Consumer Crossroads: Where Financial Services and Litigation Intersect

Servicers with non-performing loans in Connecticut may find that municipal code violations exist on a property in foreclosure. Commonly referred to as "blight," Connecticut has enacted C.G.S. § 7-148ff, which makes a blight lien a priority lien on real estate.

Last month, the North Carolina General Assembly passed NC Senate Bill 331, which aimed to bring changes to the North Carolina Consumer Finance Act. Although Governor Roy Cooper had vetoed the bill, the state Senate voted to override the veto, making the bill effective on October 1, 2023. The amendments enacted in the bill will make a number of substantive changes to, among other things, the licensing requirements for lenders and servicers operating in the state. 

In Montaquila v. Flagstar Bank, the Rhode Island Supreme Court rejected a borrower's attempt to expand the plain language of the U.S. Department of Housing and Urban Development's (HUD) federal regulation requiring loan servicers of FHA-backed mortgages to conduct a face-to-face meeting or make a "reasonable effort" to arrange a face-to-face meeting with the borrower prior to foreclosing. In reaching this conclusion, the court noted that the regulation only requires a trip to the property to arrange a face-to-face meeting; the actual face-to-face meeting is not required at this visit.

An important resource for financial services compliance professionals has been updated. The Fifth Edition of the 50 State Guide on Student Loan Servicing Laws is a quick reference guide and resource for student loan industry participants regarding enacted state laws, and pending or previously introduced legislation.

An important resource for financial services compliance professionals has been updated. The Fourth Edition of the 50 State Guide on Student Loan Servicing Regulations is a quick reference guide and resource for student loan servicers regarding the regulations specific to the industry, along with pending legislation, litigation, and court rulings.

To assist consumer financial services lenders, servicers and investors, Hinshaw has developed an interactive tracker of state regulations related to the COVID-19 pandemic. The tracker documents actions by various state regulators, along with the limits imposed by states on foreclosures, evictions, and debt collections, and allows users to click on any state to view applicable provisions. 

The COVID-19 outbreak has resulted in unprecedented job loss for millions of Americans, creating economic uncertainty and challenges for loan servicers in 2020. Until the outbreak is controlled, missed payments on mortgages and student loans are likely to increase. Already, the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Finance Agency (FHFA) have issued 60 day moratoriums on foreclosures and evictions, which some states—and most banks and mortgage loan servicers—have adopted. Meanwhile, the Department of Education has announced that all borrowers with federal loans will have their interest rates automatically set at 0% for at least 60 days. Late Wednesday night, the Senate passed H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) after senate leadership reached an agreement with the White House earlier in the week. The legislation now moves to the House of Representatives for what many hope is unanimous consent. While we are still waiting on the House of Representative's approval, we've explored measures within the bill that will immediately impact student and mortgage loan servicers and outlined them below.

In response to challenges facing the financial services industry as a result of coronavirus (COVID-19), New York's Department of Financial Services (DFS) has issued a COVID-19 compliance order, along with a series of industry guidance letters related to the organizational preparedness of regulated institutions to manage risks associated with the outbreak.

An important resource for financial services compliance professionals just received a new update. The Third Edition of the 50 State Guide on Student Loan Servicing Regulations—a quick reference guide and resource for student loan servicers regarding the regulations specific to the industry, along with pending legislation, litigation, and court rulings—now also includes language of the rules implementing state student loan servicer laws.

A recent Minnesota federal court decision (Hrebal v. Nationstar Mortg. LLC) joined a growing number of courts across the country in finding that a creditor's failure to mark a tradeline as disputed can violate the Fair Credit Reporting Act (FCRA) without a consumer having to prove that a reasonable investigation could have uncovered an actual inaccuracy. This trend has created a split between courts in the Fourth, Eighth, and Eleventh Circuits and the First, Fifth, Seventh, and Ninth Circuits.

In Traut v. Quantum Servicing Corp., on the grounds that a cover letter accompanying a forbearance agreement may have altered the terms of that agreement, the Massachusetts federal court denied a loan servicer's motion for summary judgment in a lawsuit where the borrowers claimed breach of contract arising out of a loan modification agreement. The forbearance agreement required an additional down payment and six monthly installment payments. The cover letter to that agreement stated that the loan "will be modified," modification documents "will be generated" and some of the arrearage would be forgiven if six monthly payments were made. The servicer did not permanently modify the loan because two of the six payments on the forbearance agreement were late resulting in a breach.

The Maine Supreme Court, using a recent interpretation of the business records exception to the hearsay rule under Maine law, has raised questions regarding mortgage loan servicers' ability to foreclose on defaulted borrowers. An essential element of proof in any Maine judicial foreclosure action includes evidence of default, and in Key Bank Nat'l Ass'n v. Estate of Quint, the Court affirmed exclusion of a prior servicer's screenshots submitted to demonstrate the amount a borrower owed, costs incurred and the outstanding principal balance in pursuit of a judicial foreclosure action. The current servicer's witness testified to establish default on review of the prior servicer's business records and under exception to hearsay, but the trial judge concluded that the witness had not established the hearsay exception with regard to records of the prior servicer.

There are borrowers out there who believe that the Massachusetts Obsolete Mortgage Statute, M.G.L. c. 260 sec. 33, relieves them of their repayment obligations. This statute, amended back in 2006, provides that five years after a mortgage reaches its term (or 35 years after the time the mortgage is recorded where a maturity date is not specified) it will be discharged by operation of law absent the timely recording of an extension or affidavit. The 2006 amendment specifically applied to all existing mortgages. The law is supposed to provide clarity in conveyancing and protect borrowers if their mortgagee or servicer failed to issue a discharge of the mortgage after the mortgage reaches its term.

A growing number of employers are offering student loan repayment assistance as a means of attracting and retaining talent. Industries like tech, financial services, and health services are among the early adopters, offering variations of the same general benefit:  the employer agrees to pay a certain amount—either a set figure or a percentage of salary—toward their employee’s student loan debt. Since student loan repayment benefits are relatively novel, the rules for both employers offering the benefit, and the student loan servicers administering it, are not yet explicit.

The Massachusetts Supreme Judicial Court (SJC) provided further guidance - up to a point - on mortgagees’ strict compliance with the notice of default provisions within paragraph 22 of the standard mortgage (or the equivalent) and when that standard takes effect. Mortgage holders have litigated this issue for years in Massachusetts, and the SJC first addressed compliance with paragraph 22 in a July 17, 2015 decision Pinti v. Emigrant Mtge. Co., 472 Mass. 226 (2015). In Pinti, the SJC ruled that "strict compliance" with paragraph 22 was required to effectuate a valid foreclosure pursuant to the statutory power of sale. Understanding that this decision would invalidate hundreds and potentially thousands of foreclosures in Massachusetts, the SJC held that its newly minted strict compliance standard would apply prospectively from its July 17, 2015 decision. However, the SJC neglected to address whether the strict compliance standard would apply to cases already filed in the trial and appellate courts. This caused conflicting decisions by the Massachusetts courts and required the SJC to review its Pinti decision in short term after several appeals were filed.

While most mainstream media outlets are pulling a Jan Brady and reporting "Comey, Comey, Comey," the consumer financial services community should be chewing on a different name right now: "Chopra, Chopra, Chopra."

"Franz Kafka lives. This automatic stay violation case reveals that he works at Bank of America." Thus begins an opinion stretching over 100 pages in length in which United States Bankruptcy Judge Christopher Klein fined Bank of America over $45 million for what he found to be an egregious violation of the automatic bankruptcy stay.

Last summer, the Consumer Financial Protection Bureau (CFPB) published its final rule amending existing mortgage servicer rules in Regulation X of the Real Estate Settlement Procedures Act (RESPA). Recently, the Eleventh Circuit Court of Appeals had the opportunity to determine what kind of damages might arise from a violation of Regulation X’s written acknowledgment requirement.

The student lending industry should pay close attention to the onslaught of litigation that mortgage loan servicers have faced for years. I recently authored an article on this topic for Law360. A Consumer Federation of America analysis has indicated that student loan defaults have risen at least 14 percent since 2015. Such a trend will likely make student lending market participants susceptible to increased regulatory scrutiny, and could also result in a spike in follow-on private litigation.