Recently the 4th Circuit Court of Appeals examined whether open-end lines of credit such as a home equity line of credit (“HELOC”) fall under the definition of federally related mortgage loans under the Real Estate Settlement Practices Act (“RESPA”) in the case Lyons v. PNC Bank, N.A., 112 F.4th 267.
In this case, the borrower had a HELOC with PNC Bank. After the borrower became overdue on his HELOC loan payment, PNC withdrew the payments from the borrower’s other deposit accounts to offset the outstanding payment on the HELOC account, without the initial knowledge of the borrower. The borrower sent notice to PNC notifying them that they did not have a right to make the unauthorized transfer from his accounts to satisfy the overdue HELOC loan payment, along with a request asking for certain other information.
The borrower then sued PNC, alleging that PNC was in violation of RESPA because PNC withdrew money from the borrower’s deposit accounts to offset an outstanding payment on his HELOC loan. Further, the borrower claimed that PNC had specifically violated RESPA by failing to respond timely and adequately to his correspondence, which he contended was a Qualified Written Request under RESPA.
The Court noted that, on its face, 12 U.S.C §2602(1)(A) would include HELOC type loans in the definition of “federally related mortgage loans.” However, the Court went on to state that Congress authorized the Consumer Financial Protection Bureau (“CFPB”) to prescribe rules and regulations and grant reasonable exemptions for classes of transactions. One of the regulations the CFPB enacted is 12 CFR §1024.31, which defines a mortgage loan as “any federally related mortgage loan, as that term is defined in §1024.2 subject to the exemptions in §1024.5(b), but does not include open-end lines of credit (home equity plans).” Therefore, the CFPB had explicitly excluded HELOC type loans from RESPA.
The Court outlined the process the CFPB used in amending RESPA’s Regulation X and noted that, at the same time that the CFPB amended Regulation X, it also amended TILA’s Regulation Z. The CFPB explained that the protections proposed in those amendments, which included the timely and adequate response provision, were not necessary for open-end lines of credit [i.e., HELOCs] because, the newly amended Regulation Z included similar separate error resolution and information request requirements for openend lines of credit.
The Court ultimately ruled that TILA’s Regulation Z covered open-end lines of credit, like HELOCs, and several Regulation Z provisions substantially overlapped with RESPA’s regulations. Therefore, the Court held that the CFPB had the authority to exempt HELOCs from “federally related mortgage loans,” thus affirming that a HELOC is not subject to the provisions of RESPA.
This 4th Circuit Case supports the argument that HELOCs are not subject to RESPA requirements and are not “federally related” under its provisions. It must be noted that, while other Courts may have differing opinions, the CFPB did participate in this case by submitting an amicus brief, and it is the current opinion of the CFPB that HELOC loans are not covered by RESPA.
In November 2024, the Tennessee Supreme Court held that there is no common law cause of action for “wrongful foreclosure” in Tennessee. See Case v. Wilmington Trust, N.A. et al., No. E2021-00378-SC-R11-CV, 2024 Tenn. Lexis 432 (Tenn. Nov. 14, 2024). Over the past two decades, a handful of opinions in Tennessee using “wrongful foreclosure” terminology have led some to argue that a wrongful foreclosure is an independent cause of action. In Case, the Court specifically addressed the issue, finding that “wrongful foreclosure” is not a stand-alone claim. Id. at 32-41.
The Case appeal arose from a lawsuit filed by Terry Case (“Mr. Case”) in the Chancery Court of Hamilton County, Tennessee, which asserted a claim for “wrongful foreclosure,” among others. Mr. Case claimed the defendants, Wilmington Trust, N.A. (“Wilmington”) and Wilson & Associates, PLLC (“Wilson”), wrongfully foreclosed his property by failing to give him written notice of the postponed sale pursuant to the terms of the notice of sale. The relevant facts that gave rise to his complaint are as follows: Mr. Case was delinquent on his mortgage payments. Wilmington appointed Wilson as substitute trustee and initiated foreclosure. Wilson prepared the notice of sale which was mailed to Mr. Case and published in the newspaper. Prior to the scheduled foreclosure sale, Mr. Case filed suit and obtained a temporary restraining order (“TRO”) preventing the sale. As a result of the TRO, Wilson verbally announced the sale’s postponement at the date, time, and place of the original sale pursuant to §35-5-101 of the Tennessee Code. On the postponed sale date, the property was sold at foreclosure sale. Mr. Case then amended his complaint and asserted claims for “wrongful foreclosure,” breach of contract, slander of title, and to quiet title. He claimed Wilmington and Wilson wrongfully foreclosed the property by failing to give him written notice of the postponed sale pursuant to the terms of the Notice of Sale.
The trial court dismissed Mr. Case’s claims for slander of title and to quiet title, and ultimately granted defendants’ motions for summary judgment on the remaining breach of contract and wrongful foreclosure claims. See Case v. Wilmington Trust, N.A. et al, No. 20-0144 (Tenn. Ch. 2021). Mr. Case appealed, only challenging the dismissal of the wrongful foreclosure claim. He argued that the defendants failed to provide written notice of the foreclosure sale’s postponement and failed to properly identify the location of the foreclosure sale in its notice of sale. Case v. Wilmington Trust N.A. et al., 2022 Tenn. App. LEXIS 251 (Tenn. App. June 28, 2022). The appellate court held that the lack of written notice of the foreclosure sale postponement was a breach of the deed of trust. Thus, they reversed the trial court’s order granting defendants’ motion for summary judgment as to Case’s wrongful foreclosure claim and ordered the foreclosure sale be set aside. Id. at 40-44. Wilmington then appealed to the Tennessee Supreme Court.
At issue before the Tennessee Supreme Court was whether Mr. Case had standing to bring his claim, whether Tennessee recognizes an independent common law cause of action for wrongful foreclosure, and whether the Fannie Mae/Freddie Mac Uniform Tennessee Deed of Trust requires written notice of postponement in addition to an oral announcement according to section 35-5-101(f) of the Tennessee Code. Case v. Wilmington Trust, N.A. et al., No. E2021-00378-SC-R11-CV, 2024 Tenn. Lexis 432, (Tenn. Nov. 14, 2024). The Court determined that Mr. Case held a private interest in the real property at issue, which is a private right, and that he alleged injuries to his contract rights and property rights. Thus, the Court found Case to have constitutional standing to bring his claim. Id. at 31.
The Court then tackled whether “wrongful foreclosure” is actionable in Tennessee. The court reviewed the history of appellate case law in the state that has used the “wrongful foreclosure” terminology. The Court specifically analyzed the case of Garner v. Coffee Cnty. Bank, No. M2014-10956-COA-R3-CV, 2014 Tenn. App. LEXIS 873 (Tenn. App. Oct. 23, 2015), and its reliance on Overholt v. Merchants & Planters Bank, 1982 Tenn. App. LEXIS 377 (Tenn. App. March 10, 1982), for the idea that “wrongful foreclosure” can be asserted “as a primary cause of action when a mortgagor asserts that a foreclosure action is improper under a deed of trust.” Wilmington at 33-38. The Tennessee Supreme Court ultimately disagreed with the Court of Appeals in Garner, and all subsequent citations thereto as to its analysis relating to wrongful foreclosure. The Court explained that Overholt did not hold that wrongful foreclosure is an independent cause of action under Tennessee law, but merely discussed a bank’s failure to satisfy its obligations under a deed of trust. Id. In Overholt, the court’s decision was based upon whether the bank had complied with the acceleration clause contained within the deed of trust in light of Tennessee law regarding the tender of payment after default. Therefore, the Court here found the Garner court’s analysis of Overholt does not support the proposition that wrongful foreclosure is an independent common law claim in Tennessee. Id.
The Court stated “there can be breaches of contact, torts and statutory causes of action based on allegations of ‘wrongful foreclosure,’ but the use of the terminology to describe the claim does not transform it into its own separate cause of action.” Id. at 38-39. The Court reasoned that just as “negligence” is a cause of action, “bad driving” is not a cause of action. And while “breach of contract” is a cause of action, “wrongful foreclosure” is merely a description of the breach. Id. at 39. Analysis was also given to the fact that if Tennessee recognized a common law cause of action for wrongful foreclosure, there would be case law detailing its elements and affirmative defenses, but none exist. The Court’s review of the case law in the state revealed simply that “wrongful foreclosure” is only “a description of the underlying factual basis for the substantive cause of action actually being asserted.” Id.
Ultimately, the Court was clear to point out that while borrowers who believe their property was wrongfully foreclosed cannot bring a cause of action for wrongful foreclosure, they can still present claims for breach of contract, tort, and statutory violations. Id. at 40.
Because there is no common law cause of action for wrongful foreclosure in Tennessee, the Court found Mr. Case had no remaining claims in the case. As a result, the Court did not reach the final issue of whether the Fannie Mae/Freddie Mac Uniform Tennessee Deed of Trust requires written notice of postponement, in addition to an oral announcement, according to section 35-5-101(f) of the Tennessee Code. The court reversed the Court of Appeals’ decision and remanded the case to the trial court. Id. at 41.
The U.S. Department of Housing and Urban Development (HUD) has issued a new Mortgagee Letter entitled “Modernization of Engagement with Borrowers in Default,” updating the requirements surrounding the more commonly referred to face-to-face rule.
The HUD face-to-face rule has historically required lenders to attempt to have a face-to-face interview with a mortgagor “before three full monthly installments due on the mortgage are unpaid.” According to the current version, “[a] reasonable effort to arrange a face-to-face meeting with the mortgagor shall consist at a minimum of one letter sent to the mortgagor certified by the Postal Service as having been dispatched…[and] shall also include at least one trip to see the mortgagor at the mortgaged property.” See 24 C.F.R. § 203.604(d). However, since COVID, the face-to-face specific requirements have largely been subject to HUD waiver.
In August, HUD updated the federal regulation, effective Jan. 1, 2025. Under the revised rule, mortgagees will be required to “conduct a meeting with the mortgagor, or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid and at least 30 days before foreclosure is commenced…” which is a slight change to the timing component. [Emphasis added.] Further, “[t]he meeting must be conducted in a manner as determined by the Secretary” and “[a] reasonable effort to arrange a meeting…shall consist of, at a minimum, two verifiable attempts to contact the mortgagor utilizing methods determined by the Secretary.” The Mortgagee Letter just issued provides the Secretary’s “determined methods” via both alternative interim procedures and final procedures.
Alternative Interim Procedures
Under the alternative interim procedures, which can be utilized at a mortgagee’s discretion, mortgagees must have an interview or make a reasonable effort to arrange an interview no later than the 61st day of a mortgagor’s delinquency, but alternative communication methods, such as phone interviews, emails, and video calling services, will be permitted. Meetings will not be required if: the borrower doesn’t live in the property; the subject property isn’t within 200 miles of the mortgagee, servicing mortgagee, or a branch office of either; the borrower has clearly indicated they won’t cooperate with an interview; the borrower’s payment is current due to a repayment or forbearance plan; or a reasonable effort to arrange a meeting is unsuccessful. Under the alternative procedures, a reasonable effort to arrange a meeting consists of sending the borrower a letter via a certificate of mailing or via certified mail providing interview availability and scheduling details as well as additionally attempting to contact the mortgagor at the property. These optional interim procedures expire on July 1, 2025.
Final Procedures – July 1, 2025
As of July 1, 2025, all mortgagees must be in compliance with HUD’s new face-to-face procedures. Under the new requirements, mortgagees must still conduct or make a reasonable effort to arrange a Loss Mitigation Consultation with delinquent borrowers for each default episode before three full monthly installments are due and unpaid (61 days delinquent). But, if the borrower is on a repayment plan or trial period payment plan (TPP), then mortgagees must conduct or make a reasonable effort to arrange a consult no later than 30 days after the borrower fails to make a payment on the repayment plan or TPP.
Under the new procedures, a Loss Mitigation Consultation won’t be required if:
The borrower has communicated they won’t cooperate in a consultation;
A reasonable effort (defined further below) was unsuccessful;
The borrower is on a repayment plan or TPP that will bring them current, and the borrower is meeting the terms (a forbearance does not meet this requirement); or
The borrower has filed for bankruptcy and, in the opinion of the mortgagee’s legal counsel, it would be a violation of bankruptcy law to proceed.
Notably, although the current version provides an exemption if the mortgagor fails to reside in the property or if the property is more than 200-miles from the mortgagee, both of these exemptions have been removed.
Under the new rules, a reasonable effort consists of two “verifiable attempts,” where a mortgagee documents either the date the communication was sent or the date of delivery. The first verifiable attempt must be sent by mail that utilizes a certificate of mailing or is evidenced by a tracking number. For owner occupant borrowers, an in-person attempt can be substituted for the first mailing. Acceptable methods for the second verifiable attempt include: mail, certified mail, in-person, email, text, and interactive virtual communication methods. Telephone attempts that fail to result in live borrower contact will not constitute a verifiable attempt.
Each verifiable attempt must include:
The purpose of the Loss Mitigation Consultation;
At least two available consult methods;
Scheduling instructions;
Scheduling availability, which must include at least 4 hours of mortgagee availability per week outside the business hours of 9 am to 5 pm in the borrower’s time zone;
A list of information/documents needed (if applicable);
Contact information, including a toll-free number;
Information about the availability of language access services offered (offered in Spanish and must advise to seek translation or other language assistance); and
Information on how to locate a HUD approved Housing Counselor.
Additionally, verifiable attempts must not be included with any other communication applicable to mortgage servicing, unless required by law, except that one verifiable attempt may be included with the Delinquency Notice Cover Letter or a written early intervention notice required by the CFPB.
If a reasonable effort is unsuccessful, the mortgagee must make two additional verifiable attempts at least 30 days prior to first legal. The first attempt must be sent by mail.
Further, within five days of conducting a consultation, the mortgagee must send a notice providing the date of the consultation, the loss mitigation option discussed, a list of needed documents/information (if applicable), a reminder that the borrower should contact the mortgagee if their financial situation changes at any point, the mortgagee’s contact information, and information on how to locate a HUD approved Housing Counselor.
Differing requirements exist for mortgages insured on Hawaiian homelands or Indian land.
Without Uniformity, Navigating Blight Liens can be Tricky for Mortgage Lenders
BY LAWRENCE G. WIDEM, ESQ. | MCCALLA RAYMER LEIBERT PIERCE, LLC∗ | USFN MEMBER (CT, FL, GA, IL, AL, CA, KY, MS, NV, NJ, NY, OH, OR, PA, TX, WA)Cover FeatureFeatured
Municipal blight liens are an enigma of the law. There is no uniformity from state to state. In some states, each municipality has been empowered to devise and enforce its own blight definition. There is sparce case law to offer guidance. The object of this article is to highlight some of the substantive issues lenders are likely to encounter and offer a roadmap for addressing those issues.
What is a Blight Lien?
The right of the government to address blight arises out of the police power to combat public nuisances that poses material risks to the public health and safety of the community. In recent years, some courts have come to recognize conditions that pose a material risk of materially impairing devolvement and that cause portions of the community to become economically under productive or unproductive must be considered an equal part of the police power to cure blight. Gallenthin Rlt v. Paulsboro, 191 N. J. 344, 362 (N. J. 2007) (Redevelopment case).
There is no universally accepted definition of “Blight.” HUD defines a blighted structure as “blighted when it exhibits objectively determinable signs of deterioration sufficient to constitute a threat to human health, safety and public welfare.” Some states have defined the term in their blight statutes or in their redevelopment statutes. Others have delegated the task to the municipalities to define the term in their blight ordinances. Still, others have left it to the courts to craft a definition in the litigation process. M. Uzdavines, “Super priority of remediation liens: a cure to the virus of blight” 45 U. Balt. L. Rev. 404, 405-409 (Spring, 2016). In City of Stamford v. Yanicky, Slip. Op. FST-cv-16-6029447 (Conn. Super. Ct. Oct 30, 2019), the property owner is contesting the blight ordinance on the grounds that its definition of “blight” is so vague that it violated his due process right to notice and the noticed of blight violated the property owner’s due process rights to notice because it did not spell out, in detail, what the property owner had to do to cure the blight. The court denied summary judgment because there were material issues of fact and ordered a trial. Blight liens can also be challenged on the grounds that the cure ordered exceeds the scope of the police power. The municipality cannot reach beyond its police powers to cure blight and turn the property owner into an involuntary redeveloper. See generally, Id.
Some states, including Connecticut, authorize two different types of blight liens, curative and punitive. The curative blight lien secures the actual cost the municipality incurred in remediating the blight from the mortgagor’s land and improvements. Punitive blight liens secure the repayment of public fines and penalties that the municipality has imposed against the land and improvements for violations of the governing blight statute or ordinance. Conn. Public Act 23-33, Sections 2-4 & 7. Where the blighted property has been abandoned, some state statutes permit the municipality to apply to the court for the appointment of a receiver who will collect any rents and pay for the remediation of the blighted property. When the remediation is completed, the receiver is to sell the property. Conn. Public Act 23-33, Section 1.
Blight can occur in different ways. In some cases, it is caused by repeated vandalism of the property by third parties. In other cases, it is caused by owner neglect, omission to act, or owner committed waste. It can be a result of a combination of all or some of those causes. Blight lien statutes typically do not draw any distinctions between blight that was caused by the acts or omissions to act by the owner and blight caused by third-party wrongdoers.
Some states give blight liens a super priority over all recorded mortgage deeds. The object is to induce the owner to clean up and maintain the property, or induce the lender to step in, pay off the blight lien, and then add that sum to the debt secured by the mortgage. Uzdavines, Supra., 409. Uzdavines argues that the blight lien should be viewed like a special assessment the municipality would assess all properties that specifically benefit from the replacement of a failing public sewer line with a new state-of-the-art sewer line that services the borrowers. She argues that curing the blight enhances the value of the subject property and enhances the security for the repayment of that debt. As such, the lender has a duty to step in to remediate the mortgage property. Uzdavines, Supra., 427-429.
The argument is misguided. First, punitive blight liens secure penalties and fines, they do nothing to enhance the value of the property. Curative liens may enhance the fair market value of the property but that enhancement may or may not equal the debt secured by the blight lien. Second, the lender does not own any current interest in the property. In a lien theory state, the lender owns nothing more than a lien against the property. In a title theory state, the lender owns a conditional deed which creates a future interest to foreclose upon conditions broken. The lender holds an encumbrance against title, nothing more. The rights and responsibilities of ownership and control belong to the borrower alone. The lender has no statutory, contractual, equitable, or common law duty to step in and cure the blight. See, W. Berg, “Long Term Options and the Rule Against Perpetuities” 37 California Law Review 1, 29-37 (March 1949). Third, the perfection of the super priority blight lien may cause the lender to exercise its right to foreclosure under the due on encumbrance and/or the anti-waste causes of the mortgage deed. In the alternative, the lender may leave the mortgage deed alone and bring an action on the note and seek to satisfy the underlying debt against the borrower’s personal property and/or other real estate assets. The lender might exercise its rights to contest the blight designation in a contested trial type hearing before the municipal’s appointed hearing officer. The lender may declare the loan in default and apply to the court for the appointment of a receiver with the powers to oversee the municipal vendor’s remediation work and control the costs charged. The lender may, where the changes to the land open the doors to an interim revaluation and the lender has standing to do so, perfect an interim real property tax appeal to seek a reduction of the property tax assessed against the land and improvements.
Stigma and the Valuation of Blighted Properties
A municipal determination that the subject property is blighted can affect the fair market value of the property in three ways. In some cases, the three are overlapping, and in some cases, they are cumulative. The first is the cost to cure. Will the cost of remediation exceed the remediated property bonus a knowledgeable buyer and seller would negotiate in an arm’s length purchase/sale transaction? The second is the duration of the remediation. Will the remediation disrupt the operation of the land? What effect will any such disruption have on the owner’s ability to realize a return on investment during the remediation period? The third is the stigma effect. The stigma factor is particularly pronounced in environmental contamination cases, but it may, in some instances, also apply to blighted properties. Stigma is the risk that the remediation did not fully cure all the blight conditions. There may be conditions that the vendor overlooked.
In Wrestling v. County of Mille Lacs 543 N. W. 2d 91, 92 (Minn. 1996), the Minnesota Supreme Court affirmed the reduction of the real property assessment of an improved 13.05 acres of land that generated $114,000 in annual rent to zero due to the cost to remediate environmental contaminates and the projected post remediation stigma. Id., 92.
Federal Preemption
At least one court has held that federal law preempts a municipality from perfection of a punitive blight lien that attempted to take priority over a mortgage deed in favor of the Federal Housing Finance Authority on its own behalf and as Conservator for the Federal National Mortgage Association. In Federal Housing Finance Agency v. City of Ansonia, 549 F. Supp. 3d 242 (D. Conn. 2021), the court was not required to decide and did not decide if curative blight liens were also preempted by federal law. Id., 247.
Just Compensation/Regulatory Takings and the Blight Lien
Where the municipality perfects a super priority blight lien over the lender’s first or second priority position, and federal law does not preempt the perfection of the lien, the lender may have a federal just compensation claim against both the state and the municipality. Everything depends on when the blight statute was enacted.
In Wells Fargo Bank v. Mahogany Meadows Ave. jc., 979 F. 3d 1209 (9th Cir. 2020), Nevada enacted a Common Interest Communities statute that gave homeowner’s associations a nine-month super priority lien to improve the association’s chances of collecting unpaid common charges and special assessments. Years later, the borrower purchased a unit and granted the lender a first priority mortgage deed to secure the debt. The borrower eventually defaulted, and the lender foreclosed. The non-judicial sale produced funds sufficient to pay off the delinquent common charges, but the remaining funds were insufficient to pay off the loan debt that was secured by the first priority mortgage deed. The lender brought a quite title action in federal court challenging the common charges super priority state as a taking of a property interest without just compensation in violation of the Fifth Amendment, as made applicable to the governmental actions of the states and their municipalities under the 14th Amendment. Because the case turned upon the interpretation of the Fifth Amendment, the federal court had federal question subject matter jurisdiction. The trial court dismissed the lender’s quiet title action under Rule 12(b)(6) for failure to state a cause of action. The lender appealed. ILL, 1212-1213.
The Court of Appeals affirmed the trial court’s judgment on the grounds that once the legislature enacted the priority statute, it created an inchoate lien against every common interest community property, and the borrower took title to their unit subject to that inchoate statutory priority lien. The borrower could not convey anything more than they owed to the lender. Any governmental taking occurred long before the borrower acquired title. In the alternative, the party that perfected the super priority lien was the homeowner’s association, a private business enterprise that had no governmental purpose. The Fifth Amendment only protects against takings by the government. Ids, 1216, 1214.
While there is a debate among eminent domain attorneys over whether any statute of limitations applies to such regulatory inverse condemnation actions, the recommended course of action is to bring the quiet title action seeking a determination of the priority of the blight lien as it relates to the first mortgage within the governing statute of limitations period. In some states, there are no statutes of limitations that specifically govern inverse condemnation actions, civil rights actions, Constitutional challenges, or quiet title actions. In those states, careful legal analysis is essential.
When a quiet title action is commenced, it is generally a good strategy to add a second count seeking relief under 42 U.S.C section 1983. A third count raising issues under the state Constitution’s inverse condemnation provision should also be considered.
If the host municipality perfects its super priority lien prior to the expiration of the statute of limitations, a physical inverse condemnation count against the municipality should also be considered.
Eighth Amendment Excessive Fines Clause and Blight Liens
Where the blight lien secures the sum the municipality acutely spent to clear the blight and improve the property, thereby enhancing the fair market value of the property to the benefit of both the borrower and the lender, the government may seek to set off any damages to the lender by making a benefits claim. In some cases, the benefits may exceed the damages and the taking authority may be entitled to net damage against the property owner and lender. In some states, a pre-taking written notice of the assessment of benefits is required. Some eminent domain lawyers well-argue that benefits assessments are not available in inverse condemnation actions.
Municipal blight liens that secure a fine that is grossly disproportionate to the Health Code and/or Building Code violation(s) may be challenged under the United States Constitution’s Eighth Amendment’s Excessive Fines Clause and/or under corresponding provisions of the State Constitution.
In Pimentel v. City of Los Angeles, 974 F. 3d 917 (9th Cir. 2020), the plaintiff challenged the City’s parking fines and its late fines under the Excessive Fines Clause of the Eighth Amendment. The action was brought in federal court under 42 U.S.C. Section 1983. The city fined the plaintiff $63 for parking her car in a metered parking space after the time allotted on the meter had expired and an additional $63 for payment of the parking fine more than 21 days after it was assessed. The trial court granted summary judgment in favor of the city, and the plaintiff appealed.
The Court of Appeals held that the 14th Amendment to the U.S. Constitution made the Eighth Amendment’s Excessive Fines Clause applicable to excessive municipal governmental fines and penalties. Injured citizens could sue the responsible municipal officials who have final decision-making authority and who have, while carrying out their governmental duties to enforce the governmental policies of the municipality under the color of law, violated the citizen’s Eighth Amendment rights. The doctrine of sovereign immunity precludes suit against the municipality itself. Id., 920.
A fine is unconstitutionally excessive if its amount is grossly disproportionate to the gravity of the defendant’s offense. Id., 921. The courts use a four-factor test to balance the citizen’s Eighth Amendment Rights against the municipality’s rights to sanction misconduct. Not all four factors will be applicable to each case. The factors that are applicable must be balanced in accordance with the particular facts of each case. Id., 921-922.
The first factor is the nature and extent of the underlying offense. This factor requires an examination of the degree of the citizen’s culpability for the violation. The issues to be examined include the citizen’s intent and if the citizen is acting recklessly. Id., 922. The second factor is whether the underlying offense is related to other illegal activities. Id., 921. The third factor is whether other penalties may be imposed for the same offense. Id., 921. The fourth factor is the extent of the harm caused by the offense. The court examines both the monetary harm caused by the violation (direct harm and indirect harm) and how the violation erodes the government’s purposes for banning such conduct and upholding the Health Code and the Building Code. One of the issues to be examined is whether striking down the fine will overly restrict the municipal government’s board authority to fashion fines appropriate to the circumstances of each case. Id.924.
The United States Court of Appeals for the Second Circuit has added a fifth factor. Will the governmen-tal fine deprive the citizen of their livelihood. United States v. Viloski, 814 F. 3d 104, 111-113 (2nd. Cir. 2016). The Supreme Court and the 9th Circuit have both declined to address the argument that this fifth factor should be included in the court’s analysis. Pimentel v. City of Los Angeles, supra., 925. The Eighth Amendment does not require either party to commission a quantitative analysis. Id., 924.
Municipal blight ordinances are a statutorily authorized municipal fine mechanism. Municipalities must carefully tailor their blight ordinances and its administration of those ordinances to conform to the Eighth Amendment’s Excessive Fines Clause. In addition, municipal blight ordinances must be written and employed in a way that conforms to any corresponding state Constitution Excessive Fines Clauses.
Conclusion
This is a developing area of the law. In recent months, the courts have been confronted with a number of novel issues, such as determining if an unimproved parcel of land or if agricultural land can be declared blighted. Another interesting issue is that of a shopping mall that is in foreclosure and is situated in two or more different municipalities with one of them declaring a portion of the mall to be blighted, while the other municipality comes to a different conclusion: What are the foreclosing lender’s options?
It is possible that the Uniform Commissioners of State Laws will appoint a committee to draft a uniform act that appeals to the state legislatures and provides clarity and uniformity to the ongoing efforts to remediate blight.
In late August, the legal and financial minds of USFN Members, mortgage servicers, GSEs, and industry leaders converged in Dallas for USFN’s annual Compliance & Legal Issues Seminar, hosted at the JW Marriott Dallas Arts District. The two-day gathering opened with a deep dive into compliance, regulatory issues, and best practices followed by a second day focused on the most pressing legal topics of the year.
Day one began with a reality check on the evolution of compliance over the past 15 years, offering attendees a crash course on how to survive in an increasingly regulated industry. The advice was practical, to the point, and occasionally peppered with a few “what-notto-do” examples—a roadmap for the brave souls navigating this high-stakes regulatory landscape. After an intense morning of compliance metrics, the ballroom beckoned with a well-deserved buffet lunch.
Undoubtedly, the headliner of the day was “Cyber Issues from a Compliance Perspective.” The session featured a litany of nightmare-inducing scenarios where seemingly innocuous missteps opened up enormous liability for servicers, investors, and attorneys alike. Fortunately, the speakers were also quick to deliver solutions, best practices to navigate these digital landmines, and mitigate exposure. Rounding out the day were practical tips on vendor compliance and the essential ingredient for every successful firm: an ethical workspace.
After an engaging educational first day, attendees were treated to a more relaxed evening at the historic Arts District Mansion. Built in 1890, the mansion’s NeoClassical Revival architecture offered a touch of nostalgia, taking guests back to Dallas’ transition from frontier town to modern metropolis.
Live music by Joseph Patrick Neville set the mood as participants mingled and enjoyed dinner, all while mentally preparing for day two.
Panelists lead a discussion during the Compliance at the Helm session duing the first day of the Compliance & Legal Issues Seminar.
Several ambitious souls, perhaps undeterred by the Texas heat, took to the Katy Trail early the next morning, proving that compliance and legal professionals are not only resilient in boardrooms but also in beating the sun.
Day two commenced with an engaging discussion moderated by Andy Saag, featuring Eliza Financial Protection Bureau and Katie Jo Keeling, who dissected the CFPB’s proposed amendments to Regulation X. The day’s agenda spanned bankruptcy hot topics, recent case law updates, and a roundtable tackling the legal issues affecting the entire industry. Of particular interest was an ethics session on managing AI in the legal workspace; a topic that reminded us that even machines require a moral compass.
Keynote speaker Dana Dillard discusses Creating an Ethical Culture to wrap up the first day in Dallas, TX.Elizabeth Spring with the CFPB answers questions during Regulatory Changes on the Horizon
Despite the sweltering Texas heat, the 2024 Compliance and Legal Issues Seminar was deemed a tremendous success. With its luxurious setting, timely content, and a stellar mix of USFN members, servicers, and GSEs, this event is now firmly marked as “can’t miss.” Needless to say, 2025 has some big shoes to fill when the Compliance & Legal Issues Seminar returns to the JW Marriott Dallas Arts District, August 21-22!
North Carolina General Statute § 45-91: A Small Statute with Big Implications
A seldom mentioned, oft important, unique statute in North Carolina establishes certain noticing procedures for mortgage servicers, regardless of whether the loan is in default or bankruptcy. Originally enacted in 2007, North Carolina General Statute § 45-91 provides, in pertinent part, that any fee incurred by the servicer shall be assessed within 45 days from the date the fee was incurred, and then, within 30 days of assessment, clearly and conspicuously notice the fee to the borrower in a statement at their last known address.
Borrowers who have been injured by a servicer’s noncompliance with N.C. Gen. Stat. § 45-91 may bring an action for recovery of actual damages, including attorneys’ fees. N.C. Gen. Stat. § 45-94. Prior to bringing an action against the servicer, the borrower shall, at least 30 days before instituting the action, notify the servicer of any alleged violations in writing at the address listed for servicer on any correspondence sent to borrower by servicer. Id.
Servicers can avoid liability for a violation of N.C. Gen. Stat. § 45-91 by (1) showing that the violation was not intentional or as a result of bad faith, and (2) within 30 days of being notified of the violations, and before the borrower instituted an action, correct the error and compensate the borrower for fees or charges incurred by the borrower as a result of the violation. N.C. Gen. Stat. § 45-94(1)-(2).
Rarely do courts handle litigation related to N.C. Gen. Stat. §45-91, as N.C. Gen. Stat § 45-94 provides an avenue for a resolution prior to the dispute entering the court’s purview. The lack of litigation can lead to servicers and borrowers unable to ascertain what a “fee” is and leave the parties with conflicting interpretations on whether a servicer has “clearly and conspicuously” noticed the borrower.
One important instance where a Court provided some guidance is In re Paylor. The United States Bankruptcy Court for the Middle District of North Carolina denied the borrower’s objection to the servicer’s post-petition fee notice, holding that the servicer’s force-placed hazard insurance on the property did not constitute a “fee” under N.C. Gen. Stat. § 45-91. In re Paylor, 604 B.R. 222 (M.D.N.C. 2019).
The Court reasoned that in the absence of legislative guidance and state law, the terms of a statute are afforded their natural and ordinary meaning. Id. at 227. Since the requirement to provide hazard insurance is not a cost related to labor or another personal service, the hazard insurance cost was not a “fee” that required the notice N.C. Gen Stat. § 45-91 demands. Id. at 232.
Another example of guidance for servicers and borrowers comes from In re Saeed. The United States Bankruptcy Court for the Middle District of North Carolina determined, in pertinent part, that “explanatory notes contained in the proof of claim neither clearly nor conspicuously explain the fees assessed.” In re Saeed, No. 10-10303, 2010 WL 3745641 (Bankr. M.D.N.C. Sept. 17, 2010). Although the Debtor received notice of the fees from the servicer’s proof of claim, the Court ultimately sustained the borrower’s objection to the servicer’s proof of claim, holding that the failure to mail a statement that clearly and conspicuously explained the fees, did not provide sufficient notice to the borrower. Id. at ∗3.
With minimal guidance and stringent deadlines, servicers should discuss any concerns with counsel to ensure that the servicer is in full compliance with unique state law statutes, such as North Carolina General Statute § 45-91.
New Licensing Requirements for Certain Loans in Maryland
On April 29, 2024, Maryland’s intermediate appellate court issued a reported decision in Estate of H. Gregory Brown v. Ward. (Click here for a copy of the decision). Brown involved a loan where the original lender had made a written election in the promissory note for the loan to be governed by a specific Maryland statutory scheme, i.e., Subtitle 9 of Title 12 of Maryland’s Commercial Code (the Credit Grantor Revolving Credit Provisions “OPEC”).
The Brown Court affirmed the lower state court’s decision that a prior, uncollected judgment on the promissory note did not prevent a future foreclosure action on the deed of trust and that the judgment did not need to be assigned for that foreclosure to occur. The Brown Court also reiterated that the statute of limitations does not apply to foreclosures in Maryland, and also clarified that a promissory note for an open-ended line of credit, which may not qualify as a negotiable instrument, can be enforced through Maryland’s foreclosure process when an assignment of the associated deed of trust has been recorded in the land records. Additionally, the Brown Court held that the lower court’s denial of the borrower’s motion to stay and dismiss the foreclosure proceeding without having first held a motions hearing did not violate the borrower’s right to procedural due process.
The Brown Court did, however, vacate the lower court’s ruling regarding the need for the mortgage loan’s assignee to have certain licenses to be able to enforce it through a foreclosure filed in the state court. Specifically, the Court held that the assignee was required to be licensed under both the Maryland Mortgage Lender Law and as an installment lender, unless they were exempt from those requirements.
Relevant exemptions from these licensing requirements include FNMA, FHLMC, banking institutions, savings and loan associations, credit unions, and mortgage servicers with a mortgage lending license. The Court used common law principles to apply these licensing requirements to the assignee, despite the statute’s clear wording that they were only required for lenders “making a loan or extension of credit.” By extension, this opinion also applies to loans that were made under Subtitle 10 of Title 12 of Maryland’s Commercial Code (the Credit Grantor Closed End Credit Provision “CLEC”), which contains identical licensing requirements to those found in OPEC.
The Brown Court found that the “lack of licensure is not a permanent impediment to a foreclosure pursuant to the deed of trust, by a properly licensed party or a party that is exempt from the licensing requirement.” Instead, as OPEC provided no remedy for a failure to be licensed, the Court remanded the case back to the state court for further proceedings.
The Brown decision only applies to loans where the original lender has made a written election on the promissory note for the loan to be governed by either OPEC or CLEC. It does not apply to other loans where no such election has been made. The Brown lender’s outside counsel, who handled the appeal, is considering whether to appeal the opinion to Maryland’s highest appellate court moving forward.
New Requirements for Foreclosing Subordinate Mortgages in Virginia
Virginia – also known as the “Old Dominion” – is not historically recognized for innovating new consumer protections. Indeed, the non-judicial foreclosure process in Virginia has remained largely unchanged for many decades. Surprisingly, in its 2024 legislative session, and for the second time in four years, the General Assembly enacted substantial changes to the procedures governing foreclosure sales in the Commonwealth.
This year’s enactments focus on foreclosure sales pursuant to “subordinate mortgages,” are nested in Virginia Code Section 55.1-321, and require the holders of subordinate deeds of trust to jump through additional hoops to foreclose on defaulted subordinate deeds of trust. The impetus for the bill was concern over junior deeds of trust on which borrowers had not made payments in many years. While the bill was met with some opposition in Virginia’s Senate, it was eventually passed, and Virginia’s governor signed the bill which went into effect on July 1, 2024.
The new additions to the statute will require subordinate lienholders to submit an affidavit confirming whether monthly periodic statements were sent to the property owner for each period that any interest, fees, or other charges were assessed towards the loan balance. If periodic statements were not sent, the lienholder is required to identify the exemption upon which they have relied to justify not having sent periodic statements. If the lienholder cannot identify such an exemption, the newly constituted statute seems to envision waiving the interest, fees, and other charges accrued during periods in which statements were not sent. The affidavit is also required to provide an itemized list of the current amount owed and identify any periods of time for which interest, fees, and other charges have been waived.
In addition, a copy of the affidavit must be sent to the borrowers, via certified mail, return receipt requested, with a written notice that after 60 days, the lender will request that the trustee under the deed of trust proceed with scheduling a foreclosure sale. This creates a 60-day delay in foreclosure timelines for deeds of trust that fit within the parameters of the statute. The statute also provides consumers with a mechanism for petitioning the Circuit Court to determine the proper balance secured by the subordinate mortgage and allows for recovery of their attorney’s fees and costs if the courts determine that interest, fees, and costs were charged towards the loan improperly pursuant to the statute.
Fortunately, there are several exemptions. For example, the affidavit and notice requirement does not apply to subordinate lienholders who are the original creditor or a mortgage servicer acting on the original creditor’s behalf. In addition, federal or state-chartered banks and credit unions are exempt.
The statute also requires a Trustee to obtain certification from any purchaser of property at foreclosure sale that any superior security instruments will be paid in full within 90 days of the recordation of the foreclosure deed. This applies to sales where the property reverts to the investor (REO) as well as sales to third-party purchasers. Put another way, if the written one-price bid submitted by the lender is the winning bid at the sale, the junior lienholder has 90 days (from recordation of the Trustee’s Deed) to pay off the senior deed of trust. If the purchaser does not comply, then the borrower has the right to again petition the Circuit Court for the applicable jurisdiction for recovery of any payments that the borrower made towards the senior instrument post-foreclosure sale. In practice, this enforcement mechanism will be rarely triggered. It is a rare case where a foreclosed borrower continues to make monthly payments towards their senior deed of trust post-sale. This portion of the statute is not likely to be enforced on a regular basis.
These new statutory provisions certainly should be taken into account when formulating strategies for moving forward with foreclosure of defaulted junior deeds of trust in Virginia, especially those on which payments have not been made for long periods of time. In addition, lenders and servicers should pay careful attention to the requirements for sending periodic statements moving forward.
FHA Continues the Partial Claim Trend with its New Payment Supplement Program
Over the past several years, lenders and servicers have increasingly offered Partial Claim mortgages as a loss mitigation tool. A Partial Claim mortgage allows a borrower to cure a default by signing a mortgage and note in favor of the Department of Housing and Urban Development (HUD) for the default amount, which would generally be due upon sale or refinancing of the property or upon the maturity date of the primary loan.
Recently, the Federal Housing Administration (FHA) introduced a new Partial Claim loss mitigation option to help borrowers retain their homes. On February 21, 2024, HUD published Mortgagee Letter 2024-02, announcing the Payment Supplement loss mitigation option, which allows servicers to temporarily adjust the terms of an existing loan to reduce the monthly principal and interest payments by up to 25 percent without modifying the loan’s current terms, including, most importantly, the current interest rate.
Like prior Partial Claim programs, the Payment Supplement helps delinquent borrowers cure arrearages but also provides for a Monthly Principal Reduction (MoPR), temporarily reducing the borrower’s monthly principal and interest payments for up to three years. The amounts advanced to cure the arrearages and the amount of the MoPR over the three-year period are paid back via a Partial Claim junior mortgage that is due when the homeowner sells or refinances the property, or the mortgage otherwise terminates. In addition to the junior mortgage, a borrower is required to execute a non-interest-bearing Note and a Payment Supplement Agreement, which is incorporated into the Note, in favor of HUD.
The Payment Supplement is available to borrowers that have not previously used their Partial Claim allowance, which can be up to 30 percent of the outstanding balance of the FHA-insured loan. To qualify for the Payment Supplement, in addition to other requirements, a borrower must be eligible to receive available Partial Claim funds, be delinquent for at least three full monthly payments, have a fixed-rate mortgage, and affirm they will be able to make the reduced portion of the monthly payment after the MoPR is applied.
The Payment Supplement program imposes certain requirements on servicers. Servicers must make the monthly MoPR disbursements from a Payment Supplement Account, which is a separate custodial account that holds the balance of the FHA funds for distribution and must be segregated from funds associated with the primary FHA-insured mortgage, including escrow funds. Additionally, once the Payment Supplement is finalized, the servicer must provide the written disclosures annually to the borrower, as well as 60 to 90 days prior to the end of the Payment Supplement period. Servicers also face certain requirements upon the default of a borrower participating in the Payment Supplement program.
Servicers were able to offer the Payment Supplement as of May 1, 2024. By January 1, 2025, servicers must implement the Payment Supplement for all eligible borrowers.
In the current interest-rate environment, where existing loss mitigation alternatives artificially restrain borrowers that cannot afford to modify a loan to a new and higher interest rate than their current loan, the Payment Supplement appears to be a valuable loss mitigation tool. It remains to be seen whether it will primarily be a short-term solution, as HUD’S Mortgagee Letter acknowledges that the Payment Supplement could create “payment shock” at the end of the Payment Supplement Period. Though HUD intends to assess this issue on an ongoing basis, its authority to assist further would be very limited, especially for borrowers who have exhausted the Partial Claim allowance. However, for the meantime, servicers should be ready to implement this new solution.
The 6 Pillars of Success: Best Practices to Minimize Liability and Maximize Efficiency
As Federal and Local Regulators continue to beef up policies within the mortgage industry, operational compliance is more important than ever. Due to the complex nature of the mortgage industry, we must always take into consideration the fact that our landscape is designed to protect consumers, and our compliance with local and federal laws is of utmost importance to a successful business. Minimizing liability and litigation avoidance are of paramount importance. Creating a compliance framework that is effective and realistic will ensure operations flow smoothly. This article will discuss the six pillars of compliance and why these philosophies should play a pivotal role in any mortgage default operation.
1. Understanding the Compliance Landscape
First, any successful operation must understand the current compliance landscape. Again, the mortgage industry operates within a very large network of intertwined ideas and organizations. Knowing the key players and how they impact the industry is imperative to compliant operations. There are federal and local laws and organizations that are at the helm of almost all our daily operations. Knowing the relevant organizations and laws will foster an understanding of what the business requires. The creation of the Consumer Financial Protection Bureau (CFPB), and the recent Supreme Court decision upholding the constitutionality of its structure, show that strict government oversight of our industry is here to stay. To gather this information, you will need to recruit individuals for your compliance team that understand this framework and are eager to dig in and understand the nuts and bolts of the mortgage industry.
Familiarity with the Fair Debt Collection Practices Act (FDCPA), Real Estate Settlement Procedures Act (RESPA), Servicemembers Civil Relief Act (SCRA), U.S. Bankruptcy Code, and a slew of other federal and local privacy acts and consumer protection statutes, are a necessary requirement to navigating the stormy waters of the mortgage default industry. The constantly shifting compliance landscape requires eternal vigilance to prevent a misstep. For instance, the rewrite of the FDCPA with Regulation F, and implementation of the “Debt Collection Rule,” as well as the issuance of the “Model Validation Letter” for debt collectors, required a significant investment of time by practitioners and industry participants in order to digest the new requirements and put sufficient practices into place to ensure compliance.
Likewise, new case law is frequently issued by the courts which alters prior practices, notwithstanding any change to the underlying law. The recent case of Show Me State Premium Homes, LLC v. George McDonnell, No. 22-1894 (8th Cir. 2023), even though only technically binding legal authority in one federal judicial circuit, had far-reaching implications for the industry, as some of the major title insurance underwriters have applied the ruling nationwide.
2. Establish Clear Policies and Procedures
Secondly, once we have a team in place to help us understand the laws, rules, and regulations, who is creating them, and the intended public policy behind them, we then need to establish clear policies and procedures to ensure that we are compliant. To establish clear policies and procedures, we must be sure to include the following when drafting guidelines: the policy purpose and scope, outline of roles and responsibilities, primary principles of the policy, details of any procedures and guidelines that will help employees comply, consequences of violations, and the necessary steps to ensure compliance. If the policies and procedures are concisely laid out, they will be easier to understand and follow. Having one person within the compliance team responsible for drafting and updating these policies is crucial. Although organizational compliance is a group effort, it is beneficial to have one writing style and method behind the policies and procedures. Having too many individuals involved can often lead to confusing piecemeal ideas that do not have a synchronized flow, thus making it difficult for the reader to comprehend.
3. Keep up to date with compliance training, reporting and monitoring.
Next, we must keep up with training, reporting, and monitoring. In the mortgage industry, many businesses are already required to keep track of training as well as policy and procedure updates. This is usually based on work standards provided by clients. It is important to come up with a system that works for your operation. There should be a base standard for how often training and updating must occur, which should be at hire for new staff, and at least annually for all others, to be used for clients that do not provide a standard timeframe. Then, reporting and monitoring should be used to ensure the more restrictive client policies are being followed. An individual on the compliance team should be responsible for monitoring all the policies and procedures to be sure they are reviewed and updated on a yearly or more frequent basis for training purposes. This person would also be responsible for ensuring the more restrictive standards for training and updating are reviewed in a timely fashion. This may be tracked in a report, within the organization’s case management system, or with some sort of third-party compliance tracking system. This compliance leader would also be responsible for setting up training sessions to fit within the necessary timeframes. They would also track and document employee completion of training.
4. Regular risk assessment and management
Once a method for training and tracking of policies and procedures is implemented, the leaders of the compliance team should come up with a robust risk assessment plan. This plan should contain the following steps to ensure effectiveness: First, the plan should identify the risk in question and analyze the level of that stated risk. Identifying the level of risk will help with the next step of determining what actions might have to be taken to mitigate the risk. Obviously, the higher the risk, the more active the organization will need to be in order to mitigate it. Any type of high-level risks should be brought to the highest level of management within the organization and there should be a specific plan in place to handle. A determination may need to be made as to whether to escalate a matter to in-house counsel and/or outside counsel. Keeping risk assessment procedures with your compliance leaders allows for everyone to be aware of what potential issues can arise within the business operation. Knowing is half of the battle.
5. Regular reviews and audits
Now that we have developed policies and procedures based on the current compliance environment and have reviewed and trained on these policies thoroughly, it is critical that we continually self-audit to be sure that policies and procedures are not missing any crucial steps. These self-audits can be completed by members of the compliance team, but it is sometimes beneficial to have these audits completed by managers and team leads, as these are the folks handling the day to day. It may, in some situations, be worthwhile or necessary to have an audit conducted by an outside party.
While not necessarily required, audits that meet various industry standards, such as SOC 1 (previously SAS70 or SSAE 16), SOC 2, or SOC 3, may be warranted. If there is a gap in the process, it would be beneficial for these individuals to see the issue so they can understand how to fix it. They could then work with members of the compliance team to be sure their observations are taken into consideration when updating the policies and procedures. Seeing the problem will also help managers train their staff on the changes that need to be implemented.
Self-audits also greatly benefit the organization, as they can identify gaps and holes before there is an actual client audit. Catching the problem be fore a client does is one of the main reasons for having a robust compliance team.
6. Strong compliance-based community
Finally, fostering a compliance mind ed community within the organiza tion will help tie everything we have discussed together. Having employees who are willing to “say something” if they “see something” only makes the company stronger. The more eyes, the better. Having managers and attorneys who are welcoming to individuals’ questions and concerns will help facilitate this type of com munity. Introducing engaging training sessions where all employees are free to express concerns or worries may help point out issues for which the compliance team was unaware. This team environment not only builds a strong compliance web, but it also builds relationships and morale within the organization. Having annual or more frequent tests of compliance protocols, “desktop” and otherwise, is highly recommended, in order to ensure that those protocols do not fail under real-world conditions.
Working within the mortgage servicing industry has really been an eye-open ing experience as to how truly integral compliance management is to a successful organization. By adhering to the principles of the six pillars, you can be sure that you are covering your bases.
Remember, the task of complying is not easy, nor is it generally “fun,” as a change in a policy or procedure usually means there was a problem to begin with. For this reason, we should all take a step back and thank our compliance heroes for keeping us on the up and up on a daily basis.
