up for implementation now.

Under rules approved by the Illinois Supreme Court and promulgated by the Twelfth Judicial Circuit (Will County), all residential foreclosure actions are automatically scheduled for a mandatory pre-mediation conference within 60 days.  

Along with the summons, defendant borrowers will be given a form explaining the mandatory mediation program. The form will state that the case will be evaluated by an outside mediator for possible loan modification or other resolution. It will also state that if modification is not deemed feasible or if the borrower does not want to save the home, then mediation may still be used to assist the parties in discussing a consent foreclosure in which the lender will waive any deficiency against the borrowers.  The form also will advise the borrower to bring certain financial information, and will contain a list of local counseling agencies available to assist borrowers in foreclosure.  All financial information will be held in confidence by the mediator and not disclosed to any other party without the consent of the borrower.

An independent mediator will determine at the pre-mediation hearing whether the borrower meets initial criteria of having greater monthly income than expenses in order to qualify for a loan workout or modification. If the borrower does not meet the criteria or does not wish to keep the house, the mediator may seek to determine whether the borrower can deed the property to the lender or consent to a judgment waiving any deficiency judgment against the borrower.  If the borrower meets initial criteria for a loan modification or wishes to surrender the property in a consent foreclosure or other arrangement, the mediator will scheduled a mediation conference within 30 days.

At the mediation conference, a representative of the lender must appear in person with full settlement authority and participate in good faith in the mediation process. Failure to attend or to participate in good faith will result in sanctions by the court, including possible dismissal of the action. If the borrower fails to appear without excuse, the mediation will be terminated and the matter will be referred back to the trial court.  Any agreement will be reduced to writing and signed by the parties and their counsel.

The Circuit Court may retain jurisdiction of the case for a trial period. If the borrower fails to successfully modify the loan, or if no agreement is reached, the foreclosure will resume in the Circuit Court.

The Will County Chief Judge has compiled a list of qualified mediators, who are either retired judges or attorneys with a minimum of five years experience in the mortgage foreclosure field. Any mediator will be prohibited from practice in residential mortgage foreclosure proceedings in the Twelfth Circuit in any capacity, including bidders at the Sheriff’s sales. Mediators will be paid $150 for each file. To finance the program, the Supreme Court has authorized an increase in the filing fees paid by a plaintiff for all foreclosures in the Twelfth Judicial Circuit (Will County) from $276 to $426.

 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com