Holder In Due Course
This page will provide general legal information about the topic of HOLDER IN DUE COURSE and how it may relate to foreclosure defense. All information contained on this website is general in nature, and should not be construed as legal advice or a substitute for legal advice. Although we have tried to be as accurate as possible, the following information may be inaccurate, missing some information, or outdated – as law can frequently change or become modified. If you have questions about your case, please contact a foreclosure defense or bankruptcy lawyer in your area. Please note, comments posted to this blog and emails sent to us are NOT confidential and do not create an attorney-client relationship.
HOLDER IN DUE COURSE AND HOW IT RELATES TO FORECLOSURE DEFENSE AND SECURITIZED LOANS
Trying to Leverage Loan Modifications against the Assignee of the loan (who will undoubtedly argue they are not liable for any predatory lending violations committed by the loan originator) as they are a “Holder in Due Course.”
By Steve Vondran, Esq. who is practicing Real Estate, Bankruptcy, and Foreclosure Defense in Arizona and California where he is licensed to practice law. He also holds a real estate broker’s license in both states as well. Prior to becoming an attorney, Mr. Vondran also was a mortgage loan officer which has given him insight into the current financial crises. He can be reached at firstname.lastname@example.org or (877) 276-5084. The following is general legal information only, and is not to be construed as legal advice, or a substitute for legal advice. The following information may not be updated or accurate, and is simply provided as general information and things to think about if you are facing foreclosure in California or Arizona. For specific questions, please contact a foreclosure defense attorney on your area. Please do not post confidential information on my blogs and do not send us confidential information in emails as we cannot guarantee the confidentiality of such. No attorney-client relationship is formed until a retainer agreement is signed.
One of the key things we must figure out as foreclosure defense lawyers is whether or not your loan was “sold-off on the secondary market” and/or “securitized” and sold to investors on wall street (ex. hedge funds, pension funds, foreign investors, insurance companies, etc.).
Common Scenario: Your sub-prime ARM was originated by Countrywide. Countrywide then sells the loan to Wells Fargo and Wells Fargo works either holds the note, and/or sells it off to an investment banker to securitize the loan. Countrywide, as loan originator, knowing it was going to sell off your loan, may not have cared much about any predatory lending issues such as:
(1) Ability to afford the payment after the loan adjusts (ex. option ARM loans / pick-a-pay); See our website discussing Option ARMS / Pick-a-Pay Loans atwww.OptionArmLawyer.com
(2) Inflated appraisals that helped get the loan funded;
(3) Lack of full, fair, and conspicuous disclosures as required under RESPA, Truth in Lending law (TILA), required ARM disclosures (Ex. CHARMS booklet), and Credit score / FICO disclosures;
(4) Failure to provide two completed copies of a notice of right to cancel to each borrower with the dates for recsission accurate and filled in (note failure to provide proper copies of this critical disclosure document can create an EXTENDED THREE YEAR RIGHT TO RESCIND YOUR LOAN (you can learn more about loan rescission at www.RescindMyLoan.net);
(5) Stated income that may be false, trumped up, and/or not properly verified when the circumstances suggest it would be prudent to verify;
(6) Excessive (and perhaps hidden) fees, including yield spread premiums (YSP);
(7) Failure to provide contracts in the foreign language of the borrower (California Civil Code Section 1632)
(8) Reverse Redlining / Discriminatory Lending
(9) Steering borrowers into sub-prime loans (ex. 2/28 or 3/27 ARM loans).
(10) Violations of HOEPA
And the list goes on – check your facts with your lawyer.
Countrywide, and other “originating lenders” may not have cared much about the consequences of the loan they underwrote (i.e. whether or not the toxic and predatory loan would be affordable after the interest rate adjusted, and whether or not the loan would land you foreclosure in next few years) mainly because the originating lenders, in many cases, were committed to selling the loan literally before you signed the loan documents. They knew they were going to be paid by a third party to buy the loan, and either hold it for an investment, or securitize it sell it off on wall street.
Again, these originating “lenders” in many cases were not even “lending” their own money, and may have funded the loan out of a credit line provided by a third party, such as an investment bank. Whatever the case, loans were originated by the droves, and sold off and securitized loans, while the originating “lender” was simply “cashed-out” by being paid the balance of the loan plus a fee.
This creates the potential for an originating lender to care more about volume, than quality of loans. IN many cases, investment bankers set the standards for the types of loans they would purchase, and the originating lender literally mass-produced loans that would wind up securitized in loan pools and sold to Wall Street investors.
Once your loan is sold off, the third party buying the loan will claim they took the note in good faith with no notice of claims and defenses, and therefore, under the eyes of the law, they should be deemed a HOLDER IN DUE COURSE (which in most cases, immunizes the purchasing lender from facing a whole host of claims and defenses a borrower may want to raise, including predatory lending claims – the claims and defenses a holder in due course must answer to are discussed below).
The end result then, is that the originating, as we have seen, can merely file for bankruptcy if the ‘heat gets too hot in the kitchen’ (i.e. if they are the subject of potentially expensive class action lawsuits challenging their predatory loans).
What this creates is a situation where the originating lender manufactures and creates the “garbage in” loans (loans that are destined for a loan pool) and the purchasing lender who buys the loan from the originating lender winds up securitizing these loans into loan pools, having them rated, and eventually pitching this “garbage out” to Wall Street Investors who are lead to believe these loan pools represent sound investments in Americas strength in the housing market.
Meanwhile, the borrower, the victim of predatory lending, has literally nowhere to turn to seek redress for loan non-compliance and predatory lending (at least that is the lenders and loan servicer’s position). The broker and/or originating lender may be bankrupt, and the Trustee of the Loan Trust, Loan Servicer, and Wall Street Investors all claim they have no liability because they had nothing to do with the original predatory lending issues. This is the situation many people face when trying to get a loan modification. Although forensic audits are being done, many homeowners will run up against the “holder in due course” issue.
The loan servicer is, in many cases, servicing the loan on behalf of the Wall Street Investor (note that the loan is likely in a Special Purpose Vehicle (SPV) with a bunch of other notes, and the Trustee of a Trust, in most cases, is speaking on behalf of the Investors. The Investors do not want any part of coming forward and claiming ownership of the notes, and they do not want to get involved in the foreclosure process. They want their income stream, and NOT to fight predatory lending lawsuits that they know (at least they NOW know) are predatory in many cases.
As many of you realize, the loan servicer is often the entity you must contact to seek a loan modification. The loan servicer too, claims no liability or responsibility for any predatory lending that may have occurred during the origination of the loan. They will claim “we are just servicing the loan on behalf of the investor.”
Again, in securitized loans, the investor is the Wall Street Investor who is seeking a portion of the income stream from the loan pool of which your loan is a part of. Of course they didn’t tell you about this loan pool when your loan was originated, or that your note would comprise part of the loan pool. All you knew is that the loan “might” be sold off to a third party.
So the question becomes, when seeking a loan modification, and following a loan audit, which parties, if any, can be held liable for predatory lending detected at the loan origination stage?
Again, the lender who purchased your loan will usually assert that they have no liability, as will the investment banker (who in many cases set the guidelines for the loans to be purchased and often gave credit lines to originating sub-prime lenders), nor will the Wall Street Investor or Loan Servicer. Simply put, everyone will point fingers at the originating lender and will claim you have no lawsuit to leverage against them as they are “holders in due course” and not liable for any other parties mortgage lending loan violations.
What then do we try to accomplish as Foreclosure Attorneys trying to halt foreclosure of your property?
(1) We review your loan file and look for predatory lending violations against the broker and/or originating lender. The broker (assuming you used one in the transaction) owed you a fiduciary duty that requires, among other things, that they fairly disclose material loan terms to you and to look out for your best interest (instead of theirs) and basically put you into the best loan for you given your financial condition. The lender, who “backs” the broker, at least in our opinion, has a duty to properly underwrite your loan to ensure that you will be able to pay it back. To us, a lender arguably “aids and abets” the broker by providing products designed to fail (ex. the option arm loan), and by allowing other predatory lending practices listed above to be perpetrated against a borrower. Note however, that Courts have generally held that a lender, as opposed to broker, owes you NO FIDUCIARY DUTY in a loan transaction.
(2) We ascertain to whom the loan may have been sold-off to and ascertain whether or not the loan was securitized, as many loans were over the last several years. If the loan was sold off (as many were), we realize we will be dealing with a “holder in due course” argument that the lender will maintain, but normally won’t discuss during the loan modification stage. At this point, we must determine what claims, if any, can be made against the loan assignee.
The best claim is where the originating lender never sold off the loan, and rather, services its own loan in its portfolio (called a “portfolio loan”). In these cases, the originating lender is responsible for its own garbage and cannot point fingers at other entities, such as a loan broker. You should note, that this is the precise reason why loans get sold off in the first place (why not transfer the loan, and the liability to someone else and get “cashed out” for your efforts).
Another type of claim that we think may have some viability is the situation where, for example, Countrywide originates the loan (ex. option arm loan), then sells off the loan on the secondary market, yet RETAINS the right to Service the Loan. In these cases, it is our opinion that Countrywide continues to “enjoy the fruits” of what may be a predatory loan (ex. the option ARM loan – aka “pick-a-pay”). In these circumstances, should Countrywide be deemed a holder in due course (HDC) and be permitted to avoid liability by claiming it is no longer the owner of the loan and that they are just a loan servicer for the new investor of the loan? We do not see that as a fair outcome.
Another good scenario for applying the findings in a forensic loan audit, is the situation where you can make some type of connection between the secondary market and the predatory lender and/or where you have Truth in Lending (TILA) or HOEPA material violations that allow you to make some type of Claim against the loan assignee, whether a major lending institution or trustee claiming ownership of a loan under a trust. Potential causes of action such as civil conspiracy, joint venture liability, aiding and abetting tort violations, and TILA and HOEPA are discussed below.
NOTE: One way to find out whether or not your loan was sold off and securitized on the secondary market is to use some free online search tools. Here are some tools for you to look up your property to see if Freddie or Fannie (Government Sponsored Enterprises – Quasi Private Companies) own your loan:
Does Freddie Mac own your loan?
Does Fannie Mae own your loan?
Freddie and Fannie typically securitized conventional loans, and they claim to be the holder / owner of the certain loans they securitize. You can also try to call your lender and just ask them: “do you own the loan or are you just servicing it on behalf of an investor” (sometimes they will tell you, and sometimes, strangely enough, they will keep the owner of your loan a SECRET if you can believe that).
You may also want to send in a Qualified Written Request under RESPA and/or a request under 15 U.S.C. 1641(f) to demand that the loan servicer produce the name, address, and telephone number of the holder of the loan or master loan servicer. They are required to tell you this under Federal Law (that being said, do not be surprised if they blow you off – this is the response we get in many cases, again, if you can believe it). Why is that? Because they do not want you to know who owns your loan, in some cases, because they cannot “produce the note” and prove they have the right to collect loan payments and/or foreclosure on your property. In some cases they would prefer to simply keep you ignorant.
You can also send out “debt validation letters” following the lender / loan servicer / collection companies attempts to collect a debt (i.e. calling you to discuss your past-due mortgage payments).
(3) We send out legal demand letters highlighting the best case possible for liability against the lender and/or loan servicer and/or trustee of a trust acting on behalf of Wall Street Investors. This may be to assert a TILA rescission claim and discussing a potential tender strategy, to outlining a HOEPA violation triggering rescission, or arguing for “aiding and abetting” liability, etc. Again, keep in mind, if there is not some type of connection to the originating lender (ex. the original lender sold off the loan and is now profiting from it by acting as loan servicer) it may be tough to raise a strong legal claim against the loan assignee or trustee of a trust, aside from TILA extended rescission rights or other grounds for rescission or the filing of an injunction.
NOTE: Some possible grounds for filing for an injunction (which may get the attention of a loan servicer acting on behalf of the investors) that can result from a loan audit are:
(1) TILA right of rescission (for “material” TILA violations)
(2) HOEPA (hi cost loan) violations
(3) Failure to follow Arizona or California foreclosure laws (ex. 2923.5 declarations in CA)
(4) Wrongful Foreclosure (ex. failure to clarify amounts owed pursuant to a Qualified Written Request which disputes such; or where the breach was already cured through a loan modification agreement (see our website at www.TrialPlanFraud.com for more information on Trial Plan scams and bad faith dealing we are seeing in conjunction with loan modifications)
(5) Unconscionable Loans that should not be enforced (ex. predatory option arm pick-a-pay monthly adjustable loans)
(6) Fraud in the origination of the loan which can be tied to the lender (especially a portfolio loan)
(7) Violations of California Civil Code Section 1632 – Foreign language contracts)
(8) Other equitable grounds for enjoining your foreclosure sale (contact a foreclosure defense attorney to discuss).
These are just a few sample grounds that can be reviewed, and raised where applicable to seek an injunction. In other cases, the aggrieved borrower may be have nothing more than a claim against the originating broker/lender who may now be defunct following a BK during the mortgage meltdown.
Note: Some borrower’s want to assert fraud against “the whole system” (broker, originating lender, investment banker that securitizes loan, trustee of the trust, loan servicer, etc.). This approach should be thought through to make sure you actually have good-faith claims to assert against each party. A frivolous “sue everybody” approach is not without consequence.
(4) In addition to trying to “audit” (look-for) for predatory lending and foreclosure violations, we also try to “create” legal violations (that’s right, if the loan servicer cannot comply with simple legal requirements they too can become potential defendants). To do this we send out qualified written requests; demands to validate debts; and demands to identify the holder of the loan.
While we would concede that in many cases the loan servicers had nothing to do with the origination of the loan and the predatory lending practices that may have occurred, however, there are legal rights that California and Arizona homeowners facing foreclosure have, that the loan servicers (who can also be predatory themselves) must comply with upon making proper requests. Two of the main things they are required to do are:
(a) They must respond to Qualified Written Requests. They are fairly good at this in our opinion, but their responses are often late, or often lacking in detail. They must acknowledge the QWR within 20 days, and address any valid issues within 60 days. They must also cease reporting negative credit during this period. Failure to comply creates legal violations against the loan servicer, and,
(b) They must identify the holder of the loan or master loan servicer (name, address, and phone number) as set forth above. Note that they rarely comply with this request. Given that many loans were securitized and managed by a “trustee of the trust” they will rarely provide you any meaningful information in this regard. Again, they seem to prefer to keep this a secret.
(c) There are some other items that arguably must do including following foreclosure laws, rules, and regulations when they are working with other parties seeking to foreclose on behalf of the “investor” of the loan. For example, they may be required to give (or may voluntarily give) declarations in the Notice of Default (ex. the California Civil Code Section 2923.5 declaration that certifies that the “beneficiary” of the loan, or their “authorized” agent – for example, the loan servicer claiming to be the authorized agent of the beneficiary – has contacted the borrower to assess their financial situation, and discussed loan modification options). In securitized loans, this may raise issues involving who the true beneficiary is. If you do not know who the true and real beneficiary is (ex. the true lender who is entitled to loan payments) then how can you ascertain who the “authorized agent of the beneficiary” is? And if you do not know the answer to that questions, how can you confirm there was any compliance with 2923.5? If there is no compliance with 2923.5 (or it least if the loan servicer, trustee, and lender cannot prove who the true owner of the loan is) then why should the foreclosure be allowed to proceed where compliance with California Foreclosure laws cannot be proved where challenged? We discuss more about this issue at our www.ProduceTheNoteAttorney.com website.
The bottom line is, that despite the fact that your loan was sold off, and potentially securitized, and despite the fact that the lenders, loan, servicers, and/or trustees will claim they are “holders in due course” we nevertheless attempt to identify, assert, and stand up for our clients legal rights. This is not to say there are absolute rights to stop foreclosure in every case. Some loans may be simply too old, or may be non-predatory in nature, that finding and asserting legal leverage may be tough. Not all loans are predatory. But the point is to approach every foreclosure defense case as setting up a case for potential litigation.
Too many times people come to us after hiring loan modification companies, or even other attorneys who did nothing more than submit tax returns and pay stubs (i.e. they did nothing or very little to investigate whether a legal case can be made to stop foreclosure, if necessary, and to present their findings to a loan servicer). While the servicer may not care much about potential litigation (again, they see themselves as innocent parties to the transaction and to securitization in general) nevertheless we believe it makes sense to approach these cases as if preparing for a lawsuit, for no other reason than that it may actually be required.
We have seen people squander their TILA rescission rights because they thought they had hired a loan modification company or loan modification law firm to assist them. However, not protecting your TILA rescission rights (of course you have to find these rights first) especially where you had a legal right to rescind against the loan assignee, and where you had an ability to “tender” as required under TILA, is truly a shame to see, and in my opinion creates malpractice liability exposure for the attorney who did nothing but send in a hardship letter and patted himself on the back for helping a homeowner in distress. Both the real estate broker posing as a loan modification company, and the “foreclosure defense law firm” both assume legal liability for not investigating and protecting a homeowners TILA, and/or other rescission rights. If for no other reason, that is justification for having your loan file audited, especially where you have equity, or near-equity in the property or some other means to tender following rescission. For more information about tender and rescission see our website at www.RescindMyLoan.net
At any rate, this list goes on. The point is, as Foreclosure Defense Attorneys, we are looking to see if there is any way to leverage a loan modification (or at times a short sale) against the subsequent purchasers of the loan, and/or the loan servicers and final investors of the loan (which may be largely insulated from lawsuits under the holder in due course doctrine discussed below).
HOLDER IN DUE COURSE OVERVIEW
Generally speaking, a holder in due course (in the mortgage loan context) is a subsequent purchaser of a loan (ex. Wells Fargo who buys a loan from Countrywide or Fannie / Freddie who buys a loan from a direct lender) and who buys in good faith, without knowledge of any claims, defenses, or defects in the underlying instrument. This is merely a general statement of the law.
BENEFITS OF BEING A HOLDER IN DUE COURSE: In general terms, a holder in due course will only be liable for the “REAL” defenses of a potential plaintiff (ex. infancy, duress, lack of capacity, illegality of transaction, fraud in the inducement where no opportunity to discover essential contract terms was permitted). A holder in due course is generally NOT liable for any “PERSONAL” defenses (such as undue influence, less than total competence, fraud and misrepresentation that does not prevent discovery of material contract terms, etc.).
Obviously, this creates a powerful incentive to obtain holder in due course status under the holder in due course doctrine (HDC) as there are less legal claims that can be made against you.
GENERAL REQUIREMENTS TO OBTAIN HOLDER IN DUE COURSE STATUS FOR MORTGAGE LOANS:
Generally speaking, under U.C.C. 3-302 a holder in due course is a:
(1) “Holder” of an “instrument;”
(2) Who has no apparent evidence of forgery or alteration of the instrument;
(3) Who otherwise has no notice of any other irregularity that may call into question the authenticity of the instrument;
(4) Which Holder took the instrument for value (paid consideration);
(5) And in good faith (honesty in fact and in observation of commercially reasonable standards of good faith and fair dealing);
(6) Who took without notice that the instrument may be overdue or that it has been dishonored, or that there is an uncured default with respect to payment of another instrument in the same series;
(7) And which holder took the instrument without notice of any claims under UCC 3-305(a) (“real defense”) or 3-306
(8) And which holder took the instrument without notice that the instrument contains unauthorized signatures or has been altered.
Note: the “notice” requirement seems to be more of an “objective standard” in that the Courts may look to whether or not the holder of the instrument “should have realized” any of the above items which would preclude HDC status.
Also note: Article 3 of the UCC underwent a re-writing in 1990. It should come as little surprise that the drafting process was largely dominated by the banks, clearinghouses, and federal reserve board.
So, this section indicates that if a subsequent purchaser of a loan pays value for the loan, and takes it in good faith with no notice of claims or defects listed above, generally speaking then they may be considered a holder in due course subject to the limited claims and defenses of the potential plaintiff (i.e. an aggrieved homeowner) as stated above.
NOTE: The key then is to either defeat the subsequent parties claim of HDC status, and if that cannot be done, find some other type of claim that may make them liable even though they fancy themselves as holders in due course.
If the facts of a case allows you to claim that either: (1) there is no holder, (2) there is no instrument, (3) there was no good faith, (4) there was no value paid for the loan, and/or (5) there were other noticeable claims and/or defects that should have been detected, etc., then you may be able to argue the subsequent purchaser of the loan deserves no HDC status. These are some things to look into.
NOTE: We will be updating this section with caselaw in this area as time permits. I did not have time to add to this section.
WHAT LEGAL CLAIMS, IF ANY, CAN BE MADE AGAINST A “HOLDER IN DUE COURSE?”
Now, even where the loan is owned by a subsequent lender, and/or Wall Street investors – who invest in mortgage backed securities (and where these loans are being serviced by a designated loan servicer, who may or may not be a major lender themselves) and the holder in due course issue arises, there still MAY be some claims that you MAY be able to assert against these loan assignees.
Here are a few arguments that can be looked into when trying to see if there is any way to threaten a lawsuit against the loan assignee / innocent investor / trustee under a trust / loan servicer, etc where a reasonable and meaningful loan modification is not provided to the borrower.
Please keep in mind, these can be TOUGH theories to prevail on, but homeowners should at least consider some of these theories if the lender is literally forcing foreclosure on the homeowner, and where a predatory loan is present - (typically, the option ARM loan which most people agree is predatory, including the lenders themselves who are entering into various settlement agreements with state Attorney Generals, all but conceding the predatory nature of these types of loans and the 2/28 and 3/27 Sub-prime ARMS which may also be predatory, but possibly in more limited circumstances).
Here are the theories we will be looking at in very general terms: (1) Civil Conspiracy, (2) Joint Venture Liability, (3) Aiding and abetting tort violations, (4) TILA and HOEPA rescission rights. These claims, where applicable, can be raised against loan assignees, and should be presented to the loan servicer when attempting to leverage a loan modification.
(1) Civil Conspiracy
The following highlight some general principles in the State of California that highlight the elements required to show a civil conspiracy.
In the context of securitized loans, the question would be whether or not a borrower of an alleged predatory loan (ex. an option arm loan that was not fully explained, disclosed, or that has harsh, oppressive, and confusing and conflicting terms) can sue more than just the original broker and lender, but rather, can he sue the broker, lender, loan servicer, trustee of the trust, etc., by arguing they are involved in a system or process designed to defraud California borrowers or in disregard of whether or not the borrower would wind up in foreclosure given the underwriting and other predatory practices involved in the loan origination process.
A general review of the California case law highlights what might be legally required to assert a civil conspiracy claim against the players in the “structured predatory financing” system created by the major financial institutions (my comments are set forth in italics), the requirements are taken from actual cases involving civil conspiracy claims in California.
(1) Civil Conspiracy is not cause of action, but legal doctrine that imposes liability on persons who, although not actually committing tort themselves, share with immediate tort-feasors common plan or design in its perpetration. (One could argue that the common plan or design is to originate predatory loans that have high costs and fees, and which are likely to result in foreclosure, and to securitize these loans in a manner in which everyone would profit).
(2) Elements of action for civil conspiracy are formation and operation of conspiracy and damage resulting to plaintiff from act or acts done in furtherance of common design; the major significance of civil conspiracy lies in fact that it renders each participant in wrongful act responsible as joint tort (whether or not he was a direct actor and regardless of degree of activity). Formation of a conspiracy normally requires some type of agreement as set forth below. The damage would be the resulting foreclosure that is a foreseeable consequence of some types of option arm loans.
(3) Actual knowledge of planned tort, without more, is insufficient to serve as basis for conspiracy claim as the knowledge must be combined with intent to aid in tort’s commission.Again, this seems to require some type of intent to aid the other parties. This may be a bit difficult to prove. For example, does a loan servicer have the intent to aid the original lender in originating an option arm loan?
(4) To prove claim for civil conspiracy, plaintiff must show: (1) formation and operation of conspiracy; (2) wrongful conduct in furtherance of conspiracy; and (3) damages arising from wrongful conduct. This is a general recitation of the rule.
(5) A civil conspiracy to commit tortious acts can only be formed by parties who are already under a statutory or common law duty to plaintiff, the breach of which will support a cause of action against them individually, rather than as conspirators. Stated another way, where plaintiff alleges existence of civil conspiracy he must allege allege the preexisting legal duty and its breach.
(7) Because civil conspiracy is so easy to allege, plaintiffs have a weighty burden to prove it. To prove the claim, Plaintiff’s must show that each member of conspiracy acted in concert and came to a mutual understanding to accomplish a common and unlawful plan, and that one or more of them committed an overt act to further it. Again, the cases indicate that Plaintiff must PROVE the mutual understanding……this may not be so easy to do, and must prove that each acted in concert to put Plaintiff into a predatory loan that was designed to result in foreclosure.
(8) There is no separate tort of civil conspiracy, but rather, conspirators must agree to do some act which is classified as “civil wrong. In the context of setting up a system to securitize loans, the “wrongful act” may be argued as setting up the chain of financing whereby the original broker and lender gets cashed out for their participation in essentially creating the security, while the other parties (the investment banker, loan aggregator and trustee) get immediately cashed out by the wall street investors who invest in the loan pools, and the servicer collects its fees for any and all loans that it gets to service. Note: If proper underwriting guidelines were followed, it would seem there would be a WHOLE LOT LESS LOANS TO SERVICE (meaning, less profits to the servicers). Again, proving the common plan and scheme may be the hurdle.
(9) Mere knowledge, acquiescence, or approval of an act, without cooperation or agreement to cooperate is insufficient to establish liability based on conspiracy.
NOTE: This is not an exhaustive analysis of the cases, and may be missing some recent cases involving securitized financing. These are just some general ideas to think about when determining whether there are proper grounds to assert against the parties to a securitized loan.
(2) Joint Venture liability
A joint venture is basically an agreement between two or more persons (which includes corporations) who agree to work together toward a common plan in the pursuit of profits. There must be an agreement to work together. The joint venture agreement may be oral or informal. Whether a joint venture agreement is created is a question of fact depending upon the intention of the parties.
The essential element of a joint venture is an undertaking by two or more persons to carry out a single business enterprise jointly for profit. The rights and liabilities of joint adventurers, as between themselves, are governed by the same rules which apply to partnerships. See Pellegrini v. Weiss, 165 Cal.App.4th 515, (2008).
In Smith v. Wells Fargo, 401 F.Supp.2d 549, (2005), a Plaintiff was challenging the actions of a loan originator. Countrywide and Wells Fargo claimed they were “holders in due course” and thus, could not be liable for the actions of the loan originator or its agents. The Court disagreed, and denied Defendant’s motion for summary judgment (Defendant’s claimed Plaintiffs could not prove that there was a joint venture agreement). In denying Defendants motion for Summary judgment on the joint venture issues, the Court held:
“As between the parties, a contract, written or verbal, is essential to create the relation of joint adventurers……..to constitute a joint adventure the parties must combine their property, money, efforts, skill, or knowledge, in some common undertaking of a special or particular nature, but the contributions of the respective parties need not be equal or of the same character. There must, however, be some contribution by each party of something promotive of the enterprise…….an agreement, express or implied, for the sharing of profits is generally considered essential to the creation of a joint adventure, and it has been held that, at common law, in order to constitute a joint adventure, there must be an agreement to share in both the profits and the losses. It has also been held, however, that the sharing of losses is not essential, or at least that there need not be a specific agreement to share the losses, and that, if the nature of the undertaking is such that no losses, other than those of time and labor in carrying out the enterprise, are likely to occur, an agreement to divide the profits may suffice to make it a joint adventure, even in the absence of a provision to share the losses.”
In applying this, the Court held:
“In the case sub judice, after reviewing the PSA, it appears that there was an agreement to pool and service (PSA) mortgages between Delta Funding Corporation, as seller; Countrywide, as servicer; and Norwest Bank Minnesota, National Association or Wells Fargo, as trustee. It also appears that Delta Funding provided the mortgage loans, Countrywide provided servicing the loans and Wells Fargo provided the financing or money. Finally, it appears from sections 2.04(b), 2.05, 3.08, 7.01 and 9.05 of the PSA that there was an agreement on the fees each party could collect as well as their liability for losses.
Moreover, in section 4 of the expert report by Kevin P. Byers, Mr. Byers notes that Delta Funding’s revenues result primarily from “the sale of mortgage loans (through securitization and on a whole loan basis and sale of its servicing right on newly originated or purchased pools of home-equity loans.”)…..(quoting Delta Funding’s 10-K annual report to the Security and Exchange Commission).) Therefore, taking the evidence in the light most favorable to the plaintiff, it would not be unreasonable for a jury to conclude that Delta Funding, Countrywide and Wells Fargo entered into a joint venture. As there is a genuine issue of material fact, the Court denies summary judgment.”
Potential Argument for Joint Venture Liability in the Securitization of Loans:
The pooling and servicing agreement(used when loans are securitized) is an express written agreement that basically sets the stage for the participants in loan securitization to realize a profit:
(1) The Servicer is appointed to collect loan payments and receive a profit from the collection of such from the borrower. The Servicer therefore commits its time, talent, resources, and services in an attempt to profit from the securitized loan;
(2) The Trustee agrees to perform certain duties to manage and administer payment streams for the benefit of the investors of the securitized loan;
(3) MERS may be appointed to receive a fee to track ownership and servicing rights (which may be transferred at the Trustees discretion);
(4) The seller of the security and investment banker / underwriter cannot profit “but for” the pooling and servicing agreement. In essence, it could be argued they are third party beneficiaries under this agreement;
(5) As part of the agreement, some originating lenders may agree to “buy-back” non-performing loans, keeping them on the hook under the terms of the contract (sharing in the profits and losses of the joint venture).
Obviously this is just one example, you would want to review the pooling and servicing agreement and SEC filings to see what the exact set-up is in your situation.
(3) Aiding and Abetting Liability – Creating the Marketplace for Predatory Option Arm loans.
Under the common law of many states, it is against the law to aid and abet another in the commission of a tort (ex. fraud / misrepresentation are two types of torts). For example, where you have a broker that broker’s a loan through a “direct lender” and the direct lender is “pricing out” the loan and reviewing the guidelines of the “purchasing lender” (i.e. the loan assignee who will claim they are a holder in due course) the question arises who is liable, for example, for making false statements of fact to induce a borrower to enter into an option arm loan?
It would seem appropriate that the broker (who took the loan application and made false statements of fact – in breach of their fiduciary duty to the borrower – should be held liable. But what about the “direct lender” who is funding the loan only to turn around and sell it to the “purchasing lender”? Did the direct lender aid and abet the broker by not verifying certain disclosures are made? Do they aid and abet by underwriting the predatory loan product (usually these option arm loans are underwritten to wind up in foreclosure – the borrower can afford the “teaser rate” but not the payment that would result after the loan hits is principal balance cap and recasts into a fully amortized loan at the note rate?
Did the direct lender “aid and abet” the broker? It would seem an argument could be made since the direct lender knows, or should know the details of the loan, and was in a good position to ensure proper underwriting and to ensure proper disclosures (ex. a CHARMS adjustable rate disclosure and other truth in lending disclosures are clear, conspicuous and accurate).
Taking it to the next level, even assuming you can create a case for liability against a direct lender (using our scenario above) can you then extend liability to the entity that purchases the loan from the direct lender (i.e. a private investor, private bank, investment banker, fannie mae or freddie mac, etc.?). Can you impart this level of knowledge and wrongdoing against these parties that are even more remote in the chain of things?
These are the tough questions. Again, it seems even these “purchasing lenders” are complicit, and have knowledge about the types of loans they are purchasing (in this case the option arm loan) and know, or should know that these loans are predatory, toxic, and likely to wind up in foreclosure.
In a recent predatory lending lawsuit, in the case of Plascencia v. Lending 1st Mortgage, the Defendant, EMC, claimed it could not be held liable under California’s Unfair Competition Law, (2008 WL 4544357 (583 F.Supp.2d 1090, N.D. Cal. Sept. 30, 2008)), since it was not the party that originated the loan in question (EMC purchased, and securitized loans from Lending 1st Mortgage that often had truth in lending violations).
The Plaintiff sought to hold EMC liable since they were “engaged in the business of promoting, marketing, distributing, selling, servicing, owning, or are and were the assignees of the Option ARM loans that are the subject of this Complaint.” They argued EMC was engaged in a “fraudulent scheme” with Lending 1st.
The court denied Defendant EMC’s motion to dismiss on this ground holding that essentially it was possible that Defendant could be held liable for aiding and abetting. Specifically, the Court stated:
“By showing that EMC purchased Lending 1st’s Option ARM loans with knowledge of Lending 1st’s TILA violations, Plaintiffs may be able to establish that EMC gave Lending 1st a financial incentive to continue to commit those violations, and therefore may be subjected to liability for aiding and abetting violations of the UCL. Moreover, EMC’s profiting from loans featuring oppressive terms that were not fully disclosed in compliance with TILA could itself be an unfair business practice under the UCL. EMC may therefore be liable for UCL violations in its own right. Accordingly, the UCL claim will not be dismissed.”
NOTE: This case may be limited to cases where the borrower was unaware they had a negative amortization option arm loan and/or where Plaintiff can prove that the Purchasing lender has knowledge of TILA defects in the loans they are purchasing. This is a good case that talks about fraud and the Unfair Competition Law in regard to Mortgage Loans and creates some “hope” for lender liability.
NOTE 2: The Plascencia Case also discussed / cited another case, the In re First Alliance Mortgage Co. case which citation can be found at 471 F.3d, 977, 994-995 (9th Cir.2006). In this case, a California Federal Court imposed aiding and abetting liability on Lehman Brothers for predatory loans made by First Alliance which targeted senior citizens with false and misleading loans representations. Lehman purchased the predatory loans and securitized them – while First Alliance remained as the loan servicer earning additional profits off what were found to be predatory and fraudulent loans. Again, the case indicated that Lehman had knowledge of Alliance’s lending practices and even provided a warehouse line of credit so that First Alliance could continue to originate these types of loans. Again, which indicates some level of knowledge of the predatory loan origination practices may have to be shown as a pre-requisite to filing suit.
This case is important because companies like Countrywide often originated predatory option arm loans (or “backed” brokers who pitched these loans) and often sold them off on the secondary market, and retained the servicing rights. We have been saying that in these cases, Countywide (now BofA) should not be able to claim they are an innocent party, or that they have some type of “holder in due course status” when they are continuing to profit from their dirty laundry.
A separate question to consider is whether a Plaintiff can attack what may appear to be a truly innocent “loan servicer” (without proof of predatory knowledge), with aiding and abetting liability where a loan servicer refuses to modify a loan that was a product of fraud at the loan origination stage. It seems that some level of knowledge of the predatory loan origination may be required (although some would argue all loan servicers are implicit as to the true nature and quality of loans securitized and pooled into trusts). Where a loan servicer is appointed / hired to collect loan payments on behalf of a trustee of a trust, it is not clear whether or not a predatory knowledge can be established, but should be investigated in each case.
NOTE 3: Another case that may help in analyzing and aiding and abetting liability claim against a loan purchaser / loan assignee who may have securitized your loan or a loan servicer with knowledge of predatory loan origination is Schulz v. Neovi Data Corp., 152 Cal.App.4th 86 (2007). This is the case where an online payment processing company allowed an illegal online lottery site accept payments for its business. The Plaintiff made a claim under the California Business and Professions Code Section 17200 (California’s unfair competition law) and argued that the payment processing company had “aided and abetted” the illegal lottery site. The Court held:
Liability may be imposed on one who aids and abets the commission of an intentional tort if the person knows the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act……..this is consistent with Restatement Second of Torts Section 876, which recognizes a cause of action for aiding and abetting in a civil action when the wrongdoer knows that the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself.
The rationale is that advice or encouragement to act operates as a moral support to a tortfeasor and if the act encouraged is known to be tortious it has the same effect upon the liability of the adviser as participation or physical assistance.
Under this theory, at least for California loans, it appears a borrower may be able to sue a purchasing lender of a predatory loan who securitizes and profits off the loan, and potentially a loan servicer who profits off a predatory loan (even though the Schulz case does not involve the holder in due course argument) where it appears the lender or servicer has knowledge that the originator of the loan was committing a tort by breaching a legal duty (ex. making fraudulent representations to induce a borrower into entering into an option arm loan) AND, where the lender or loan servicer gives substantial aid, assistance, and/or encouragement.
Under this theory, it would seem you would need to prove two tough things, (1) knowledge of the tortious breach of duty by the loan originator, and (2) active participation in encouraging the predatory practice. This may be an easier case to make against a purchasing lender who is looking to securitize loans, than it is a loan servicer seeking to profit off its servicing of virtually any loan (the servicer does not care what the loan is, they will service any loan).
At any rate, the facts of the case should be looked at to determine which, if any, parties may be proper parties to file a lawsuit against. Remember, filing false and frivolous claims can result in sanctions and other unfavorable responses by the Court. There needs to be good faith grounds to file a lawsuit against any party.
(4) HOEPA (high cost loans) and TILA Extended Right of Rescission Claims apply to assignees of loans even those claiming Holder in Due Course Status.
Note: MATERIAL TRUTH IN LENDING VIOLATIONS THAT CREATE AN EXTENDED THREE YEAR RIGHT TO RESCIND APPLY TO ALL LOAN ASSIGNEES EVEN TO ANY PARTY DEEMED A HOLDER IN DUE COURSE. THAT IS WHY A TILA LOAN AUDIT IS SO POWERFUL BECAUSE IF YOU HAVE AN ABILITY TO “TENDER” THIS CLAIM WILL SURVIVE EVEN TO A HOLDER IN DUE COURSE.
More about these types of rescission claims can be found at our website www.RescindMyLoan.net
Although the financial giants have created an elaborate system of securitizing loans – which arguably encouraged, facilitated, and assisted the originating lender to loosen up the underwriting standards and create as many loans as possible that were designed to be bought up, securitized, and ultimately sold-off to wall street investors – they also helped draft the UCC Holder in Due Course rules which they seek to hide behind whenever they are sued.
Although it can be difficult to make credible claims against a loan assignee, trustee of a trust, loan servicer or other entity that was intended to profit off securitized loans, there are some claims and defenses that should be explored.
Foreclosure defense is a difficult line of business because often times loan payments are not being made by the borrower, and at times the loan servicer may even offer some type of a loan modification that can be used to show good faith in a Court of Law in the event a lawsuit is filed. In addition, judges are literally inundated with foreclosure defense lawsuits, and where a judge is paying his or her mortgage, they may not look favorably on others who don’t pay their mortgage, and it is possible that only the worst of the worst predatory lending practices will ever see the light of a jury. Of course, judges are bound to follow the law, and it is our job as foreclosure defense lawyers to try to make a persuasive case for predatory lending, injunctions, damages, assignee liability, and rescission rights.
Sure the deck is stacked against you, but why take foreclosure lying down? If you are denied a loan modification, and believe you may be the victim of predatory lending, have your case reviewed to see if you have any proper grounds to challenge the assertion of HDC status, or to lay claim against the parties to loan securitization for aiding and abetting legal violations and engaging in civil conspiracy’s and joint ventures that seek profit at the expense of legal compliance and at the expense of the homeowner.
Where you have valid good-faith legal claims that you can assert material TILA violations raising extended rescission rights against ANY loan assignee (ex. civil conspiracy, joint venture liability, aiding and abetting, TILA rescission rights, HOEPA recsission rights, etc.), this might be the best time to raise the “produce the note” defense and make them prove that: (a) they have the legal right to foreclosure on you (i.e. that their is some entity/beneficiary holding the note that has a legal right to foreclosure on your property) and that (b) this beneficiary, or their authorized agent, has complied with all required aspects of foreclosure law in California)?
If the “wrong lender” or “pretender lender” (as this term is used by Neil Garfield) forecloses on you, how can you be certain the “real lender” (i.e. the entity/beneficiary that may be holding your original promissory note and all properly recorded assignments) won’t come knocking on your door – wherever that door may be – and calling its loan due.
Should a homeowner / mortgagor be required to risk “financial double jeopardy” where it is not clear who owns your loan given the nature of securitized loans and given the tendency of loan servicers to keep this fact a secret?
Again, no one is saying this is an easy battle. These are just some things to think about and issues to explore when your house is on the line. This article is not to imply success on any of the theories outlined above. For specific legal questions, please contact a foreclosure defense attorney in your area. We are only licensed to practice law in the states of California and Arizona, and only seek to solicit clients in these states. This is an advertisement and communication pursuant to state bar rules.
To see some of other other websites dealing with the financial crisis please review the following websites:
(1) www.OptionArmLawyer.com (potential attacks against the predatory option arm loan – aka “Pick-a-Prey”)
(2) www.TrialPlanFraud.com (tackling issues involved with what we call trial-plan shennanigans)
(3) www.BKAttorneyS.net (BK Attorney Steve – Chapter 7 Bankruptcy information for Arizona and California Homeowners)
(4) www.RescindMyLoan.net (website that discusses Truth in Lending Rescission information)
(5) www.LoanModRadio.com (site which features foreclosure defense issues in streaming audio)
(6) www.ProduceTheNoteAttorney.com (general information on the “Produce the Note” foreclosure defense strategy that is running rampant on the Internet)
www.LoanModSolutions.net (Submit your Wachovia / World Savings Loans)
www.LoanModificationRipoff.net (Submit your Loan Mod Scam – we may be able to take your case on contingency).
Our profiles will also be listed on www.ContingencyCase.com an online legal directory for lawyers who will consider taking cases on a contingency fee basis in a variety of legal areas. I will be listed for our World Savings and Wachovia Option Arm loans.
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Note: Our Foreclosure Defense work is primarily driven by phone, fax and email with you and the lenders.
As a consequence we are able to serve Arizona loan modification clients in the following Arizona cities:
Lake Havasu City
The foregoing information is general legal information only and shall not be relied upon as legal advice, or a substitution for legal advice. If you have specific legal questions about your foreclosure case, or loan modification case you should seek out the advice of a real estate attorney. In addition, the information posted above may not be 100% complete, accurate or up-to-date. The Law Offices of Steve Vondran is licensed to practice law in the state of Arizona and California and only seeks to solicit and serve Clients in these two states. Steve Vondran, Esq. is a licensed attorney and real estate broker in California and Arizona. He can be reached by email at email@example.com or toll free (877) 276-5084. This is an advertisement and communication pursuant to State Bar Rules. Please do not send us private or confidential information through any of our above-listed websites. Sending us an email does not create an attorney-client relationship (only signing a legal retainer will do this).