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Weathering the Storm: How Mortgage Servicers and Default Firms can Work Together to Survive COVID-19 Moratoria

by Christianna Kersey, Esq., Richard Solomon, Esq., Michael McKeefery, Esq. and Kevin Hildebeidel, Esq.
Cohn, Goldberg & Deutsch, LLC
USFN Member (DC, MD)


To date, over 3 million cases of COVID-19 have been reported worldwide. With no vaccine and no way of knowing when the curve will completely flatten, federal and local governments have taken drastic and unprecedented steps to ease the burden on borrowers affected by the virus. Moratoria on residential foreclosure actions imposed by various private investors, government sponsored entities and state and local governments have dramatically altered the needs of foreclosure servicing agents. These unparalleled governmental actions have both mortgage servicers and default law firms in a state of flux. With needs ever-changing, there is one common goal: withstand the storm.

Since the COVID-19 pandemic was first declared in the United States, there have been numerous federal and state moratoria imposed on both foreclosure and eviction actions.

On March 25, 2020, the U.S. Senate passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The U.S. House passed the bill on Friday, March 27, 2020, and President Trump signed the bill into law that same day. The more stringent CARES Act foreclosure moratorium supplanted all the prior federal moratoria that had been imposed between March 18, 2020 and March 19, 2020.

Section 4022(c)(2) of the CARES Act (“Foreclosure Moratorium and Consumer Right to Request Forbearance”) provides “Except with respect to a vacant or abandoned property, a servicer of a Federally backed mortgage loan may not initiate any judicial or non-judicial foreclosure process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale for not less than the 60-day period beginning on March 18, 2020.” The CARES Act defines a “Federally backed mortgage loan” as any loan that is secured by a first or subordinate lien on real property (including individual units of condominiums or cooperatives) designed principally for the occupancy of from one to four  families that is either insured by the Federal Housing Administration or the National Housing Act, guaranteed under Housing and Community Development Act, the Department of Veterans Affairs, or the Department of Agriculture, made by the Department of Agriculture or purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.

On April 8, 2020, Fannie Mae issued an update to its previously issued LL-2020-02 indicating that “In response to the CARES Act, we are acknowledging that the servicer must now suspend foreclosure-related activities in accordance with the requirements of the CARES Act,” and Freddie Mac issued an update to Bulletin 2020-10, which indicated “As provided in the CARES Act, Servicers must suspend all foreclosure actions, including foreclosure sales, through May 17, 2020. This includes initiation of any judicial or non-judicial foreclosure process, move for foreclosure judgment or order of sale. This foreclosure suspension does not apply to Mortgages on properties that have been determined to be vacant or abandoned.”

Fannie Mae further indicated, “Fannie Mae generally requires servicers to file motions for relief from the automatic stay in bankruptcy cases upon certain milestones. In light of the CARES Act and other impacts resulting from the COVID-19 National Emergency, Fannie Mae is temporarily relieving servicers of the obligation to meet these timelines. This temporary suspension shall be in effect for not less than the 60-day period beginning on Mar. 18, 2020.” Freddie Mac had nearly identical language in its Bulletin 2020-10.

It should be noted that the CARES Act specifically exempts “vacant or abandoned” properties. However, notwithstanding the CARES Act, states, of course, may have more stringent prohibitions in place.

Maryland and the District of Columbia are two jurisdictions that have issued emergency measures and guidance in addition to the federal prohibitions. On March 18, 2020, the same day as most of the federal mandates, the Court of Appeals of Maryland issued an Administrative Order indicating that “Those foreclosures of residential properties and foreclosures of the rights of redemption of residential properties pending in the circuit courts shall be stayed effective immediately; and Residential eviction matters pending in the District Court of Maryland and all pending residential eviction orders shall be stayed effective immediately; and New foreclosure of residential property, foreclosure of rights of redemption after a tax sale, and residential evictions shall be stayed upon filing.”

On March 25, 2020, the Court of Appeals of Maryland issued an Administrative Order rescinding its prior order, and indicating that “All proceedings related to foreclosures of residential properties, … pending in the circuit courts shall be stayed effective immediately, … ; and New foreclosures of residential property, … , and all other actions for possession (residential evictions) shall be stayed upon filing; … .” The only exception being “Where the parties can demonstrate that a delay of a residential foreclosure will place an undue burden on the defendant, a consent motion to lift stay to allow ratification, signed by the defendant, shall be considered on an expedited basis.”

Unlike with the federal mandates, there is no specific end date for the current Maryland Order (like the earlier order), and it merely states that the order “will be revised as circumstances warrant.” Also, conspicuously, there was no exception, as with the federal mandates, for vacant or abandoned properties. This order (also like the earlier order), left open the possibility of sending the Maryland Notice of Intention Foreclose, in addition to being able to at least file a foreclosure case.

However, on April 3, 2020, the Governor of Maryland issued Executive order 20-04-03-01, indicating that “The Commissioner [of Financial Regulation of the State of Maryland] is hereby ordered to suspend the operation of the Commissioner’s Notice of Intent to Foreclose Electronic System, and to discontinue acceptance of Notices of Intent to Foreclose until the state of emergency is terminated and the catastrophic health emergency is rescinded.” This had the practical effect of putting a stop to nearly all foreclosure related activity in the State of Maryland from the very beginning of the process to the very end.  Basically, at the current time, the only action permitted on Maryland residential foreclosure matters is the bare filing of foreclosures based on Notices of Intent to Foreclose (“NOI”) sent prior to the Governor’s order suspending the NOI registration database.

In the District of Columbia, the Chief Judge of the Superior Court initially continued all foreclosure hearings and stayed all evictions before May 1, 2020.  The Court of Appeals canceled all oral arguments before May 31, 2020.  The Mayor issued a series of Emergency Orders which stopped all foreclosures and evictions.  All of the Mayor’s Orders were later extended to May 15, 2020 (Order 2020-063).  The Council also considered legislation prohibiting evictions and requiring mortgage companies to offer 90-day deferrals of payments.  What emerged was D.C. Act 23-286, which excepted foreclosures which had already been initiated, or where the acceleration had already been exercised, before March 11, 2020.  All others, without regard to the type or nature of the loan (residential and commercial included) will have to comply with the Commissioner of the Department of Insurance, Securities and Banking (“DISB”) to grant a 90-day deferment and waive any late fees, processing fees or other fees accrued during the emergency.

Servicers cannot report delinquency or other derogatory information to credit agencies as a result of the deferral.  Servicers are required to approve all applications where the borrower demonstrates a financial hardship and agrees to pay within a “reasonable” time.  That length of time is defined as either the time which is agreed by the parties or, if there is no agreement, five (5) years after the end of the deferment period or the original term of the loan–whichever is earlier.  No lump sums can be required as a part of the deferral.  Servicers will need to take both the date of acceleration or filing and the new requirements into account before proceeding in the District.

The Act also addressed debt collection generally.  On April 24, 2020 the Office of the Attorney General of the District of Columbia provided guidance on the debt collection provisions and how they would interpret the same.  While the entire guidance is recommended reading to those who are interested, the major points are: the limitations last for the length of the Mayor’s Emergency Declaration and 60 days beyond; attempts to initiate contact with debtors in connection with debt collection are prohibited; and no suits for collection or threats of suits for collection may be issued during the provided term.  Repossession activity must also be halted

Virginia, a non-judicial state, is normally very “hands-off” when it comes to foreclosures. On March 30, 2020, Governor Northam issued Executive Order 55, a “stay at home” order which enumerated items for which people could leave their home.  The Order invoked VA Code Sec. 44-146.17 and threatened a Class 1 misdemeanor for violations of the Order.  Calling or attending foreclosure sales was not specifically listed among the enumerated items, leading one to believe it is not permitted.  Moreover, it was suggested that sales might be chilled if bidders could not lawfully attend or were deterred from attending.  The Order states it will remain in effect for ten (10) weeks, until June 10, 2020, unless amended or altered.  Courts were effectively closed, with each jurisdiction defining what essential functions would be handled during the emergency.

The primary focus of servicers during this unprecedented period has been, and will likely continue to be, loss mitigation assistance.  While foreclosure actions are on mandated holds, servicers are inundated with requests for loss mitigation assistance, including, but not limited to, requests for loan modification, repayment plans, forbearance agreements, deeds in lieu of foreclosure and short sales.  Servicers need to ensure that they not only compile the information and/or documentation necessary to fully review borrowers for any and all applicable loss mitigation alternatives to foreclosure, but servicers must also ensure that they are complying with the Consumer Financial Protection Bureau (“CFPB”) regulations regarding loss mitigation requests.  See 12 C.F.R. § 1024.41.  Furthermore, servicers need to review borrowers for eligible loss mitigation options, and issue decisions regarding each application.  During this entire process, servicers must ensure that they are fully compliant with all applicable CFPB guidelines and local regulations.  Due to the expected significant increase in requests for loss mitigation assistance, servicers may be hard pressed to timely review and respond to loss mitigation applications within the prescribed CFPB or local deadlines.

Servicers will also likely experience a significant increase in volume to their call centers.  As unemployment increases to historic levels, and as many Americans continue to be unsure about their economic future, borrowers will likely contact servicers’ call centers to discuss mitigation of any mortgage loan default, and alternatives to the normal repercussions of such default, i.e. foreclosure.  Borrowers will also contact the servicers’ call centers to determine the current status of their loan and to proactively inquire as to what options are available to them if income streams are impacted by the current pandemic.  All of these factors lead to a serious need for servicers to keep their call centers fully staffed with knowledgeable and experienced individuals who can answer borrowers’ inquiries and who can effectively and accurately usher borrowers through the loss mitigation process.  Servicers must ensure that they have plans in place to safeguard their call centers from being overwhelmed with borrower inquiries.

It may now seem far off, but, at some point not in the too distant future, the imposed moratoria will all be lifted.  When that occurs, it will behoove many servicers to be ready to proceed with files that have been on hold for a significant period of time.  As a result, it is important for foreclosing servicers to focus upon drafting and preparing necessary documentation during these mandated foreclosure holds.  Information and documentation that is needed in order to send out any state or contractually mandated notices that are required prior to initiating foreclosure, or to file first legal, can be completed and submitted to local foreclosure counsel while foreclosure holds are still in full effect.  Ensuring that such documentation is ready will guarantee that servicers and local law firms can work quickly to proceed with foreclosure actions once they are able to do so.

Furthermore, it is very important for servicers to gather information from their various local foreclosure counsel on what the foreclosure restrictions are for each state and/or jurisdiction.  While foreclosure moratoria are in place, servicers can determine what actions are legally permissible in each state to ensure that they are proceeding with their respective portfolios in a practical and legally responsible manner, and to ensure that they are prepared to proceed with foreclosure actions once the moratoria are lifted. 

During these uncertain times, the primary focus of local foreclosure counsel is to assist servicing clients with their ever-changing needs. Most law firm employees and attorneys have a significant amount of experience, that, in many cases, spans decades and covers the entire default process. Unfortunately, at the moment, many of these knowledgeable folks are sitting idle, as the numerous moratoria have brought default legal services to a screeching halt.

While foreclosure actions are on mandated holds, and requests for loss mitigation assistance continue to grow, experienced law firm staff could undoubtedly assist servicers with the processing and drafting of the loss mitigation documents such as loan modifications, repayment plans, forbearance agreements, deeds in lieu of foreclosure and short sale agreements.  Not only would servicers have the benefit of highly experienced and knowledgeable staff drafting documents, but there would also be attorney involvement each step of the way.  Since local counsel have considerable experience with CFPB guidelines and local loss mitigation laws, local firms can also ensure that servicers are fully compliant with all guidelines, laws and rules applicable to the loss mitigation process.  Local foreclosure counsel can also be tapped as a well-versed intermediary with regard to short sale communications, as interacting with borrowers, realtors and opposing counsel are all routine law firm functions. Law firm employees know the right questions to ask and how to properly communicate this information to servicers. Further, most firm employees and attorneys already have relationships with individuals at the servicing companies, so communication should be relatively seamless. Shifting some, or all, of this burden to local firms conserves resources for the variety of other loss mitigation activity which must be performed by the servicer.

As indicated above, servicers have to ensure that they have plans in place to prevent their call centers from being overwhelmed.  In addition to assistance with loss mitigation, local counsel can be sourced as local call center support. Firms have been thoroughly vetted and are already integrated into numerous servicing platforms. Firm employees could quickly direct calls to the proper individuals within each servicing entity, benefitting the borrower by saving time, while also alleviating the servicers’ need to hire and vet additional staff. This would ultimately reduce out of pocket costs to the servicer. 

Another area where existing default operations should focus, is on pre-sale documentation. In more restrictive jurisdictions it is important for foreclosing servicers to carefully consult with local counsel on drafting and preparing necessary documentation to facilitate expedited first legal filing once moratoria are lifted. It is said that “proper planning prevents poor performance,” so pre-planning this process in conjunction with local law firms will minimize legal issues and restart time. Local counsel are experienced in their respective jurisdictions and can gather the necessary information to place each case in a proper posture for filing quickly once the moratoria lift.  Much of this information can be collected while holds are still in place. Substitutions of trustees can be executed, assignments can be executed and made ready for recording, and assignments can even be recorded in jurisdictions that have E-recording.  Title curative actions can proceed and probate petitions can be filed for deceased borrowers. In certain circumstances, under the CARES Act, where properties are vacant, the foreclosure process can continue, if permitted by state law. Servicers should communicate with counsel in various jurisdictions to see if the state moratoria are more restrictive. If they are not, counsel could assist with verification of vacancy on properties, to push the process forward.   Ensuring that such information and documentation is ready and being processed will ensure that servicers and local law firms can work quickly to move forward with foreclosure actions once they are able to do so, and will mitigate the shock to those departments when foreclosures resume.

Finally, while it remains very important for servicers to understand what actions are legally permissible in every jurisdiction, it is equally important to ensure that they are prepared to proceed with foreclosure actions once the holds are lifted. Although it may be difficult to shift perspectives to think of the delay as beneficial, in states where servicers have been given time to prepare, servicers should maximize that preparedness in cooperation with the local law firms.

We do not have a crystal ball and we do not know what the future holds for the default industry, but what we do know is that servicers and counsel can work in concert to prepare for the many shared challenges facing both before and after the lifting of the moratoria imposed as a result of the COVID-19 pandemic.


This article originally appeared in the USFN, on Tuesday, May 5, 2020 and is reprinted with permission.

The Solar Foreclosure Fixation

By:  Ronald S. Deutsch
Cohn, Goldberg & Deutsch
Towson, MD

With the torrid pace of solar energy equipment installations, it has become more common to experience legal and practical issues resulting from the financing of such equipment. Such installations and financing have increased by nearly 500% in the last several years, with homeowners taking advantage of falling prices and tax credits. An average homeowner, it has been estimated, will recoup the costs of their system in approximately seven years.

Foreclosure attorneys must analyze several legal issues when discovering solar equipment financing on a property. Paramount in the analysis is whether a solar panel is a fixture or whether it is a separate property or a chattel. Priority is another critical issue that must be reviewed.

It is blackletter law that when a bank forecloses on a property, it takes the land, the building, and all permanent fixtures attached. Fixtures are improvements or items of separate property that are attached to a building, making them part of the building. Fixtures are defined in Article 9 of the Uniform Commercial Code “UCC” to include “goods that have become so related to a particular property that an interest in them arises under real property law.” State law must also be reviewed to determine whether a particular “good” is a fixture. Although not uniform, most states have adopted the critical factors established by the Ohio Supreme Court in Teaff v. Hewitt when analyzing whether a good is a fixture or a chattel. These factors are: (1) whether the good is attached to the real property, (2) whether the good has been adapted for the use of the real property, and (3) whether the parties intended a good to be permanently attached.

Hornbook fame, Professors White and Summers, proposed a half-inch formula stating that “anything which could be moved more than a half-inch by one blow with a hammer weighing not more than five pounds and swung by a man weighing not more than 250 pounds would not be a fixture”. Many examples of property found not be a fixture include such extremes as twenty-ton machines anchored in with screws. On the other hand, a mobile home was a fixture, where the intent of the parties demonstrated such an intent.

With respect to solar panels, attachment can occur through means such as nails, screws, bolts, adhesives, moldings, tiles, and other fastenings. Even if not physically attached, panels can have a constructive attachment when it permanently rests upon the building, and it is necessary for the use of the building.

In analyzing whether a solar panel has been adapted for use for the real property, a court generally reviews several factors. These include whether the solar panel is an integral and indispensable part of the property, whether it would damage the structure if it were severed, and whether the solar panels are highly customized in fabrication and installation to meet the specific criteria of the property where it is installed. The more generic and less customized, the more likely the solar panel would be found to be separate property or a chattel.

Intent is also a critical factor. That is, do the parties intend a solar panel to remain separate or mere personal property or instead intend the panel to become a fixture? The clearest way to demonstrate intent is where a lender and the property owner document their intent through the execution of an agreement in writing. Intent, however, can be overridden when a court finds that a solar panel cannot be removed without substantially damaging the structure or whether it has become essential to the property to which it is attached.

Lenders generally perfect their security interest in chattels by filing a financing statement with the applicable Secretary of State or such other office where it would normally file a financing statement covering personal property. Alternatively, a fixture filing may be filed in the local office where it would normally record a mortgage to encumber the real estate property. Fixture filings contain the same contents as a personal property filing, but includes additionally, (a) a specification that the collateral includes fixtures, (b) indicates that it is to be recorded in the real property records, (c) provides a description of the related real property and, (d) provides the name of the record owner if the debtor does not have an interest of record. Most jurisdictions also permit the recordation of a mortgage that fits the requirements of a fixture filing. Each of these steps results in a lender having a perfected security interest in the fixtures. That said, personal property and fixture filings may lapse after five years unless renewed. Mortgages offer the advantage of having a greater initial life.

In any event, if a solar energy installation is a fixture, a foreclosing bank may be able to reap the benefit of any property value accretion upon completing its foreclosure action. Lenders who finance solar energy installations that remain chattels are also protected, as they can repossess such items through a replevin action filed in the county courts.

The priority of solar panel financing must additionally be reviewed closely. With the advent of government-approved Property Assessed Clean Energy (PACE) loans, enacted in more than 30 states and the District of Columbia, mortgage lending priority rules, have been upended. No longer is the axiom that first to file is first in right controlling.

PACE financing, as defined by Wikipedia, is a means of financing energy efficiency upgrades, disaster resiliency improvements, water conservation measures, or renewable energy installations of residential, commercial, and industrial property owners. PACE enables property owners to defer the upfront costs that are the most common barrier to energy efficiency installations and thereby facilitate increased installations.

PACE loans are paid by an additional special assessment on the property’s tax assessment over an agreed number of years, while energy costs are simultaneously lowered, providing the borrower with a net financial benefit. Because the solar panels are attached to the property, the consumer can sell the property leaving the debt to be paid through the tax assessment on subsequent owners. Critical to parties handling actions involving a default in a typical mortgage is how the solar panel security interest affects their action and potential claims of priority. The analysis involves reviewing whether the asset is a fixture or not, and also whether the loan product is a PACE loan. A major problem associated with PACE loans is that it takes priority over other lien-holders and those lien-holders may not have been notified or given an opportunity to object.

Another issue arising from solar panel financing is the differing treatment of government and GSE loans at origination and or resale. Fannie Mae and Freddie Mac have refused to purchase or underwrite loans for properties with existing PACE based tax-assessments. However, the Veterans Benefits Administration (VA) in mid- 2016, announced guidelines on managing the financing of properties with PACE obligations. The Federal Housing Administration (FHA), on the other hand, will not allow a property encumbered with a PACE obligation to be eligible for its financing programs unless the lien remains subordinate to the insured mortgage. The ineligibility of a property for a new FHA loan may impact the resale of a home that has been encumbered with PACE loan by prospective Sellers.

There is a myriad of paths that must be analyzed when determining the rights of a foreclosing party or determining the advisability of financing solar energy installations. The analysis can be complex but is necessary to determine the various practical implications as well as the rights of any secured party.

I Can Name That Tune in One (Lost) Note

By: Ronald S. Deutsch, Esq. and Richard Solomon, Esq.
Cohn, Goldberg & Deutsch, LLC
USFN Member (DC, MD)

Somewhere out there, lost notes occupy a forgotten drawer and outnumber the inventory of songs. What effect does this have on the foreclosure process?

Rule 14-207(b)(3) of the Maryland Rules of Procedure provides that in an action to foreclose, the complaint or order to docket shall … be accompanied by … “a copy of any separate note or other debt instrument….” If the note was transferred from the original payee, as a matter of court practice, the note must additionally be properly endorsed to establish the transfer of the right to enforce it, in a foreclosure proceeding.

Many notes are endorsed in “blank,” or alternatively, name a specific payee. These endorsements are typically found on the back of the note or contained on an “Allonge.” Endorsements are often scrutinized by courts and borrowers in attacks on the right to enforce.

How does one handle the situation where all assignments of the security instrument have been recorded but an endorsement is missing on the Note? A conclusive presumption exists under Md. Ann. Code, Real Property Section 7-103(a) that the title to any promissory note is vested in the person holding the record title to the “mortgage.” Will this conclusive presumption cited above cure the missing endorsement situation? The answer may possibly be found in Le Brun v Prosise, 197 Md. 466, 79 A.2d 543 (1951), which held that a deed of trust “need not, and properly speaking cannot be assigned like a mortgage.” If so, does the conclusive presumption in Section 7-103(a) apply to Deeds of Trust? As this is unclear, the conclusive presumption may, therefore, provide very limited comfort to a party relying on the recorded assignment to cure a missing endorsement. It should be noted that likely, more than 95% of all security instruments in Maryland are deeds of trusts, and mortgages are generally only used, as a matter of local practice in Baltimore City.

What if the original note is lost but the noteholder has a copy that can be filed in the foreclosure action? Under Maryland law, the courts may accept a lost note affidavit from the party who lost the note if the affidavit 1) identifies the owner of the debt and it states from whom and the date on which the owner acquired ownership; 2) states why a copy of the debt instrument cannot be produced and 3) describes the good faith efforts made to produce a copy of the debt instrument. In general, a person claiming to be a holder of a note must 1) establish a foundation for the admission of the evidence of the note and, if so established, 2) provide proof of the execution and contents of the instrument and 3) satisfy the court that the maker of the note is adequately protected against loss that might occur by reason of a claim by another person. Adequate protection may be provided by any reasonable means e.g. the posting of a bond.

The more difficult scenario is where a note has been lost and the Assignee purchases it from the Assignor or someone else in the chain who lost it. In most states, including Maryland, the version of Section 3-309 of the Uniform Commercial Code (UCC) adopted provides that persons seeking to establish a lost, destroyed, or stolen instrument by secondary evidence must first show that:

(i) The person was in possession of the instrument and entitled to enforce it when loss of possession occurred; (ii) the loss of possession was not the result of a transfer by the person or a lawful seizure, and (iii) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.

What is problematic in the statutory language is that if a creditor was NOT in possession of the note when it was lost, then the creditor cannot enforce it.

One lead case was decided in the District of Columbia. In Dennis Joslin Company, LLC v. Robinson Broadcasting Corp. 977 F. Supp. 491 (D.C. Cir. 1997) the federal court held that under the DC version of 3-309, in effect at the time, the assignee of the prior creditor could not enforce a note, since the note was lost by the prior creditor and not by the party seeking to enforce the note. This had the unfortunate result that the assignee could not collect a note with a balance of more than one million dollars.

The former version of Section 3-309, as interpreted by Joslin, was adopted by the District of Columbia when it originally adopted Article 3 of the Uniform Commercial Code. Prior to the adoption of Article 3, the section governing lost instruments provided that the “the owner of an instrument which is lost, whether by theft or otherwise, may maintain an action in his own name, and recover from any party liable thereon upon due proof of his ownership, the facts which prevent his production of the instrument and its terms.” The decision in Joslin caused a split in many state and federal courts over the interpretation of the provision. Some courts followed the literal holding in Joslin. (WV, CT, FL). Other courts disagreed with Joslin’s holding (5th Cir., TX, MN, NJ, NH, and PA). These courts held that the right to enforce could be assigned along with the assignment of the note.

To resolve this dispute section 3-309 of the Uniform Commercial Code was subsequently amended to omit the possession requirement, and to require only an entitlement to enforce the instrument when the instrument was lost, or the acquisition of ownership from a person who was so entitled, either directly or indirectly. The 2002 revision of section 3-309 states in part:

  1. a)  A person not in possession of an instrument is entitled to enforce the instrument if: (1) The person seeking to enforce the instrument (a) was entitled to enforce the instrument when loss of possession occurred, or(b) had directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred;

At least eighteen states and the District of Columbia (but not Maryland) have substantially adopted the 2002 amendment to the UCC, thereby eliminating the possession requirement under Section 3-309. Those states include Alabama, Arkansas, Florida, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Hampshire, Ohio, Oklahoma, South Carolina, Tennessee, and Texas. In doing so, those states have explicitly rejected the reasoning of the Joslin holding. Additionally, despite not adopting the 2002 amendment, New Jersey recently held the right to enforce a note can be transferred by the party who lost the note to the assignee who was not in possession. Investor’s Bank v. Torres, 197 A. 3d 686, 457 N.J. Super. 53 (N.J. Super. Ct. App. Div 2018). To allow otherwise, the court reasoned, would violate the equitable principle of unjust enrichment. The District of Columbia, in response to the Joslin case, adopted the 2002 amendment and rejected the reasoning of the court. Many states, however, including Maryland, which adopted the original version of Section 3-309 have failed to either adopt the amended version or interpret the original version in accord with Torres, so the landmine remains.

Because of the complexity in the law for enforcing a note, it is critical that lenders and servicers maintain adequate controls of loan documentation. Moreover, when purchasing loans, the purchase agreements should provide for the seller’s repurchase of any loan that cannot be enforced due to lost notes of missing endorsements.


This article originally appeared in the August 2019 edition of the USFN e-Update and is reprinted with permission.

Maryland Senate Bill 485 attempts to reverse Blackstone v. Sharma, 233 Md. App. 58, 161 A.3d 718 (2017) Decision

By: Richard Solomon and Christianna Kersey

On February 4, 2019, a bill was introduced in the Maryland legislature, with the stated intent of abrogating the holding of the Court of Appeals of Maryland in Blackstone v. Sharma, 27 461 Md. 87, 191 A.3d 1188 (2018), and reinstating the decision of the Court of Special Appeals of Maryland in Blackstone v. Sharma, 233 Md. App. 58, 161 A.3d 718 (2017).  In short, that decision stated that, notwithstanding any separate licensing by the loan servicer, if different, the owner of loan, if not otherwise exempt, must be licensed under the Maryland Collection Agency License Act (MCALA) in order to commence a foreclosure on real property in this state securing a “consumer loan,” if the loan was in default at the time acquired by the current owner.  Banks, credit unions, saving & loan associations, government-sponsored enterprises and entities that are otherwise licensed under the Maryland Mortgage Lender Law (“MMLL”), are exempt from the requirements of the proposed law.  However, the decision in Blackstone v. Sharma, 233 Md. App. 58, 161 A.3d 718 (2017) specifically held that foreign statutory trusts were not exempt from the requirements of the law.

The introduction of this Bill left many investors and attorneys concerned. After waiting over a year for the Court of Appeals decision in Blackstone v. Sharma, 233 Md. App. 58, 161 A.3d 718 (2017), investors were scrambling to determine if becoming licensed was the best option, as another hold up would cause major timeline delays.

On March 12, 2019, the first hearing was held in front of the Senate Finance Committee, at which time numerous lobbyists and attorneys testified in favor of upholding the Court of Appeals decision.  On March 29, 2019, the Senate Finance Committee returned an unfavorable report on the Bill.

Although this Bill did not make it out of Senate, it should be noted that it was sponsored by nearly half the members of the Maryland Senate, and had the support of the Office of the Attorney General. With that being said, this licensing issue could remain a hot button topic for future legislative sessions. Although the future of any required licensing is uncertain, investors can rest easy for at least another year.

Condominium Association Issues Linger in the District of Columbia

By: Christianna Kersey

With the issuance of its decision in Chase Plaza Condominium Ass'n v. JP Morgan Chase Bank, N.A., 98 A.3d 166, (D.C. 2014), the Court of Appeals for the District of Columbia upended the established manner in which condominium liens have been handled in the District. In Chase Plaza, the Court interpreted D.C. Code §42-1901 and its provisions regarding the six-month "super-priority" of a condominium association lien to wipe out a mortgage lender, including those in "first" position. As a result of this decision, a number of related cases have been working their way through the Superior Court to the Court of Appeals. In Liu v. U.S. Bank, N.A. 179 A.3d 871 (D.C. 2018), the Court once again ruled in favor of third-party purchasers at a condominium association's foreclosure auction and against the mortgage lender, despite notice to all potential buyers that the sale was to be conducted "subject to the first mortgage or deed of trust.”

In Liu, the Court discounted arguments of equitable estoppel put forth by the lender and ruled that the statute specifically prohibited the ability of the condominium association to "waive" the super-priority status per D.C. Code. §42-1901.07. At the time, the Court apparently offered hope to lenders as the Court did not address the issue of a "split-lien" and how it might rule in the event that the condominium lien at issue was longer than six months. However, that issue was addressed quickly thereafter in 4700 Conn 305 Trust v. Capital One, N.A., No. 16-CV-977, CAR-593-15, September 13, 2018. In 4700 Conn, the Court ruled that the fact that a condominium lien was for more than six months did not constitute a difference for the purposes of interpreting the statute. The lender once again was faced with a situation where its lien was extinguished by the Court.

How then, are lenders to move forward? One apparent avenue of assistance was the Condominium Owner Bill of Rights and Responsibilities Amendment Act of 2016. This legislation anticipated and directly addressed the issues which arose out of Chase Plaza and its progeny, by specifically requiring that a condominium association send notice to any holder of a first deed of trust or first mortgage of record, their successors and assigns, etc., but more importantly, requiring the Association to expressly state whether the foreclosure sale is either 1) for the six month priority lien, not subject to the first deed of trust, or 2) for more than the six month priority lien, which is subject to the first deed of trust. However, the Court has also called into question the validity of this legislation. Once again, the Court does not directly address the effect of this particular statute and leaves it to future cases.

This sequence of decisions would indicate a continual pattern, by the Court, to reinforce its decision in Chase Plaza. Currently, the litigation in 4700 Conn is moving back to the trial court to address issues related to a sale price that was significantly below the value of both the property and the mortgage and whether or not the condominium foreclosure should be invalidated based upon the "erroneous" belief that the sale was subject to the first deed of trust. Lenders should be cautious, however, moving forward as to the apparent opening left by the Court of Appeals. The Court seems eager to rule on the enforceability of notice conditions on current and future condominium associations, and the Court may disappoint lenders yet again upon reviewing a decision in 4700 Conn, even if the trial court invalidates the condominium sale due to unconscionability or other equitable grounds.

The Dual-Tracking Duel

Ronald S. Deutsch & Michael Mckeefery
Cohn, Goldberg & Deutsch, Towson, MD
A USFN member

Whether dual-tracking is permissible has been the subject of several important recent developments.

As background, the recent foreclosure crisis was the worst the United States has ever experienced, both in duration and in depth. At times, the foreclosure rate was more than triple the rate experienced at the height of the Great Depression. According to RealtyTrac, a real estate information company and an online marketplace for foreclosed and defaulted properties in the United States, more than 7.2 million consumers lost their homes between 2007 and 2014. Of these 7.2 million consumers, 5.4 million consumers lost their homes through a foreclosure sale, while 1.8 million consumers participated in a short sale program. Although the economic crisis began in September of 2007, the effects of this crisis are being experienced even today. The resulting losses have had a significant negative impact on investors, borrowers, and communities.

As a result of this crisis and actions by various parties, Congress implemented several protections for consumer borrowers. These protections include the creation of the Consumer Financial Protection Bureau (“CFPB”), the Home Affordable Modification Program (“HAMP”) and amendments to the Real Estate Settlement Procedures Act (“RESPA”).

Borrowers have increasingly utilized the various defenses created by these protections when attempting to retain their homes. One such protection raised in litigation is the prohibition of dual-tracking. The United States District Court for the District of Maryland recently dealt with this issue in an unreported case, Sherry L. Weisheit v. Rosenberg & Associates, LLC Civil No. JKB-17-0823.

In Weisheit, the Plaintiff executed a mortgage in 2007, which mortgage became delinquent in 2009. The servicer assumed responsibility for the servicing of the loan in 2012. Foreclosure proceedings began on April 26, 2016. Then, almost five (5) months later, but more than thirty-seven (37) days prior to a scheduled foreclosure sale, the Plaintiff submitted a “complete” loan modification application to the servicer under HAMP.

Pursuant to RESPA and its implementing regulations, if a borrower submits a complete loss mitigation application by a certain, specified date prior to a scheduled foreclosure sale, a loan servicer must evaluate that application before moving for foreclosure judgment or order of sale, or conducting a foreclosure sale. 12 C.F.R. § 1024.41(g). If a borrower submits a loss mitigation application to a servicer forty-five (45) days or more prior to a foreclosure sale, then that service is required to promptly review the application to determine if the application is complete. 12 C.F.R. § 1024.41 (b) (2) (i) (A). Within 5 business days after receiving a loss mitigation application, a servicer must notify a borrower in writing “that the servicer acknowledges receipt of the loss mitigation application, and that the servicer has determined that the loss mitigation application is either complete or incomplete.” 12 C.F.R. § 1024.41

(b) (2) (i) (B). If the loss mitigation application is incomplete, the notice shall state the additional documents and information that the borrower must submit to complete the application. Id. Provided that a complete loss mitigation application is submitted to service more than thirty-seven (37) days prior to any scheduled foreclosure sale, then a foreclosure servicer may not move for foreclosure judgment or order of sale, or conduct a foreclosure sale. If the servicer does so, then that service is engaging in a prohibited practice known as dual-tracking.

In Weisheit, after a failed attempt at mediation, the servicer denied the Plaintiff’s loss mitigation application by letter. The stated reason for the denial was that the resulting modified payment was outside the required range of 10-55% of the Plaintiff’s monthly gross income. The servicer concluded that, based on the financial information provided, the Plaintiff did not meet the debt to income ratio requirement established for a HAMP Tier 1 loan modification option.

Under RESPA and its regulations, a borrower is entitled to appeal the denial of a loan modification application. 12 C.F.R. §1024.41(h). In Weisheit, the Plaintiff timely appealed the servicer’s denial of the Plaintiff’s loss mitigation application on November 29, 2016. In the appeal, the Plaintiff alleged that the servicer did not calculate the debt to income ratio correctly and that the Plaintiff’s financial information established that she qualified for a loan modification. On December 29, 2016, the servicer sent a letter to the Plaintiff in response to her appeal (the “Response Letter”). In the Response Letter, the servicer did not dispute the Plaintiff’s calculations. Instead, the servicer asserted that an investor restriction prevented it from extending the term of the loan. However, in the Response Letter, the servicer did not name the investor and did not describe the specific nature of the alleged investor restriction. Furthermore, the servicer indicated in the Response Letter that “we have enclosed all supporting documentation used to complete the review of your account,” but no documentation was enclosed with the Response Letter. The Plaintiff responded to the servicer on January 12, 2017, and advised the servicer that she would appeal the denial set forth in the Response Letter once she had received the supporting documentation from the servicer. The Plaintiff also notified the foreclosure firm that she intended to appeal the denial decision so that the foreclosure firm would not improperly proceed with the foreclosure sale during the appeal process. However, on March 9, 2017, the Plaintiff’s home was rescheduled for sale. On February 22, 2017, the Plaintiff received a communication from the servicer that the reference to supporting documentation in the Response Letter had been an inadvertent error, and, thus, the servicer would not be providing the Plaintiff with any such documentation. On February 28, 2017, without receiving any supporting documentation, the Plaintiff submitted a further appeal to the servicer. In this appeal, the Plaintiff asserted that the servicer violated RESPA because a foreclosure sale had been scheduled while the Plaintiff was still engaged in loss mitigation. The servicer did not respond to the Plaintiff’s appeal. As a result, the Plaintiff filed an Emergency Motion to stay the sale, which Motion was granted by the Circuit Court on March 8, 2017.

The Plaintiff then brought an action against the servicer and the foreclosure firm (collectively, the “Defendants”) in the United States District Court for the District of Maryland. In her lawsuit, the Plaintiff alleged that the servicer violated RESPA and that both Defendants violated the federal Fair Debt Collection Practices Act (“FDCPA”). The Defendants moved to dismiss the Plaintiff’s complaint.

However, the Defendants’ Motions to Dismiss were both denied by the Court. The reasons for these denials are discussed below.

The Court noted that RESPA is a consumer protection statute, designed to protect mortgagors from “certain abusive practices in the real estate mortgage industry.” RESPA is implemented by CFPB regulations, which are collectively known as Regulation X. See 12 C.F.R. § 1024.1, et seq. The Court stated that dual-tracking is the practice of moving towards foreclosure while the loss mitigation process is ongoing and further indicated that such action is prohibited. The Court further noted that the loss mitigation process begins when a borrower submits a complete loss mitigation application and ends when the servicer denies that application on appeal (or, the loss mitigation process ends after the servicer’s first denial if the borrower fails to timely appeal that denial decision). A denial of a loan modification application must state the “specific reason or reasons for the servicer’s determination.” According to the CFPB’s official interpretation, if the denial is due to a restriction by the investor – that is, if the modification cannot be made by the servicer because the owner of the mortgage would not allow some condition necessary for the modification, then the explanation for the denial “must identify the owner or assignee of the mortgage loan and the requirement that is the basis of the denial.” Simply stating that the denial is based on an investor requirement, without additional identifying information or explaining the restriction, is insufficient. Therefore, the Court found that the denial contained in the servicer’s Response Letter was insufficient because the servicer did not name the investor, and did not describe the specific nature of the alleged investor restriction. According to the Court, an insufficient denial such as the denial letter issued by the servicer, in this case, did not end the loss mitigation process. As a result, since the loss mitigation process was not ended, the servicer and the foreclosure firm were prohibited from moving towards a foreclosure sale. By moving towards a sale under these circumstances, the servicer and the foreclosure firm essentially created a situation whereby the servicer was simultaneously pursuing loss mitigation and a sale of the property.

The Court also held that the Plaintiff’s letter, dated February 28, 2017, could be found to be a Qualified Written Request (“QWR”) under RESPA. This letter included the borrower’s name as well as a statement of the reasons for why the borrower believed that the servicer was in error and/or the specific information that the borrower sought. The servicer’s failure to respond to that letter plausibly falls within the requirements of QWR protections under Regulation X.

Next, the Court noted that Congress enacted the FDCPA after being confronted with “abundant evidence of the use of abusive, deceptive and unfair debt collection practices….” 15 U.S.C. § 1692. Debt collectors are prohibited under §§ 1692e and 1692f of the FDCPA from utilizing any false representations or unfair practices, including threatening to take any action to proceed with foreclosure if the debt collector has no right to take possession of the property at issue. The Plaintiff asserted that scheduling a foreclosure sale and issuing a notice of sale when no right to proceed with the foreclosure action existed constituted a false representation and also constituted an unfair practice to collect a debt under §§ 1692e and 1692f of the FDCPA. Guided by the legal standard established by the Fourth Circuit, the Court found that such a representation is material and that such a representation would affect “a least sophisticated consumer’s decisionmaking” with regard to a debt. Goodrow v. Friedman & MacFadyen, P.A. Civil Action No. 3:11cv20, 2013 WL 38948442.

In summary, the Court ruled that the Plaintiff alleged sufficient facts to state a claim for relief against the servicer for violations of RESPA’s prohibition of dual-tracking and for violations of the FDCPA. Similarly, the Court held that the Plaintiff alleged sufficient facts to support a claim that the foreclosure firm violated the FDCPA. By ruling in this manner, the Court dismissed the servicer’s and the foreclosure firm’s Motions to Dismiss, and permitted the Plaintiff’s lawsuit to continue.

What is clear is that dual-tracking prohibitions must be strictly followed. Lenders would be well served to either review or have their local counsel review their procedures as to whether they are in strict compliance with the law. Failing to be in compliance can be costly.

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