“When in doubt, duck”
(Malcolm Forbes 1919-1990)
On February 13, 2014 the New Mexico Supreme Court issued a
unanimous opinion on residential mortgage foreclosures, Bank of New York v. Joseph
A. Romero and Mary Romero, Docket No. 33224. The Romeros appealed from a judgment of
foreclosure entered against them in Santa Fe District Court. The New Mexico Court of Appeals affirmed the
district court. The Supreme Court
reversed the Court of Appeals and instructed the district court to vacate its
foreclosure judgment.
With one exception, noted at the end of the Blog, it is
possible that the Romero case will not be that important to most New
Mexico banks. The following factors in the case which may make its precedential
value less important: (1) it is a
refinance of a residential mortgage; (2) it involves a MERS transaction with
sloppy record keeping and servicing procedures, compounded by poor presentation
of evidence and (3) the refinance transaction took place in 2006 and statutory
changes to the Home Loan Protection Act consistent with the Supreme Court’s
opinion have taken place (in addition to the new mortgage regulations of the
Consumer Financial Protection Bureau). Nonetheless,
Justice Daniels, writing for the Court, engaged in interpretation of documents
and evidence in a manner that may cause defense attorneys to construct defenses
in both cases involving old mortgages and newer ones. Also the Court’s ruling on preemption may be
very important.
The facts are simple.
A lender, Equity One, convinced the Romeros in a cold call to refinance
their existing mortgage in 2006. The new
interest rate was higher than the existing mortgage—almost double. The amount of the refinanced mortgage was
almost $50,000 higher than the old one. No income data was gathered, except Mr.
Romero’s claim that his business made $5,600 per month. The monthly payment increased
by approximately $400. In an effort to
satisfy the HLPA’s requirement that the
refinanced loan conferred “a reasonable tangible net benefit” to them, Equity
One had the Romeros sign a document that their receipt of $30,000 cash from the
transaction was “ a reasonable tangible
net benefit” to them. The Romeros defaulted. In 2008 Bank of New York filed suit for
foreclosure, claiming it was the holder of the Romeros’ Note with right of
enforcement. The Romeros responded. In
effect, they argued, “Who is Bank of New York” and claimed that Bank of New
York did not own the note and lacked standing to foreclose.
The Supreme Court agreed.
Although the principal holding on
standing may not affect many New Mexico
banks it is an amusing example of how some servicers handle the foreclosure
process when dealing with mortgage backed securities. The MERS apparently did not assign the Note to
Bank of New York until three months after the Romeros were sued. The Note attached to the complaint showed an
endorsement to J.P. Morgan Chase. The servicer’s
witness presented a Note without endorsements and claimed Bank of New York was
holder. When he tried to rehabilitate
the Note status, defendants Romero objected that the testimony was hearsay
since the servicer was not brought into the case until several months after the
complaint was filed. The trial court and
Court of Appeals dismissed this objection.
However, Justice Daniels did not.
The Court agreed with the Romeros that the Bank of New York’s evidence
about the Note was fatally flawed. He
held that Bank of New York had not proved its status as holder or its rights to
enforce the Note and foreclose. It
lacked standing to foreclose.
But Justice Daniels went further. Writing for the Court, he stated that HLPA
requires that the borrower’s ability to repay the mortgage loan must be a
factor in meeting HLPA’s requirement that the borrower receive a “reasonable,
tangible net benefit”. Justice Daniels
dismissed the Romeros’ signing a document stating that their receipt of $30,000
was a “reasonable, tangible net benefit”.
He noted that the document prepared by Equity One was part of a mass of
closing documents. He noted that such
form documents could not replace the lender’s ”conscientious compliance with
the obligations imposed by HLPA”. Thus the Court held that in the absence of a
showing that the lender looked at the borrower’s ability to repay there was a
violation of HLPA. It should be noted
that the 2009 amendment to HLPA now requires lenders to make a good faith effort
to determine a borrower’s ability to repay, and federal law and the recent
CFPB’s regulations are similar.
The Court also held, in what is arguably the most important
holding for even current mortgage lending, that federal law does not preempt
HLPA enforcement by the state. It is
also probable that the CFPB’s new regulations do not preempt HLPA since most
experts feel that CFPB preemption would only occur if the state regulations or
law were more lenient that the federal rule. Additionally, the Court held that
Dodd-Frank made the preemption claim not valid.
Justice Daniels noted that the Financial Institutions
Division had not updated its regulations since 2004. In 2004 the Division concluded that an OCC
directive prohibited the Division from enforcing HLPA against national
banks. However, Daniels reviewed U.S.
Supreme Court preemption cases since 2004 and concluded that the Division’ s
acceptance of federal preemption was outdated.
In addition, he reviewed the preemption standards for national banks set
forth in Dodd-Frank, which significantly relaxed the preemption standards. The OCC has now corrected its 2004 blanket
preemption rule to meet Dodd-Frank. And
Justice Daniels compared Dodd-Frank’s preemption rule to HLPA and found no
conflict.
Lawyers can always argue about what cases mean and their
application to facts. However, there is
no question that the Romero is important. For refinanced mortgages before 2009 the
lender must prove that the borrower’s ability to repay was considered in a
meaningful, good faith manner. The
holders of notes and mortgages that have been through the MERS process must put
on evidence that meets the normal court rules on evidence. Finally, those who are in the mortgage
business must look closely at HLPA and not comply only with CFPB regulations
but HLPA. And HLPA has rights of action that
CFPB may not have.
The bright spot is that Justice Daniel’s opinion goes far in
blunting the contention that existing New Mexico law does not protect the
borrower. So why enact untried and
possibly harmful legislation to meet the so-called “foreclosure crisis”?
Do good.
Marshall G. Martin
505 228 8506
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