The Impact of Robo-signing on Foreclosure Investors and REO Purchasers in California
By: Henry Chuang, Esq.
Recently, with the announcements of foreclosure moratoriums from some of the largest banks in the nation, including JP Morgan and GMAC, there has been increased attention on the problems with the foreclosure system. Specifically, the media has focused on a practice the press has nicknamed “robo-signing”. Robo-signing refers to bank employees signing court declarations, under penalty of perjury, stating that the employee has personally reviewed all of the facts of the foreclosure and determined that they are accurate. While the banks involved have stated that the affidavits are accurate and there are no deficiencies, some banks such as JP Morgan have admitted that its employees did not actually review all of the information.
In fact, in May, an employee of JP Morgan, Beth Ann Cottrell, admitted in her sworn deposition testimony that she and her staff of eight signed 18,000 documents a month. Similarly, in a deposition in July, the vice president of bankruptcy and foreclosure at One West Bank stated that she and her team of seven signed 24,000 documents without reading each document. She stated that she spent 30 seconds per document. Further, Wells Fargo has admitted that some of its foreclosures were technically deficient and has submitted additional paperwork to support proceeding with the foreclosure.
How does this affect Californians and foreclosures here in California? Not a whole lot. Some states, like the 23 states that have the voluntary moratorium, require a judicial foreclosure–one where the court must be involved. Here in California, lenders predominantly use non-judicial foreclosure process, which is intended to be a speedier remedy for lenders. Accordingly, there is no declaration to the courts that the bank employees must attest to. Instead, the loan servicer is required to comply with the state foreclosure guidelines, such as phoning, mailing and posting. If a borrower thinks there has been a technical defect in the foreclosure sale, they must seek a temporary restraining order (TRO), and preliminary injunction to halt the sale. If they fail to halt the sale, but wish to set aside the sale after the fact, the law requires the borrower tender—that is, pay the full amount of the disputed loan. As you can imagine, tender does not happen often. The risk of foreclosure sales in California being vacated and set aside is relatively low.
While robo-signing may lead to stricter oversight of banks and their paperwork, the underlying economic realities remain. The borrower has not paid, and in many instances, cannot pay even given an extension of time. Second, while there may be technical deficiencies and a failure to comply with statute, many of the statutory provisions violated have no private right of action. In California, the law generally favors a final foreclosure sale. Specifically, while there is a case which requires servicers discuss loan payment options with borrowers, it does not provide for any remedies beyond delaying the sale. Further, the California courts and the legislature have consistently held that public policy favors a final foreclosure sale. Civ. Code §2924 has been drafted to encourage bidders at foreclosure sales by providing protections against challenging the foreclosure sale. Courts have also adopted requirements such as the tender offer rule where the borrower must offer to pay the full amount of the debt before the debtor can challenge the fore closure sale. As such, while there may be technical deficiencies, absent other factors, those deficiencies will not result in a delay or rescinding of the foreclosure sale.
Take Away Message – While robo-signing is a hot topic with a lot of media attention, it is unlikely to have any significant impact on the foreclosure system, at least not in California. Where we think the benefit of the media attention will come from is in circumstances where lenders like Wells Fargo, under such scrutiny, make concessions such as their new proposed model where they will voluntarily suspend foreclosure after a borrower has applied for a loan modification. Presently, that seems to be one of the most difficult hurdles for borrowers, is the confusion of whether the foreclosure sale has been postponed while they are attempting to obtain short sale approval or loan modification approval. Suspending a foreclosure sale during that process would greatly minimize the confusion to borrowers and reduce possible litigation after the sale itself—thereby giving greater certainty to REO purchasers and foreclosure investors.