Common Issues in Litigation that require Lender and Servicer Representation
Lenders and servicers are on the forefront of the mortgage industry. They play critical roles in the completion of majority of real estate transactions. But with the ever increasing regulatory guidelines from federal, state, and local authorities, they are under more scrutiny than ever before, often finding themselves in need of lender and servicer representation.
Common litigation issues that require lender and servicer representation
Persons facing default and foreclosure are increasingly fighting back, naming lenders and servicers as a matter of course. Some of the matters involved in claims include:
1. Predatory lending
This has become one of the most critical policy concerns facing the financial services industry, especially mortgage lending. The vast majority of federal financial services regulatory agencies have publicly denounced predatory lending, calling for more effective regulation to tackle the problem. However, there is no consensus on what constitutes illegal predatory lending, or how to effectively address the primary predatory lending practices.
Predatory lending is characterized by:
- Excessively high interest rates of fees
- Abusive or unnecessary provisions that are not beneficial to the borrower – like large pre-payment penalties, single-premium credit life insurance, balloon payments, and underwriting with total disregard of the borrower’s repayment ability.
Predatory lending does not serve the borrower’s best interest, with the loans locking a borrower into unfair loan terms. The result is severe hardship or default. But not all high-cost loans are predatory, plus some loan provisions like prepayment penalties may be reasonable and legitimate under certain conditions. So, there is possibility for solid defense with lender and servicer representation by a business law attorney.
2. Mortgage fraud
Mortgage fraud occurs when a borrower or mortgage industry professional deliberately provides incorrect information to the lender so they can purchase, fund, apply for, or insure a mortgage loan that would otherwise not have been approved. The deliberate omission of certain information, such as the borrower’s true source of funds used for the down payment, their self-employment status, and earnest money deposit or closing costs can also be considered as mortgage fraud. Sometimes, mortgage fraud can occur without the active participation or even knowledge of the borrower.
Common mortgage fraud schemes include:
- Property flipping – where real estate is purchased falsely, appraised at a higher value, and then quickly resold. Property flipping is illegal because it usually involves one or more of the following: fraudulent appraisal information, inflated buyer income, and doctored loan information, among others.
- Silent second – the property buyer borrows the down payment from the seller by issuing a non-disclosed second mortgage, which is not recorded. So the lender assumes that the borrower is investing his/her own money in the down payment yet it is borrowed.
- Nominee loans or straw buyers – the actual identity and credit history of the borrower is concealed through a nominee who allows the borrower to use their name and credit history to apply for a loan
- Fictitious or stolen identity – where a false identity, including the personal identifying information and credit history, are used on the loan application
- Equity skimming – where the investor uses a straw buyer with false income documents and credit reports to obtain a mortgage loan on the straw buyer’s name. After closing, the straw buyer sings the property over to the investor in a quit claim relinquishing all rights to the property – without providing a guaranty to title. So the investor rents the property without making mortgage payments until foreclosure occurs.
3. Wrongful foreclosure
Wrongful foreclosure claims usually occur when the lender or mortgagee fails to adhere to the terms of the mortgage or violates the statutory provisions regulating foreclosure. The most common instances of wrongful foreclosure involve:
- Forged signatures – wrongful foreclosure can arise when the processing company submits documents to courts before review and signing by the homeowner – so the submitted documents bear a forged signature.
- Robo-signing –Lenders should review all documents to ensure that the borrower has actually missed payment, certify the amount of the default, and identify the outstanding balance before submitting the affidavit to the court – after which they can recover the property. If the lender, however, signs off on these documents without verifying the details, it amounts to robo-signing or submitting false affidavit to a court.
- Failure of the lender to abide by the provision of the federal service members Civil Relief Ac.
Wrongful foreclosure can also arise when the lender fails to follow state procedure throughout the whole foreclosure process.
4. Wrongful eviction
If the bank evicts a tenant without following the state and city statutory requirements for eviction, it is considered wrongful eviction. It may involve the lender scaring or forcing a tenant off by:
- Intimidating the tenant
- Threatening the tenant’s safety or health
- Shutting off the utilities – gas, electricity, water, and heat
- Attempting to physically remove the tenant by removing their items from the house or changing locks
- Using other action forbidden by city or state statute
Homeowners are seeking relief from their inability to qualify for the various solutions offered under the HAMP – Home Affordable Modification Program, requiring the intervention of lender and servicer practices.
While lender and servicer representation can help you get out of issues in litigation, it is better to anticipate and protect against them than to react after the lawsuit has been filed. This may include training and monitoring staff in the proper implementation of loan protocols and reviewing and revising internal servicing processes affecting loans.