If you're behind on your mortgage or facing default on your mortgage payments, and want to keep your home, you should speak to a home preservation specialist or an attorney immediately. The loan modification process (part of a suite of potential alternatives to foreclosure your mortgage servicer refers to as "loss mitigation") is fraught with chances to misstep, which despite your best efforts may cost you your home. Many of those missteps may not be your fault, and without the assistance of counsel or a HUD-certified housing counselor you may not recognize them or be able to prove that your servicer is to blame. 

Since January 2014, many servicers have had to follow regulations that demand they meet strict deadlines and disclose a great deal of information about your loss mitigation application, your eligibility and ineligibility for various alternatives to foreclosure, and your right to appeal their determination of eligibility or ineligibility. If they follow these guidelines, their customers are likely to reach an outcome that is beneficial to them. However, if they do not follow these regulations, servicers may be liable for damages, which, in some cases, could pay a portion or all of a homeowner's past-due payments. 

Unfortunately, even with counsel, fault can be difficult to prove, but there are a few things you can do to protect yourself and help your attorney reach a good outcome. 

1. Never trust that your servicer's advice is in your best interest.

We hear it all the time: servicers tell their customers that they need to be in default in order to be considered for a loan modification. Servicers advise homeowners "not to worry" about the foreclosure lawsuits they file against homeowners, explaining that it's "just something our collections department does". They tell homeowners that all they have to do is keep working on a loan modification and not to respond to the lawsuit. 

Despite providing advice and guidance to its customers, if you're in foreclosure, your servicer will flatly deny any advice it gave was meant to be relied upon, since it is a business and is concerned foremost for the interest of its shareholders, not its customers. That does not mean that it cannot be held to account for advice it has given you or promises it has made, but it does mean that you will be in for a fight if you have followed your servicer's advice to your detriment. Don't trust your servicer without verifying the advice you're getting from the servicer by asking a lawyer or housing counselor about the advice. Following this rule will help protect you from some of the worst abuses. 

2. Keep everything your servicer sends you.

Especially when you're in default and applying for some sort of loss mitigation, you should receive a lot of letters from your servicer. All of them are important, and many are governed by the regulations linked above. You should keep all of these letters. Moreover, since you cannot always trust that a letter was sent on the date it claims, you should keep all of the envelopes these letters come in. The envelope will have a postmark date on it, which can be invaluable when trying to prove a required deadline was not met.

3. Keep a copy of everything you send your servicer.

One of the disclosures your servicer must send you is a notice that your application is not complete. It must outline what documents are missing and give you an opportunity to send them. If you do not provide necessary documentation, your servicer can deny you any loss mitigation option. Keeping a copy of what documents you've sent -- and when and how you sent them -- may protect you and assist you on any appeal of a negative determination.

4. Take notes.

When speaking with your servicer on the phone, make a note of when the phone call took place, who you spoke with, and what advice or guidance the servicer provides you. 

In case you were wondering what weaving references to The Big Lebowski into 35 slides about Kentucky consumer law looks like, well, wonder no more. 

PDF of full presentation here: Kentucky Consumer Law Presentation, Lebowski-ized

Tomorrow, I have the opportunity to talk for an hour about consumer law at the Kentucky Bar Association's New Lawyers Program. In anticipation of the presentation (and so I didn't have to fill my slides with text), I prepared a non-comprehensive outline about many of the common law causes of action, state laws, and federal statues that constitute "Consumer Law". 

Below is the outline with some hyperlinks, but because the formatting will never be right in this post, here is a .pdf of the Kentucky Consumer Law Outline. Use it instead. In case you thought it might be, I need to say that this consumer law outline is absolutely not legal advice, dummy.  

And, yes, the presentation will have a Lebowski theme. 

I do mind, man. The dude minds. This aggression will not stand, man. 

▾    1    Kentucky Consumer Protection Act

    ▾    1.1    Legislative Intent

    •    1.1.1    KRS 367.120 “The General Assembly finds that the public health, welfare and interest require a strong consumer protection program to protect the public interest and the well-being of both the consumer public and the ethical sellers of goods and services…”

    •    1.1.2    “The Kentucky legislature created a statute which has the broadest application in order to give Kentucky consumers the broatest possible protection for allegedly illegal acts. In addition, KRS 446.080 requires the statutes of this Commonwealth are to be liberally construed.” Stevens v. Motorist Mutual Ins. Co., Ky. S.W. 2d 819 (1988). 

    ▾    1.2    Who is protected?

    ▾    1.2.1    Statutory Language

    •    1.2.1.1    Any person who purchases or leases goods or services primarily for personal, family or household purposes and thereby suffers any ascertainable loss of money or property, real or personal, as a result of the use or employment by another person of a method, act or practice declared unlawful by KRS 367.170, may bring an action under the Rules of Civil Procedure in the Circuit Court in which the seller or lessor resides or has his principal place of business or is doing business, or in the Circuit Court in which the purchaser or lessee of goods or services resides, or where the transaction in question occurred, to recover actual damages. The court may, in its discretion, award actual damages and may provide such equitable relief as it deems necessary or proper. Nothing in this subsection shall be construed to limit a person's right to seek punitive damages where appropriate. Ky. Rev. Stat. Ann. § 367.220

    ▾    1.3    Who’s Covered in Practice

    ▾    1.3.1    A person (not business) who “purchases or leases goods or services primarily for personal family, or household purposes”

    •    1.3.1.1    But the absence of a finding of a valid contract is not fatal to a claim for unfair trade practices under the KCPA as it would be to a breach of contract claim. Nothing in the KCPA—particularly KRS 367.170 and KRS 367.220—explicitly requires that a binding contract be reached for a purchaser damaged by unlawful trade practices to have a private right of action. Rather, because Piles and Warner qualified as purchasers under the KCPA, they were entitled to sue for any damages resulting from unfair trade practices by Sonny Bishop Cars under KRS 367.220. Craig & Bishop, Inc. v. Piles, 247 S.W.3d 897, 903 (Ky. 2008);

    ▾    1.3.2    Renters

    •    1.3.2.1    In both matters the tenant asserts that the landlord's failure to make needed repairs and his violations of the local housing code constitute unfair, false, misleading or deceptive acts. As a violation of a housing code does not create a cause of action in favor of the tenant, the failure of the landlord to comply with a housing code cannot be deceptive in the absence of an express covenant or agreement that the landlord would comply with such housing code. Likewise, in the absence of a duty or obligation *519  to make repairs to a rental unit, the failure to make such repairs cannot be construed to constitute an unfair, false, misleading or deceptive act. Miles v. Shauntee, 664 S.W.2d 512, 518-19 (Ky. 1983)

    ▾    1.3.3    Homebuyers/Homeowners

    •    1.3.3.1    “That brings us to the violation of the Kentucky Consumer Protection Act, KRS 367.110, et seq. The jury did make a finding of a breach, but with zero damages. We need not get into a discussion as to whether the verdict is an oxymoron because we do not believe that the Kentucky Consumer Protection Act applies to real estate transactions by an individual homeowner.” Craig v. Keene, 32 S.W.3d 90, 91 (Ky. Ct. App. 2000)

    •    1.3.3.2    Summary: Buyers of “as is” mobile home can still maintain causes of action for fraudulent misrepresentation and KCPA. Elendt v. Green Tree Servicing, LLC (Ky.App. 2014) 443 S.W.3d 612.

    ▾    1.3.4    People Seeking the Extension of Credit

    •    1.3.4.1    A federal court has interpreted case law and the KCPA to determine that the sale of credit, so long as it was purchased for personal use, is covered by KCPA. Stafford v. Cross Co. Bank, 262 F. Supp. 2d 776, 792-3 (W.D.Ky. 2003).

    ▾    1.3.5    Purchasers of Insurance Policies

    •    1.3.5.1    “It is the holding of this Court that the Kentucky Consumer Protection Act provides a homeowner with a remedy against the conduct of their own insurance company pursuant to KRS 367.220(1) and KRS 367.170.” Stevens v. Motorists Mut. Ins. Co., 759 S.W.2d 819, 821-22 (Ky. 1988)

    ▾    1.4    What are they protected from?

    ▾    1.4.1    Statutory Language

    •    1.4.1.1    KRS 367.170: (1) Unfair, false, misleading, or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.

(2) For the purposes of this section, unfair shall be construed to mean unconscionable.

    •    1.4.1.2    “The terms ‘false, misleading and deceptive’ has sufficient meaning to be understood by a reasonably prudent person of common intelligence. Therefore, when the evidence creates an issue of fact, that any particular action is unfair, false, misleading or deceptive it is to be decided by a jury.” Stevens v. Motorist Mutual Ins. Co., 759 S.W.2d 819, 820 (Ky. 1988). 

    ▾    1.5    What are they not protected from?

    ▾    1.5.1    Not covered: incompetence

    •    1.5.1.1    “While there can be no doubt Gamble was initially buried in the wrong plot in contravention of the burial contract, ‘[n]ot every failure to perform a contract is sufficient to trigger application of the Consumer Protection Act. The statute requires some evidence of “unfair, false, misleading or deceptive acts” and does not apply to simple incompetent performance of contractual duties unless some element of intentional or grossly negligent conduct is also present.’” Keaton v. G.C. Williams Funeral Home, Inc., 436 S.W.3d 538, 546 (Ky. Ct. App. 2013) quoting Capitol Cadillac Olds, Inc. v. Roberts, 813 S.W.2d 287, 291 (Ky.1991).

    ▾    1.5.2    Not covered: “mere breach of promise”

    •    1.5.2.1    A mere breach of promise does not constitute an unfair, false, misleading or deceptive act. The facts in Miles v. Shauntee indicate that the landlord made assurances of repair which were never significantly honored or fulfilled. This Court cannot hold as a matter of law that such assurances constitute unfair, false, misleading or deceptive acts declared unlawful under the Consumer Protection Act. Miles v. Shauntee, 664 S.W.2d 512, 519 (Ky. 1983).

    ▾    1.5.2.2    But, breach of promise to do something in the future is actionable when there is no present intent to perform that future act.

    •    1.5.2.2.1    An accepted rule is, a misrepresentation, to be actional, must concern an existing or past fact, and not a future promise, prophecy, or opinion of a future event, unless declarant falsely represents his opinion of a future happening.” “One may commit ‘fraud in the inducement’ by making representations as to his future intentions when in fact he knew at the time the representations were made he had no intention of carrying them out.” 

PCR Contractors, Inc. v. Daniel, 354 S.W.3d 610, 614 (Ky. App. 2011) quoting Bear, Inc. v. Smith, 303 S.W.3d 137, 142, 614 (Ky. App. 2010).

    ▾    1.6    Damages

    ▾    1.6.1    Compensatory Damages

    ▾    1.6.1.1    Logical and natural consequences

    •    1.6.1.1.1    Diminished value

    •    1.6.1.1.2    Higher repair costs

    •    1.6.1.1.3    Time missed from work dealing with issue

    ▾    1.6.1.1.4    Inconvenience

    •    1.6.1.1.4.1    Clearly, the inconvenience award was not duplicative of the loss of use award. No loss of use award was permitted for Piles.21 Thus, without an inconvenience award to her, Piles would stand to recover no compensatory damages at all, despite testimony that she had to miss work and suffered difficulties at her job caused by constant telephoning and trips to the dealership. Craig & Bishop, Inc. v. Piles, 247 S.W.3d 897, 907 (Ky. 2008);

    ▾    1.6.1.2    Mental and emotional suffering

    ▾    1.6.1.2.1    No case that says damages for mental and emotional suffering are available under KCPA. No Kentucky case says they’re not. 

    •    1.6.1.2.1.1    “Defendants also assert that Plaintiffs are not entitled to mental suffering or emotional distress damages. Kentucky courts have been clear that these types of damages are not recoverable under a contract-type cause of action. See, e.g., Combs v. Southern Bell Tel. & Tel. Co., 38 S.W.2d 3, 5, 238 Ky. 341, 345-46 (Ky.1931). Plaintiffs cite no persuasive authority to the contrary. No Kentucky court has concluded that the KCPA entitles plaintiffs to mental suffering or emotional distress damages. This Court declines to do so now.” Peacock v. Damon Corp., 458 F. Supp. 2d 411, 420 (W.D. Ky. 2006);

    ▾    1.6.2    Rescission (equitable relief)

    •    KRS 367.220 explicitly allows the Court the power to “in its discretion, award actual damages and may provide such equitable relief as it deems necessary or proper.”

    ▾    1.6.3    Punitive Damages

    •    1.6.3.1    KRS 367.220(1): Nothing in this subsection shall be construed to limit a person’s right to seek punitive damages where appropriate. 

    ▾    1.6.3.2    Because actual damages will likely be relatively small, punitive damages in consumer cases can be larger than punitive damages in other kinds of cases.

    •    1.6.3.2.1    “It appears that the amount of the punitive damages award was rationally imposed by the jury to serve the deterrent effect for which punitive damages were designed, especially in consumer protection cases where the economic harm is relatively small.” Craig & Bishop, Inc. v. Piles, 247 S.W.3d 897, 906–07 (2008);

    •    1.6.3.2.2    The United States Supreme Court has provided three factors trial courts may consider:

1) the degree of reprehensibility of the conduct; 

2) the disparity between the actual harm and the punitive damages, generally expressed as a ratio; and

3) a comparison of penalties that could be imposed for similar conduct in similar analogous cases.   

Paraphrasing BMW v. Gore, 116 S.Ct. 1589, 1598–99 (1996.)

Of these three factors, the first—the degree of reprehensibility of the conduct—is the most important. See State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408, 419 (2003)

    ▾    1.6.4    Attorney’s fees should be included in the damages awarded when determining the reasonableness of the ratio between actual harm and punitive damages.

    •    1.6.4.1    In Willow Inn, Inc. v. Public Service Mut. Ins. Co., the Third Circuit Court of Appeals included the attorney’s fees into the ratio calculus of an insurance bad faith case (called a Section 8371 action in Pennsylvania). It explained, “Section 8371's attorney fees and costs provisions vindicate the statute's policy by enabling plaintiffs such as Willow Inn to bring § 8371 actions alleging bad faith delays to secure counsel on a contingency fee. Moreover, “one function of punitive-damages awards is to relieve the pressures on an overloaded system of criminal justice by providing a civil alternative to criminal prosecution of minor crimes,” Mathias v. Accor Economy Lodging, Inc., 347 F.3d 672, 676 (7th Cir.2003), and the structure of § 8371 enlists counsel to perform a filtering function akin to prosecutorial discretion, because rational attorneys will refuse to work on a contingent fee arrangement when their investigation reveals the bad faith allegations of prospective clients to be meritless.” Willow Inn, Inc. v. Pub. Serv. Mut. Ins. Co., 399 F.3d 224, 236 (3d Cir. 2005).

    •    1.6.4.2    The Third Circuit noted that its decision to include attorney’s fees in the ratio analysis “is supported in the case law” and explained that a recent Pennsylvania state court decision also included the attorney’s fees incurred in a bad faith claim in the ratio analysis. This position has also been adopted by the 11th Circuit in Action Marine, Inc. v. Cont’l Carbon Inc., 481 F.3d 1302 (11th Cir. 2007) and Illinois state courts in Kirkpatrick v. Strosberg, 894 N.E.2d 781 (Ill. App. Ct. 2008).

    ▾    1.6.5    Attorney’s Fees

    •    1.6.5.1    KRS 367.220(3) In any action brought by a person under this section, the court may award, to the prevailing party, in addition to the relief provided in this section, reasonable attorney's fees and costs.

    •    1.6.5.2    The seminal case on the award of fees pursuant to the Kentucky Consumer Protection Act is Alexander v. S&M Motors, Inc., 28 S.W.3d 303 (Ky. 2000). That case holds that the award of fees is in the sound discretion of the trial court. In Alexander, the Kentucky Supreme Court explained that permitting the additional recovery of attorney’s fees in consumer protection cases serves two purposes. First, it is “intended to compensate the prevailing party for the expense of bringing an action under the statute.” The Court continued, “[a] further aim is to provide attorneys with incentive for representing litigants who assert claims which serve an ultimate public purpose (i.e. a deterrent to conduct resulting in unfair trade practices which perpetrate fraud and deception upon the public.)” Alexander at 305.;

    ▾    1.6.5.3    Attorney’s fees are determined by using the “lodestar method”

    •    1.6.5.3.1    In Hensley v. Eckerhart, 461 U.S. 424, 429 (1983), the United States Supreme Court noted that “the most useful starting point for determining the amount of a reasonable fee is the number of hours reasonably expended on the litigation multiplied by a reasonable hourly rate.”

    •    1.6.5.3.2    You must keep your time contemporaneously. I suggest using a time-tracking service like Harvest (https://www.getharvest.com/) to capture and track time. 

▾    2    Kentucky Lemon Law (KRS 367.840, et seq.)

    ▾    2.1    Purpose

    •    2.1.1    Kentucky’s “Lemon Law” is intended to accomplish three goals: (1) To protect consumers who buy or lease new motor vehicles that do not conform to applicable warranties by holding manufacturers accountable for certain nonconformities; (2) To limit the number of attempts and the amount of times that a manufacturer or its agents shall have to cure such nonconformities; and (3) To require manufacturers to provide, in as expeditious a manner as possible, a refund, not to exceed the amount in KRS 367.842, or replacement vehicle that is acceptable to the aggrieved consumer when the manufacturer or its agents fail to cure any nonconformity within the specified limits.

Ky. Rev. Stat. Ann. § 367.840

    •    2.1.2    Note: the Magnuson-Moss Warranty Act (15 USC § 2301, et seq.) may also offer remedies for breach of warranty issues arising from the sale of a new vehicle. 

    ▾    2.2    Application

    •    2.2.1    Kentucky’s Lemon Law applies to new motor vehicles and not to: (a) Any vehicle substantially altered after its initial sale from a dealer to an individual; (b) Motor homes; (c) Motorcycles; (d) Mopeds; (e) Farm tractors and other machines used in the production, harvesting, and care of farm products; or (f) Vehicles which have more than two (2) axles.

Ky. Rev. Stat. Ann. § 367.841

    ▾    2.3    Process

    ▾    2.3.1    KRS 367.842 outlines the process and rights of consumers afflicted with a “lemon”.

    ▾    2.3.1.1    Consumers must give the manufacturer a “reasonable number” of attempts to repair any nonconformity.

    •    2.3.1.1.1    A presumption that the consumer has given the manufacturer a reasonable opportunity to repair the vehicle if he or she has a) returned the vehicle for repair of the same nonconformity 4 times or b) lost use of the vehicle for the nonconformity for more than 30 days. 

    •    2.3.1.2    The nonconformity must “sustantially impact” the “use, value, or safety” of the motor vehicle”.

    •    2.3.1.3    The consumer must report the failure to repair the nonconformity in writing to the manufacturer in the first 12 months or 12,000 miles of use, whichever comes sooner. 

    •    2.3.2    KRS 367.842(4) requires consumers to particpate in an informal dispute resolution process before filing suit

    ▾    2.3.3    Damages

    ▾    2.3.3.1    The consumer can choose between replacement of the vehicle or refunding the money he or she paid for the vehicle.

    •    2.3.3.1.1    Under KRS 367.842(2), “the manufacturer, at the option of the buyer, shall replace the motor vehicle with a comparable motor vehicle, or accept return of the vehicle from the buyer and refund to the buyer the full purchase price. The full purchase price shall include the amount paid for the motor vehicle, finance charge, all sales tax, license fee, registration fee, and any similar governmental charges plus all collateral charges, less a reasonable allowance for the buyer's use of the vehicle.

    •    2.3.3.2    A court may award reasonable attorney's fees to a prevailing plaintiff. KRS 367.842(9)

▾    3    Kentucky Repossessions

    •    3.1    There is an entire book published by the National Consumer Law Center on protecting consumers from repossession, prosecuting wrongful repossession, and helping consumers recover from repossessions.

    ▾    3.2    Reposssessions in Ketucky are governed by KRS 355.9-601, et seq.

    •    3.2.1    Repossessions must be 1) after default and must not 2) breach the peace.  KRS 355.9-609

    •    3.2.2    The repossessing business can resell the collateral but only after providing notice to the consumer KRS 355.9-610 and 9-611.

    •    3.2.3    Remedies for violations of UCC’s repossession provisions are located at KRS 355.9-625. 

▾    4    Usury

    ▾    4.1    Legal rate of interest

    ▾    4.1.1    KRS 360.010 states that the legal rate of interest is 8%

    •    4.1.1.1    On loans of $15,000 or less, the parties can contract for up to 19%, and

    •    4.1.1.2    On loans greater than $15,000, the parties can contract for whatever interest rate they want. 

    ▾    4.1.2    Damages under KRS 360.020

    •    4.1.2.1    The taking, receiving, reserving, or charging a rate of interest greater than is allowed by KRS 360.010, when knowingly done, shall be deemed a forfeiture of the entire interest which the note, bill, or other evidence of debt carries with it, or which has been agreed to be paid thereon. In case the greater rate of interest has been paid, the person by whom it has been paid, or his legal representatives, may recover, in an action in the nature of an action of debt, twice the amount of the interest thus paid from the creditors taking or receiving the same: provided, that such action is commenced within two (2) years from the time the usurious transaction occurred.

    •    4.1.3    Often, businesses effectively charge interest greater than the legal or contractual rate by padding the deal with additional charges and fees. You must acquaint yourself with the case law on these statutes to determine whether certain charges are “interest” and therefore usurious. 

▾    5    Federal Laws

    ▾    5.1    Fair Debt Collection Practices Act (FDCPA)

    •    5.1.1    Protects people from abusive debt collection practices

    •    5.1.2    15 USC 41 § 1692, et seq. http://www.law.cornell.edu/uscode/text/15/chapter-41/subchapter-V

    •    5.1.3    Prohibits false or misleading representations, unfair practices, harrassment or abuse

    •    5.1.4    Again, the National Consumer Law Center publishes an entire book on this subject and some practitioners focus exclusively on prosecuting these claims.

    •    5.1.5    Report on Debt Collection from the Center for Responsible Lending: http://www.responsiblelending.org/state-of-lending/reports/11-Debt-Collection.pdf

    ▾    5.1.6    Damages

    •    5.1.6.1    § 1692k allows people to recover their actual damages suffered as a result of the violation, up to $1,000 in statutory damages, and attorney’s fees 

    ▾    5.1.7    This area of law is extremely rewarding and challenging. Abuse is rampant and the issues that arise are novel and nuanced.

    •    5.1.7.1    Conway v. Portfolio Recovery Associates, LLC, 13 F.Supp.3d 711 held that a person stated a cause of action for FDCPA violations when a debt collector that received payments in Virginia sued on the debt in Kentucky. Conway’s attorney argued that the debt collector violated the FDCPA because it sued beyond the statute of limitations of the debt and the Court held that the SOL that applied was Virginia’s (3 years), not Kentucky’s (5 or 15 years).  

    ▾    5.2    Fair Credit Reporting Act (FCRA) 15 USC § 1681 et seq. 

    •    5.2.1    Provides a mechanism for consumers to dispute inaccurate information on their credit reports and imposes penalties on credit reporting agencies and furnishers of credit information for failure to correct inaccuracies.

    •    5.2.2    FTC’s Summary of Consumer Rights under FCRA: https://www.consumer.ftc.gov/articles/pdf-0096-fair-credit-reporting-act.pdf

    ▾    5.2.3    Damages (§ 1681(n))

    •    5.2.3.1    Actual damages in any amount or statutory damages not to exceed $1,000

    •    5.2.3.2    Punitive damages

    •    5.2.3.3    reasonable attorney’s fees

    ▾    5.3    Truth in Lending Act (TILA) 15 USC ch 41  § 1601 et seq.

    •    5.3.1    Standardizes how fees and interest are calculated in consumer finance transactions

    •    5.3.2    Creates environment in which consumers can comparison shop by requring businesses to calculate the “true cost” of the loan and the “real” interest rate after taking into account fees, charges, and other costs of credit

    •    5.3.3    TILA’s specific requirements are in the awesome-sounding “Regulation Z”: 12 CFR 226

    ▾    5.4    Real Estate Settlement and Procedures Act (RESPA)

    •    5.4.1    The CFPB’s new Regulation X provides a private cause of action for violations of many of the regulations governing mortgage servicers. Read more here: http://www.consumerfinance.gov/regulations/2013-real-estate-settlement-procedures-act-regulation-x-and-truth-in-lending-act-regulation-z-mortgage-servicing-final-rules/

    ▾    5.5    Telephone Consumer Protection Act (TCPA): 47 USC § 227

    •    5.5.1    The Telephone Consumer Protection Act prohibits obnoxious and costly use of telephones. It limits the circumstances under which businesses can contact consumers and places meaningful restrictions on telemarketers and the use of automated dialing systems (“autodialers” or “robodialers”), text messages, voice recordings, and fax machines. 

    ▾    5.5.2    Damages

    •    5.5.2.1    Actual damages

    •    5.5.2.2    Statutory damages up to $1,500 per violation

    •    5.5.2.3    No attorney’s fees under the TCPA

▾    6    Other Causes of Action

    ▾    6.1    URLTA (Uniform Residential Landlord Tenant Act) KRS 383.505

    •    6.1.1    KRS 383.500 requires local governments to adopt URLTA in its entirety and without amendment. As of 2009, the following jurisditions had adopted URLTA’s provisions: Barbourville, Bellevue, Bromley, Covington, Dayton, Florence, Lexington-Fayette County, Georgetown, Louisville-Jefferson County, Ludlow, Melbourne, Newport, Oldham County, Pulaski County, Shelbyville, Silver Grove, Southgate, Taylor Mill and Woodlaw. 

    ▾    6.1.2    Remedies include a private right of action

    •    6.1.2.1    KRS 383.520: (1) The remedies provided by KRS 383.505 to 383.715 shall be so administered that an aggrieved party may recover appropriate damages. The aggrieved party has a duty to mitigate damages. (2) Any right or obligation declared by KRS 383.505 to 383.715 is enforceable by action unless the provision declaring it specifies a different and limited effect.

    •    6.1.2.2    No decision on whether attorney’s fees are “appropriate damages” under URLTA. 

    ▾    6.2    Equitable Estoppel: Fluke Corporation v. LeMaster, 306 SW 3d 55 (Ky. 2010). 

    •    6.2.1    Under Kentucky law, equitable estoppel requires both a material misrepresentation by one party and reliance by the other party:

The essential elements of equitable estoppel are[:] (1) conduct which amounts to a false representation or concealment of material facts, or, at least, which is calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert; (2) the intention, or at least the expectation, that such conduct shall be acted upon by, or influence, the other party or other persons; and (3) knowledge, actual or constructive, of the real facts. And, broadly speaking, as related to the party claiming the estoppel, the essential elements are (1) lack of knowledge and of the means of knowledge of the truth as to the facts in question; (2) reliance, in good faith, upon the conduct or statements of the party to be estopped; and (3) action or inaction based thereon of such a character as to change the position or status of the party claiming the estoppel, to his injury, detriment, or prejudice.

    ▾    6.3    IIED

    •    6.3.1    In certain circumstances, unscrupulous businesses’ actions will rise to the level of Intentional Infliction of Emotional Distress.

    •    6.3.2    Our Commonwealth first adopted the tort of intentional infliction of mental distress in the case of Craft v. Rice, Ky., 671 S.W.2d 247 (1984). In Craft, we adopted Restatement (Second) of Torts, section 46, and recognized the elements of proof necessary for this new tort: 1. The wrongdoer's conduct must be intentional or reckless; 2. The conduct must be outrageous and intolerable in that it offends against the generally accepted standards of decency and morality; 3. There must be a causal connection between the wrongdoer's conduct and the emotional distress; and 4. The emotional distress must be severe. Kroger Co. v. Willgruber, 920 S.W.2d 61, 65 (Ky. 1996)

    ▾    6.4    Breach of Contract

    •    6.4.1    Of course, in many cases, not only will you have KCPA violations and tortious activity, you will also have breach of contract claims. 

    ▾    6.5    Insurance Bad Faith

    •    6.5.1    Kentucky’s Unfair Claims Settlement Practices Act (KRS 304.12-230) supplements common law “bad faith” administration of insurance claims.

    •    6.5.2    It prohibits specific activities that are unfortunately common during the process of making a claim for coverage including, but not limited to, “failing to acknowledge and act reasonably promptly upon communications”, failing to investigate claims, “failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed”, and “not attempting in good faith to effectuate prompt, fair, equitable settlements of claims in which liability has become reasonably clear.” Reading the entire statute and surrounding jurisprudence is, of course, necessary. 

    ▾    6.6    Fraud

    ▾    6.6.1    Elements

    •    6.6.1.1    In a Kentucky action for fraud, the party claiming harm must establish six elements of fraud by clear and convincing evidence as follows: a) material representation b) which is false c) known to be false or made recklessly d) made with inducement to be acted upon e) acted in reliance thereon and f) causing injury. Wahba v. Don Corlett Motors, Inc., Ky.App., 573 S.W.2d 357, 359 (1978). United Parcel Serv. Co. v. Rickert, 996 S.W.2d 464, 468 (Ky. 1999)

    ▾    6.6.2    Promises of future performance

    •    6.6.2.1    An accepted rule is, a misrepresentation, to be actional, must concern an existing or past fact, and not a future promise, prophecy, or opinion of a future event, unless declarant falsely represents his opinion of a future happening.” “One may commit ‘fraud in the inducement’ by making representations as to his future intentions when in fact he knew at the time the representations were made he had no intention of carrying them out.” 

PCR Contractors, Inc. v. Daniel, 354 S.W.3d 610, 614 (Ky. App. 2011) quoting Bear, Inc. v. Smith, 303 S.W.3d 137, 142, 614 (Ky. App. 2010).

    ▾    6.6.3    Fraudulent Omission

    •    6.6.3.1    This subset of “fraud” is a common cause of action in consumer law practice.

    •    6.6.3.2    To prevail on a claim of fraudulent omission, a plaintiff must prove: (a) a duty to disclose a material fact; (b) a failure to disclose a material fact; and (c) that the failure to disclose a material fact induced the plaintiff to act and, as a consequence, (d) to suffer actual damages. Rivermont Inn, Inc. v. Bass Hotels & Resorts, Inc., 113 S.W.3d 636, 641 (Ky.App.2003). A caveat to the necessary elements under either claim is that “mere silence does not constitute fraud where it relates to facts open to common observation or discoverable by the exercise of ordinary diligence, or where means of information are as accessible to one party as to the other.” Bryant v. Troutman, 287 S.W.2d 918, 920–921 (Ky.1956). Waldridge v. Homeservices of Kentucky, Inc., 384 S.W.3d 165, 171 (Ky. Ct. App. 2011).;

    •    6.6.3.3    A duty to disclose facts is created only where a confidential or fiduciary relationship between the parties exists, or when a statute imposes such a duty, or when a defendant has partially disclosed material facts to the plaintiff but created the impression of full disclosure. Dennis v. Thomson, Ky., 240 Ky. 727, 43 S.W.2d 18 (1931). Rivermont Inn, Inc. v. Bass Hotels & Resorts, Inc., 113 S.W.3d 636, 641 (Ky. Ct. App. 2003);

    ▾    6.6.3.4    Beyond these three situations cited in Rivermont in which a duty arises, Kentucky courts have found other circumstances in which a party may commit fraudulent concealment:

    •    6.6.3.4.1    A duty to disclose may arise from a fiduciary relationship, from a partial disclosure of information, or from particular circumstances such as where one party to a contract has superior knowledge and is relied upon to disclose same. Smith v. Gen. Motors Corp., 979 S.W.2d 127, 129 (Ky. Ct. App. 1998)

    •    6.6.3.4.2    We may readily agree with the appellants that mere silence with respect to something related to a transaction is not necessarily misrepresentation and does not itself constitute fraud. However, it is otherwise when the circumstances surrounding a transaction impose a duty or obligation upon one of the parties to disclose all the material facts known to him and not known to the other party. The suppression or concealment of the truth under such circumstances may constitute a means of committing a fraud as well as misrepresentation openly made. Since the beginning of our jurisprudence, the principle has been consistently adhered to that the concealment by a seller of a material defect in property being sold, or the suppression by him of the true conditions respecting the property, so as to withhold from the buyer information he is entitled to, violates good faith and constitutes deception which may relieve the buyer from an obligation or may permit him to maintain an action for damages or to vacate the transaction. Hall v. Carter, 324 S.W.2d 410, 412 (Ky. 1959)

    ▾    6.7    Negligent Misrepresentation

    •    6.7.1    A majority of jurisdictions have adopted Restatement (Second) of Torts § 552, which outlines the elements of negligent misrepresentation as follows:(1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information. (2) Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered (a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and (b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction. Presnell Const. Managers, Inc. v. EH Const., LLC, 134 S.W.3d 575, 580 (Ky. 2004)

▾    7    Foreclosure Defense

    •    7.1    See outline that follows

    ▾    7.2    Foreclosure Defense includes helping your client rigorously pursue all loss mitigation options

    •    7.2.1    http://www.makinghomeaffordable.gov/for-partners/understanding-guidelines/Documents/mhahandbook_41.pdf

I was in Fayette County this to appear for my client, a homeowner facing foreclosure. I counted the number of motions that were foreclosure-related and how many were other civil actions. Of the 32 motions made, only seven were not related to foreclosures. Twenty-seven (84%) were foreclosures.

With foreclosures dominating motion hours and dockets across the state and straining Court resources, it is time to increase filing fees on foreclosures? Increasing foreclosure filing fees would be a great and long-overdue way for Kentucky courts to fund foreclosure mediation and dispute resolution efforts.  The current system was not designed to deal with the volume of foreclosures currently filed each year and each case is fact-specific and requires the Court's attention to ensure banks do not inflict needless foreclosures on our communities. 

Kentucky needs additional systems to deal with foreclosures and increasing the filing fees on foreclosures can help fund the construction of that infrastructure.  

Ben Carter Law PLLC has filed a class action lawsuit Jefferson County Circuit Court against attorney Marilyn Hartley, one of Louisville's largest private tax collectors. Ms. Hartley collects taxes under an assumed name, "DETCO".

In Kentucky, local governments fund their operations in part by selling unpaid property taxes as "Certificates of Delinquency" to individuals and businesses. These Certificates of Delinquency give these individuals and businesses the right to collect delinquent taxes. Today, 115 individuals and businesses have registered to purchase Certificates of Delinquency and function across the Commonwealth as private tax collectors. In the past, delinquent taxpayers didn't know what to expect from these private tax collectors: some were responsible and honest while others crushed delinquent taxpayers by charging them exorbitant, unjustified fees and costs and sometimes forcing the taxpayer's home into foreclosure. 

In 2012, the Kentucky legislature passed new laws and the Department of Revenue issued new regulations in an effort to curb the most abusive practices and ensure that third-party purchasers treated Kentucky's delinquent taxpayers fairly and uniformly. When a third party purchaser like Marilyn Hartley buys a Certificate of Delinquency, these new laws and regulations require third party purchasers to provide important information to delinquent taxpayers. The laws and regulations ensure transparency from the third party purchaser and require the third party purchaser to explain to the delinquent taxpayer the taxpayer's rights, obligations, and alternatives now that a third party purchaser owns the Certificate of Delinquency.

Transparency from the third party purchaser, fair treatment of an individual delinquent taxpayer, and equal treatment of taxpayers across the industry are important goals to the legislature: the new law forbids third party purchasers from charging interest, fees, or costs to a delinquent taxpayer's account unless they have provided the required information to the delinquent taxpayer.  

On January 22, 2013, I filed a class action lawsuit on behalf of my client—James C. Brown—and 459 other delinquent taxpayers who have been harmed by the failure of Marilyn Hartley to provide them with necessary, required information about their rights, obligations, and alternatives after she purchased their Certificates of Delinquency. Ms. Hartley purchased more Certificates of Delinquency in Jefferson County last year than any other third-party purchaser.

Read the Class Action Complaint and view the exhibits to the Complaint. 

Despite her failure to provide delinquent taxpayers with the required information, Ms. Hartley is charging interest, attorney's fees, administrative fees, and—in some cases—payment plan servicing fees. The law does not allow Ms. Hartley to charge interest and fees until after she has sent a proper notice of transfer that contains all of the information required by the new law. I believe that Ms. Hartley has unlawfully charged to the accounts of Mr. Brown and the Class members 1% interest per month, at least $52,900 for administrative fees, and at least $80,500 for attorney's fees. 

The heart of the suit is summed up in paragraph 146 of the Complaint:

In short, Defendant’s entire course of conduct—from her effort to obfuscate the true relationship between Marilyn Hartley and DETCO, to her failure to provide proper notice of transfer, to her failure to itemize both the amount currently due and the amount due under a payment plan, to her unlawfully inflated claims of amounts due under a payment plan, to her presentation of a payment plan as a one-time opportunity with a limited time to accept, to her citation to expired law—is an elaborate artifice designed to disorient hundreds of consumers, confront them with a placeless and faceless creditor, “DETCO”, and intimidate them into paying her hundreds of thousands of dollars in interest, attorney’s fees, administrative fees, and servicing fees to which she is simply not entitled under the law.

This lawsuit seeks to force Ms. Hartley to refund to the accounts of the Class members all of the unlawful interest and fees she has charged to the delinquent taxpayers' accounts. My client is asking for an injunction that would prohibit Ms. Hartley from charging fees and interest to the accounts until she has sent a notice that complies with Kentucky laws and regulations. Further, the lawsuit seeks to recover additional damages because Marilyn Hartley made false and misleading statements to get some delinquent taxpayers to enter into a payment plan agreement with her that requires them to pay interest and fees to Ms. Hartley to which she is not entitled. Finally, the lawsuit seeks punitive damages. Punitive damages in this case will serve three functions. They will:

1. Punish the Defendant for charging delinquent taxpayers interest and fees that the law forbids her from charging,
2. Make an example of the Defendant for other third party purchasers who might be tempted to line their pockets with bogus and unlawful interest and fees, and
3. Level the playing field for the third party purchasers who are abiding by the law and yet have been injured by the competitive advantage Ms. Hartley has enjoyed by charging delinquent taxpayers unlawful interest and fees.   

If you have been contacted by Marilyn Hartley or DETCO or if you are currently paying DETCO under a repayment plan, you can contact me online, email me at ben@bencarterlaw.com, or call (502) 509-3231. 

There are 115 other third party purchasers of Certificate of Delinquency operating in the Commonwealth of Kentucky today. If you suspect you are being charged too much by a third party purchaser or would like me to review a letter you received about your delinquent taxes, please contact me.

The Consumer Financial Protection Bureau (thanks, Senator Warren!) issued new rules for mortgage servicers yesterday. The good news: they're good rules. The bad news: they don't kick in until January 10, 2014. [Sad face].

Read more about the rules and the press coverage.

Even though the rules don't apply until 2014, I think that Kentucky attorneys defending homeowners facing foreclosure can consider using the rules (and the abusive, reckless, callous, obnoxious behavior of servicers that made these rules necessary) in briefs sooner rather than later. They establish an industry standard. There's good language in the Background section of the "Summary of the final mortgage servicing rules".

I am presenting to a group called "friskies" tomorrow morning. These are people who work at our schools' FRYSCs: Family Resources and Youth Services Centers. FRYSCs are on the front lines of out-of-school problems kids and families are facing that could affect in-school achievement. Tomorrow, they want info on renters' rights in foreclosure because this is an issue they see arise over and over again. FRYSCs report that often children and their families lose housing quickly and without much warning because a landlord and the foreclosing bank fails to tell the renter about the foreclosure. 

Because of the Protecting Tenants in Foreclosure Act, renters have substantial rights regarding their ability to enjoy the property they are renting even though it is going through a foreclosure. Originally scheduled to expire at the end of this year, the protections were extended through 2014 as part of the Dodd–Frank Act. Unfortunately, cuts to funding to Legal Aid organizations means that renters do not often have the representation they need and these rights often go unenforced. 

Renters' rights are pretty straightforward under the Protecting Tenants in Foreclosure Act. Provided you are not related to the landlord, are paying a fair price for the rent, and the rental agreement was an arms-length transaction, you are allowed to stay in the property all the way through the sale of the home in foreclosure. Even after the sale, the new purchaser must ask the court to issue him or her a deed. Only after the court issues a new deed can the new owner send you a Notice to Vacate and even then the new owner must provide you with ninety days (NINETY!) to vacate and find new housing. 

That's the bare minimum. If you have a lease agreement with the old landlord that lost the property in foreclosure that lasts longer than the ninety day minimum notice, you are entitled to enjoy the property for the duration of that lease unless the new owner plans on occupying the property as his or her primary residence.

As I said above, these are substantial rights that are rarely enforced because we do not fund legal aid organizations they way they should be funded and our legal system does not provide the infrastructure to renters that it should. I have created a document I'm calling "Entry of Appearance and Notice of Rights under the Protecting Tenants in Foreclosure Act". Two versions are below. One is blank and can be downloaded and handwritten. The other contains form fields into which you can type the required information.

Before you go using these forms, listen: I am not your lawyer. By using these forms you acknowledge that you are unrepresented by counsel and are seeking to assert your rights yourself, without an attorney. If I were going to be your lawyer, you would have to contact me and we would have to actually, you know, talk and you would probably have to pay me money. I am providing these forms as a community service and do not promise they will be useful or effective in any way. You know what is effective? Having a lawyer. So, you can contact me or contact the Kentucky Lawyer Referral Service to find one to help you with your case. I hate to get a stern tone with you, but seriously: I'm not your lawyer. 

All that being said and understood, here are the forms. You can "right-click" on these links to download the files to your computer).

• Blank "Entry of Appearance and Notice of Rights" (good for handwriting)
• Form-Fillable "Entry of Appearance and Notice of Rights" (good for people with computers)

Renters are often less financially secure than homeowners and so the disruption of a foreclosure can hit innocent renters even harder than it can the landlord being foreclosed upon. The Protecting Tenants in Foreclosure Act is designed to offer a brief period of stability following a foreclosure sale while the tenant endeavors to secure new housing. It's important to our community and especially our kids that we as a legal community do everything we can to provide them that stability in a time of flux. 

Do you know that sometimes being a lawyer gives me the chills?

After I announced my willingness to help lawyers build better, more beautiful, easier-to-maintain websites, a few attorneys have asked me what they can do to increase their prominence on Google's search results. Many of them have the sense that SEO ("search engine optimization") is some magic dust that techies can sprinkle onto their website that will lift the site up into the first page of search results. (Of course, many have this sense because SEO "experts" market themselves as the 21st-century's dark magicians.)

Sorry, it doesn't work like that. 

Certainly, there are some best practices you can use when creating pages and titling blog posts that will help search engines determine whether what you're saying will be responsive to a particular query from a user. But, beyond a few very basic premises (which we'll be discussing at this summer's Commonwealth Justice Conference—sign up for email updates), the reality of increasing your prominence online is that you have to actually provide value to people. Gyi Tsakalakis explains this in a useful blog post. I particularly enjoyed his list of activities that real law firms engage in. 

“So what kind of “stuff” do real law firms do? Here are some ideas:

Real law firms stand for something.
Real law firms are active in their communities.
Real law firms educate the public.
Real law firms inspire social change.
Real law firms help real people.
Real law firms partner with organizations that further justice.
Real law firms raise awareness of important social issues.
Real law firms maintain the dignity of the profession.
Real law firms participate in public service.”

— Gyi Tsakalakis

The idea, folks, is that you start getting better results online only after you start achieving better results offline. Do something in the world worth telling people about and then tell them on your site. Or, do something online that brings people together in a new and unique way. Over time, documenting the real work that your law firm does and providing real value to your online community will naturally translate into better search results. But, this is important: you do the things not to get better search results but because the things are important to do. They're important to you, your clients, your community. Maybe the traffic from search results comes, maybe it doesn't. But, either way, you've done something worthwhile with your limited time and energy.  

I have exciting news: Ben Carter Law PLLC is a thing that exists in the world. Today. 

While there are a number of heartening things about starting my own firm, perhaps the best is that I now count myself as a member of the elite class of “job creators” that make America great.

My job at Ben Carter Law PLLC? I built that.

I want to tell you what I’m going to be working on because I think some of it is very exciting:

• I’m going to continue working for the Network Center for Community Change, advising them on issues surrounding foreclosure and vacant and abandoned property. I’ll be training Kentucky attorneys to defend homeowners facing foreclosure and lobbying in Frankfort to give local communities the 21st–century tools they need to address the growing number of vacant, abandoned, and blighted homes.
• I will represent creative professionals: web designers, app developers, photographers, videographers, musicians, and graphic artists. These good people often don’t use lawyers and as a result don’t have contracts that help them have good conversations with their clients about deadlines, payment, and deliverables or protect them when things occasionally go south.
• I am going to continue representing people who have been injured by someone else’s negligence, whether that someone else is a negligent driver, lawyer, doctor, corporation, or property owner.
• I’m going to continue representing consumers that have been duped and defrauded by the false, unfair, deceptive, or misleading acts and practices of unscrupulous businesses.
• I want to help attorneys build beautiful, easy-to-maintain websites and not be idiots about technology. Many attorneys pay too much money for ugly, unusable sites.  Others don’t have sites at all. In 2012, it doesn’t have to be this way.
• One of the things I am most excited about is a conference I’m organizing for 2013. The Commonwealth Justice Conferencewill be in Louisville from August 8–10. It’s for attorneys and laypeople in Kentucky who want to use the law and grassroots organizing to pursue impact litigation and legislative change to make Kentucky a better, safer, fairer place to be a worker, an immigrant, a homosexual, a voter, a kid, or a consumer. I’ll be launching a website and providing additional information about location, events, schwag, and speakers in the weeks and months ahead. Please sign up to receive email updates if you are interested in hearing more about Commonwealth Justice 2013.  

That’s it. This is the plan. You can get email updates from the firm, but only if you sign up for them. 

My phone number is (502) 509-3231 and email isben@bencarterlaw.com.

You can be strange, but don’t be a stranger.

—Ben

P.S. Since I last emailed you, I wrote a pretty good essay on typography that lawyers and other people who type on a computer should read.

P.P.S. You really should hop on the Commonwealth Justice train. 

The reality of judicial races is that people who work outside our legal system feel ill-equipped to cast an informed ballot. I'm often asked by my non-lawyer friends who they should vote for in judicial races. In the Court of Appeals race in Jefferson County, I suggest a vote for Judge Jim Shake. 

Judge Shake is a smart, pragmatic judge that works hard and takes risks to ensure that everyone has access to the court system and that the courts are solving problems. I know. In 2009, as the Chief Judge of the Jefferson Circuit Court, Judge Shake worked with advocates for homeowners (I was an attorney for the Legal Aid Society at the time), bank attorneys, community groups, and the court system to create the Foreclosure Conciliation Project. With the FCP, Jefferson County became the first court system in the state to attempt to address the exploding numbers of foreclosures in our community.

As part of the project, Judge Shake ensured that each homeowner facing foreclosure received credible, timely information about alternatives to foreclosure and steps to take to avoid foreclosure. The FCP provided homeowners with outreach, housing counseling, legal representation, and an opportunity to meet with their banks to pursue these alternatives. Hundreds of homeowners saved their home through the process that Judge Shake created and the lessons we learned in Jefferson County have influenced similar programs across the state.

Judge Shake has been a judge for 19 years. He knows the immense impact the courts have on Kentuckian's lives. The courts impact lives not just in individual cases, but also in the processes and procedures they build to solve emerging problems like the foreclosure crisis. I'm supporting Judge Shake because he has shown the willingness and ability to solve problems—big and small—as a judge.

I have to admit to being totally frustrated by articles like this. How is it surprising that homeowners--many already burned once by HAMP--are reluctant to participate in another program designed to "help" them?

On March 15, I presented at the University of Kentucky's Consumer Bankruptcy Symposium. I promised certain materials and here they are: 

Here is the brief about the Uniform Commercial Code, Standing, and Securitization. 

Here is the brief about the Rogan v. Bank One case. 

How to Find and Use PSAs. 

Here are the presentation slides. 

The Network Center for Community Change pays me (yes, it is a great job) to train attorneys attorneys to defend homeowners facing foreclosure and work with courts to implement processes that ensure everyone is getting a fair shake during a foreclosure. This is a presentation from last fall at the Kentucky Bar Association's Kentucky Law Update in Covington, Kentucky in which I explain to attorneys how they can profitably incorporate foreclosure defense into their practice, how loan modifications work and don't work, and why the court system needs to change how it handles foreclosure proceedings. Somehow, I also talk about the Sausage of Justice.

Read more about the Network Center for Community Change: makechangetogether.org

If you would like for me to come to your area to give a talk, I'm available. 

I didn’t think practicing law was going to be fun. This weekend, I am at the National Consumer Rights Litigation Conference, hosted in Chicago this year by the National Consumer Law Center (NCLC). Three years ago, at their conference in Portland, the NCLC showed me just how much fun being an attorney was going to be.

I could sue banks. I could defend homeowners. I could pursue creditors who pursued my clients. I could make them pay. Wow.

If you went to an Occupy Wall Street gathering and found the prevailing attitude towards banks a little tame, this conference is for you.

I’m learning about consumer arbitration agreements, consumer class actions after Concepcion, credit reporting, loan modifications, payday loans, predatory lending, auto fraud, expert witnesses, lemon laws, foreclosure mediation programs around the nation. The speakers include the great Paul Bland and Deepak Gupta (who argued Concepcion and who shared 30 minutes of his time with me in his office while he was at Public Justice. Last night, Matt Taibbi addressed the members of the National Association of Consumer Advocates (NACA); we gave him our annual Media Award for his work publicizing the dastardly deeds of foreclosing servicers, banks, and attorneys. Today, we’ll hear from Susan Saladoff, director of Hot Coffee and I’m spending all morning with Ron Burge. Tomorrow, I’m attending the Consumer Class Action Symposium.

I like so much about this conference. So much. I like that I learn about both the substance and procedure of practicing consumer law. I like that this conference gives me big ideas about expanding what I can do for my clients and big ideas about what I can do to change the terms of debates in the public sphere: debates about our civil justice system, mandatory arbitration, the utility of foreclosure mediation. Each year, I come away energized and inspired. These attorneys are so good.

The odds we face are enormous. The monied interests have bought our politicians, they’ve funded aggressive public relations campaigns that seek to close the courthouse doors to you and me. But, the NCLC and NACA and Public Justice (and KJA) are working hard to make us better attorneys for our clients and better advocates for the system of justice for which our founders fought.

Cross-posted at BlueGrassRoots...

This essay is deeply indebted to two articles: "Defending Mortgage Foreclosures: Seeking a Role for Equity" by law professor David Super and a National Consumer Law Center report: "Servicer's Failure to Engage in Appropriate Loss Mitigation as a Foreclosure Defense. The NCLC article does not appear to be available online, but many other resources from the amazing National Consumer Law Center are available. 

Dear Judge,

I’m writing today because it is down to you. You are the last, best hope for Kentucky’s homeowners–both those facing foreclosure and their neighbors.

Our neighbors’ homes are on fire. The foreclosure crisis blazes through our neighborhoods and continues to grow. One in four Kentucky homeowners owe more on their house than it is currently worth. One in ten is more than thirty days behind on their home loan.

Foreclosure is too expensive, too extreme, to be granted as a matter of routine—each sale adds fuel to the raging fire. Foreclosure devastates homeowners, destabilizes financial institutions, degrades neighborhoods, and impoverishes communities.

Kentucky faces a situation in which homeowners facing foreclosure are clueless, powerless, and unrepresented by counsel. The federal program designed to encourage banks[1] to modify homeowners’ loans (HAMP) is a colossal failure. Reckless banks pursue foreclosure even to their own (and everyone else’s) detriment. Worse, problems with the banks’ own loan documents abound; their right to foreclose at all is deeply suspect.

The federal government first failed to adequately regulate mortgage lending. Now, it is failing to address the fallout. State and local government’s efforts to mitigate the losses have been similarly watered-down and ineffective. Frankfort lacks the political resources and local governments lack the financial resources to address a crisis of this proportion. Banks can walk all over a local government.

But, they can’t walk over you.

Kentucky, thank God, is a state that requires banks to seek judicial approval before taking a homeowner’s house. Some states don’t. I’m writing today to encourage you to apply much stricter scrutiny–both legal and equitable–on foreclosure proceedings than has traditionally been applied. I’m writing to ask you to incorporate alternative dispute resolution in your foreclosure cases that will ensure that the parties have explored in good faith every alternative to foreclosure before granting judgment in favor of foreclosing Plaintiffs. I’m writing to ask you to ensure that the foreclosures inflicted upon the community are only those that are absolutely necessary.

What is happening is not traditional; it’s extraordinary. It’s time to start treating it extraordinarily.

How We Got Here

Later in this letter, I will urge you to evaluate and question whether equity will permit the foreclosure the bank is asking you to grant. I will encourage you to aggressively apply equitable remedies in Kentucky foreclosure proceedings. To evaluate the equity of the situation, you need to know how all of these loans that are now in default came to exist in the first place.

In the past decade, the system set up by federal regulators, banks, and investors to finance home loans incentivized originating exotic, risky, and unsustainable loan products to Americans unlikely to appreciate the complex terms contained in their loan.[2] Fraud and unconscionable practices pervaded the mortgage lending landscape. Lenders qualified borrowers for unaffordable mortgages by offering initially-low interest rates that obscured the true cost of the loan. Many homebuyers never knew their house payments would increase dramatically a few years into the loan. Borrowers who were savvy enough express concern about these “teaser rates” were told not to worry about the adjustable rate, that they would refinance the homeowner into a fixed rate before the rate adjusted. Banks paid mortgage brokers a “Yield-Spread Premium”—often thousands of dollars—to place homebuyers in loans with higher interest rates than the rate for which the homeowner’s credit history and income actually qualified them.

Not surprisingly, the victims of these lending abuses were often the very people who could least afford it: poor people and minorities.[3] Often, these loans were written at 100% of loan-to-value,[4] leaving homeowners trapped and unable to refinance out of spiraling interest rates once housing prices plummeted in the wake of the subprime mortgage meltdown.

After mortgage brokers and lenders placed homeowners in risky loans, they sold the right to collect payments on those loans to investment firms who then pooled those loans with thousands of other loans. Investors—from school boards in Iowa to the government of Iceland—bought the right to be paid proceeds from the revenue the pooled loans generated. Investment firms who purchased individual mortgages and created residential mortgage-backed securities grossly underestimated the riskiness of the loans they were purchasing and credit rating agencies likewise gave the securities the safest (“triple-A”) rating that many institutional investors required.

Because this system sold not only the right to collect mortgage payments, but also the risk of a defaulting loan, it removed any incentive from the loan originator to exercise due diligence, verify income, ensure sustainability, or prevent appraisal fraud. The system of securitization designed by Wall Street investment firms rewarded lenders who could originate as many loans as quickly as possible.

As is obvious in hindsight, the incentives surrounding this entire scheme of financing loans are exactly backwards. Mortgage brokers are rewarded not for finding homeowners the most affordable loan, but the most expensive. Originating lenders have no interest in the long-term sustainability of the loan, and investment firms only care that there are investors for the securities they’re creating. Credit rating agencies are paid by the very firms that they’re grading.

Before the housing bubble, lenders and the eventual investor (usually FannieMae or Freddie Mac) cared whether an individual homeowner could pay their mortgage payment. Suddenly, no one did. It was a system for financing home loans that did everything wrong. It was destined to collapse.

Foreclosure Hurts Everyone

Now that the collapse has happened, the mortgage meltdown and the broader economic downturn have introduced into the public conscience the ravages of foreclosure on individuals and communities. No one wins when a house is sold at a foreclosure auction.[5]

Homeowners lose their home. They always lose the emotional equity they’ve invested into their home, and often any financial equity, as well. They lose the stability that homeownership provides. Their world suddenly uncertain, homeowners bear the cost of moving and reestablishing housing in another neighborhood, sometimes another city or state.

Lenders lose money along every step of a foreclosure sale. A 2008 paper by the Mortgage Bankers Association acknowledges lenders often lose in excess of $50,000 in each foreclosure, or 30–60% of the outstanding loan balance.[6]

From the moment a homeowner stops paying their mortgage, lenders lose money. While the loan is delinquent, lenders lose principle and interest payments, as well as taxes and insurance payments. They must maintain the property, if necessary, and invest in trying to collect the on the loan. Once the home is in foreclosure, lenders must hire lawyers, pay court costs, and administrative fees. Then, they then must hire a company to maintain the property and secure the property. Finally, after the home is sold in foreclosure, the lender often must restore the property before selling it and hire a realtor.[7] If the lender is lucky, the property will sell at a deeply discounted rate, if it sells at all.[8]

Beyond the parties to the contract—the homeowner and lender—foreclosure hurts innocent neighbors and plagues communities with a vicious cycle of depreciation and degradation.

Because houses sold at a foreclosure auction are eventually sold for a fraction of what they otherwise would have, foreclosures damage the value of neighboring homes. When a neighborhood’s homes begin to depreciate, many innocent homeowners find themselves “upside-down” on their own loans. That is, they suddenly owe more on their homes than they are worth.[9] When a family needs to move or refinance, they find doing so next to impossible. Even for those hoping to remain in the neighborhood, a foreclosure sale on a neighbor’s property, over which they have no control, strips them of equity and reduces the value of their investment.

This collateral damage (literally and figuratively) is exacerbated by the fact that many foreclosed properties are not properly maintained and remain vacant or abandoned for months or years.[10] Researchers in Philadelphia have determined that properties within 150 feet of an abandoned property lose $7,627 in value. Those within 300–450 feet lose $3,542. Properties on a block with an abandoned house sell for $6,715 less than those without a vacant property. Metropolitan Housing Coalition, 2009 State of Metropolitan Housing Report 16 (2009). Louisville currently has between 7000 and 8000 vacant properties—a number that has doubled in the past six years—and the roughly 250 foreclosure sales scheduled each month continue to grow the number of vacant properties. The Center for Responsible Lending anticipates that Kentucky will lose $2.2 billion in home equity due to nearby foreclosures between 2009 and 2012. That’s an average loss of $2,610 per home.

Because of foreclosure sales, deeply discounted REO properties, and the glut of vacant and abandoned properties depress property values, ordering a foreclosure sale will reduce the local government’s property tax revenues–the lifeblood of municipal budgets. Not only will it reduce the money local governments bring in, foreclosures require the government to spend up to $34,000 per foreclosure on “inspections, court actions, police and fire department efforts, potential demolition, unpaid water and sewage, and trash removal.”[11] All told, the Joint Economic Committee of the U.S. Congress estimates that each foreclosure costs all parties $80,000.[12]

Kentucky Judges Should Consider Equity and Equitable Remedies

Five hundred years ago, England developed equitable proceedings for cases in which the strict enforcement of rigid legal principles made the attainment of justice unlikely. Our own legal system, descended from the English system, requires courts to exercise both legal and equitable jurisdiction. Modern practice in Kentucky merges the two systems of law and equity. Ford v. Gilbert, 397 S.W.2d 41 (1965). The Kentucky Constitution “imbues the circuit courts with the general power to determine all matters of controversy arising under common law or equity.” Hisle v. Lexington-Fayette Urban County Government, 258 S.W.3d 422, 432 (Ky. App. 2008).

In Hisle, the Court notes that “[a]lthough modern partition proceedings generally involve statutory provisions, the jurisdiction of equity courts to partition real property is very ancient and has existed in common law both in England and this country since its founding.” Hisle at 431. Therefore, statutes that govern partition of land “supplement, or are supplemented by, the traditional jurisdiction of equity courts to decree partition.” Hisle at 432 quoting Atkinson v. Kish, 420 S.W.2d 104, 110 (Ky. 1967).

Similarly, in a foreclosure proceeding, the statutory provisions intersect with equitable considerations. Equitable relief is available in states, like Kentucky, where foreclosure is a statutory action. Union National Bank of Little Rock v. Cobbs, 509 A.2d 719, 721 (Pa.Super. 1989). “Foreclosure is peculiarly an equitable action, and the court may entertain such questions as are necessary to be determined in order that complete justice may be done.” Morgera v. Chiappardi, 813 A.2d 89, 98 (Conn. App. 2003) quoting Hartford Federal Savings & Loan Assn. v. Lenczyk, 217 A.2d 694 (1966). Emphasis in original. “The determination of what equity requires in a particular case, the balancing of the equities, is a matter for the discretion of the trial court.” LaSalle National Bank v. Freshfield Meadows, LLC., 798 A.2d 445 (Conn.,2002).

Today, Kentucky courts [13] have the ancient opportunity and duty to weigh the equities present in each foreclosure case. To evaluate the equity of the situation, the Court should ask itself two questions:

1. Does the bank deserve the right to foreclose on this particular homeowner?
2. Should the Court allow the bank to inflict a foreclosure on the community?

Does the Bank Deserve the Right to Foreclose on This Particular Homeowner?

As an initial matter, the court should examine the Plaintiff’s own conduct and its relationship to the homeowner. “Equitable defenses invite the court to consider only the plaintiff’s ethical standing and to deny all remedies if the plaintiff does not meet equity’s standards.” Dan B. Dobbs, Dobbs Law of Remedies § 2.3(3) at 80 (2d ed. 1993). Courts can examine the behavior of the parties over the life of the loan: from the origination of both the note and mortgage, to their validity, to their enforcement. Bank of New York v. Conway, 916 A.2d 130 (Conn. Supp. 2006).

For example, when a “mortgagor is prevented by accident, mistake or fraud, from fulfilling a condition of the mortgage, foreclosure cannot be had.” New Haven Sav. Bank v. LaPlace, 783 A.2d 1174, 1180 (Conn. App., 2001). Courts have also recognized other equitable defenses to foreclosure: unconscionability, abandonment of security, usury, accident, fraud, equitable estoppel, laches, breach of implied covenant of good faith and fair dealing, tender of deed in lieu of foreclosure, a refusal to agree to a favorable sale to a third party, and violations of state consumer protection laws. Id.

What is the Plaintiff and What Has It Done to Avoid Foreclosure?

In the context of a foreclosure on a person’s home, a constellation of considerations often undermines the Plaintiff’s equitable standing to pursue a forfeiture of that home. From the origination of home loans, to their securitization, to their servicing, and finally to the treatment of defaulting homeowners, the mortgage brokers, appraisers, realtors, banks, investment firms, and investors purposefully and profitably participated in a tremendously flawed lending system. These flaws erode the Plaintiff’s equitable standing to now insist on the drastic remedy that requires a family to forfeit their home.

Failing to consider origination abuses would encourage the kind of schemes constructed within the last decade in which each party to the loan, from origination to securitization, sought and profited from plausible deniability of such abuses. The Plaintiff in most cases will not have originated the loan. It may not have been there when the appraisal was massaged. It may not have paid the broker for placing the homeowner in a more expensive loan than was justified by the homeowner’s credit score. It may not have written risky loans to people who didn’t understand the loan’s terms. But, it intentionally chose to participate in the system by purchasing those loans from the originating lender. It sought to profit from the fraud and unconscionable actions perpetrated by mortgage brokers, realtors, appraisers, and lenders. The Plaintiff’s hands became unclean when it shook the dirty hands of the loan’s originators.

Plaintiff’s willingness to participate in a reckless lending environment fraught with fraud, unconscionable lending practices, and bad faith impacts its equitable standing to now seek the extreme remedy of foreclosure. But the inquiry into equitable standing does not end there. The Court must inquire into any servicing abuses, as well as whether and how diligently the Plaintiff has pursued other, less drastic, loss mitigation options in the face of the homeowner’s alleged default.

• When the homeowner began struggling with the mortgage payments, did the Plaintiff consider a forbearance agreement in cases of temporary hardship? 
• Did it offer to modify the homeowner’s interest rate as it was spiraling out of control? 
• Did it structure its loss mitigation and loan modification departments in ways that encouraged participation by homeowners? [14]
• Did it consider accepting a deed in lieu of foreclosure or the sale of the property to a third party?
• Did the Plaintiff insist on pursuing foreclosure even while telling the homeowner it was considering him or her for a loan modification?

Failure to provide meaningful loss mitigation options to struggling homeowners damages the Plaintiff’s equitable standing to now seek a forfeiture of the Defendant’s home.

Has the Servicer Participated in HAMP in Good Faith?

The existence of a federal program that is designed to encourage services to modify struggling homeowners’ loans adds an additional layer to the Court’s analysis of the Plaintiff’s equitable standing.[15]

After creating an incredibly risky and ultimately disastrous system for financing home purchases, banks and investment firms received $700 billion of taxpayer money as part of the Troubled Asset Relief Program (TARP). As part of that program, lenders and servicers of home loans could opt in to the Home Affordable Modification Program (HAMP), allowing them to access $50 billion in taxpayer money. The federal government intended HAMP to “help up to 7 to 9 million families restructure or refinance their mortgages to avoid foreclosure. Home Affordable Modification Program, Supplemental Directive 09–01 1 (April 6, 2009). Under HAMP, a lender or servicer receives cash payments for modifying loans in its portfolio according to the requirements of the program. Once it has opted in to the program, a lender or servicer is obliged to review all of its loans for eligibility under HAMP.

Participation in this program is optional, compliance with its regulations is not. Numerous state and federal courts have found that a lender’s violation of a federal law designed to prevent foreclosure should be raised by the borrower in state court as an equitable defense in a foreclosure proceeding, instead of as a private cause of action.[16] Similarly, state courts also have found that a lender’s non-compliance with federal FHA, HUD, or VA guidelines designed to prevent foreclosure may be raised by the borrower as an equitable defense in a foreclosure proceeding.[17]

Resolving how and whether a servicer has complied with the HAMP regulations require courts to both enforce legal rights and weigh equitable considerations. Like the facts surrounding the origination and servicing of the loan, a servicer’s compliance with HAMP will affect their equitable standing to pursue a foreclosure action.

How HAMP Works

Broadly speaking, HAMP requires the lender or servicer to ask itself, “Would modifying this loan under the terms of HAMP yield a loan that is more or less profitable than foreclosing on the property?” If modification is more profitable, the participating entity must offer the homeowner a conforming loan modification. If foreclosure is more profitable, the lender can proceed with foreclosure.[18] This analysis is called a “Net Present Value” (NPV) calculation. Many courts have held that a servicer’s failure to comply with similar loss mitigation requirements in the FHA loan program was a defense to foreclosure.

To appreciate the importance and difficulty of doing a proper NPV analysis, it is critical to understand what variables go into a Net Present Value calculation. To properly perform an NPV, banks must compare the value of the income from a foreclosure sale to the value to the investors of a modified loan. Many variables go into calculating the potential loss from a foreclosure sale. Unfortunately, the participating lenders claim their NPV models are “proprietary,” so we cannot be entirely certain what variables lenders consider. However, the FDIC provides their “Mod in a Box” calculator to the public and it provides the masses an idea of what the calculation involves.[19]

To calculate the value of the income from a foreclosure sale, the bank must consider variables like the likelihood that the homeowner will “cure” the deficiency, making foreclosure unnecessary. Further, the lender must anticipate the amount for which the property can be resold in a post-foreclosure sale, how long such a sale would take, and what costs would be involved (including maintenance, taxes, legal fees, court costs, inspections, etc.).

With so many variables to consider, participating servicers can make mistakes in their Net Present Value analyses. Sometimes, the value of the property (a consideration in its potential resale value) has declined without the servicer’s knowledge. Sometimes, the homeowner has significant defenses to the foreclosure that need to be litigated prior to foreclosure, increasing both the time and cost of foreclosure.

Without production of the NPV analyses, the court and homeowners have no way of verifying the accuracy or veracity of the foreclosing parties’ analyses. Without a court order, homeowners have no assurances that the servicer or bank has done the math properly and according to the HAMP’s requirements. This math will determine the homeowner’s fate and whether or not the homeowner will, in fact, remain a homeowner. This lack of transparency violates public policy and is especially disturbing in light of the recent economic crisis. The banks and servicers entrusted to perform the NPV analyses are the same banks whose math counseled for the origination of risky adjustable rate mortgages written at 100% loan-to-value. Their math assured investors that securitizing subprime loan products was a safe bet, that housing prices would continue to climb. That banks and servicers now expect homeowners, courts, and communities to trust them to do the math correctly behind closed doors strains credulity and demonstrates, still, the height of hubris.

To ensure participating lenders are complying with their obligation to accurately perform a Net Present Value analysis and to ensure taxpayers are getting value for their investment in the HAMP program, this Court, operating in equity, should order participating lenders to produce their NPV analyses prior to ordering a foreclosure sale. The stakes are too high for everyone—banks, homeowners, neighbors, and communities—to not get this right.

How HAMP Doesn’t Work

A homeowner is extremely lucky if the only shortcoming in the process of applying to HAMP is their bank’s failure to “show their work” on their Net Present Value analysis. So much pain exists in the process before the bank ever has the chance to do the math wrong. As has been well-documented elsewhere, servicers routinely

• lose homeowners’ paperwork 
• ask for additional paperwork 
• ask for duplicative paperwork 
• encourage homeowners to miss a payment “in order to be eligible” for a loan modification 
• say one thing on the phone and another in paperwork 
• misapply payments 
• extend three-month trial modifications for 8, 10, 12, 15 months 
• deny modifications they had previously accepted

Plaintiffs will characterize their actions in court—filing foreclosures and pursuing judgments and sales—as innocent and harmless steps designed to protect its legal rights. They are not. Plaintiff’s actions actually damage the homeowners’ ability to get a loan modification, contrary to the goals of HAMP, the purpose of servicers’ voluntary participation in the program, and the requirement to participate in good faith.

One of the variables banks and servicers include in their NPV analysis is the cost of successfully taking a piece of property through a foreclosure sale; these costs include legal fees and court costs. Typically, banks pass along these costs to the homeowner in a modification, adjusting the unpaid balance upwards by thousands of dollars. By increasing the unpaid balance of the loan, modifying that loan so that the monthly payment is 31% of the homeowner’s gross monthly income (a requirement under HAMP) appears less palatable. The higher those foreclosure fees (and ultimately the unpaid balance of the loan) are, the less likely a homeowner is to receive a modification.

Similarly, another variable banks estimate when deciding whether to modify a homeowner’s loan is the months to a foreclosure sale. The more months before achieving a foreclosure sale, the more expensive the foreclosure becomes and the longer it will be before the house is ultimately resold by the bank to recoup its investment. As the months to a foreclosure sale rise, modification becomes an increasingly profitable alternative under a NPV analysis. By aggressively pursuing legal claims, banks are taking affirmative actions to keep the months to a foreclosure sale low and decreasing the homeowner’s likelihood of receiving a loan modification. Thus, by pursuing foreclosure even while considering a homeowner for modification, banks and servicers are undermining the taxpayer-funded program in which they chose to participate and that program’s stated goals.

Even if the Plaintiff’s own equitable standing is impeccable, the Court’s inquiry into the equities of the case does not end there. Given taxpayers’ significant investment into this program and its goal of drastically reducing the number of foreclosures, the community has a broader equitable interest in ensuring its success.

Should the Court Allow the Bank to Inflict a Foreclosure on the Community?

While courts will inquire into the behavior of the Plaintiff and the circumstances surrounding the origination, servicing, and enforcement of the note and mortgage, a foreclosure involves broader equitable considerations. Courts not only consider strict equitable defenses, but also “balance hardships that the parties, other affected persons, and the public would face under various possible outcomes.” Handbook of Modern Equity, de Funiak, William Q., 42–46 (2d ed. 1956). Again, trial courts “may examine all relevant factors to ensure that complete justice is done.” Johnnycake Mountain Associates v. Ochs, 932 A.2d 472 (Conn. App. 2007). Here, this examination requires inquiry into the devastating impact of foreclosures on the parties and the community. Furthermore, courts must consider the hardships caused by securitized loans, as well as Plaintiff’s compliance with federal efforts to stabilize the housing market and end the foreclosure crisis.

Kentucky courts have long-recognized the doctrine of equitable waste to prevent parties from abusing their own rights to the detriment of others. The Kentucky Court of Appeals, then the Commonwealth’s highest court, held in 1912 that:

[E]quity will sometimes restrain equitable waste. Equitable waste is defined by Mr. Justice Story to consist of ‘such acts as at law would not be esteemed to be waste under the circumstances of the case, but which, in the view of a court of equity, are so esteemed from their manifest injury to the inheritance, although they are not inconsistent with the legal rights of the party committing them.’ The same author further says: ‘In all such cases the party is deemed guilty of a wanton and unconscientious abuse of his rights, ruinous to the interests of other parties.’ Lord Chancellor Campbell defines equitable waste to be ‘that which a prudent man would not do with his own property.’ Landers v. Landers, 151 S.W. 386, 391 (Ky.App. 1912). Internal citations omitted.

When operating in equity, then, courts will intervene to avert financial ruin, even if a party may be legally entitled to ruin either itself or others.

In foreclosure cases, courts should undertake a complete inventory of the cost of the foreclosure to both the parties and the larger community. “Balancing … public interest and third person rights … admits a modicum of economic analysis into the equity case.” Dobbs at § 2.4(6) at 112. When the court weighs the equities in a foreclosure proceeding, it must consider the effect a foreclosure sale will have on innocent homeowners in the neighboring area.[20]

As discussed above, lost equity, maintaining and reselling foreclosed property, lost investment, depreciation of nearby properties, and lost tax revenue add up quickly to make foreclosure an exceptionally costly remedy. Unfortunately, due to perverse incentives for servicers in Pooling and Servicing Agreements, lenders cannot be relied upon to manage their interest in the property “as a prudent man would” as required by the Court in Landry. Instead, lenders pursue foreclosure to their own detriment and the detriment of the homeowner, neighbors, and the larger community. In these cases, the court is required to consider the public interest and third party rights in an economic analysis of the equities in a foreclosure case. The high cost of foreclosure to all involved make it a remedy that should only be granted when all other options have been exhausted and other equities compel it.

Beyond the barrier posed by the servicers’ warped incentives, securitization creates another barrier to a mutually beneficial settlement. Stock, called "certificates, in residential mortgage-backed securities are divided into tranches; investors in various tranches can have very different financial incentives. Investors in a RMBS receive different returns on their investment and receive payment in different orders of seniority. So, even when these notes were effectively securitized, the certificateholders of the security have very different interests. Some (those with the most seniority) will prefer pursuing foreclosure, while investors in more junior tranches will profit by a mortgage reformation. In this situation, many servicers will decline to act to modify a home loan, citing either the constraints of the Pooling and Servicing Agreement or exposure to potential liability to one investor or another.

This situation is inequitable. Foreclosures devastate homeowners, neighborhoods, and communities while servicers and their investors fail to pursue alternatives to foreclosure. Kentucky courts, operating in equity, should require both parties to a note secured by real estate to negotiate in good faith before pursuing the drastic and costly remedy of forfeiture through a foreclosure sale.

When a homeowner has applied for a HAMP modification, the securitization of the homeowners loan can prevent modification. Under HAMP, if a loan has been securitized (and 85% of outstanding home loans have), the servicer must get approval from the trustee of the residential mortgage-backed security–approval the investor is not obligated to give. Many homeowners go through months of heartache and hassle trying to get their loan modified only to be told, simply, “the investor is not participating.” When this occurs, Courts must be deeply skeptical of the Plaintiff’s equitable standing to pursue foreclosure. If a servicer has asked an investor’s permission to modify a loan, it’s because the servicer has already calculated that EVERYONE, including the investors, will lose less money modifying a homeowner’s loan than by foreclosing on the home. The investor’s non-participation in this situation is profoundly inequitable.

Kentucky courts already recognize that when the state seeks to condemn property under its power of eminent domain cases that the condemning authority has the “additional duty … to negotiate in good faith for the acquisition of property prior to initiating condemnation proceedings.” Golden Foods, LLC v. Louisville & Jefferson County Metropolitan Sewer Dist., 2005 WL 1049388, 3 (Ky. App., 2005). The two situations—eminent domain and foreclosure—are similar. Both involve parties with radically different levels of bargaining power. Both involve the forfeiture of real estate to the party of greater power. In foreclosure suits, courts should exercise their equitable jurisdiction and withhold foreclosure until the party seeking to foreclose can offer convincing evidence of having negotiated in good faith and can demonstrate that no other alternative to foreclosure exists.

Remedies Available in Equity

Sitting in equity, the Court has broad discretion to fashion a remedy that does justice in a particular case. It can refuse to grant a foreclosure sale: “[w]here the Plaintiff’s conduct is inequitable, a court may withhold foreclosure on equitable considerations and principles.” Morgera v. Chiappardi, 813 A.2d 89, 91 (Conn. App. 2003).[21] In cases in which the alleged delinquency is caused by unemployment, disability, or other loss of income, the Court may stay a foreclosure to provide the Defendant time to find employment, apply for benefits, or otherwise remedy the loss of income. When a homeowner has applied for a loan modification, the Court may dismiss premature suits for foreclosure when the Plaintiff has not finished evaluating that homeowner for a loan modification. Similarly, the Court may stay a foreclosure proceeding until a servicer or bank gives convincing evidence of having negotiated in good faith with a homeowner. Negotiating in good faith will include exploring less-costly alternatives to foreclosure like short sales, deeds-in-lieu of foreclosure, reasonable payment plans to erase the arrearage. Courts may modify mortgage payments as required by the demands of equity.[22]

A bank’s failure to explore all options to avoid inflicting a foreclosure will impact their standing to pursue a foreclosure. Courts do not need to wait on homeowners attorneys to make these arguments or question the bank’s equitable standing. As a judge in Kentucky, you can inquire sua sponte into the parties’ standing, as standing impacts the court’s subject matter jurisdiction. Kentucky Employers Mutual Insurance v. Coleman, 236 S.W.3d 9, 15 (2007). If a bank is behaving recklessly, the Court may dismiss the case for lack of subject matter jurisdiction because the bank’s bad acts rob it of the equitable standing it needs to pursue foreclosure in our courts.

Alternative Dispute Resolution in Foreclosure Cases

Courts across the country are changing their judicial processes to ensure that the parties have exhausted all alternatives to foreclosure, bargained in good faith, and deserve to proceed with a foreclosure sale.

Right now, we have a situation in which clueless homeowners lack information about the civil process and the resources available in the community to assist them in responding to the complaint and exploring alternatives to foreclosure. More than 80% of all homeowners facing foreclosure will lack the benefit of legal counsel. In an adversarial system of justice, this virtually guarantees that the homeowner will be steamrolled in a proceeding in which our system of justice has broken down.

The failure of our system to efficiently assist clueless homeowners in finding legal counsel should concern each member of the bar. Combine vulnerable homeowners with a failed federal loan modification program and lack of legal counsel and you have a situation that is most easily defined simply as “pain.”

If timely information delivered credibly is combined with the counsel and advocacy of an attorney and a judicial program with teeth, we can enter world that involves less pain, that avoids unnecessary foreclosures, and helps our community recover from the housing crisis as quickly as possible.

The first thing we did in Jefferson County (and, frankly, the most important thing you can do) is attach a Notice to each foreclosure complaint before the Sheriff delivers the complaint and service of summons. The Notice should be full-color (or a least printed on colored paper) and should contain a phone number homeowners can call to receive a referral to an attorney or housing counselor.

You will need to work with your local bar association and legal aid offices to develop a referral system that works for your jurisdiction.

National best practices for these foreclosure mediation programs are emerging and include:

1. An automatic stay of the foreclosure proceedings until the servicer has established its good faith compliance with its obligations
2. Transparency from all parties that includes production of net present value calculations and loan documents
3. Active, neutral oversight from an official with the power to impose sanctions on parties
4. Requirement to pursue alternatives to foreclosure in good faith
5. Sustainable funding mechanisms that allow program administrators to be paid
6. Oversight of attorney’s fees and foreclosure costs

The Franklin County Circuit Court has implemented a program that incorporates many of the emerging national best practices. A copy of the Court’s order is available here.

In Franklin County, the Court issues an automatic stay in every foreclosure case. If the homeowner takes no action within 20 days, that stay is lifted. However if the homeowner is participating in Franklin County’s foreclosure mediation process, the stay will remain in place until the parties agree on an alternative to foreclosure or the servicer can demonstrate that they have analyzed and pursued every other alternative to foreclosure and they are both legally and equitably entitled to the extreme remedy of foreclosure. A mediator oversees this entire process and can report to the Court regarding the efforts both sides are making to avoid a foreclosure.

It’s Down to You

The foreclosure crisis rages across our state. Banks add fuel to the fire with each foreclosure they pursue. with each foreclosure sale, surrounding homes lose value.[23] Despite profiting from their subprime lending spree, the TARP bailout, and the Home Affordable Modification Program, banks are actively seeking to foreclose, adding unnecessary costs to the loan and diminishing homeowners’ chances to qualify for loan modifications. Banks chose to play with fire in the risk-filled world of residential mortgage-backed securities; they now expect the Court to stand aside and watch as our neighborhoods burn.

The Court does not have to stand aside. Rather, the Court has the obligation to weigh the equities in each foreclosure case and decide whether the Plaintiff has the legal and equitable standing to impose the costs of foreclosure on innocent neighbors and the city’s strained coffers. You have the authority to evaluate the equity of the situation and craft equitable solutions unique to each case. Or, you have the authority to order a mediation at which each alternative to foreclosure will be considered and eliminated prior to allowing the Plaintiff the extreme remedy of foreclosure.

Federal and state officials have failed to adopt policies that would reduce the foreclosure crisis and the unemployment crisis. It’s down to you.

It’s up to you.

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1. Throughout this letter, I will use the word “bank” and “servicer” interchangeably. There is a difference. But, when I’m referring to a “bank” pursuing foreclosure, I mean “the entity charged with servicing the loan and exploring loss mitigation options.” This will often, in fact, be a servicer. About 85% of all home loans have been bundled into residential mortgage-backed securities; those lines are usually managed by a “servicer,” not a “bank.” That servicer would often be the entity responsible for collecting and accounting for payments, determining default, initiating and prosecuting the foreclosure, and exploring alternatives to foreclosure.  ↩

2. For a general overview of the risks of adjustable rate, interest-only, and payment-option mortgages, see Mark Zandi, Financial Shock: A 360° Look at the Subprime Mortgage Implosion and How to Avoid the Next Financial Crisis 35–38 (FT Press 2009). Zandi reports that the lending industry regarded payments scheduled to “rise substantially” as “a problem for another day.” He also notes that because ARMs “shift substantial risk to borrowers when rates fluctuate…the delinquency rate on ARM loans is 50% greater than on fixed-rate loans.”   ↩

3. While some unqualified borrowers received loans, other borrowers received high-cost loans when the borrower’s income and credit history qualified them for more traditional, affordable loans. The National Community Reinvestment Coalition issued a report, “Income is No Shield” in 2008 describing in detail the disparate impact the lending environment had on minorities, regardless of income or credit score. In Louisville, specifically, the report found that low-to-middle income African-Americans were 2.3 times more likely to receive a high-cost home loan than their low-to-middle income white counterparts. Even middle-to-upper income African-Americans were 1.3 times more likely to receive high-cost home loans than their white counterparts. Again, this report is adjusted for traditional lending risk factors such as income and credit score and reflects the likelihood of receiving high-cost (and therefore high-risk) loan products by race. The report suggests that, reprehensibly, in recent years lending institutions have regarded race as a risk factor when originating loans.   ↩

4. Often the true loan-to-value was even greater than 100% when one considers that many of the loans were justified based on inflated appraisals.   ↩

5. To say that “no one wins” is not entirely accurate when a loan is serviced by a company that is not the owner of the note. A third party often services the loan when the loan has been securitized into a REMIC (Real Estate Mortgage Investment Conduit). In these cases, the trust will hire a third party to collect payments from the thousands of loans pooled in the security and divide the proceeds according to various investors’ rights under the Pooling and Servicing Agreement (PSA). In many PSAs, the loan servicer is paid a nominal fee for collecting the monthly checks, but gets to keep the proceeds of fees that flow from a homeowner’s default and resulting foreclosure. Thus, PSAs create in servicers the perverse financial incentive to foreclose even when both their investors and the homeowner would benefit from a negotiated settlement or loan modification that kept the homeowner in the home and monthly checks flowing to the investor. Many of the provisions of the President’s Home Affordable Modification Program aim to overcome these misaligned incentives.   ↩

6. Mortgage Bankers Ass’n, “Lenders’ Cost of Foreclosure” p. 2 (May 2008), available at http://www.mbaa.org/files/Advocacy/2008/LendersCostofForeclosure.pdf .   ↩

7. Id. at 4–5 (May 2008).   ↩

8. It is worth noting that the MBA acknowledged in 2008 that the current “softness” of the housing market could push the losses investors experience in an REO sale “even higher.” Since that statement, the housing market has not stabilized and remains soft.   ↩

9. In 2008, “ten million American homeowners, a fifth of all mortgage holders, are now in this untenable financial situation.” Mark Zandi, Financial Shock: A 360° Look at the Subprime Mortgage Implosion and How to Avoid the Next Financial Crisis 44 (FT Press 2009). In Kentucky, 1 in 4 homeowners are underwater.   ↩

10. Another report from the Metropolitan Housing Coalition notes that “[T]he best defense to a home becoming vacant and abandoned due to foreclosure is quick action by the homeowner to seek assistance from a reliable nonprofit housing counseling program in seeking a loan modification from the creditor. The chance of a property becoming vacant and abandoned is greatly diminished by the owner negotiating new loan arrangements and remaining in the home as long as possible.” Metropolitan Housing Coalition, *Vacant Properties: A Tool to Turn Neighborhood Liabilities into Assets*. Plaintiff’s are far less likely to be guilty of equitable waste if they engage in rigorous good-faith negotiations with homeowners in default.   ↩

11. David Newton, “Widespread Panic: Why the Mortgage Lending Industry Can Calm Down About Amending Cramdown” 98 Ky. L.J. 155, 159 (2009) quoting NeighborWorks America, Foreclosure Statistics, http://www.fdic.gov/about/comein/files/foreclosure_statistics.pdf .   ↩

12. U.S. Congress, Senate Joint Economic Committee, Sheltering Neighborhoods from the Subprime Foreclosure Storm, Special report by the Joint Economic Committee, 1, 110th Cong., 1st sess. (Washington: GPO 2007) available for download at http://jec.senate.gov/archive/Documents/Reports/subprime11apr2007revised.pdf  ↩

13. Master Commissioners may also consider arguments based in equity. CR 53.04 notes that courts may “specify or limit [a commissioner’s] powers and may direct [the commissioner] to report only upon particular issues or to do or perform particular acts.” However, the rule is clear that absent such limitations, the commissioner “has and shall exercise the power…to do all acts and take all measures necessary or proper for the efficient performance of his duties.” Without a referral that specifically directs the commissioner to consider only issues of law, the commissioner has the duty to consider issues of equity, as well.   ↩

14. Consider, for example, the successful loss mitigation efforts of Shiela Bair and the FDIC in their administration of the failed California bank, IndyMac. The FDIC created a loss mitigation program that automatically qualified homeowners for a loan modification rather than placing onerous, opaque, and frustrating requirements on the borrower.   ↩

15. All of the servicer’s obligations under the Home Affordable Modification Program are outlined in the Handbook for Servicer’s of Non-GSE Mortgages.   ↩

16. Lillard v. Farm Credit Services of Mid-America, ACA, 831 S.W.2d 626 (Ky. Ct. App. 1992). See also, e.g., Farm Credit Bank of Spokane v. Debuf, 757 F.Supp. 1106 (D. Mont. 1990); Federal Land Bank of St. Paul v. Overboe, 404 N.W.2d 445 (N.D. 1987); Burgmeier v. Farm Credit Bank of St. Paul, 499 N.W.2d 43 (Minn. App. 1993); Western Farm Credit Bank v. Pratt, 860 P.2d 376 (Utah Ct. App. 1993).   ↩

17. See, e.g., Williams v. Nat’l Sch. Of Health Tech., Inc., 836 F.Supp. 273, 283 (E.D. Pa. 1993), aff’d, 37 F.3d 1491 (3d Cir. 1994); Fed. Nat’l Mortg. Ass’n v. Moore, 609 F.Supp. 194, 196 (N.D. Ill. 1985); Wells Fargo Home Mortg., Inc. v. Neal, 922 A.2d 538 (Md. 2007); Union National Bank of Little Rock v. Cobbs, 567 A.2d 719 (Pa. Super. Ct. 1989); Fleet Real Estate Funding Corp. v. Smith, 530 A.2d 919 (Pa. Super. Ct. 1987); Hayes v. M & T Mortg. Corp., 906 N.E.2d 638 (Ill. App. Ct. 2009); Countrywide Home Loans, Inc. v. Wilkerson, 2004 WL 539983 (N.D. Ill.); ABN AMRO Mortg. Group, Inc., 2009 WL 1066511 (Iowa Ct. App.); Ghervescu v. Wells Fargo Home Mortg., 2008 WL 660248 (Cal. Ct. App.).  ↩

18. There will be instances in which even when the NPV calculation demonstrates that foreclosure is more profitable that equity will demand some alternative other than foreclosure. Under HAMP, homeowners who have significant equity in their homes will be the least likely to qualify for a loan modification. The cruel irony of the program is that homeowners who have invested most in their homes and made payments most regularly and over the longest period of time will be the most likely to lose their homes because lenders are more likely to recoup the full Note value of the loan in foreclosure. Equity will require some solution other than foreclosure in these cases.   ↩

19. Maine has established the FDIC’s program as the NPV analysis standard at court-ordered mediations. “Mediations conducted pursuant to the program must use the calculations, assumptions and forms that are established by the Federal Deposit Insurance Corporation and published in the Federal Deposit Insurance Corporation Loan Modification Program Guide as set out on the Federal Deposit Insurance Corporation’s publicly accessible website.” 14 M.R.S.A. § 6321-A . An overview of the program and how the Excel spreadsheet operates is available here. The Net Present Value test is available as an Excel spreadsheet.  ↩

20. This abandonment of property becomes even more inequitable when one considers the bank’s active contribution to neighborhood disintegration. Judge Boyko notes that while “financial institutions or successors/assignees rush to foreclose [and] obtain a default judgment,” the bank will then “sit on the deed, avoiding responsibility for maintaining the property while reaping the financial benefits of interest running on a judgment. The financial institutions know the law charges the one with title (still the homeowner) with maintaining the property.”   ↩

21. See also Bank of New York v. Conway, 916 A.2d 130 (Conn. Supp. 2006).   ↩

22. In times of economic crisis, the state has the power to alter the terms of contracts between private parties to protect the vital public interests. “The reservation of state power appropriate to such extraordinary conditions may be deemed to be as much a part of all contracts as is the reservation of state power to protect the public interest in the other situations to which we have referred. And, if state power exists to give temporary relief from the enforcement of contracts in the presence of disasters due to physical causes such as fire, flood, or earthquake, that power cannot be said to be nonexistent when the urgent public need demanding such relief is produced by other and economic causes.” Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398, 439–40 (1934).  ↩

23. The Center for Responsible Lending [estimates] that over 800,000 Kentucky homes will lose an average of $1,800 in equity due to nearby foreclosures between 2009 and 2012. That’s $2.2 billion in lost equity statewide.   ↩

If you are looking to fall down the rabbit hole of foreclosure defense, here are some places to add to your bookmark bar:

Listservs
HAMP Enforcement Google Group--Sarah Parady and Rebekah Cook-Mack serve up a hot mess of strategies to help homeowners qualify for Home Affordable Modification Program loans and to use HAMP as a sword and a shield in court.
NACA Foreclosure Listserv--the National Association of Consumer Advocates' active and expert-laden listserv. Ask a question, get a quick answer or fifty. Gotta be a NACA member to participate in the listserv.

Websites
NCLC Studies--the National Consumer Law Center does great reports. Witness: Why Servicers Foreclose When They Should Modify, And Other Mysteries of Servicer Behavior. The full list of special reports should keep you busy for a while!
Max Gardner--a bankruptcy ninja in North Carolina, Max's blog has a good mix of general housing/foreclosure news and highly-specific litigation aids like this one.
Credit Slips--a high-level and useful blog from law professors and practitioners about credit and finance.
Calculated Risk--a blog about housing and the economy. Beautiful graphs.

Books
I'm one of those guys that thinks that the answers to everything are in a book somewhere, so when I started at Legal Aid Society I read Financial Shock: A 360 Degree Look at the Subprime Mortgage Implosion, and How to Avoid the Next Crisis by Mark Zandi, an economist at Moody's. It helped me get a quick lay of the land and understand the relationships between all the mortgage players: the Federal Reserve, originators, brokers, servicers, securitized trusts, Wall Street, and homeowners.

Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisi