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ABA Business Law Section Consumer Financial Services Winter Meeting January 7, 2012

ABA Business Law Section Consumer Financial ABA Business Law Section Consumer Financial Services Winter Meeting January 7, 2012Services Winter Meeting January 7, 2012

Beer & Basics – Latest Developments in RobosigningBrett J. Natarelli


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Robby The RobosignerRobby The Robosigner

Oddly enough, this is NOT what people mean by “robosigning.”

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Presentation OutlinePresentation Outline

What is Robosigning?• The Foreclosure Process• What it IS • Affidavits• Notarizations

What Robosigning ISNT A Brief History of Robosigning

• How it All Started• New Rules in New York, Vermont, Ohio• AG investigation, split offs• Law firm troubles• Nevada criminal indictments

Case Law Trends

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ThesisThesis

Court, regulator, and AG reaction has been less robust than expected because:

• The law was historically designed, purposefully, to uphold document execution defects.

• Judicial – false evidence doesn’t overturn judgment, no private right of action even for perjury, meritorious defense needed

• Non-Judicial – tender rule, rules of finality\waiver, lack of prejudice

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The Foreclosure ProcessThe Foreclosure Process Judicial – you foreclose by filing routine litigation

• Assignment• Complaint (Verified in FL and PA)• Affidavit in Support of Judgment from servicer• Various affidavits from counsel – costs, fees,

mailing• Affidavit of Non-Military (default judgments)• Deeds\Conveyances

Non-Judicial – you foreclose by mailing some documents to the borrower and giving them one last chance to pay

• Assignment• Substitution of Trustee• Notice of Default• Notice of Sale• Deeds\Conveyances• Affidavits rare, and generally not filed with any

court

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What IS Robosigning?What IS Robosigning?• Signer executes an affidavit without

reviewing the contents and\or underlying facts (lack of personal knowledge)

– Evidentiary Problem– False Statement Problem

• Notary notarizes document without a personal appearance from the signer (for acknowledgments) or witnessing the signer’s signature (for jurats).

– Substantive Validity Problem– False Statement Problem

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AffidavitsAffidavits

Signer typically states he\she “reviewed the books and records”

Signer might state he\she “has personal knowledge” or “knowledge gleaned from a review of the records”

Signer might state the foundation for the business records exception to the hearsay rule

The facts themselves – amount in default, borrower’s name and address, almost always accurate

Signers sometimes asked to certify true things they didn’t see - processes

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NotarizationsNotarizations

Acknowledgments (assignments, lien releases, satisfactions, notices of default, substitutions of trustee) –

• Purpose of Notary is to confirm identity of Signer

• Signer must personally appear to the notary, and acknowledge the signature as the signer’s own.

• Notarization must occur contemporaneously with personal appearance

• Notary need not witness signature• Notarization need not occur on same

day as signing

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Notarizations (Cont’d)Notarizations (Cont’d)

Jurat (affidavits, declarations, other statements given under penalty of perjury)

• Purpose of Notary is to Create Oath

• Signer must sign with notary watching signature

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What ISN’T Robo-Signing?What ISN’T Robo-Signing?• One individual signer wears a variety of hats

(e.g., vice-president for MERS and\or numerous servicers).

• Signer does nothing all day but sign same non-testimonial document (assignment, notice of default) without reviewing them

• Signer executes an affidavit after subordinate reviews underlying business records to confirm their accuracy

• Signer’s signature applied electronically without the signer’s knowledge in an individual case

• Presenting a “stack” of documents to a notary• One person is authorized to sign, but many

individuals sign that person’s signature as delegated by signer (e.g., Nevada indictments).

• Technical defects in notarization (failure to administer oath, failure to review ID when signer personally known to notary)

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A Brief History of RobosigningA Brief History of Robosigning While issue began to percolate in mortgage

servicing industry in September 2010 due to depositions in Florida and a case in Maine, mainstream media runs major new stories beginning in the first week of October 2010when Richard Cordray (then Ohio AG, now Director of CFPB) sues Ally Financial based on deposition testimony from Jefferey Stephan.

Issue existed years beforehand. GMAC was even sanctioned by judge in Florida in 2009, but never made the news.

Fairly hot issue in debt-collection in 2007-08.

Wall Street Journal reported that 2006 Fannie probe conducted by outside counsel found document execution issues.

Most servicers put foreclosures on hold, examine document execution practices.

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Judicial ResponsesJudicial Responses• New York – attorneys must certify prior

filings of affidavits were made with personal knowledge and notarized properly; must certify new filings.

• Vermont – Similar to New York, but excludes unoccupied properties

• Cuyahoga and Franklin County, Ohio –Fight over whether attorney certification requirement violates attorney\client privilege.

• New Jersey – Big Six required to show compliant procedure

• Counties, standing orders – bring the original note if standing challenged, attach assignment to complaint, attach SCRA lookup, live testimony

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AG Investigation; RecordersAG Investigation; Recorders

Iowa’s AG Tom Miller leads task force investigating robosigning issues for all 50 states

It’s been over a year now. Internet is replete with quotes from Tom Miller saying settlement is “weeks away.”

But several AG’s are out –• California (Kamala Harris) by choice (citing concerns

that servicers would be released from liability). 25% of foreclosures, roughly.

• New York (Eric Schneiderman) (apparently kicked out) (Miller says Schneiderman “actively worked to undermine” the group’s efforts – seems focuses on securitization process)

• Delaware (Beau Biden) (doing his own investigation)• Massachusetts (Martha Coakley) (has her own

lawsuit, described as a robosigning case, but it’s really an Ibanez suit)

Current Status – you tell me.

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AG Investigation; RecordersAG Investigation; Recorders

In June 2011, Guilford County, North Carolina stopped accepting “suspect”signatures – no clear definition of what they find suspicious, and not limited to foreclosure documents (also lien releases and the like).

DocX CEO subpoenaed by Michigan AG, Florida AG, resigns.

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Law Firm TroublesLaw Firm Troubles

David Stern and Florida Default Group

Ben Ezra & Katz (Florida)

Steven J. Baum Firm (New York)

Fisher and Shapiro (Illinois) (affidavits with minor but sometimes substantive changes after signature)

Many other law firms investigated.

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Nevada IndictmentsNevada Indictments

November 17, 2011 – Two LPS employees indicted – Gary Trafford, Gerri Sheppard. Upshot is they authorized employees to sign their names, and notaries to notarize the signature.

http://www.mynews3.com/media/lib/166/8/5/c/85c1cf89-dd56-400d-92f5-55590c5c7d85/Trafford__Sheppard_GJ_Transcript_day_1.pdf

http://www.mynews3.com/media/lib/166/d/c/5/dc532010-4941-4397-b2d7-573b899b0f38/Trafford___Sheppard_GJ_Transcript_day_2.pdf

Sheppard and Trafford set for trial Sept. 17, 2012, pled not guilty

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Nevada IndictmentsNevada Indictments

Tracy Lawrence, notary, pled guilty and apparently committed suicide.

Three other notaries indicted – Meghan Shaw, Jennifer Bloecker, and Joseph Noel. Expected to plead guilty and get light sentences in exchange for testifying against Sheppard and Trafford.

Expect civil lawsuits attempting to invalidate foreclosures and seek money damages. Some filed already.

December 15, 2011 - Nevada AG Cortez Mastoalso filed civil fraud suit against LPS and subsidiaries. Not just robosigning – alleges fee-splitting too.

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Will CFPB Get Involved?Will CFPB Get Involved?

Richard Cordray heading CFPB by recess appointment

It was Cordray’s suit against Ally in October 2010 that brought the issue to light in the media

Potential for Politics

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Hurdles in Judicial StatesHurdles in Judicial States No mechanism to recover damages

for false affidavit. • Bradbury v. GMAC Mortgage, LLC

780 F.Supp.2d 108 (D. Me. Feb. 16, 2011).

• See also Dupree v. EMC Mortgage Corp., No. 4:10-cv-356, 2011 WL 147683 (E.D. Tex. Jan. 7, 2011) (no claim stated for violation of a criminal statute punishing perjury because “even if there were a violation of the criminal statute, there is no private civil cause of action”).

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Hurdles in Judicial States (Cont’d)Hurdles in Judicial States (Cont’d) False statement in affidavit usually not sufficient

grounds to overturn a judgment of foreclosure.• “[E]ven perjury does not suffice to allow the

litigant another opportunity to try the merits of the case.” Barker v. Friendly American, Inc., 606 S.W.2d 457, 460 (Mo. App. 1980)

• Vulcan Materials Co. v. Bee Construction, 449 N.E.2d 812, 815 (Ill. 1983) (“It is well established that once a court acquires jurisdiction, subsequent fraud, concealment, or perjury will not render its order void.”)

Freemon v. Deutsche Bank Trust Co. Americas, 46 So.3d 1202 (Fla. App. 4 Dist. 2010) (deposition testimony from signer admitting to lacking personal knowledge in some instances insufficient to overturn judgment because no evidence THIS affidavit was defective)

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Hurdles in Judicial States (Cont’d)Hurdles in Judicial States (Cont’d) To vacate a judgment, challenger must

usually show meritorious defense or due diligence in pursuing it.

• Ameritech Publishing of Ill. v. Hadyeh, 839 N.E.2d 625, 629-30 (Ill. App. 2005)

• Capital One Bank (USA) NA Successor in Interest to, Capital One Bank v. Largent, 314 S.W.3d 364 (Mo. App. 2010).

Generally no meritorious defense (foreclosure was proper) and generally no diligence (affiant could have been deposed).

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Federal Court ChallengesFederal Court Challenges State law generally will not allow vacating the

judgment, and federal courts have been reluctant to overturn state court judgments under Rooker-Feldman.

• Davis v. Countrywide Home Loans, Inc., No. 1:10-cv-1303-JMS-DML, 2011 WL 837048 (S.D. Ind. Mar. 4, 2011).

• Figueroa v. Merscorp, Inc., 766 F. Supp.2d 1305 (S.D. Fla. 2011).

But see Sheenan v. Mortgage Electronic Registration Sys., Inc., No. 10-cv-06837, 2011 WL 3501883 (D.N.J. Aug. 10, 2011) (post-judgment payoff based on affidavit was allegedly inflated, therefore conduct was post-judgment)

But see Bradbury (claim is that servicer’s conduct created harm, not that state courts committed any legal error).

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Hurdles in Non-Judicial StatesHurdles in Non-Judicial States

Is it even robosigning? No personal knowledge requirements for acknowledgments (SOT, NOD, assignments) which tend to be all there is in a non-judicial foreclosure.

What’s the harm? Tough to show actual damages.

Many states require a borrower to “tender” indebtedness before complaining of foreclosure defects.

• Arnolds Mgmt. Corp. v. Eishen, 158 Cal. App. 3d 575, 577 (1984)

• Neely v. Regions Bank, Inc., 2007 WL 571111 (N.D. Miss. 2007)

• Collins v. Union Federal Sav. & Loan Ass'n, 662 P.2d 610, 623 (Nev. 1983)

• Marty v. Mortgage Electronic Registration Systems, 2010 WL 4117196, *8 (D. Utah, Oct. 19, 2010).

• Amos v. Aspen Alps 123, 2010 WL 27401, *7-11 (Col. App. Jan. 7, 2010).

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Hurdles in Non-Judicial StatesHurdles in Non-Judicial States

And like judicial states, non-judicial states often have rules of waiver or finality.

• Arizona - A.R.S. § 33-811(c) –prohibits most challenges to sales if made after sale (except notice defects)

• Arkansas - A.C.A. § 18-50-116(d)(2)(B)

• Tenn. Code § 21-1-803; § 35-5-106

• Olsen v. Pesarik, 77 P.3d 385 (Wash. Ct. App. 2003)

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Not a Valid Defense to EvictionNot a Valid Defense to Eviction

Armesco Residential Mortgage Corp. v. Stange, 631 N.W.2d 444, 445 (Minn. Ct. App. 2001)

Leve v. Delph, 710 S.W.2d 389, 391 (Mo. App. 1986)

Dime Sav. Bank, FSB v. Greene, 813 A.2d 893, 895 (Pa. Super. 2002)

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Is it a good defense to foreclosure?Is it a good defense to foreclosure? Usually yes, defective affidavit will

prevent foreclosure, but only useful as a delay tactic.

• See, e.g., U.S. Bank N.A. v. Kimball, No. 2010-169, 2011 WL 2937311 (Fla. App. July 22, 2011) (“[T]his may be but an ephemeral victory for homeowner. Absent adjudication on the underlying indebtedness, the dismissal cannot cancel her obligation arising from an authenticated note, or insulate her from foreclosure proceedings based on [a] proven delinquency.”).

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Defective NotarizationsDefective Notarizations

• Does not giving an oral oath matter? Probably not.

– Rogers v. People of Colorado, 422 P.2d 377 (Colo. 1966) (overturning conviction for perjury where notary probably did not administer oath)

– Sam v. Town of Rotterdam, 248 AD2d 850, 670 NYS2d 62 (3d Dept 1998) (challenge to affidavit without oath was waived by not raising it)

– Rotterdam (also noted that if it had been raised at trial, witness could have just renewed oath)

– Cincinnati Finance Co. v. First Discount Corp., 17 N.E.2d 383 (Ohio 1938) (written statement on the document conveyed the oath sufficiently)

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Defective Notarizations (Cont’d)Defective Notarizations (Cont’d)

Does a defective notarization matter?• Tough to even get notary challenges going. Notarization

creates presumption of validity that is trumping robosigning reports in the media.

• Generally, for documents requiring an acknowledgment, the underlying document is still valid without it.

• “[B]y the great weight of authority, which in our opinion is supported by the better reason, where an instrument bearing a certificate of acknowledgment or proof which is regular on its face is presented to the recording officer, it becomes his duty to record it, and its record operates as constructive notice to third persons, notwithstanding there may be a hidden defect in the acknowledgment.”Franklin Sav & Loan Co. v. Riddle, 216 S.C. 367, 371 (1950).

• Always at least good between the parties.• Almost always valid if recorded. But see In re Phelps,

341 B.R. 848 (Bankr. W.D. Ky. 2006) (applying Kentucky law) (defectively acknowledged mortgage would not provide constructive notice) (citing In re Vance, 99 Fed. Appx. 25 (6th Cir. 2004).

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Is it a Deceptive Trade Practice?Is it a Deceptive Trade Practice?Well, maybe.

• But specific facts must be alleged. Merely referencing media reports is insufficient. Cercedes v. U.S. Bankcorp, No. CV 11–219 CAS, 2011 WL 1666938, at * 4 (C.D. Cal. Apr. 29, 2011)

• In re Giza, 441 B.R. 395, at 400 n. 8 (Bankr. D. Mass. 2011) (“[T]he Gizas’ proposed Amended Complaint, briefing, and argument surrounding the declaratory judgment claim appear as if their counsel sought to include every miscellaneous allegation that has been in the press with regard to mortgages, notarization, robo-signing, and assignments—whether relevant, irrelevant, or grounded in any actual law or fact pertinent to this case”)

• Director Cordray’s Ohio case on hold due to definitional question about the scope of the statute.

• But in principle, assuming the facts can be properly pled, maybe actionable as fraud. See Staton v. BAC Home Loans Servicing, L.P., Civ. No. 10-01306-AA, 2011 WL 2213800 (D. Ore. June 3, 2011).

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Is it Criminal?Is it Criminal?

On the affidavit side, only most egregious cases. No intent in most cases.

On the notary side, easier to criminalize legally, but senseless politically.

• Sympathetic defendants• Sloppy notarization practices at

AG’s office, respected law firms• Criminal penalties rather light• Whole thing is very 1800’s

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The End of Robo-JudgingThe End of Robo-Judging

Courts are interpreting the business records exception to the hearsay rule more literally, and otherwise more closely scrutinizing the evidence being presented in affidavits.

“I examined the loan account” not enough to satisfy business records exception to hearsay. Wachovia Bank of Delaware, N.A. v. Jackson, No. 3020-CA-00291, 2011 WL 2557039 (Ohio App. June 27, 2011).

The accuracy of the facts matters. HSBC Mortg. Services, Inc. v. Murphy, 19 A.3d 815 (Me. May 19, 2011) (affidavit gave amounts due in the future without explanation it was an estimate).

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Other Evidentiary IssuesOther Evidentiary Issues Servicer’s employee could not lay foundation for business

records exception to the hearsay rule for the prior loan servicer’s records. Glarum v. LaSalle Bank National Association, as Trustee et al., 2011 WL 5573941(Fla. 4th DCA November 17, 2011).

“The law does not require an affiant who relies on computerized bank records to be the records custodian who entered or created the data, nor must the affiant identify who entered the data into the computer. The law is also clear there is no per se rule precluding the admission of computerized business records acquired from a prior loan servicer.”

Evidence 101: • (1) the record was made at or near the time of the

event;(2) was made by or from information transmitted by a person with knowledge;(3) was kept in the ordinary course of a regularly conducted business activity; and(4) that it was a regular practice of that business to make such a record.

California | Illinois | Michigan | Texas | Washington, D.C.www.dykema.com

ABA Business Law Section Consumer Financial Services Winter Meeting January 7, 2012

ABA Business Law Section Consumer Financial ABA Business Law Section Consumer Financial Services Winter Meeting January 7, 2012Services Winter Meeting January 7, 2012



Copyright 2012 Hudson Cook, LLP

Beer and BasicsBeer and BasicsJanuary 2012January 2012

Crystal GrayHudson Cook, LLP

Washington, DC

The Durbin Amendment:The Basics

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What is the Durbin Amendment?

• Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Electronic Fund Transfer Act.

• Section 920 of the EFTA (a)(2) limits the amount of the interchange fee to “reasonable and proportional” to the issuer’s cost

• Section 920 of the EFTA (a)(3) required the Board of Governors of the Federal Reserve to establish a regulation to implement the rule.

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Fee Restrictions

What is an interchange fee?•Any fee established, charged, or received by a payment card network (VISA, MasterCard, etc.) to compensate a debit card issuer (usually a bank, credit union, etc.) for its involvement in an electronic debit transaction.

The fees levied by the Durbin Amendment:•The Federal Reserve Board first proposed a $0.12 cap with the implementing rule. However, the Board settled on a maximum of $0.21 per debit card transaction, and included an additional 5 basis points of the transaction’s value (0.05% of the transaction amount); and•A fraud prevention adjustment up to $0.01 per transaction for qualifying issuers.

Pre-Durbin fees averaged $0.45 per debit card transaction.

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Fee Exemptions

Regulation II implemented by the Federal Reserve Board establishes three exemptions to the Durbin Amendment fee limitation:

• Small debit card issuers with less than $10 billion in assets,

• Government administered programs that issue debit cards, and

• Reloadable general use prepaid cards.4


Network Exclusivity and Routing Restrictions

The Durbin Amendment and its implementing Regulation II prohibit:

•An issuer or payment card network from restricting the number of payment card networks on which an electronic debit card transaction may be processed to less than two unaffiliated networks. •An issue or payment card network from limiting a merchant’s ability to direct the routing of the debit card transactions forprocessing over the payment card network of its choice.

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The Numbers: What does this all mean?

• In the 3 days following the October 1 effective date, merchants saved $1.8 million in debit card fee reductions

• $6.6 billion is the amount of money nonexempt banks will lose annually from fee reductions

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Bank Reaction

• Chase, Wells Fargo, Bank of America and others added or increased monthly fees for debit card accounts.

• Many major banks sought to eliminate their rewards programs on their debit cards, rewards which were formerly funded by the interchange fee profits.

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Consumer Reaction

Bank Transfer Day – November 5, 2011•More than 650,000 people switched to local community banks and credit unions which are exempt under the Durbin Amendment and its implementing Regulation II.

Bank of America’s $5 Debit Card Account Fee•Successful online petition included over 300,000 signatures against Bank of America’s debit card fee. •Bank of America backed down on the fee after the negative publicity it received and other banks, such as Chase, and Wells Fargo followed suit.

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Merchant Reaction

Where will the $10 billion in savings go?•Merchants will see an increase to their bottom line, maybe.

– The Durbin Amendment does not restrict the fee amount that the debit card networks can charge.

– There has already been talk about this occurring, causing the savings to be passed from the Banks, to the Retailers, to the Debit Card Networks, with essentially no reduction in costs to consumers.

•Some retailers may avoid raising prices•Some retailers may cut prices

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Questions & Answers

Questions?

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Contact Information

Crystal GrayHudson Cook, LLP1020 19th Street NW Suite 700Washington, DC 20036 Phone (202) 327-9702 email [email protected]

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