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USFN Report: Blight Liens & Mortgage Lenders

As published in the Fall 2024 USFN Report

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

mortgage lenders

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.

USFN Report: Compliance & Legal Issues Recap

As published in the Fall 2024 USFN Report

USFN’S Compliance & Legal Issues Seminar Delivers Engaging Mix of Education & Networking in New Lone Star State Location

BY ROBERT D. FORSTER, II, ESQ.  |  BARRETT DAFFIN FRAPPIER TURNER & ENGEL, LLP∗   |  USFN MEMBER (TX, AZ, CA, CO, GA, NV)Compliance & Legal Issues Seminar

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
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
Keynote speaker Dana Dillard discusses Creating an Ethical Culture to wrap up the first day in Dallas, TX.
elizabeth spring with the cfpb
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!

USFN Report: North Carolina Update

BY RYAN SRNIK, ESQ. 
BROCK & SCOTT, PLLC∗   
USFN MEMBER (CT, NC, RI, AL, FL, GA, KY, ME, MD, MA, MI, NH, NJ, OH, PA, SC, TN, VT, VA)

As published in the Summer 2024 USFN Report

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.

USFN Report: Maryland Update

BY MATT COHEN, ESQ.
BWW LAW GROUP, LLC∗   
USFN MEMBER (MD, DC, VA)

As published in the Summer 2024 USFN Report

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.

USFN Report: Virginia Legislative Update

BY KATHRYN KELLAM, ESQ.
BWW LAW GROUP, LLC∗ 
USFN MEMBER (MD, DC, VA)

As published in the Summer 2024 USFN Report

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.

USFN Report: FHA Introduces Payment Supplement Program

BY PATRICK HRUBY, ESQ.
BROCK & SCOTT, PLLC∗   
USFN Member (CT, NC, RI, AL, FL, GA, KY, ME, MD, MA, MI, NH, NJ, OH, PA, SC, TN, VT, VA) 

As published in the Summer 2024 USFN Report

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.

Full details of the Payment Supplement can be found in HUD’s Mortgagee Letter 2024-02, available at: https://www.hud.gov/sites/dfiles/OCHCO/documents/2024-02hsgml.pdf.

USFN Report: Building a Strong Compliance Foundation

BY CHRISTIANNA KERSEY, ESQ. & RICHARD SOLOMON, ESQ.
 COHN, GOLDBERG & DEUTSCH, LLC∗ 
USFN MEMBER (DC, MD)

As published in the Summer 2024 USFN Report

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.