May 16, 2014
If a bank makes a technical error in the foreclosure process, what difference does it make? This blog post explores new legal developments regarding the materiality of breaches of mortgage documents. Residential foreclosure is a dramatic remedy. A lender extended a large sum of credit. Borrowers stretch themselves to make a down payment, monthly payments, repairs, association dues, taxes, etc. If financial hardships present obstacles to borrowers making payments, usually they will do what they can to keep their home.
In order to foreclose, lenders must navigate a complex web of provisions in the loan documents and relevant law. Note holders frequently commit errors in processing a payment default through a foreclosure sale. Sometimes these breaches are flagrant, such as foreclosing on a property to which that lender does not hold a lien. Usually they are less significant in the prejudice to the borrower’s rights. For example, written notices may not follow contract provisions or regulations verbatim, or a notice went out a day late or by regular mail instead of certified mail. Regardless of their significance, these rules were either willingly adopted by the parties or represent public policies reduced to law.
When homeowners challenge foreclosures in Court, lenders frequently argue in defense that the errors committed by the bank in the foreclosure process are not material. One could express this argument in another way by quoting the title lyric to British band The Smiths’ 1984 song, “What difference does it make?” The lenders typically highlight that the borrowers fell behind on their payments, did not come current, and do not have a present ability to come current on their loans. Borrowers face an uphill battle convincing judges to set aside or block foreclosure trustee sales or award money damages for non-material breaches. However, last month, two new court opinions illustrate a trend towards allowing remedies to homeowners for technical breaches. A relatively small award of money damages may not give homeowners their house back, but it may provide some consolation to the borrower and provide an incentive to mortgage investors, servicers and foreclosure trustees to strengthen their compliance programs.
Content of Written Notices Required by Mortgage Documents:
On June 13, 2010, Wells Fargo Bank sent Bonnie Mayo a letter telling her he was in default on her mortgage on her Williamsburg residence. The letter indicated that if she failed to cure within 30 days, Wells Fargo would proceed with foreclosure. The letter informed her that, “[i]f foreclosure is initiated, you have the right to argue that you did keep your promises and agreements under the Mortgage Note and Mortgage, and to present any other defenses you may have.” However, the Mortgage required the lender to state in the written notice the borrower’s “right to reinstate after acceleration and right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale.” Ms. Mayo’s notice did not include this language. She did not bring a lawsuit until after the date of the foreclosure sale.
In her post-foreclosure lawsuit, Mayo alleged (among other claims) that this breach entitled her to rescind the foreclosure and receive money damages. Wells Fargo moved to dismiss this claim on the grounds that the difference between the contractually required language and the actual letter was immaterial. In an April 11, 2014 opinion, Judge Raymond Jackson observed that just because a breach is non-material does not mean it is not a breach at all. He reached a conclusion contrary to a relatively recent opinion of another judge in the U.S. District Court for the Eastern District of Virginia.
Virginia courts recognize claims to set aside foreclosure sales for “weighty” reasons but not “mere technical” grounds. Judge Jackson suggested that the bar may be higher for a homeowner to set aside a foreclosure sale after it occurs than to block it from happening in the first place. The Court declined to dismiss this claim on the sufficiency of the notices. Judge Jackson found that the materiality of this breach was a factual dispute requiring additional facts and argument to resolve.
A foreclosure is less susceptible to legally challenge after a subsequent purchaser goes to closing. Thus, the bank’s omission of language informing the borrower of her right to sue prior to the foreclosure carried a heightened potential for prejudice. Whether Ms. Mayo had a likelihood of prevailing in an earlier-filed lawsuit is a different story.
Failure to Conduct a Face-to-Face Meeting Prior to Foreclosure:
In 2002, Kim Squire King financed the purchase of a home in Norfolk, Virginia, with a Virginia Housing Development Authority mortgage. Her loan documents incorporated U.S. Department of Housing & Urban Development regulations requiring a lender to make reasonable efforts to arrange a face-to-face interview with the borrower between default and foreclosure. Loss of employment caused King to go into default on her VHDA loan in March 2010. VHDA never offered King a face-to-face meeting. VHDA instituted foreclosure wherein the trustee sold King’s property to a third-party.
King filed a lawsuit seeking money damages and an order rescinding the foreclosure sale. The judge in Norfolk agreed with defense arguments that the error was not grounds to set aside the completed foreclosure or award compensatory damages. The court dismissed the lawsuit. Squire appealed to the Supreme Court of Virginia. The Justices upheld the dismissal of her request to set aside the completed foreclosure sale. The lawsuit failed to allege facts sufficient to show that the sale was fraudulent or grossly inadequate.The Supreme Court distinguished King’s situation from legal precedents where the borrower filed suit prior to the foreclosure. Surprisingly, the Court found that the trial judge erred in dismissing King’s claim for money damages arising out of the failure to arrange the face to face meeting. The Justices remanded the case to proceed on the damages issue.
When mortgage servicers and foreclosure trustees commit technical errors, what difference does it make? These new legal decisions show increasingly nuanced analysis of these particular issues. The materiality of the lender’s breach depends on a number of factors, including:
- The borrower’s apparent ability to reinstate the loan. If it is unlikely that the homeowner will get back on track, denying the bank foreclosure makes less sense.
- Did the borrower file suit before or after the foreclosure sale? A lawsuit can delay a foreclosure until the borrowers enforce their rights under the loan documents and incorporated regulations. However, unless the borrowers have a strategy to work-out the distressed loan or otherwise favorably dispose of the property, a pre-foreclosure lawsuit may only delay.
- The relationship between the technical error and the relief requested by the borrower. For example, if the loan documents require a notice to go out by certified mail and it only goes out by first class mail, but the borrower received it anyway, then there isn’t any prejudice.
- Money damages suffered by the borrower that arose out of the technical breach. Borrowers seek to keep their homes and to pay according to their abilities. The U.S. District Court for the Eastern District of Virginia and the Supreme Court of Virginia show an increasing willingness to hold lenders monetarily responsible for prejudicial lender breaches in the foreclosure process. A legal claim that partially offsets the lender’s judgment for the balance of the loan post-foreclosure may provide some consolation but may not avoid bankruptcy.
Discussed Case Opinions: