HOT TOPICLEGAL UPDATES

Presented by the AFN’s Legal Services Committee

SPEAKERSWilliam M. LeRoy - ModeratorCEOAmerican Legal & Financial Network “AFN”

Asha Shravah, Esq. - PanelistSenior AssociateRosicki, Rosicki & Associates, P.C.

Matthew C. Abad, Esq. - PanelistPartnerBurke, Costanza & Cuppy L.L.P.

Michelle Garcia Gilbert, Esq. - PanelistAttorneyKass, Shuler, Solomon, Spector, Foyle & Singer, P.A.

Nosek - Update

Sanctions: Ameriquest - $250,000 Wells Fargo - $250,000

Various law firms Creditors’ rights firm #1 - $25,000 Partner/Atty at firm #1 - $25,000 Creditors’ rights firm #2 - $100,000

Practice Pointers From Nosek Sanctions

Holder of the note, servicer, creditor’s rights attorneys must accurately inform Themselves, debtor, the Court

Communication with Parties/Court must be Reasonable, Accurate, and Not increase the burden on the trustee/debtor or the Court

Holder of the note, servicer, creditor’s rights attorneys must accurately inform Re: Status of debt

Pre-petition Post-petition

Changes in escrow requirements Changes in interest rate and payments

Why The Practice Pointers Matter

Holder of the note, servicer, creditor’s rights attorneys may be sanctioned for failures to: Accurately communicate status of account Identify actual holder of note Identify the servicing relationship

Reliance on another party’s assertion not a defense to potential sanctions No Finger Pointing – PPPPPP - Power Proper Preparation Prevents

Poor Performance) Strict liability for misrepresentation Scienter not relevant.

In assessing sanctions – court uses objective or reasonableness standard while analyzing behavior of parties

Nosek Best Practices Not Followed

Timely and appropriate communication re: status of mortgage loan during the: POC Notice of Transfer of claim Motion for Relief Adversary proceedings

Facts

11-25-97 - Debtor gave Ameriquest a note and mortgage

11-30-97 – Ameriquest assigned to Norwest 5-22-00 – Assignment recorded 3-31-05 – Ameriquest assigns servicing rights to

AMC Ameriquest not a holder since 11-30-97 Not a servicer of loan since 3-31-05

Ameriquest and its various attorneys continually made contrary representations as to status as Servicer Note holder

Facts (Cont)

2-13-03, Ameriquest filed POC Claim #1 No reference to assignment or status as servicer

4-22-03 Ameriquest filed an Amended POC No reference to assignment or status as servicer

Debtor objected to POC 2-17-03 – Atty signed a pleading in response to

objection – Part of the pleading: Ameriquest is the holder of the first mortgage on real

property known as 60 Bolton Road, South False assertion – resulted in sanctions 2-24-03 - Same atty signed a Motion for Relief

identifying Ameriquest as “. . .the holder of a first mortgage ....”

Facts (Cont)

Ameriquest sent several letters over a period of time identifying itself as the holder, for e.g. 10-26-02 – Ameriquest’s Customer Serv. Dept letter 4-26-03 - Ameriquest sent another letter containing this

language stated: Both letters stated that Ameriquest Mortgage

Company (AMC) holds an Adjustable Rate Note secured by a mortgage (or Deed of Trust)

These failures violate BR 4001-1(b)(2)(F), a (not part of the rules at the time

Nothing in previous rules allowed misrepresentation of movant’s role

At time of trial, Ameriquest was not the servicer

Facts (Cont)

1-3-05 another atty at the same firm signed the answer to the Adversary Complaint Admitted the allegation in the complaint filed

December 2, 2004 (Ameriquest “is” the holder of the first position mortgage)

Atty defending Ameriquest failed to advise the Court that Ameriquest was neither the note holder nor mortgagee

2nd creditor’s rights firm entered the melee 7-17-06 – atty filed an appearance in Adversary

Proceeding 04-4517 1-9-08 finally notified the court on 1-9-08 in another

Adversary of Ameriquest’s true role

Analysis

Court noted mistakes in the residential mortgage industry: Not limited to confusion, lack of knowledge,

sloppiness, as to the entities roles Servicer’s reputation in industry is poor Sloppiness causes court/debtor/trustee to

expand valuable resources

In re: Laskowski - Lessons Follow all applicable laws (that do not conflict)

RESPA, BK, FDCPA, State statutes Follow the Best Practices Liability can result from multiple sources

Federal Statutes State Law

Servicers must comply with RESPA Respond to QWR inquiries(20 and 60 day letters) Annual escrow analysis

Increase post-petition mortgage and escrow payments to reflect increases in taxes/insurance

Notify Debtor/Trustee/Court of changes Principal, interest, insurance and tax payments Escrow deficiencies or changes

Bound by the plan If the terms are not favorable – violate your rights – you must object Failure to object results in a waiver of your rights

In re: Laskowski - Facts

Confirmed Ch 13 Plan required monthly payments to servicer Principal interest, and escrow (taxes and insurance)

Servicer provides a “refund” of overpayments during course of Bk

Debtor completes the Plan payments 10/06

Trustee sends QWR to servicer requesting final accounting pursuant to RESPA

Facts (Cont) Servicer fails to respond to QWR

No 20 day letter No 60 day letter

After the Bk plan is complete/discharged Servicer notifies trustee of post-petition fees due Amounts owed

in the escrow account in 04/06 Servicer admitted it didn’t analyze escrow accounts for loans in

bankruptcy Trustee filed an Adversary claiming contractual, and statutory

damages, legal fees and costs RESPA Violations

Failure to conduct annual escrow analysis Failure to notify debtor of surplus or deficiency Failure to acknowledge receipt of QWR (20 days) Failure to respond with written explanation (60 days)

Servicer delays caused Debtor to remain in bankruptcy

Facts (Cont)

Servicer Response to Debtor: Pre-emption - Bankruptcy Code has priority

and precludes RESPA claim No Private Cause of Action under RESPA §

2609 Trustee Lacks standing to bring QWR claim RESPA doesn’t require annual accounting for

bankrupt borrowers Bankruptcy Code precludes state based

contract claim. Contract law doesn’t apply to Ch. 13 plan

Court’s Analysis (Judge Dees)

RESPA and Bankruptcy are different statutes Different Purposes Different requirements Different remedies

RESPA does grant private rights of action for certain violations (including the violations claimed in this case)

Trustee has standing to bring RESPA claim as agent of debtor Servicer must conduct annual analysis Servicer not required to provide debtor with annual statement Bankruptcy Code does not preclude state contract claims.

No showing that state law claims actually conflict with Bankruptcy Code Contract claims are allowed:

Ch. 13 plan operates like a court-approved contract Ch. 13 provided that creditor must notify debtor of change in payments

In Re: Laskowski – Best Practices

Best Practices Not Followed Communication – accurately re: identify of

parties, amount of debt (pre- and post-petition Allows debtor and Trustee to make appropriate,

timely post-petition and claim payments Servicer failed to inform trustee/debtor of

changes in post-petition payments Servicer failed to take action to ensure

accuracy and completeness of the balances to reduce litigation

Accurate balances and amounts due post-petition

Best Practices (Cont)

Failed to analyze not only this loan, but any loan in Bankruptcy on an annual basis

Servicers Policy was to not analyze escrow accounts for Bk loans

Court held that RESPA requires servicer to conduct annual analysis

Servicer failed to provide a dedicated phone line and contact for Ch. 13 trustee inquires Although not required, assists with inquiries and

resolutions Dedicated line would have avoided sixth month gap

between mailing of QWR and response

Best Practices (Cont)

Servicers should supply and maintain a contact for debtor’s counsel and trustees for the purpose of loss mitigation for active bankruptcy accounts

This was not done in Laskowski and trustee later brought a claim alleging that the creditor delays re responding caused the debtor to remain in bankruptcy longer and prevented the debtor from re-financing the home

This claim brought by the trustee seemed likely to succeed so the practice of maintaining such a creditor contact seems to be very important given the negative effect of delays caused by the creditor

Best Practices (Cont)

But what about the Professional Rules of Ethics As creditors’ rights attorneys representing the servicer, we could not

call the debtor’s directly How is it that the Trustee and the debtor’s attorney are exempted

from this requirement in this suggestion Servicer failed to inform debtor’s attorney and trustee of

changes in payment/interest/taxes as they occurred Servicer should have notified of the changes no later than 30

days before the effective date Servicers should have concurrently filed a notice of the

payment change with the court clerk Servicer did not have an appropriate Corporate Governance

Process in Place Did not appear to have any mechanism to catch or notify

anyone of the charges until the completion of the bankruptcy

Best Practices (Cont)

Corporate Governance – LACRP Legal – advise as to the legal risks (statutory, regulatory, litigation) Audit – check to see that the other departments are following the

procedures Compliance – checks for compliance with regulations Risk – Credit and Reputational Privacy – checks for compliance with privacy regs The groups should coordinate with the line of business Set-up the appropriate processes and procedures for the line of

business (servicing) Prevent litigation, regulatory or reputational risk Prevent debtors from going straight into foreclosure after

completing their Ch 13 Servicer in this case failed to file escrow changes with the BK court Remember PPPPP – Proper Power Planning Prevents Poor

Performance

ConclusionQuestion & Answer Period

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