Transcript of “Holding Banks and Attorney Accountable For False Claims”

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Hi Neil Garfield here and this is Thursday March 21st, 2019. Happy first day of Spring! 

Winning foreclosure cases. Sometimes it is the homeowner. Reminds me of the old story in Spain which I won’t repeat. If it’s the homeowner it’s only because the homeowner defended aggressively and the bank or servicer had nothing. And so, in a way this show is devoted to the story of nothing. 

Tonight we talk about how both the banks and the lawyers are getting away with it and what we can do to force them to actually prove their case and be held accountable when they present false claims.

Remember you can always come back and listen to the show again or send it to a friend by going to Blog Talk Radio and looking up the Neil Garfield Show.

First a little somewhat related news and comment about an article on the NY decision of BONY v Dieudonne, 2019 WL 114973 (2d Department 2019). It’s important. I posted an article relating to this a couple days ago. 

In Bank of New York Mellon v. Dieudonne, 2019 WL 1141973 (2d Dept. 2019), the Appellate Division, determined that a mortgage is accelerated by the filing of a complaint to foreclose the mortgage with an election to accelerate.

This is true even though a provision in the mortgage preserves the borrower’s right to make installment payments rather than the full debt. The context of this decision was the statute of limitations.

The ruling essentially bars action on an alleged default after the statute expires. NY does not recognize the twisted Florida rule in which an implied deceleration takes place when a second suit is filed. That is the Bartram rule.

Dieudonne will reverberate nationally and through New York. It may also create pressure on states like Florida that invent crazy doctrines that will haunt them int hen future.

This is not rocket science, folks. If a bank lends money to a borrower and the the borrower can’t or won’t pay the usual bank will sue in no more than 6 months after attempts to find a workout. Actually they are required to do so by regulation, custom and practice in the banking industry.

The NY rule is simple and easy to understand. If the bank waits more than 6 years after it has accelerated the entire amount due, the bank is itself foreclosed. If it waited 6 years it is simply too late, and there was probably a reason.

The New York Law Journal article by Adam Swanson and Jessie Bonaros says that “In the throes of the Great Recession, many foreclosure actions were commenced and ultimately dismissed or abandoned. Among the causes were an overwhelming volume, fluctuating laws, and new regulatory requirements.

Financial institutions are now seeking to foreclose those loans and finding that they are barred by the statute of limitations because those old lawsuits accelerated the mortgages years earlier. Courts are giving out free houses but not to homeowners—to real estate speculators who are paying pennies to the homeowner for the right to fight foreclosure.” 

So the moral of that story is that the right to challenge foreclosures is a marketable commodity with considerable value that can be measured by the equity in the house if the mortgage is removed or deemed unenforceable. 

I might add that a part of the reason why some foreclosure cases linger for 10 years or more is to avoid the statute of limitations problem which they all know was the rule before the laws got twisted when the banks wrecked the financial system.

What the article leaves out that not all homeowners sell their right to defend. Many defend themselves and win, just as I have been saying here for years and years. And it leaves out that BONY Mellon is listed as Plaintiff but never receives any remedy even if it wins. That is because the money from the sale of foreclosed property goes to parties who also don’t own the debt. BONY is like MERS. It is a naked nominee.

Now to the topic at hand.

 In the Case of OBDUSKEY v. MCCARTHY & HOLTHUS LLP, decided yesterday, March 20, 2019, a unanimous but ambivalent Supreme Court of the United States decided that lawyers are not debt collectors in non judicial states. In doing so, they undermined the due diligence requirement in the bar rules of every jurisdiction that require a lawyer to perform enough investigation to assure that the client is real and has at least an arguable claim.

Several justices opined that Congress should clear up the ambiguity that they perceived in the law. The case was seen as fundamental challenge to the non judicial statutory scheme adopted in 32 states in which property subject to a Deed of Trust could be sold privately without judicial process. We have called out the problem as a substantive and procedural one.

What is more important and least understood is that the virtual immunity granted to lawyers provides banks with an impenetrable vehicle through which they continue to commit widespread fraud — to the detriment of borrowers, investors, taxpayers, the financial system and society at large.

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The Holding in Obduskey is that “A business engaged in no more than nonjudicial foreclosure proceedings is not a “debt collector” under the FDCPA,”. Despite voting unanimously, several justices said that they have doubts whether the ruling was justified. What they were all stating is that the FDCPA left open crack through which the Wall Street Banks ran an entire business model involving trillions of dollars.

The specific holding unequivocally means that as far as the FDCPA is concerned lawyers have no duty to investigate whether their client or the claim is real.

The Supreme Court all agreed that the enforcement of a security interest like a mortgage or Deed of Trust is different than the enforcement of a debt or note. In plain language the conservative judges were searching for a way tom protect the lawyers and the banks while the more progressive judges thought that the wording of the statute was ambiguous.

It is decisions like this that makes the practice of law so maddening.

Where the foreclosure mill initiates foreclosure I still think there are claims available for fraud, misrepresentation and negligence. Where a new foreclosure mill is substituted during the foreclosure I think that the options are either limited or nonexistent. But liability under the FDCPA is being narrowed almost out of existence.

The fact remains that none of the Bar associations are willing to investigate, much less find probable cause of violations by foreclosure mills, despite clear and convincing evidence in the public domain that they rely upon false statements, fabricated documents and forged signatures.

Substantively, most such sales are based upon false premises, i.e., that the claimant is a beneficiary which in simple language means that it is the owner of the debt.

Procedurally, the flaw in the nonjudicial scheme is that a challenge to the foreclosure puts the burden of proof on the borrower who has no direct knowledge of the foundation and can only interpret what is available.

Many people are asking and apparently making inquiry to Bar associations who have turned blind eye to attorneys who are filing claims without owners of the claims. The potential for moral hazard is horrendous.

It means that attorneys can invent claims or pretend to represent rogue trusts or other fictitious entities and seeks collection and even forced sale of homes, autos equipment etc.

There is nothing to stop unscrupulous attorneys from pocketing the proceeds — or getting their share through what appears to be attorney fees from a fictional character that is created by a friendly but supposedly unrelated entity that is in on the scheme.

Such decisions immunizing lawyers have gone too far. I agree that lawyers and litigants should be protected by litigation privilege. But I also believe that abuse of litigation privilege is abuse of process, which is a recognized claim.

I agree that lawyers who have questionable clients with questionable claims may file such claims with immunity. But there is a different between questionable and just plain false claims.

By now there isn’t a lawyer in the country who doesn’t know that the trust doesn’t exist, that even if it did exist it doesn’t own the debt, and that even if the foreclosure is successful the alleged trust won’t get any money out of it. No lawyer familiar with the current foreclosures believes that investors are getting the money.

Foreclosure mill attorneys are using a thinly veiled scheme to protect themselves in the interest of making hundreds of millions of dollars per year collectively.

They don’t ask and the bank don’t tell.

The lawyer doesn’t ask because he gets the assignment of the case electronically implying the a claim exists. The assignment comes from a servicer like Ocwen.

Meanwhile Ocwen’s only claim to authority comes from a Pooling and Servicing Agreement that was never completed in the most major important detail — no loan schedule. So Ocwen is claiming authority from an entity that doesn’t exist based upon a document that was never completed.

I agree that a lawyer representing a debt collector should not be held to be a debt collector. But if the lawyer has no actual client who is a debt owner and no client who is a debt collector for a debt owner then the attorney isa debt collector and is violating the FDCPA every time he or she acts because the attorney is pursuing a nonexistent claim on behalf of a nonexistent non owner of the debt.

So SCOTUS was half right in their discussion of the relationship between lawyer misconduct and the FDCPA, but the rest of the story belies their intent and more importantly the intent of Congress when it passed the FDCPA. It opens  yet another door to moral hazard in a world where moral hazard is expanding.

Additional note: As previously reported the Third Circuit went the other way on companies who purchase debt and then claim exemption as the owner of the debt.

In an article published on Lexicology by Melanie Brody and Francis Doorley thye point out that

On February 22, the Third Circuit sidestepped the Supreme Court’s 2017 holding in Henson v. Santander Consumer USA Inc. and found that a purchaser of defaulted debt qualified as a debt collector under the Fair Debt Collection Practices Act.

In Barbato v. Greystone Alliance, the Third Circuit considered whether an entity that purchased charged off receivables and outsourced the actual collection activity was subject to the FDCPA. In analyzing the issue, the court explained that the FDCPA’s definition of the term debt collector has two prongs, and if an entity satisfies either of them, it is a debt collector subject to the Act. Under the “principal purpose” prong, a debt collector includes any person who “uses any instrumentality of interstate commerce or the mails in any business the principal purpose of is the collection of any debts.” Under the “regularly collects” prong, a debt collector includes any person who “regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.”

Applying the principal purpose prong to Crown, the Third Circuit found that the company fits squarely within the statutory definition because “Crown’s only business is the purchasing of debts for the purpose of collecting on those debts.” The court went on to reject Crown’s argument that Congress did not intend the FDCPA to apply to a passive debt owner that outsources the actual collection. The court reasoned that unlike a traditional creditor that is incentivized to “cultivate good will among its customers and for which debt collection is one of perhaps many parts of its business,” Crown’s only need for consumers is to make them pay their debts.

I think the foreclosure mills actually fall into a similar category and thus should be subject to the FDCPA. WHile they haven’t purchased the debts their sole purpose is to collect the debt “of another”. Rather than being the legal arm of the “other” they are substituting themselves, directly or indirectly as the claimant.

The fact that they name a claimant that might not even exist or who technically exists but doesn’t own any right, title or interest in the debt, note mor mortgage should not be allowed to create an exemption for what is clearly an abuse of judicial process and a direct attempt to profit from the debt collection activity.

10 Responses

  1. Ian — your post is great!, and the point well taken!!!!!!!!

    Everyone — how many of you took a loan during the financial crisis heyday only to be contacted immediately, or shortly thereafter, by a debt collector?

    “We are debt collector attempting to collect a debt,” was always the message.

    “What debt??” Many thought. Why is there a debt collector? Ohh– and one may have received a debt validation notice that you ignored.

    Many years later, one has to ask – “Why was I in debt collection….from the onset?”

    Thanks Ian — always love your insight.

  2. Sorry spellcheck butchered up part of my post. Gotta have one of my kid’s turn the flipping thing off. I’m perfectly capable of making myself look like an idiot- don’t need help from anyone else!

  3. Absolutely Ian —- And, will also say that the title companies KNOW that there is no mortgagee. So, even if paying, or paid up any missed payments, the “stigma” of default, real or not, remains with corrupted title. This is a problem not only for the marketability of the home, but, also, where is the money going? It can create a permanent situation where money can never be traced, and the property remains in a chronic “distressed” state — which will spill over even to the purchaser even IF one can manage to sell it (or sale by foreclosure). And those “modifications” make it worse. I believe this “pattern” started a very long time ago, and actually fueled the mechanisms of the financial crisis in which the truth was never told. No one in authority seems to care. It was something just accepted in order to escape what could have been a complete financial collapse. That was then. It is now, and it needs to fixed.

  4. ANON- your statement “ why are ( current ) homeowners saddled w a debt collector and without a mortgagee?
    I never thought of that. Although I’ve told people ad Infinitum that I don’t have a bank , I don’t have a creditor, I don’t have a lender, and that my original lender ( originator) went bankrupt years ago. And that banks don’t go bankrupt, they go into FDIC receivership. So I never had a bank.
    So- even when one is current they are in default. I’ll have to take a look at the industry trade journal again- “Default Servicing News” and see what other fraudulent activities they have cooked up-

  5. Specialized Loan Servicing. Nothing but 1 Star Reviews all over The Internet. Nothing but Debt collectors scumbags. They Have absolutely no standing. Yet the courts are allowing them to steal houses !!!!! WTF.

  6. Ian – -you are right. Non-bank servicers are DEBT COLLECTORS. And, for those that never missed a payment, why are you with a debt collector, and without a mortgagee????

    Anyone who has a debt collector servicer means the loan was reported in default before there was even a default. All with no notice to the borrower.

  7. Understatement of the year:

    “The fact remains that none of the Bar associations are willing to investigate, much less find probable cause of violations by foreclosure mills, despite clear and convincing evidence in the public domain that they rely upon false statements, fabricated documents and forged signatures.”

    They’re complicit and part of the racketeering enterprise.

  8. This applies to law firms, I didn’t see mention of mortgage servicers: when I call to make a phone payment, their recording states: “ this company is a debt collector, attempting to collect a debt. Any information received may be used for that purpose.”
    Maybe someone should tell them that they aren’t debt collectors, and to call the Supreme Court for clarification!

  9. Thank you Neil

  10. Thus, it appears, the FDCPA may apply differently in judicial and non-judicial states, which, given that FDCPA is a federal law, makes zero sense. Is this the product of a flawed FDCPA law, or a flawed non-judicial system?

    Make no mistake, however, winning a foreclosure case in judicial states is just as difficult as in non-judicial states as both apply fake documents. The real question is why would the Supreme Court promote a practice that, in effect, conceals the fraud?

    Importantly, the Supreme Court seems to assume that the “Security interest” is valid. As Neil explains, anyone involved in this mess knows the “security interest” (and title) is not as stated – at least for the crisis loans.

    Without acknowledging that title is bad, that the named creditor will not receive any money, and that borrowers and investors are harmed beyond repair, the Supreme Court just condoned the greatest fraudulent scheme upon the American public of all time. But, it is not the Supreme Court’s duty to enforce the law, and expose the fraud. It is only their duty to interpret the law. The fault lies with Congress, and the U.S. Department of Justice.

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