Supreme Court debates the meaning of the term 'debt collector' in a foreclosure protections case dating back to the financial crisis

  • The Supreme Court on Monday heard arguments in a case that dates back to the financial crisis a decade ago.

  • The justices, missing Justice Ruth Bader Ginsburg, attempted to resolve a legal question that could have broad ramifications on hundreds of thousands of Americans who are foreclosed on without a judicial process each year.

  • A key issue in the matter is who or what can be considered a "debt collector."

January 7, 2019 | CNBC Markets are racked by turmoil, and there are signs the booming U.S. economy could slow down later this year. Yet the Supreme Court is reckoning with the lingering fallout from the financial crisis that rocked the global economy a decade ago.

The top court on Monday attempted to resolve a legal question that could have broad ramifications on hundreds of thousands of Americans who are foreclosed on without a judicial process each year. A key issue in the matter is who or what can be considered a "debt collector." Read more here.

Mortgage Industry Panics Over Obscure Provision in Senate Tax Bill

November 29, 2017 | Bloomberg            The mortgage industry is panicking over a provision in the Senate tax bill that some analysts and trade groups say may drive small lenders out of the business.

The Mortgage Bankers Association and other bank and mortgage trade groups scrambled over Thanksgiving weekend after staff members discovered a provision in the bill that would change the time at which lenders pay taxes on the streams of income they earn from managing borrowers’ mortgages.

That change could cost banks tens of billions of dollars as the value of those income streams drops. The reduction would be enough to drive smaller lenders and non-bank lenders to either exit the mortgage market altogether or restructure their businesses, said MBA president David Stevens.

“It’s a fire drill,” Stevens said. “We’re scrambling to get people on phone calls. It would cause a significant disruption in the industry.”

It’s unclear whether Senate tax writers intentionally targeted lenders -- or whether they intend to leave the provision in place. The episode may reflect the unusual speed with which the Senate is trying to approve legislation that was introduced in written form only nine days ago. Senate leaders plan to vote on the bill Thursday or Friday.

“As Congress continues to debate the Senate’s tax reform plan that was reported out of the Finance Committee, Chairman Hatch will work with members to make the appropriate policy decisions to help deliver a comprehensive tax overhaul that will grow the economy, boost job creation, and increase paychecks for the American people,” Julia Lawless, a Senate Finance Committee spokeswoman, said in an email.

For lenders, the issue surrounds a central way they make money. When a borrower takes out a loan, lenders often sell that loan to government-backed companies, while keeping the right to collect borrower payments and manage the loan. Those so-called mortgage servicing rights are a valuable asset, and lenders often sell them to each other or to outside investors such as hedge funds when they want cash.  Read more here.

House Passes Bill to Extend Veteran Foreclosure Protection

Law Passed Senate in 2015

HousingWire |  March 22, 2016      The House of Representatives passed S. 2393 yesterday to extend the one-year protection from foreclosure in the Servicemembers Civil Relief Act.  

The Senate already signed the bill in 2015, and will extend relief to veterans through 2017.

“Extending the one-year protection from foreclosure for another two-years allows service members and military families sufficient time to get on their feet financially and to avoid the stress of potentially losing their home as they manage their finances in a post-active military life,” said Housing Policy Council President John Dalton.   Read more here.

California Supreme Court Permits Foreclosure Lawsuits Over Ownership of Loans

ABA Journal | March 2, 2016       A ruling from the California Supreme Court could enable lawsuits from thousands of people who may have been wrongfully foreclosed, the Los Angeles Times reported today.

The court ruled unanimously Feb. 18 that foreclosed homeowner Tsvetana Yvanova of Los Angeles may amend her lawsuit with a wrongful foreclosure count based on the claim that an assignment of her loan was invalid. In so ruling, the court said Yvanova is not barred from suing because she was in default on the loan, or because she wasn’t a party to the assignment.

A lower court will decide whether the facts in Yvanova’s case support her contention that the company that foreclosed on her home didn’t have the legal right to foreclose. But the ruling will open the courthouse doors to people in Yvanova’s situation, according to University of California at Irvine law professor Katherine Porter.

That’s because lower courts often rule that borrowers have no standing to sue when they are in default on their loans and when they are challenging contracts to which they are not a party.

Justice Kathryn Werdegar wrote that mortgage borrowers like Yvanova have standing to challenge assignments when they are demonstrably void, which would remove the foreclosing party’s authority to foreclose, Bloomberg BNA reports.

“The borrower owes money not to the world at large but to a particular person or institution, and only the person or institution entitled to payment may enforce the debt by foreclosing on the security,” Werdegar wrote.  Read more here

MERS' Role in Foreclosures

Mortgage Electronic Registration Systems, Inc. (MERS) is a Delaware Company based in Reston, Virginia.  MERS is named on nearly all mortgages and deeds of trust in the USA as the “beneficiary” of the mortgage “solely as nominee for lender and lender’s successors and assigns.”  As is the case in these days of securitization, the original lender named in a mortgage or deed of trust is not usually the party that attempts to foreclose on the loan.  That means the original lender sold the loan into the secondary market, either to be securitized by Wall Street or otherwise. 

Since the 2008 housing crisis, many Texas state courts and Texas federal courts have upheld the proposition that a homeowner may challenge the standing of a bank that claims the right to conduct foreclosure.  These cases hold that a party that is not the original lender has to show an unbroken chain of assignments and/or transfers from the original lender to itself of either the mortgage note or deed of trust in order to foreclose. 

However, the banks have used MERS’ status as “beneficiary” of the security instrument “solely as nominee for lender and lender’s successors and assigns” to try to avoid showing what parties actually are in the chain ofassignments and/or transfers of the loan documents.  The banks will simply file an assignment in the real property records from MERS to the party that is foreclosing and argue that such an assignment demonstrates a complete chain of assignments from the original lender to the party that is foreclosing.  However, on nearly every MERS assignment, MERS does not state for whom they are acting as “nominee” in making the assignment; rather they simply recite that MERS is acting “solely as nominee for lender and lender’s successors and assigns.”  The question thus becomes, for whom is MERS making the assignment for as a “nominee”?

It is common knowledge that MERS does not actually hold or own mortgages or mortgage notes in its own name.  This is the conclusion reached by a federal judge in the Southern District of Texas in the case of Nueces County v. MERSCORP Holdings, Inc., No. 2:12-CV-00131 (Docket #70), 2013 U.S. Dist. LEXIS 93424 (S.D. Tex. July 3, 2013) (“MERS is not a lender, and it does not have the rights of a lender, note holder, or note owner to enforce a promissory note and seek a judgment against a debtor for the repayment of loans.  MERS is merely an agent or nominee of its members, who are banks, lenders, and other financial institutions that hold and trade promissory notes secured by deeds of trust naming them as the lenders and MERS as the beneficiary.”  Id. at 12 (emphasis added).  “MERS has no right to enforce the promissory notes or seek judgments against borrowers in default. MERS is simply the nominee of the beneficiaries of the security instruments with the right to foreclose on behalf of the secured parties under the deeds of trust. In sum . . . Texas law [does not] support Defendants’ argument that MERS may serve as a secured party or lienholder.”  Id. at 22 (emphasis added)).  You can read a copy of Nueces County v. MERSCORP Holdings, Inc. here.

Jackson & Elrod, LLP has several cases pending where this issue has been presented to the courts.  As of this writing, the firm has been able to convince one Texas federal court that MERS’ failure to identify for whom they are acting as “nominee” in a mortgage assignment creates a claim under the Texas Fair Debt Collection Practices Act for “misrepresenting the status or nature of a debt.”  Johnson v. Morrison Home Funding et. al., No. H-14-2549 (Docket #30) (S.D. Tex. August 6, 2015).  You can read a copy of the Johnson memorandum and order here.

Jackson & Elrod, LLP will continue to fight to protect Texas homeowners’ common law right to have the foreclosing bank reveal the true real-parties-in-interest along a chain of assignments and/or transfers of a loan.  If the banks are allowed to skirt this requirement, they will be incentivized to blow up more housing bubbles since the law will not require them to actually complete contemporaneous transfer documents when a loan is sold in the secondary market.  The ability to flash-trade mortgage loans leads to speculative bubbles and a lot of innocent victims in our society when the bubbles crash.