Servicers Fight Litigation Over Handling of Loans

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Sept. 11–Courts are refusing to toss cases alleging improper mortgage payment crediting practices, and mortgage servicers continue to make amends for improper foreclosures. A new law firms is being formed to enforce borrowers’ rights.

U.S. District court judge Amy St. Eve on July 29 refused to dismiss a federal class action lawsuit in Illinois against GMAC Mortgage for allegedly crediting mortgage payments improperly and reporting plaintiffs to credit agencies, and against Partners for Payment Relief and Potestivo & Associates for allegedly sending vague collection letters and presenting themselves as collection agencies without proper license.

The complaint alleges violations of federal and state collections law as well as fraud, defamation and breach of contract.

The named plaintiff in the case alleges that on several occasions, she paid slightly more than the required monthly mortgage payments, paying $700 on a $696.21 monthly bill. She alleges that GMAC treated these payments as “additional payments” and applied the entire amount to the principal. GMAC then sent the plaintiff default notices and allegedly reported her as delinquent to credit reporting agencies.

After that, GMAC transferred the mortgage to Partners and Potestivo, who sent letters to the plaintiff stating that she was in default and threatening her with foreclosure. The agencies refused to accept any continued payments. According to the plaintiff, these letters demanded payment and failed to clearly identify the name of the creditor. The plaintiff sent the defendants a dispute letter and filed suit two days later.

According to the court, the defendants essentially argued that before bringing suit, the plaintiff had to wait for the defendants’ response to the dispute letter. The court found that this was not a basis for dismissing the case and found that the plaintiff’s allegations were specific enough to allow the case to move forward.

Federal district court judge Virginia Hopkins on June 26 ruled in Alabama on allegations against JPMorgan Chase related to improperly crediting a mortgage payoff and reporting the borrower to credit reporting agencies.

The complaint arose because Chase failed to credit the borrower’s account for several months after a payoff was received. By that time, Chase contended that the payoff was short and refused to credit the account at all due to the “short” payoff. Chase did not confirm that the loan was paid off until five months after the payoff was received.
Meanwhile, the plaintiff had a miscarriage during this period. The complaint alleged fraud, misappropriation of funds, breach of contract, negligence, defamation, and mental anguish.

The court allowed to trial the plaintiff’s fraud and breach of contract claims that the submitted payoff amount was sufficient to cover the entire loan and that the mortgage required Chase to credit the payoff upon receipt, as well as the plaintiff’s misappropriation claims that Chase improperly held the payoff funds without the plaintiff’s consent. The court nonetheless ruled for Chase on the plaintiff’s negligent loan servicing claim, noting that Alabama law would not recognize such a claim. The court also ruled for Chase on the plaintiff’s defamation claim, noting that the Fair Credit Reporting Act preempts defamation claims that arise out of false reports made to credit agencies. Finally, the court ruled for Chase on the plaintiff’s mental anguish claim, finding that her miscarriage was unconnected to Chase’s actions.

The state Court of Appeals in California reversed a lower court’s dismissal of a case against Chase alleging that it improperly required the borrower to pay Chase’s shortfall after a short sale. The court found that California’s Code of Civil Procedure section 580b protects borrowers from such an obligation no matter whether the property was sold in a short sale or in a foreclosure sale.

The Federal Reserve announced on July 26 that it ordered GMAC and ResCap to pay approximately $230 million to more than 232,000 mortgage borrowers who were in foreclosure with GMAC during 2009 and 2010. The Fed said $198 million will be paid into a settlement fund to be distributed to borrowers by category, and $32 million will satisfy GMAC’s obligation to provide loss-mitigation assistance, which is directed to foreclosure prevention and keeping borrowers in their homes.

According to the Fed’s announcement, borrowers accepting payments are still permitted to take other actions related to their foreclosures, as GMAC is prohibited from asking borrowers to sign waivers in connection with receiving payments.

The formation of the Hoffman Law Group, a new mortgage litigation firm, was announced in May. According to the announcement, the firm works with homeowners struggling with payments, dealing with foreclosure, or fighting against predatory lending. The firm pursues lenders for breach of implied covenant, promissory estoppel and fraudulent concealment, as well as violations of state consumer protection laws, the federal Truth in Lending Act and the Real Estate Settlement Procedures Act.

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