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MARS Attacks! Newest Loan Modification Legislation and What You Need to Know NOW!

Kathleen A. Scanlon — Thu, 20 Jan 2011 14:43:22 +0000

Throwing its hat into the arena in the crusade to protect distressed home owners, the FTC imposed new regulations on mortgage relief companies effective December 29, 2010, except for their advance fee ban which goes into effect January 31, 2011. Although many states, including New York, have imposed their own statutory regulations, the FTC sought to address consumer abuses in those States that had not enacted protective legislation. The FTC issued the Mortgage Assistance Relief Services (MARS) Rule (16 C.F.R. Part 322: Mortgage Assistance Relief Services; Final Rule and Statement of Basis and Purpose, FTC File No. R911003) to prevent bogus operations falsely claiming, for a fee, that they will negotiate with the consumer’s mortgage lender or servicer to obtain a loan modification, a short sale, or other relief from foreclosure. Several of these types of companies pretended to be affiliated with the government and government housing assistance programs.

In the November 2010 press release, FTC Chairman Jon Leibowitz said, “By banning providers of these services from collecting fees until the customer is satisfied with the results, this rule will protect consumers from being victimized by these scams.”

The MARS rule has a three-prong approach – it bans advance fees, requires certain disclosures and prohibits certain claims:

Advance Fees

Mortgage Relief companies may not collect any fee until they have provided the homeowner with:

a written offer from their lender or servicer that the consumer decides is acceptable; and
a written document from the lender or servicer describing the key changes to the mortgage that would result if the consumer accepts the offer.

Required Disclosures

In any advertising and in communications directed at individual consumers (such as telemarketing calls), the mortgage relief companies must make the following disclosures:

they are not associated with the government, and their services have not been approved by the government or the consumer’s lender;
the lender may not agree to change the consumer’s loan; and
if companies tell consumers to stop paying their mortgage, they must also tell them that they could lose their home and damage their credit rating.

Further, these companies must also disclose in their communications to consumers that

they can stop doing business with the company at any time,
can accept or reject any offer the company obtains from the lender or servicer, and
if they reject the offer, they don’t have to pay the company’s fee – said fee must also be disclosed

Prohibited Claims

The MARS Rule prohibits mortgage relief companies from making any false or misleading claims about their services, including claims about:

the likelihood of consumers getting the results they seek;
the company’s affiliation with government or private entities;
the consumer’s payment and other mortgage obligations;
the company’s refund and cancellation policies;
whether the company has performed the services it promised;
whether the company will provide legal representation to consumers;
the availability or cost of any alternative to for-profit mortgage assistance relief services;
the amount of money a consumer will save by using their services; or
the cost of the services.

In addition, the rule prohibits mortgage relief companies from telling homeowners to stop communicating with their lenders or their representatives. Further, these companies must also have reliable evidence to back up any claims they make about the benefits, performance, or effectiveness of the services they provide.

Lastly, it is a violation of the MARS Rule for any person to provide substantial assistance or support to a MARS Provider when that person knows or consciously avoids knowing that the MARS Provider is engaged in any act or practice that violates this Final Rule. (16 CFR Section 322.6).

Q&A:

What Exactly Are Mortgage Relief Services?

Mortgage Assistance Relief Services (MARS) are services offered or provided to a Consumer for consideration that are intended directly or indirectly to assist the Consumer with regard to:

Stopping or postponing a foreclosure sale;
Negotiating or arranging a Modification of a Dwelling Loan;
Obtaining a forbearance in the timing of payments due on a Dwelling Loan;
Negotiating or arranging any extension of the time period for curing a default or reinstating the Dwelling Loan;
Obtaining a waiver of an acceleration clause or balloon payment in a Dwelling Loan;
Negotiating or arranging a short sale, deed-in-lieu of foreclosure, title reconveyance, sale/leaseback or any other disposition of the Dwelling other than a sale to a third-party purchaser;
Offering or conducting a Forensic Loan Audit which is a legal analysis of mortgage loan documents for the purpose of finding compliance violations under federal and/or state law or regulation for the alleged purpose of helping Consumers acquire leverage over their Servicers;
Marketing of services to assist consumers in selling a Dwelling to a third party if the intent of the sale is to enable the Consumer to avoid foreclosure; and
Marketing of refinancing options by Mortgage Brokers if offered to avoid a foreclosure.

Does MARS Apply to Attorneys?

Attorneys are fully exempt if they:

Provide mortgage assistance relief as part of the practice of law;
Are licensed to practice law in the state in which the consumer for whom the attorney is providing mortgage assistance relief services resides or in which the consumer’s dwelling is located;
Comply with state laws and regulations that cover the same type of conduct the rule requires;
Deposit any funds received from the consumer prior to performing legal services in a client trust account and withdraw fees only as they are earned; and
Comply with all state laws and regulations, including licensing regulations, applicable to client trust accounts.

Does MARS Apply to Real Estate Agents?

It appears from examination of the language contained in the Supplementary Information in the Federal Register that the intent was to avoid including real estate brokers and agents handling sales of real property in the definition of MARS. However, it is certainly clear that real estate agents and brokers handling short sales, title re-conveyance or any other sale or endeavor undertaken in an effort to stop a foreclosure sale would be covered by the MARS definition.

The Supplementary Information states that the FTC does not consider the typical functions of real estate brokers, including showing homes, finding homes for Borrowers and listing homes for sale, to be MARS functions. Nonetheless, any endeavor undertaken by a real estate agent or broker in an effort to prevent a foreclosure other than these typical functions, such as negotiating with a Servicer the terms of a short sale,WILL be considered a MARS activity.

The MARS rule is something with which everyone involved in, either directly or indirectly, assisting consumers avoid foreclosure will need to understand and be in compliance with. It is broad and far reaching. The penalties for non-compliance with the FTC’s new MARS rule are $11,000 a day.

A New Year: Looking Back and Looking Forward at Fraudclosure

Kathleen A. Scanlon — Mon, 17 Jan 2011 15:48:33 +0000

2011 was ushered in with the usual fanfare in my family – lots of tasty appetizers, hanging out with the kids until the stroke of midnight and off to bed. I spent the end of 2010 trying to push a few small sales, despite overwhelming resistance by ignorant negotiators and researching a new gun to hold to the bank’s head – the faulty securitization of the mortgages and the resulting lack of standing of these various Plaintiff trustees to bring foreclosure actions.

It is not light reading by a long stretch. Understanding the securitization process from the originator to the Trustee, locating and understanding the governing document, the Pooling & Servicing Agreement (PSA), is no simple matter. But we have done just that and analyzed numerous defective Assignments of Mortgage for New York City properties. These banks and their respective attorneys flagrantly ignore the rule of law, routinely perjury themselves, do documents without authority, and directly violate the terms of the PSA. These banks have also been paid over and over for the same loan because of the over-collateralization of these mortgage securities, but seek to enrich themselves further by availing themselves of the remedy of foreclosure. And yet, the tax payer pays them yet again, via the Obama Administration, instead of taking that same money to make jobs to bolster our sagging economy.

These banks are posting record profits for 2010 as our country fails to recover for lack of not only jobs but of credit. The purpose of the TARP funds was to give an incentive to the banks to extend credit but they failed to do so and really decreased lending. Congress, in their haste, failed to include any strings in that gift package. The Wall Street Journal indicated that such failure was the reason for the decreased lending:

The fact that loan portfolios are shrinking at many of the largest TARP recipients underscores how few strings Treasury Department officials attached to the infusions. That has made it hard to prevent banks from using the money to pay dividends, make acquisitions and fund bonuses for top executives.

Pioneers saw what the banks were doing – getting rich from tax payers’ monies and then enriching themselves further through foreclosure of these overcollateralized securities or peoples’ homes. They fought the banks in court by going back to the basics and not just blinding accepting the banks’ right to foreclose on their “security”. It started with “produce the note” because the whole mortgage industry had gotten sloppy and couldn’t locate their documents. But then it went further, questioning whether the bank really owned the Note and if you could foreclose on a mortgage once it had morphed into a security. MERS‘ role was being investigated and foreclosure defense lawyers questioned whether or not it could bring a foreclosure action as plaintiff, because it did not really own the Note as well as failed to maintain a proper chain of assignment.

These very foreclosure defense attorneys and judges, inundated with millions of foreclosure actions, started to see an hideous pattern and the same names over and over again, executing assignments, affidavits of merit etc. Brooklyn’s own Judge Schack has been on the forefront of demanding legal compliance from the banks and making them account for their failure to adhere to the law as well as outright committing fraud. Our courts have been on the forefront of insuring that homeowners’ rights are not trampled – that the banks act in excellent faith and when they don’t – holding them liable for it. The banks and their attorneys step very carefully into our courts these days for dread of the ultimate punishment – dismissal of their action with prejudice.

I reckon 2011 is the year we take back our country from Wall Street and the banks. The tide is turning.

NY Appellate Division Overturns LI Couple’s Mortgage Victory

Kathleen A. Scanlon — Sat, 04 Dec 2010 04:22:22 +0000

On November 16, 2010, the NY Appellate Division delivered a stunning blow to the foreclosure defense community when it reversed the trial court’s choice in Indymac Bank v. Diana J. Yano-Horoski, 890 N.Y.S.2d 313 (Suffolk County, 2009)

In the highly publicized choice, Judge Spinner had not only vacated the Judgment of Foreclosure, but ordered that the mortgage and note be cancelled in their entirety. Spinner blisteringly castigated the plaintiff and characterized its course of conduct as “wholly unsupportable at law or in equity, greatly egregious and so completely devoid of excellent faith that equity cannot be permitted to intervene on its behalf. Indeed, plaintiff’s actions toward defendant in this matter have been harsh, repugnant, shocking and repulsive to the extent that it must be appropriately sanctioned”.

The Appellate Division held that the such a severe sanction was “not authorized by statute or rule” and the bank was not given “honest warning that such a sanction was even under consideration”. Further, the court held that the trial court’s equity powers did not include the “authority to cancel the note and mortgage since there was no acceptable basis for relieving the homeowner of her contractual obligations to the bank” noting that a judgement had already been entered in the bank’s favor. The court’s opinion can be found here.

Judge Spinner has gotten the attention of the banks in a huge way – his three recent decisions, Indymac Bank v. Yano-Horoski (cancelling note and mortgage), Wells Fargo v. Tyson (awarded $155,000 in hurts to the homeowner) and Emigrant Mortgage v. Corcione (awarded $100,000 in hurts to the homeowner) has made him the hero of the foreclosure defense community and a fearsome figure to the foreclosure plaintiffs. Spinner just issued another crushing choice on December 1st in U.S. Bank v. Mathon 2010 NY Slip Op 52082(U) granting Defendant’s Order to Show Cause, staying all proceedings and scheduling a hearing for possible sanctions against the Plaintiff and other possible remedial relief based on the bank’s appalling terrible faith dealings on a loan modification. The Banks’ attorneys no longer entrust their cases to junior associate,s when appearing in his courtroom at mandatory settlement conferences, because apparently, the risks are too fantastic.

Am I shocked at the Appellate Division’s reversal? Not at all – I really predicted this would be the outcome. As you get higher up the food chain, it gets to be more about policy than law sometimes. The Yano-Horoski trial court choice would have set a perilous precedent and sent shock waves through the mortgage credit industry. A mortgage is a debt security and should a judge just cancel such a debt based upon broad powers of equity, what bank would lend on a home in such a climate? And if the bank were willing to risk it, at what cost to the consumer? The banks would need to insulate themselves against the risk of mortgage cancellation and the way they do that is by increasing the profit margin dramatically. Also, lets look to the every day people who are paying their mortgage every day, even if their house is underwater – what would be their reaction if all of sudden, homeowners left and right were given free houses? The outrage would start to build (if it hasn’t already) – and they would start to wonder why should they pay their mortgages?

I believe that the parties will quietly come to a settlement, probably sealed of course, and the Horoskis will receive a nicely, modified loan with a stout principal reduction and the bank has a stellar precedent on the appellate record.

Something for Everyone on the S&P Networking Site

Kathleen A. Scanlon — Sun, 25 Jul 2010 18:35:37 +0000

Its summer I've been out having fun with my family at the pool, beach, BBQs etc. and unfortunately, my blog posts have become few and far between. But, I wanted to alert everyone to some new posts over at our S&P Networking site:

Events:

In person networking is vital – online networking often starts the relationship but in-person cements it. I posted several events in the NY metro area that are not be missed including the NYC Business Networking Event – Luxury Series (7/27) and Queens Real Estate Group Summer Soiree (7/28) among others. Extend your knowledge by taking a class – Dealing with Banks: REOs and Small Sales or a webinar such as Understanding Titles & Closings for Real Estate Investors .

Small Sales

Small Sales are now the focus of the real estate loss mitigation community and the banks have finally realized that a small sale is the premier solution as the return, dollar for dollar, is far superior to foreclosure and REO. Check out the webinar, Understanding Fannie Mae, Freddie Mac HAFA Small Sale Rules to make sure you are abreast of the new rules. Watch some of the new videos, like Internal Bank Form Gives Insight Into Small Sales vs Foreclosure or Citimortgage Changes Small Sale Policy Again! as the banks are constantly changing how the game is played. Visit the forums as some of our own gurus post their tips and experiences.

Remember, the S&P Real Estate Networking Site is a "members-only" site so apply for membership now (it is free!) for exclusive access.

Delight in your summer!

Foreclosure Proceedings and the Right of Redemption in NY

Kathleen A. Scanlon — Fri, 12 Mar 2010 01:42:54 +0000

New York is a judicial foreclosure state and the process can take over a year to proceed from Summons & Complaint through judgment and then auction. A homeowner has a right to redeem up and until auction, but unlike many states, there is no right of redemption after Sale (but see Bill proposing to allow right of redemption for up to 1 year post Sale.).

The New York Court of Appeal recently opined in NYCTL 1999-1 Trust v. 573 Jackson Avenue Realty Corp., 13.N.Y.3d 573 (December 15, 2009) that the definitive requirement for redeeming real property during foreclosure proceedings is the “unconditional tender [to the foreclosing party] of the full amount due” before auction. This general rule in mortgage foreclosure proceedings also applies to the foreclosure of a tax lien.

But, note that the Courts will exercise their broad equitable powers to void judgments and even set aside sales (extending the homeowner's right of redemption), where homeowners are seeking to modify or reinstate their mortgages while the lender continues with the foreclosure action. Jimmy Lathrop, Esq., the Director of Foreclosure Intervention at the Brooklyn Bar Association Volunteer Lawyers Project, recently discussed in his blog post, three cases where the court found that the homeowner's excellent faith negotiations mandated an equitable solution and a possible complete bypass of RPAPL §1341 which defines the requirements and time frame of the borrower's right of redemption.

Contract Contingencies: Sale of Purchaser’s Current Residence

Kathleen A. Scanlon — Wed, 06 Jan 2010 04:34:41 +0000

While the first time home buyers are out in force looking to buy a home, the reality is that a excellent part of the elusive purchaser pool is made up of homeowners looking to trade up to a new home. Which means, for the most part, they need to sell their current residence to be able to buy a new residence. Contracts often contain certain contingencies which, if not met, allow the parties to unilaterally cancel a contract and the buyer recoup their down payment monies. One such contingency is conditioning contract performance on the sale of the Purchaser’s current residence.

In the seller’s boom market in years past, any prospective purchaser who would dare question for this contingency would never even make it to the binder stage let alone contract. Contracts often crossed my desk that were missing mortgage contingencies, even though Purchaser needed a mortgage to complete the transaction – competition was so fierce that these buyers would agree to nearly anything to cinch the deal. But that market has come and gone – we are in the midst of a buyer’s market and now the purchaser has some leverage.

Still, most real estate attorneys will balk on including a Sale of a Purchaser’s Current Residence (SPCR) Contingency in their Contract. The rationale is that the Seller has to take their home off the market and risk losing the opportunity to snag a qualified Purchaser who doesn’t need such a contingency. This is a very sound rationale and certainly makes sense in the Seller’s market. Here, but, there is some bargaining room as “qualified” purchasers aren’t lining up in droves so that the Seller’s risk is lessened.

There are a few strategies that can be employed on a Purchaser’s behalf in this type of situation. If Purchaser is obtaining a mortgage and needs the funds from the sale of the current residence (or the removal of the debt obligation), this will often be a condition in the mortgage commitment. So, even if seller’s attorney won’t include an actual SPCR Contingency, the mortgage contingency clause will therefore indirectly include the SPCR contingency. I am not overly fond of this strategy because of its ambiguity. Ambiguity makes issues of fact which can lead to uncertainty and litigation. Also, please note, attorneys have caught onto this trick and include language that specifically states the contract is not contingent upon the sale of the purchaser’s home and that a mortgage commitment will be considered firm and unconditional (and therefore satisfy the requirements of mortgage contingency clause which causes its removal) even if it has a condition requiring the sale of Purchaser’s real property or the payoff of certain debts and liens.

I have a unique solution to this very problem and it is usually well received by other real estate attorneys. Modify the SPCR Contingency to include an escape clause for the seller. Allow the Seller to continue to market the property for the time the contingency is in effect. If a prospective buyer makes a bona fide offer, Seller gives notice to the Contract Purchaser of the offer and allows Contract Purchaser to either remove the SPCR contingency and continue with the Contract or cancel the Contract and receive a refund of the down payment monies. With this modification, Purchaser does not have to worry about jeopardizing their down payment and Seller does not have to take their house off the market and lose out on potential qualified buyers.

The modification of the Sale of a Purchaser’s Current Residence Contingency is a way to balance and satisfy the needs of both parties while removing an nearly impossible roadblock to a potentially successful real estate transaction. Careful examination of the terms of the proposed contract and wording of the SPCR Contingency with modification language is key and should be left to the expertise of a real estate attorney.

Pt II: So You’re a Distressed Property Consultant: How to Stay Compliant with NY’s Foreclosure Prevention & Responsible Lending Act of 2008

Kathleen Scanlon — Wed, 14 Oct 2009 02:50:30 +0000

Back on July 29, 2009, I authored a discussion on what activities and/or circumstances would cause a service provider to be labeled a Distressed Property Consultant under New York’s Foreclosure Prevention & Responsible Lending Act of 2008. Please review that discussion and keep in mind the exceptions when it comes to the Homeowner as well as the Consultant. I promised a Part II to review compliance if you are a Distressed Property Consultant and, well, better late than never! If you know me personally, you are aware of the circumstances of the past few months and as such, I am sure know the delay.

Section 265-b enumerates which activities are forbidden to Distressed Property Consultants:

1. Providing services without a written, fully signed contract with a homeowner;

2. Charging or collecting payment from a homeowner before completion of services;

3. Taking a Power of Attorney from a homeowner;

4. Keeping any original Loan Documents or any original documents relating to the distressed home loan;and

5. Inducing a Homeowner to executing a Contract that does not comply with the provisions of the Act.

The Contract

Section 265-b lists very specific requirements when it comes to the Contract for Distressed Consultant Services. First, it must be in writing and must contain the entire agreement of the parties. Therefore, oral agreements pre- and post-contract are not enforceable and the agreement is enforceable only as to those provisions contained within the four corners of the written Contract. Also, the proposed Contract must be provided to the homeowner, in advance, for his review.

Content & Form

The NY legislature laid out very specific requirements as to the form and content of the Distressed Consultant Contract. First, as to the font, it must be in at least 12 point type and in the same language that was used between the Consultant and the Homeowner to discuss the Consultant’s services. For example, if the parties conversed in Spanish about the proposed services, then the resulting written contract must be in Spanish.

The Contract must provide full disclosure. It must include:

1. the exact nature of the services to be provided by the Consultant and anyone who is associated with the consultant;

2. the total amount and terms of compensation for such services;

3. the name, business address, and telephone number of the distressed property consultant and the address (if different), phone & fax number or email address of the distressed property consultant where the homeowner can send communications to the consultant;

4. it must be dated and personally signed by the homeowner and the distressed property consultant before a Notary Public;

5. It cannot limit the liability of the Distressed Property Consultant nor waive any provisions under this Statute and cannot require arbitration of any dispute arising under the Contract;

6. it must contain a specific Right to Cancel:

a. 14 point boldface type;

b. Containing the following language with the Distressed Property Consultant accurately entering the date the right to cancel ends and his name -

NOTICE REQUIRED BY LAW

YOU MAY CANCEL THIS CONTRACT, WITHOUT ANY PENALTY OR OBLIGATION AT ANYTIME BEFORE MIDNIGHT OF _________________________ (FIFTH BUSINESS DAY AFTER EXECUTION).

_______________________________________ (THE”CONSULTANT”) OR ANYONE WORKING FOR THE CONSULTANT, MAY NOT TAKE ANY MONEY FROM YOU OR QUESTION YOU FOR MONEY UNTIL THE CONSULTANT HAS COMPLETELY FINISHED DOING EVERYTHING THIS CONTRACT SAYS THE CONSULTANT WILL DO.

YOU SHOULD CONSIDER CONSULTING AN ATTORNEY OR A GOVERNMENT-APPROVED HOUSING COUNSELOR BEFORE SIGNING ANY LEGAL DOCUMENT CONCERNING YOUR HOME. IT IS ADVISABLE THAT YOU FIND YOUR OWN ATTORNEY, AND NOT CONSULT WITH AN ATTORNEY RECOMMENDED OR PROVIDED TO YOU BY THE CONSULTANT. A LIST OF HOUSING COUNSELORS MAY BE FOUND ON A THE WEBSITE OF THE NEW YORK STATE BANKING DEPARTMENT, www.banking.state.ny.us OR BY CALLING THE BANKING DEPARTMENT TOLL FREE AT 1-877-BANK-NYS (1-877-226-5697). THE LAW REQUIRES THAT THIS CONTRACT CONTAIN THE ENTIRE AGREEMENT BETWEEN YOU AND THE CONSULTANT. YOU SHOULD NOT RELY ON ANY ORAL AGREEMENT OR PROMISE.

c. The date for the Right to Cancel: it is midnight of the 5th business day following the day the Contract was executed by both parties.

d. Notice of Cancellation:

1. must be in writing and delivered by the homeowner or the homeowner’s representative, to the Property Consultant to the address, fax or email address specified in the notice.

2. The Contract must include (2) copies of a Notice of Cancellation in the following form:

NOTICE OF CANCELLATION

YOU MAY CANCEL THIS CONTRACT, WITHOUT ANY PENALTY OR OBLIGATION, AT ANY TIME BEFORE MIDNIGHT OF _____________________________ (ENTER DATE).

TO CANCEL THIS CONTRACT, SIGN AND DATE BOTH COPIES OF THIS CANCELLATION NOTICE AND PERSONALLY DELIVER ONE COPY OR SEND IT BY FACSIMILE, UNITED STATES MAIL OR ANY ESTABLISHED COMMERCIAL LETTER DELIVERY SERVICE, INDICATING CANCELLATION TO THE DISTRESSED PROPERTY CONSULTANT AT ONE OF THE FOLLOWING:

NAME OF CONTRACTOR: ________________________________
STREET ADDRESS:______________________________________
CITY, STATE, ZIP:______________________________________
FACSIMILE:___________________________________________

I HEREBY CANCEL THIS CONTRACT

Name of Homeowner: ___________________________________________

Signature of Homeowner:________________________________________

Date:_________________________________________________________

e. Compliance with Notice of Cancellation: If a Distressed Property Consultant receives the Notice of Cancellation within the proscribed time frame, the Consultant must, within (10) days, return the original Contract and any other documents signed by the Homeowner to the Homeowner. Cancellation, of course, releases the homeowner from any obligation to pay the Distressed Property Consultant.

PENALTIES FOR VIOLATION

If a Distressed Property Consultant violates this Statute, the legislature has crafted the following penalties:

1. Court can declare Contract to be null and void;

2. If the homeowner incurs hurts because of the violation, the homeowner can recover actual and consequential hurts, as well as costs, from the Consultant;

3. If the Consultant intentionally or recklessly violates the provisions of this Statute, the Court can award to the homeowner treble (3x) hurts, attorney’s fees and costs;

4. An application can be made by the Attorney General to issue an injunction forcing the Consultant to stop and desist from engaging in future distressed consulting activities without requiring proof that any person has been injured or hurt and also can require restitution; and

5. The court can fine the Consultant not more than $10,000 for each violation.

There you have it – if you are offering any type of services to a Homeowner who is behind on their mortgage, real estate taxes etc., first determine if you are a Distressed Property Consultant (and not a member of an exempt category) and if your Homeowner and their financial distress is covered by the Statute. If so, make sure you are in compliance by following the tenets outlined above. The penalties can be severe but at least now, you have an outline for a plot of compliance.