March 18, 2015
Successful law firms cultivate, among other things, professional referral sources and a reputation for responding to client needs. Can these best practices be taken too far? This topic came up in a federal court opinion issued in a class action lawsuit brought by home loan borrowers against Friedman & MacFadyen, a Richmond debt collection law firm and its foreclosure trustee affiliate.
On February 27, 2015, I wrote an entry about the Fair Debt Collection Practices Act claim in this case, Goodrow v. Friedman & MacFadyen. The law firm had a practice of sending letters to borrowers, threatening to file lawsuits. Later correspondence referred to lawsuits. However, the borrowers alleged in their class action that no such lawsuits were ever filed. The FDCPA claim sought money damages for the alleged False Representations. What would motivate a law firm to threaten to sue and later make references to non-existent suits if the goal was foreclosure? Another part of the judge’s opinion suggests an answer.
Fannie Mae and its loan servicers retained Friedman & MacFadyen and F&M Services, Inc., to collect on home loan debts by foreclosing on deeds of trusts in Virginia. The borrowers allege that this specific arrangement incentivized the law firm to complete foreclosures quickly and discouraged delays and loan modification workouts. In the foreclosure, the lender appointed F&M Services, Inc., as substitute trustee under the mortgage documents. A third-party, Lender Processing Services, Inc., played a significant role. LPS maintained a rating system for foreclosure law firms. Timely completion of matters timely would earn a firm a “green” rating. Mixed results earned a “yellow” designation. If matters got bogged down, a “red” rating could result in loss of future referrals (the opinion does not reference any colored cupcakes). This foreclosure law firm rating system played a key role in the facts of the case. LPS required the law firm to pay a referral fee for each case. At the end of each matter, Friedman & MacFayden filed a trustee’s accounting with the local Commissioner of Accounts. According to the plaintiffs, the $600.00 trustee’s commission listed on the accountings included an undisclosed referral disbursement to LPS.
The class action lawsuit accused the defendants of breaching their trustee’s duties in the foreclosures. The borrowers also alleged that the law firm engaged in impermissible “fee-splitting” with the non-lawyer referral company LPS. A foreclosure trustee is forbidden from purchasing the property at the sale. The Trustee’s own compensation is subject to review in the filed accounting. In foreclosure matters, courts in Virginia interpret a foreclosure trustee’s duties to include a duty to act impartially between the different parties who may be entitled to the property or disbursement of the proceeds of the sale, including the lender, borrower and new purchaser. Concurrent with such trustee duties, the defendants had their arrangement with Fannie Mae and LPS.
This is where the representations in the correspondence to the borrowers seem to fit in. If borrowers demanded loan modifications, made repeated inquiries, requested postponement or filed contesting lawsuits, then matters could be delayed. The law firm’s colored rating with LPS might be downgraded and cases might stop coming.
The law firm was not purchasing the properties itself in the sales at a discount. However, they were alleged to be financially benefiting from the disbursement of the proceeds of the sale in a manner not reflected in the trustee’s accounting statements. Further, any amount paid to LPS from the sale went neither to reduction of the outstanding loan amount or for allowable services in the conduct of the sale.
In considering the facts, the federal court denied the defendant’s motion to dismiss the borrowers’ Breach of Fiduciary Duty claim. The court found those claims to adequately state a legal claim that would potentially provide grounds for relief.
Whether a borrower has grounds to contest a real estate foreclosure action in court depends upon the facts and circumstances of each case. The Goodrow case illustrates how many of those circumstances may not be apparent from the face of the loan documents, correspondence or trustee’s accounting statements. If you have questions about the legality of actions taken in a foreclosure, contact a qualified attorney without delay.
(I would like to thank the generous staff member who brought in the cupcakes depicted on the featured image. They were delicious and great to photograph!)
February 27, 2015
On December 4, 2014, I wrote a blog post about a borrower who brought a lawsuit against her lender after the Richmond law firm that conducted the foreclosure went out of business. The federal judge denied the bank’s motion to dismiss the borrower’s claims based on a faulty loan default notice. In that post, I mentioned that the involved law firm, Friedman & MacFadyen, was the target of class action litigation arising out of their debt collection and foreclosure practices. Of the several bases to the class action, the only one that will be discussed here has to do with False Representation liability under the Fair Debt Collection Practices Act. The lawsuit accused Friedman & MacFadyen of sending correspondence to borrowers containing false threats of lawsuits followed by notices with references to court actions that had not been filed. Put another way, the class action claimed that there was a legal thriller published in foreclosure notices to borrowers.
Someone with legal training knows whether a lawsuit is pending. A case cannot proceed unless the party is properly served with a copy. If one knows where to look, one can search court records to verify whether someone is party to a pending lawsuit. But the process of determining this is not common public knowledge. In its opinion, the federal court discussed the alleged practices of the law firm. F&M initially wrote to the borrowers to tell them, among other things, that their, “loan[s][had] been referred to this office for legal action based on a default under the terms of your Mortgage/Deed of Trust and Note.” Later correspondence suggested that a lawsuit was pending or about to be filed. However, the law firm never intended to file a lawsuit against these borrowers. Virginia is a non-judicial foreclosure state. Foreclosures routinely occur here as a trustee transaction and not normally in a lawsuit. Later firm correspondence instructed the borrower on how to obtain “withdrawal” or “dismissal” of the “action.” F&M would refer to these matters as the name of the bank “v.” the name of the borrower, the way lawyers style a lawsuit.
People tend to take a dispute more seriously once a case is active before the court. A legal action does not exist until a party files it in writing with the court’s clerk. Attorneys know that the threat or current existence of a lawsuit causes negative emotions on the part of the defendant, such as anger, fear, anxiety, avoidance or aggression. However, there is a difference between candidly informing an opposing party that suit will be filed if the dispute cannot be resolved and the facts alleged about Friedman & MacFadyen. The opinion discusses allegations that the law firm was in a client relationship where it would be rewarded for foreclosing quickly, and less rewarded for negotiating loan modifications. If the borrowers had known that there were no pending lawsuits, they may have handled their situations differently. In essence, the class action suit accused the foreclosure law firm of putting fictional accounts of lawsuits in foreclosure correspondence with the goal of obtaining favorable responses by borrowers in light of how the law firm was rewarded by its client.
Lawsuits have value for collecting on debts. They also cost money the parties filing them. Once the lawsuit is actually filed, the party and its attorneys have obligations to the court. A fictional lawsuit, on the other hand, does not require anything to be prepared, no court fees to be paid, scheduling conferences to attend or any other responsibilities. The plaintiffs’ suit included a Fair Debt Collection Practices Act claim for False Representation for what might be described as “shadow litigation” issues. In a January 16, 2015 blog post, I discussed the basics of FDCPA False Representation claims, where a debt collector uses a false, deceptive or misleading representation to collect consumer debt. In denying F&M’s motion to dismiss the lawsuit, the court observed that it would construe the foreclosure correspondence collectively to determine any tendency to mislead the borrowers.
If you have received any foreclosure-related correspondence that references a lawsuit that you cannot verify, contact a qualified attorney to discuss defense of your right to be communicated fairly with regarding your property rights.
January 16, 2015
Foreclosure of residential real estate is traditionally based on state law and agreements between the borrower and lender in the loan documents themselves. Each state has its own rules governing whether foreclosure should occur in or out of a court proceeding. In Virginia, the vast majority of foreclosures occur in bank-appointed trustee’s sales. State and federal courts review and supervise this activity through lawsuits brought by one or more of the parties, usually borrowers seeking to set aside trustee’s sales. However, they resist efforts to transform the foreclosure process into a judicial one, ruling on various motions brought early in cases.
The mortgage crisis is a national concern involving federal policies promoting home ownership. Is there a federal regulation of nonjudicial residential foreclosure? Through supervision of the mortgage giants Fannie Mae, Freddie Mac, and other administrative programs, the federal government is invested in the mortgage origination process. In some cases, a federal agency takes direct title to distressed home loans or the foreclosed real estate itself. I have written about some of those cases in the past few months. For example, Fannie Mae and Freddie Mac enjoy property recording tax exemptions. Also, in states like Nevada that allow homeowners associations to foreclose, government agencies find themselves in title litigation when properties are assigned to them pursuant to the terms of federal mortgage programs. In the event of default of a loan tied to a federal program, the government may find its interests aligned more on the creditor’s side.
Foreclosure is one of many remedies available to lenders to collect on defaulted home loan debt. For over 30 years, Congress has come to the aid of consumers in debt collection matters. In 1977, Congress enacted the Fair Debt Collections Practices Act to curb abusive practices by the debt collection industry against consumers. The FDCPA also has the effect of benefiting non-abusive debt collectors harmed by violating competitors. Since its enactment, Congress and the federal courts have clarified the FDCPA’s role in regulating debt collection law firms’ activity obtaining foreclosure sales and deficiency money judgments. Since an attorney’s sale of distressed Virginia real estate in a trustee’s auction is an activity outside of the traditional perception of debt collection, the role of the FDCPA in foreclosure practice has been relatively unclear until the past few years, when a slew of foreclosure contest lawsuits have tested the utility of the statute.
The FDCPA applies to lawyers collecting on home loan debts, not just non-attorney debt collection agencies. Federal courts in Virginia have recognized that the Act also applies when lawyer debt collectors act as trustees in residential foreclosures where the notices include a demand for payment. These consumer protection laws regulate, among other things, the communications between the debt collector and the consumer. In order to conduct a foreclosure practice, the attorney must send notices to the borrower. The FDCPA may provide independent causes of action against the attorney found to have engaged in abusive practices. FDCPA issues thus pervade residential foreclosure matters. Consumers, lenders, and their attorneys must be aware of how this Act affects a contested foreclosure matter. There are many ways the FDCPA may be violated in a foreclosure matter, including the following:
False Representations. Under ordinary circumstances, it is difficult for a party to prove that they are entitled to relief because their opponent is allegedly lying, cheating or stealing. These are weighty accusations; the standard for proof is high, and the defenses are many. In 15 U.S.C. § 1692e, the FDCPA changes the rules of the game in the consumer debt collection context. The consumer doesn’t need to prove that he was actually deceived by the misleading communication. Instead, the consumer must show that false representations in a debt collection communication materially affects a consumer’ ability to make intelligent decisions with respect to the alleged debt. The courts apply a “least sophisticated consumer” standard to alleged false representations. This tends to prevent application of 20/20 hindsight in the interpretation of correspondence. The court will consider whether the correspondence is susceptible to more than one interpretation, one of which is misleading. Between the FDCPA, the Deed of Trust and state law, the debt collection law firm and attorney foreclosure trustee have multiple compliance obligations in preparing correspondence to the borrower.
Validation Notices. The FDCPA goes beyond prohibiting false representations. In 15 U.S.C. § 1692g, Congress mandates that disclosures be put into debt collection correspondence. In nonjudicial foreclosure, notices to the borrower are an essential element of the process. The initial communication must contain several messages, including, but not limited to:
[A] statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector[.]
If the debtor asks for verification of the debt, the collector must cease all collections activity until the verification is made. This not only means ceasing telephone calls, letters and collections lawsuits; it also includes the nonjudicial foreclosure activity.
Since foreclosures are typically conducted by law firms that exclusively pursue debt collection activity, these provisions of the FDCPA have served as the basis for class action lawsuits. Through the FDCPA, the federal government is heavily involved in regulation of nonjudicial, residential foreclosures. Borrowers, banks and their attorneys must be cognizant of the government’s role as regulator of collection of home loans and sometimes as assignee of mortgage debt or foreclosed real estate. Ironically, consumer protection attorneys are litigating FDCPA claims in federal courts against attorneys for their debt collection work on behalf of federally subsidized mortgage giants.