You’ve Been Sued. Now What?

September 9th, 2015

bank-foreclosures-9-9-15.pngForeclosure lawsuits against defaulting borrowers may seem relatively straightforward, but they often elicit counterclaims that can be costly for a bank. Compliance with state and federal laws and acting in accordance with the terms of the mortgage or deed of trust can limit a bank’s exposure to significant defense costs and potential liability.

The following provides common counterclaims raised against banks in foreclosure and strategies to deal with them.

FDCPA Claims
Under the Fair Debt Collection Practices Act (FDCPA), the foreclosure of a mortgage is deemed a “debt collection” and borrowers can assert a counterclaim based on a bank’s violation of the FDCPA. Borrowers can recover up to $1,000 in statutory damages, as well as actual damages and attorneys’ fees and costs. In these instances, a borrower will often allege the bank violated the FDCPA by continuing to contact the borrower after being informed the borrower is represented by counsel or after receiving written notice from the borrower to cease calling or writing the borrower regarding the debt. Bank management and the board must ensure that the bank and/or its foreclosure counsel have processes and procedures in place to ensure compliance with all aspects of the FDCPA, including the borrower contact provisions. Should a bank find itself facing a FDCPA counterclaim, when evaluating the strength of the counterclaim, it should determine whether the debt originated with it or was acquired before the debt was in default. If either of those two scenarios are true, then the FDCPA would not be applicable to the bank and it could seek a quick dismissal of the case.

Notice Under the National Housing Act
Another counterclaim often asserted by borrowers is a bank’s failure to comply with the notice requirements of the National Housing Act (NHA). Under the NHA, private lenders servicing non-federally insured home loans are required to advise borrowers of any home ownership counseling they or the United States Department of Housing and Urban Development (HUD) may offer. The notice must be provided within 45 days after any default in payment. Again, effective, well-communicated processes and procedures are key risk management features to ensure compliance. A counterclaim making this type of allegation may be dismissed for failure to state a claim, as federal courts have held this statute does not create a private right of action allowing a borrower to recover against a bank for any violation.

Original “Wet Ink” Promissory Note
The most common counterclaim is the “show-me-the-note” claim. In these cases, the borrower alleges, in order to foreclose, the bank must produce the original promissory note bearing a “wet ink signature.” Most jurisdictions, however, do not require a party to present the original promissory note or mortgage, even when a lender is taking affirmative actions, such as commencing foreclosure proceedings. Additionally, many jurisdictions now recognize typed, stamped and scanned signatures, so long as they are rendered by or at the direction of the signer. Accordingly, banks should review the relevant statutes to determine whether the original or “wet ink” note or mortgage is required to be presented. If the statute does not require it, then the bank can seek to have the borrower defendant’s claim dismissed for failure to state a claim upon which relief can be granted.

Fraud and Misrepresentation
A borrower defendant could assert a counterclaim for fraud and misrepresentation if any of the signatures on the promissory note were forged. Often, this type of forgery occurs when one spouse signs the other spouse’s name and the note is notarized as if both spouses were present to acknowledge their signatures. Because a bank may not be able to easily defend itself against this type of counterclaim, it must ensure that if its employees are notarizing mortgage documents, they are adhering at all times to the relevant notary statutes and bank notary policies.

A handwriting expert can assist with determining if the signature was, in fact, a forgery. If so, a bank may still be able to proceed with the foreclosure proceeding and successfully defend against the counterclaim if it can establish ratification of the forged signature. To prove ratification, the defendant must have knowledge of the forgery and have conducted himself or herself in a way that would manifest an intention to approve the act. For example, if the borrower defendant was aware of the forgery, yet made payments on the mortgage loan, a court could find that ratification occurred.

These are just a few examples of counterclaims brought by borrowers against banks during foreclosure proceedings. While a bank may never successfully avoid foreclosure counterclaims, it can definitely minimize its risk and mitigate any potential damages.

mdailey

Mike Dailey is a partner at Dinsmore & Shohl and the chair of the firm’s Financial Institutions practice group. He represents financial institutions in all aspects of corporate law, including M&A, regulatory compliance, securities law and corporate governance.

abondlewis

Alicia Bond-Lewis of Dinsmore & Shohl LLP defends banks and other financial institutions in federal and state courts throughout the United States in a wide variety of litigation matters involving defense of mortgage counterclaims, trusts and fiduciaries, the Uniform Commercial Code, Fair Credit Reporting Act and Telephone Consumer Protection Act.