Daily Development for Monday, October 1, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

LENDER LIABILITY; SERVICING; REINSTATEMENT: Florida court certifies class of claimants for servicer misconduct to include persons losing their homes to foreclosure as a consequence of inability to pay overcharges demanded for reinstatement.

Cole v. Echevarria, McCalla, Raymer, Barrett & Frappier, 2007 WESTLAW 2805409 (Fla. App. 9/28/07) 

The plaintiffs are residential property owners who were in default on their mortgages, and the defendants are attorneys representing the mortgage holders. The essence of the complaint is that the defendants engaged in an illegal collection practice and a deceptive trade practice by requiring the plaintiffs to pay inflated costs for title searches and title examinations in order to reinstate their mortgages.  Presumably these charges were demanded pursuant to language in the standard FNMA/FHLMC residential mortgage instrument that permits reinstatement, even after acceleration, if the borrower:

 pays all expenses incurred in enforcing [the mortgage], including, but not limited to, reasonable attorneys fees, property inspection and valuation fees, and other fees incurred for the purpose of protecting Lenders interest in the Property and rights under this Security Instrument; and. . .  takes such action as Lender may reasonably require to assure that Lenders interest in the Property and rights under this Security Instrument, and Borrowers obligation to pay the sums secured by this Security Instrument, shall continue unchanged.

Specifically, plaintiffs alleged that defendants included a charge of $325 for title services when in fact the cost to the defendants of the services was $55.  Defendants responded that their contracts with the lenders permitted them to levy the disputed fees for the services performed.  It appears that the defendants were claiming that their fees were a permitted mark up. 

Thus far, apparently, the trial court has not reached the substance of the charges made by the borrowers, but, after numerous appeals, has remained bogged down in class certification issues.  The trial court originally ruled that it would certify a class consisting only of persons who paid defendants allegedly improper charged in order to avoid foreclosure.  Plaintiffs insisted that the class ought also to include persons who failed to pay the disputed fees and lost their property in foreclosure.  They argued that the offense was not the collection of the charges, but the demand for them.  All plaintiffs in the asserted large class had received a reinstatement letter demanding the disputed charges. 

In a prior appeal, the defendants had argued (perhaps offhandedly) that the basis for the trial courts ruling, otherwise unexplained, might have been that the litigation privilege immunized the defendants in those cases that proceeded to foreclosure.  Florida Court of Appeals had ruled categorically that the litigation privilege was applicable only to common law defamation actions, and was not available in cases involving statutory claims.  The Florida Supreme Court reversed that ruling, and remanded.   This Court of Appeals case follows that remand and a further inquiry on the part of the Court of Appeals to the trial court.

The Court of Appeals obtained a communication from the trial court that in fact its decision to narrow the class was not based on the litigation privilege, and thus the appeal to the Supreme Court on that issue proved to be an idle exercise. The trial court indicated that it did not think the litigation privilege applied because the reinstatement letters were not sent in the process of an ongoing foreclosure proceeding.  The Court of Appeals commented that this ruling was not before it, thus setting up still more grinding away by the defendants to avoid getting to the substantive issue.

But the court of appeals did rule, again, that aside from any claim based upon litigation privilege, the broader class should have been certified:

We have considered the possibility that the distinction the trial court made might have been based on the fact that those who lost their property in foreclosure would have a different kind of injury from those who did not. That notion is dispelled by the findings in the certification order. The order states that "[i]ndividual issues of reliance and damages do not predominate," because the remedy in all cases is limited to the damages set by statute. This statement is consistent with the trial court's observation in an earlier part of the order that the case focuses on the actions by the defendants, not on individual differences between the prospective class members.

Comment 1: The editor normally would not be filing a DD involving a procedural ruling in the context of ongoing litigation.  But the issue of alleged wrongdoing by the community of residential loan services has reached such a pitch on the editors DIRT internet discussion group that the editor has concluded that some ongoing reporting in this area seems appropriate.

Comment 2: Of course, it is too early to make a final judgment on the substantive issues.  But the editor feels constrained to point out that the borrowers are all parties who allegedly had committed a default in a residential mortgage and the ongoing negotiations with the borrower had reached the point that an acceleration had been declared.  Unless there has been a dramatic change in servicing practices, the gap between initial default and ultimate acceleration customarily is somewhat extended, with ample opportunities for borrowers who in fact have the resources to continue paying on the loan to avoid acceleration. 

Of course, recent dramatic changes in loan charges, including monthly payments increased as a consequence of adjustable rates, have created stress for many borrowers, particularly those with otherwise heavy debt loads.  Many would argue that these borrowers should have thought of this before they agreed to a loan with a low initial rate but a likely bump later on.  Insofar as the legal issues go, however, the foolish have the same legal rights as the wise.  But see Comment 4, where I report reactions from foreclosure defender April Charney.

 The editors only point is that borrowers who had suffered accelerations were a class of borrowers as to whom it was highly unlikely that reinstatement would in fact lead to a happy lending relationship, and the lender certainly was justified in asking that there be an evaluation of the title to ascertain whether any additional risks to the security were evident, including any violations of the due on sale clause (which also is triggered by most junior liens.)

Comment 3: The next question is whether the lenders counsel is justified in charging more to the lender for title services than the services cost the counsel.  Of course, the courts could tell us otherwise, but the editors impression is that many lawyers enter into retention agreements with their clients that permit them to charge mark ups for a variety of things.  Clients pay more attention to the overall cost of representation, rather than to the way in which the costs are derived. 

If the lawyers costs will be paid by the lender regardless of whether the lender recovers the fees from the borrower through foreclosure or otherwise, the editor suspects that, in the end, the lawyers will not be found guilty of inappropriate consumer practices here.  If, however, the lender pays the lawyers only what is recovered from the foreclosure, then in a sense the charges question are not charges to the lender, but to the borrower, and of course the borrower has no employment contract.  Lets see where all this goes as the litigation progresses. 

Comment 4:  I  prescreened this DD with consumer lawyer April Charney, and she responded that, insofar as the subprime market is concerned, the original sale of these mortgages to borrowers was rife with hard sell deception, and the servicing laden with inappropriate fees, so that it is wrong to conclude that the borrowers were just plain stupid - they were defrauded, in her view.  Further, it is wrong to conclude that their situation is hopeless, since, in her view, we should roll back the deal and give them the loan that they deserved, not the one which they got stuck with.  Or else we should give them remedies for fraud and mistreatment that would in fact make it possible to avoid the economic circumstances in which they find themselves.

As long term readers of DIRT know, Ive been warning about fraud among many mortgage brokers for years, and anticipating that they were pushing into the system borrowers who had no chance of repaying their debt.  Consumer activists would have it that the rot is much more widespread in the consumer mortgage lending industry, and goes beyond the brokers to include servicers and even trustees engaged in fraudulent and unlawful practices designed to wring the last ounce of profit from their broken victims.  These advocates  have provided lots of anecdotal evidence of that, and it will be interesting to see how their claims work out in court. 

The editor is stubbornly caught in the model, based upon thirty years of experience, that the last thing a lender typically wants is a foreclosed loan, and the lender will do everything possible to work with borrowers to prevent that from happening.  The editor sees no reason that this model wouldnt apply to securitized loans in the present situation.   Under that model, the chaos in the servicing industry now is due  not to fraud or malevolence, but. to incompetence and unanticipated volume, since it operates against the best interests of the lenders as well as the borrowers.  And it likely also affected by the fact that there has been so much layering on of costs on these mortgages that there is now going to be a loss to be distributed somewhere in the system, and everyone is pushing to make sure the losses go somewhere other than in their pockets. 

Along these lines, April gives us the cite to In re Fagan, 2007 Westlaw 2782773 (9/24/07), where a bankruptcy judge imposed $10,000 in sanctions when a creditor falsely claimed that the debtor had defaulted on the mortgage loan postpetition.  The court commented that there had been too many of these false default claims in the court in recent months, and it was time to crack down.  April would cite this as attempted chicanery.  I would say it results from incompetence and disorganization.  Why would a creditor deliberately mislead aa federal court?  An invitation to disaster.

I wish that the mortgage banking industry could  sit down with consumer advocates to work out a program to save that part of the situation that can be saved.  But, like many negotiations between two camps that are much at odds, constructive compromise may already be out of reach.  The lenders point to many situations in which the borrowers clearly were irresponsible flippers, liars who deserved what they got,  or just plain foolish, and refuse to bail them out.  The consumerists point to the fraud and deception that infects some of the loans, and demand recompense.  Neither side can afford to give up any of their constituency, so they are unable to get together on the middle group. 

Items reported here and in the ABA publications
are for general information purposes only and
should not be relied upon in the course of
representation or in the forming of decisions in
legal matters.  The same is true of all
commentary provided by contributors to the DIRT
list.  Accuracy of data and opinions expressed
are the sole responsibility of the DIRT editor
and are in no sense the publication of the ABA.

Parties posting messages to DIRT are posting to a
source that is readily accessible by members of
the general public, and should take that fact
into account in evaluating confidentiality


DIRT is an internet discussion group for serious
real estate professionals. Message volume varies,
but commonly runs 5 to 15 messages per work day.

Daily Developments are posted every work day.  To
subscribe, send the message

subscribe Dirt [your name]


To cancel your subscription, send the message
signoff DIRT to the address:


for information on other commands, send the message
Help to the listserv address.

DIRT has an alternate, more extensive coverage that includes not only
commercial and general real estate matters but also focuses specifically upon
residential real estate matters.  Because real estate brokers generally find
this service more valuable, it is named BrokerDIRT.  But residential
specialist attorneys, title insurers, lenders and others interested in the
residential market will want to subscribe to this alternative list.  If you
subscribe to BrokerDIRT, it is not necessary also to subscribe to DIRT, as
BrokerDIRT carries all DIRT traffic in addition to the residential discussions.

To subscribe to BrokerDIRT, send the message

subscribe BrokerDIRT [your name]



To cancel your subscription to BrokerDIRT, send the message
signoff BrokerDIRT to the address:


DIRT is a service of the American Bar Association
Section on Real Property, Probate & Trust Law and
the University of Missouri, Kansas City, School
of Law.  Daily Developments are copyrighted by
Patrick A. Randolph, Jr., Professor of Law, UMKC
School of Law, but Professor Randolph grants
permission for copying or distribution of Daily
Developments for educational purposes, including
professional continuing education, provided that
no charge is imposed for such distribution and
that appropriate credit is given to Professor
Randolph, DIRT, and its sponsors.

DIRT has a WebPage at:
https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=3D http://cctr.umkc.edu/dept/dirt/

< BR>To be removed from this mailing list, please go to
<https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=3D http://listserv.umkc.edu/listserv/wa.exe?SUBED1=3DBROKERDIRT%26A=3D1& gt;
or send an email message to the address listserv@listserv.umkc.edu,
with the text SIGNOFF BROKERDIRT in the body of the message. Problems
or questions should be directed to manager@listserv.umkc.edu.