Client Alert: New Case Highlights The Dangers of Communicating with a Debtor that has Received a Bankruptcy Discharge on a Mortgage Loan. Upcoming Regulations Make it Worse.

Note: The following is a general discussion on the specified topic or issue and may not be relied on as legal advice in any specific case or matter you encounter. You should review any applicable case, or matter with counsel experienced in this area of law and should not generally rely on the discussion in this Alert.

Date:  December 28, 2017
Client Alert:
To: All Scheer Law Group Clients and Affiliates:
Subject:  New Case Highlights The Dangers of Communicating with a Debtor that has Received a Bankruptcy Discharge on a Mortgage Loan.  Upcoming Regulations Make it Worse.

As most of you know, a discharge in bankruptcy removes the personal obligation on the debt (absent reaffirmation of the debt), but does not remove the lien securing the debt.  A 9th Circuit BAP case issued a few days ago highlights the dangers of communicating with a debtor on a mortgage, when the debtor has received a discharge in bankruptcy.  You will be a target for similar lawsuits, if you engage in similar conduct.

• Please review the following carefully and determine if you engage in similar practices. If so, you should review your policies and procedures and adjust them now. If you are a larger servicer on covered loans, you must coordinate any post-discharge communications with the requirements to continue communication on loans subject to a bankruptcy discharge including communications on charged off loans.  Please do not be fooled, as many  lender/servicers are, by thinking that a “general disclaimer covers a multitude of discharge violations.“ As shown below, this is flimsy and ineffective protection.  The lower court in this case awarded $119,000 in damages, one thousand dollars for each improper contact and the appeals court sent the case back to allow the lower court  to award even more.

The specific facts and the rulings in the case of In re Marino, No. 3:13-BK-50461-BTB, 2017 WL 6553691, at *1 (B.A.P. 9th Cir. Dec. 22, 2017),  are as follows and should be noted:

Debtors were obligated on a mortgage loan, obtained a bankruptcy discharge and indicated  in their bankruptcy schedules that they would surrender the property, Ocwen, the servicer obtained a stay relief order, allowing foreclosure. Ocwen continued to communicate with the debtors from June 2013-April 2015. There were numerous calls and written communications, including sending account statements, notices re forced placed ins. coverage, escrow statements and other matters. There were small font disclaimers on the bottom of  the written communications, asserting that the communication was not an attempt to collect the debt. Ocwen eventually foreclosed about 2 years after getting relief from the stay. Ocwen testified that most of its written communications were computer generated and not reviewed by a human. The Debtors testified that Ocwen’s relentless communications resulted in continued stress and humiliation, and almost ended their marriage. The Bankruptcy Court awarded the Debtors $119,000 in damages and Ocwen appealed.

On appeal, Ocwen defended saying that many of the communications complained of were in fact required by law. i.e. 12 CFR § 1024.37 (required notice of forced placed coverage, 12 USC §§2605, 2609 (required notice of escrow balance), 15 USC §1692g (debt validation notice ), Cal. Civ. Code §2924(a), required NOD, Cal. Civ. Code §2923.5 (HOBR, pre-foreclosure contact notice ) and §2924.9 (HOBR post foreclosure contact notice). The appellate court found that Ocwen’s communications went well beyond required statutory notices and were coercive, designed to pressure for money and that the time it took Ocwen to foreclose (2 years after stay relief), evidenced this. The Court found the putative disclaimers were “buried”, sequentially placed after the coercive demands and were ineffective given the corresponding conduct and continue pressure.

The court refused to uphold Ocwen’s claimed reliance on state and federal laws to justify its communications. The Court found that many of the statutes cited by Ocwen as requiring communications were just pretense, either inapplicable to the foreclosure of a lien, or not mandating repeated relentless communications. The Court also found that Ocwen’s phone calls were not tailored via scripting to avoid a coercive effect, and that overall, the use of putatively permissible communications under the law to buttress illegal ones would not be upheld.

The Court recognized the legitimate tension between a lender/servicer’s need to communicate re foreclosure of its security, and asserting the personal obligation of a debtor to pay on the debt, and found that Ocwen went far beyond  protecting lien rights.

While the lower court expressed its reluctance to award punitive damages, the appellate court had no such reluctance. The court recognized a split in authority that generally prohibited  punitive damages, unless “relatively mild”  but which allowed non-compensatory fines to be assessed in appropriate circumstances, and discarded the distinction. The Court found that whatever the penalties are called, they can be assessed if they are “relatively mild “, and then sent the case (remanded) back  to the bankruptcy court to make such determination and to award even more damages.  All in all, a bad Christmas for Ocwen and its lender.

This ruling must be considered in light of pending amendments to the TILA/RESPA Mortgage Servicing Rules (See e.g. 12 CFR 1026.41), effective April 19,2018, conditioning and in some instances mandating continued communications to a borrower in bankruptcy or who has received a bankruptcy discharge,

To Recap Some lessons of this holding:

1. Examine the Debtor’s schedules to determine what the Debtor’s intentions are.
2. Determine if you or your agents will continue to communicate and ensure your system restricts communications to specified personnel who will adhere to specified guidelines.  Ensure your agents are equally restricted.
3. Absent reaffirmation of the Debt, Tailor any post-discharge communications to be informative  and not coercive.
4. Script any telephone calls (if you decide you really want to call) to avoid any cohesive effect.
5. Tailor all written communications so that all disclaimers are prominent, bolded, larger font, at the beginning and not at the end of the communication.
6. Coordinate, your obligations under the pending Amendments to the Mortgage Servicing Rules.

Please call or email if you would like to discuss.

Spencer Scheer