The following article by the late Harold I. Levine was originally printed in the December 2002 issue of the ISBA Real Property Newsletter (Vol. 48, No. 3, pp. 4-7). Harold sent us a copy earlier this year, just before he became ill (his obituary appears in the summer issue of Shareholder's Update). As was his practice, he included a friendly note in his familiar handwriting that was large, clear, and unassuming - just like the man himself: "Greetings. I hope you are well. I'm enclosing a recent article. I'm sure the folks at the ISBA wouldn't mind if you used it in ATG's newsletter. Regards, Harold." So, with heavy hearts we publish our last Levine article. Reprinted with permission from the folks at the ISBA.

MORTGAGE DEFENSE 101
by Harold I. Levine, Esq., Harold Levine, Ltd., Chicago, Illinois

1. Be Sure the Lender Has Standing

Lenders frequently assign or transfer their loans. Sometimes they are securitized. Sometimes the servicer seeks to foreclose. The upshot is that frequently the borrower in foreclosure is confronted with a plaintiff once or twice removed from the original lender with whom he or she has executed the loan. A mortgage is an interest in real estate - frequently the only recorded document is the original mortgage. Now the lender will argue in its complaint that as long as it alleges it is the owner or holder of the mortgage, it can always satisfy that issue at trial. The lender often needs this time to look for the missing assignment, note, or trust deed because it is not available at the time the complaint is filed. To vigorously represent your client, if the foreclosing lender is different than the original one, be proactive: file a motion to dismiss on the grounds that the lender is not the real party in interest. If the lender claims title by assignment, review the assignments and their dates; frequently the dates do not track the mortgage or are out of the chain of title. If the loan is securitized, insist on the attachment of all underlying trust and securitization documents. If the loan servicer has filed suit, insist on reviewing the servicing agreement to see whether such rights are reserved.

2. Make the Lender Prove-Up its Numbers

The lender, after an answer is filed, will usually move for summary judgment. In doing so, the lender will invariably attach or file an affidavit of prove-up. A lender has the burden of proof on only three issues: Ownership, execution, and amount. As to these issues, the lender must prove its case and has the burden of going forward.

The trial in a mortgage foreclosure case is ordinarily governed by the same rules that are applicable in other chancery proceedings. A careful reading of Farm Credit Bank of St Louis v Biethman, 262 Ill App 3d 614, 634 NE 1312, 199 Ill Dec 958 (5th D 1994) sets forth the requirements for a prima facie case of foreclosure.

If your client executed the note and you have no other substantive or affirmative defense, one response to the summary judgment could be to admit liability and ask that the lender prove up the amount due at an evidentiary hearing. In many cases, you will find out that in a contested prove-up on the amount due, which is the lender's burden, the lender (a) can't find any documents; (b) can't find the original or correct documents; or (c) is unable to prove-up computer-generated records. If this is the case, why do judges usually accept affidavits of prove-up? The answer is that nobody complains. However, it is clear that the affidavit of prove-up when properly challenged violates both the hearsay and best evidence rules. As the court said in Cole Taylor v Corrigan, 23 Ill App 3d 122:

While the bank's documents show that Lilek (bank's loan officer) signed the original documents evidencing the loan and security agreement, the affidavit did not show his familiarity with the amounts disbursed or the amounts collected. He did not provide the documents upon which he relied when he made his conclusion that the current balance due was $3,043,215.78. We note that under Supreme Court Rule 236 (134 Ill 2d R 236 (admission of business records in evidence)), it is the business record itself, not the testimony of a witness, who makes reference to the record, which is admissible (Smith v Williams (1975), 34 Ill App 3d 677, 680, 339 NE2d 10; see Ill Rev Stat 1989, c. 110, 8-401). The bank did not lay the foundation necessary to overcome the original writing and hearsay rules. The conclusions within the affidavit were not admissible into evidence, and thus the affidavit did not comply with Rule 191(a)(134 Ill 2d R 191(a)).

Forceful assertion of these principles is intended lead to an evidentiary hearing, which is the last thing a lender wants.

3. Discovery, Discovery, Discovery

Any serious foreclosure case worth defending is worth serious and complete discovery. Make use of depositions, interrogatories, and document requests. Document requests are especially important. Ask, where relevant, for the entire loan file, the title file, the correspondence file, records of loan committee meetings, etc. It is important to remember that volume filers need to handle these cases on an assembly line basis. Seventy percent of foreclosures in Cook County are unopposed. If you want to separate your case from the pack, and where necessary to properly represent your client, take discovery. Further, if a motion for summary judgment is filed, careful compliance with Rule 191(a) will allow the borrower to take discovery prior to answering the summary judgment. The additional holding in theCole Taylorcase was that the defendant in a foreclosure case is entitled to a continuance for the purpose of discovery in response to a motion for summary judgment where there is a showing of no prejudice from delay; all evidence is in the hands of the plaintiff, and defendant had already initiated discovery.

4. How to Reinstate

Here is what frequently happens when a borrower desires to reinstate: Assume the borrower desires to reinstate. The mortgage is in arrears two months and he or she has the funds for the delinquent two months' interest and attorney fees. The borrower obtains a reinstatement letter that he feels is wrong or excessive and begins to negotiate with the lender whose main office is in a small town in Wyoming. Endless letters, e-mails, and faxes to back and forth and it takes five months to resolve the problem. But by that time the borrower has to pay five months of payments, interest, and attorney fees instead of the two months the borrower had put aside, and either there is not sufficient money or the period to reinstate has passed.

The answer is to ignore the lender and make a tender to the court. This is done as follows: Talk to your client, calculate as best you can the principal and unpaid interest, get a certified check for that amount, and make a tender to the court by way of motion. The motion should recite that (a) the tender is timely; (b) it is a good faith effort to estimate the principal and interest; (c) the parties cannot agree on the proper amount or that the lender will not cooperate; and (d) the borrower agrees to pay reasonable attorney fees at a hearing set by the court. Properly done, the tender should toll the running of the time to reinstate and additional fees and costs. Remember that the amount must be accurate or close to the actual amount due. The borrower cannot just pick a figure out of the air. SeeDaiwa Bank Ltd v LaSalle, 229 Ill App 3d 366. For a case supporting this procedure, seeLomas & Nettleton Co v Humphries(ND Ill 1989), 703 Fsupp 757.

5. How to Handle a Holder in Due Course

Although not generally understood, there is a definite relationship between the increase in residential foreclosures and coercive home improvement contracts. Much to the surprise and dismay of property owners, many foreclosures arise out of home improvements contracts. The worst elements of the mortgage industry and the home improvement industry are sadly united.

The scam works like this: An uneducated or confused homeowner executes a home improvement contract. During the process, but usually before the completion of the job (which is likely to be substandard), the contractor asks the owner to sign a "completion statement" or a "letter for the bank." The document is really a mortgage or trust deed. The contractor immediately records the trust deed and sells it to a lender at a deep discount. The contractor has his money but the homeowner refuses to pay the lender because of inadequate workmanship and back-breaking finance charges and, as a result, the lender forecloses and attempts to cut off all defenses against the bewildered owner by claiming it is a holder in due course.

So the lawyer is called upon to defend a foreclosure with these characteristics:

  • The owner had no idea that he or she was signing a mortgage and never intended to;
  • The contractor recorded the mortgage and quickly sold the paper to the lender for a substantial discount;
  • The work was substandard; and
  • The lender tacked on its fees and costs and then foreclosed.

The lender claims it was a holder in due course and the contractor's substandard work should not be set off against it.

The case should be defended as follows: Take the lender's deposition to find out (a) the number of transactions between lender and builder; (b) how long the contractor held the contract; and (c) the discount rate. What you hope to find is that the lender and contractor had a long relationship with a volume of cases and that there was a substantial discount. Then you can rely onChristensen v Venture Construction, 109 Ill App 3d 34, arguing that the close connection doctrine applies. That argument states that the purchaser cannot be a holder in due course if its relationship with the transferor is too intimate, given the historical relationship between the plaintiff and the construction company; and that therefore plaintiff is not a holder in due course. This shifts the burden of proof to the plaintiff to prove plaintiff's status as a holder in due course underNeBoshak v Berzane, 42 Ill App 2d 220. The defendant will further assert as a defense that plaintiff failed to complete the work under the home repair contract and that this was a precondition to recording the mortgage and requiring the defendant to commence payments.

6. Look to Third Parties

Loan brokers operate as middlemen. They solicit loans and place them with entities who have funds. The use of loan brokers is sometimes harmful to borrowers. First, the borrower pays the broker's fee, which means it is usually capitalized over the life of the loan. Second, the broker has no responsibility at all after the transaction closes. If the refinance closed and the borrower defaults on his very first payment, the loan broker walks away fully paid.

Mortgage brokers originate more than 50 percent of subprime loans. Illinois courts recognize a fiduciary relationship between the broker and the borrower requiring the broker to find the best deal for the homeowner. Often, however, brokers do not.

Loan brokers are a major cause of default in foreclosure. Brokers frequently quote monthly payments without disclosing taxes and insurance or use deceptive teaser rates. If you feel your client's default was caused by the actions of a loan broker, you should be familiar with the Illinois Residential Mortgage License Act, 205 ILCS 635/1,et seq., which:

  • Provides for licensing and regulation of mortgage lenders and brokers;
  • Requires written agreement between broker and client, and provides that attorney fees are awardable in an action for breach;
  • Provides that mortgage brokers must provide disclosure of their status as such; and
  • Has resulted in new predatory mortgage regulations (but no private right of action).

To bring the loan broker into the foreclosure involves a careful analysis of whether the litigation strategy requires a cross-claim, a counterclaim, or a third-party complaint. Careful study is required to ascertain proper pleading procedure.

7. Alphabet Soup

You cannot begin to understand or defend a foreclosure without a working knowledge of the federal statutory framework: TILA (Truth in Lending Act), HOEPA (Home Ownership and Equity Protection Act), RESPA (Real Estate Settlement Procedures Act), ECOA (Equal Credit Opportunity Act) and others are the keystone of aggressive defenses. Lender's counsel, you can be sure, are well schooled in every nuance of these statutes.

The most favored defense of lenders is preemption. This is the process of nullifying state laws and ordinances that could offer a defense to a foreclosure and forcing all parties to deal with a complex set of federal law known as "Alphabet Soup"1 which lenders have mastered and can assert on a uniform basis.

These federal laws were enacted by the government with the assumption that by preempting state laws, the national home mortgage market would be preserved and function smoothly.

The federal preemption statute has been criticized by several commentators on the grounds that, in reality, it has the effect of undermining a vast number of helpful state and local reforms that were more effective in dealing with abuses such as loan flipping, negative amortization, financing of points, balloon payments, etc.

8. Look to Administrative Remedies

Defense lawyers should be aware of the following administrative remedies, among others:

  • On May 17, 2002, the Illinois Commissioner on Banks & Real Estate (OBRE) enacted amended regulations that now impose certain conditions on lenders regarding the origination of "high risk home loans." 205 ILCS 635/4-1(g).
  • On July 5, 2001, the Illinois Association of Mortgage Brokers filed suit in the District Court for the Northern District of Illinois, Illinois Association of Mortgage Brokers v Office of Banks and Real Estate, et al, O1C 5151, declaring that OBRE be enjoined from enforcing its regulations that are preempted by the Parity Act (see b. of the endnote).
  • The District Court entered an order granting summary judgment for defendant OBRE on all issues on December 4, 2001. Plaintiff then filed a notice of appeal. On October 21, 2002, the decision was ordered vacated and remanded by the Seventh Circuit on the basis that the regulations violated federal preemption.

Nevertheless, the original OBRE regulations are still in effect and should be carefully reviewed, as they are most helpful. Here are the statutes with which the practitioner should be familiar:

  • Ill. Consumer Fraud Act, § 2N (Foreign Language) need for a translator;
  • Illinois Residential Improvement Loan Act, 815 ILCS 135/1 et seq;
  • Retail Installment Sales Act, 815 ILCS 405/1 et seq;
  • Illinois Residential Mortgage License Act, 205 ILCS 635/1-1 et seq, and regulations.

9. Conclusion

Look for Mortgage Defense 102 (intermediate) shortly.

NOTE:
1. (a) DIDMCA: Deposition Institution Deregulation and Monetary Control Act of 1980, 12 USC §§ 1735F-7A AND 1831D, and OTC regulations, 12 CFR part 590 (points cap preempted on purchases money firsts; cases divided on non purchase money firsts; cases divided on non purchase money firsts). (b) AMPTA: Alternative Mortgage Transaction Parity Act, 12 USC § 3801 et seq (preempts points and prepayment penalty restrictions on all balloon loans, ARMs). (c) OTS (FHLBB) regulations, 12 CFR part 560; generally, prepayment penalties may be imposed notwithstanding state law on loans made by institutions supervised by OTS. (d) National Bank Act, 12 USC §§ 85-6, 371, and Comptroller of the Currency Regulations, 12 CFR pats, 7, 34.

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