HSBC Sued by NY A.G. Over Foreclosure Abuse
Today, the New York State Attorney General’s Office (AGO) announced that it has filed suit against HSBC Bank USA and HSBC Mortgage Corporation (USA) in NY State Supreme Court in Erie County. See THE PEOPLE OF THE STATE OF NY vs. HSBC BANK USA. The lawsuit states that HSBC is failing to follow state law related to foreclosure actions, thereby putting homeowners at greater risk of losing their homes.
Background
In New York, loans for real property are secured through mortgages rather than through deeds of trust. New York, unlike trust states, is a judicial foreclosure state. In states like New York, mortgage foreclosure actions must proceed through the judiciary system.
Clearly, there are laws that govern the judicial foreclosure process and lenders are no exception to the requirement that these laws be followed. The New York State Unified Court System (UCS) issued a rule in October 2010 requiring that all foreclosure law firms attest to the accuracy of the legal papers they filed in court, in response to the widely reported robo-signing scandal in the mortgage industry. Since the implementation of the rule, after a foreclosure action is filed, the foreclosure firm must file an affirmation (the “Due Diligence Affirmation”) simultaneously with its filing of a Request for Judicial Intervention (RJI). The process mandates that the lender then attend a settlement conference within 60 days. Surprisingly, many foreclosure law firms almost immediately stopped filing RJIs after issuance of the court rule. Foreclosure law firms who refuse to file the RJIs not only run afoul of state law, but also significantly injure homeowners who want to save their homes.
A RJI is a very important instrument in the litigation process that transforms an indexed case wherein documents are filed to a case that now has a justice assigned to the matter. Without an RJI, New York courts do not schedule court-supervised foreclosure settlement conferences. Cases, in which complaints are filed but no RJI is filed—which would otherwise move the case forward by assigning a justice to the matter—often linger indefinitely on the “shadow docket”. The shadow docket in New York consists of thousands of foreclosure cases that linger for several months, and sometimes years, causing distressed homeowners and the overtaxed judicial system to suffer. A recent report indicates that a “re-review of the November 2010 and March 2011 residential foreclosure filings in Brooklyn and Queens reveals that 43% of cases remain in the shadow docket.”
While cases are on the shadow docket, delinquent interest, inspection fees, attorney’s fees, and other costs in addition to the mortgage, continue to accrue. In general, the larger a loan balance, the more difficult it is to attain an appropriate and affordable modification.
Discussion
An investigation conducted by Attorney General Schneiderman showed that lenders HSBC Bank USA and HSBC Mortgage Corporation (USA) repeatedly failed to timely file the RJI in hundreds of foreclosure cases against New York homeowners, increasing the risk that those homeowners would lose their homes. A sampling of HSBC foreclosure filings from four counties — Erie, Monroe, Suffolk and Bronx — identified close to 300 instances where HSBC failed to file the RJI with the proof of service. In some of those cases, homeowners waited for over two years for HSBC to file the RJI.
“Companies like HSBC are brazenly ignoring state law, leaving homeowners across New York stuck in a legal limbo where they can’t even get the legally required settlement conference that could help them keep their homes,” said Attorney General Schneiderman. “For homeowners facing foreclosure, time is their greatest enemy. Every day spent waiting for a settlement conference is a day that the lender piles on additional interest, fees and penalties and the homeowner falls further behind. I am committed to doing everything I can to stand up for New Yorkers who are trapped in the ‘shadow docket’ and denied their right to fight for their homes.”
As a result of these findings, Attorney General Schneiderman filed suit seeking to compel HSBC to file the RJI immediately in all cases in which it has filed a proof of service, and to file an RJI simultaneously with proof of service in all future cases. In cases where HSBC has already failed to file the RJI with proof of service on the homeowner, the suit also seeks to compel HSBC to take the following steps to protect New York homeowners:
- Prepare an accounting of interest charges, penalties and fees (e.g. late fees, inspection fees, attorney’s fees, broker reports) that accrued beginning 60 days after the filing of proof of service on the homeowner;
- Toll and waive all accrued interest charges, fees and penalties that accrued, or will accrue, beginning 60 days after the filing of proof of service on the homeowner;
- Grant restitution for interest charges, fees and penalties paid by the homeowner that accrued beginning 60 days after the filing of proof of service on the homeowner; and
- Grant damages to homeowners injured by HSBC’s illegal practices.
Case Details
The presiding justice is Justice John L. Michalski. The index number for the instant action is 001660/2013. The attorney representing the AGO is James Morrissey. The RJI was filed on May 31, 2013. The AGO’s motion seeking the aforementioned relief was filed on June 3, 2013 and has a motion hearing date of July 24, 2013.
Conclusion
New York is undoubtedly well-represented. Attorney General Schneiderman is committed to prosecuting HSBC and any other lenders that deny New York homeowners their legal rights to negotiate alternatives to foreclosure. Schneiderman asserts that he will not hesitate to bring similar actions against other mortgage lenders who hold borrowers in the shadow docket in defiance of state law.
sewellnylaw
I reside in Kings County and would like for the Attorney General or his assistant
to see evidence of his claim against HSBS in the NY. State Supreme Court of Kings County. How that this practice of shadow docketing has caused a pro-se defendant
to be in legal proceeding for four years now, among other illegalities. The actions involved are indexed no. 26162/09, 20602/11, and 8470/ 13. Talking about damages to a defendant and public citizen!!!!!
sewellnylaw
I volunteered with the Queens Volunteer Lawyers Project and received training to represent clients in mortgage foreclosure settlement conferences. Moreover, I represented a client in a Queens Supreme Court foreclosure matter. According to N.Y. C.P.L.R. § 3408, settlement conferences must be commenced within 60 days of when proof of service is filed with the county in foreclosure cases that resulted from sub-prime mortgages, which was the case with my client. Foreclosure settlement conferences, are pre- trial conferences, in which the judge basically tries to mediate a happy ending for both parties, hopefully reaching an agreement in which the bank gets paid on the mortgage and the homeowner has the payment and possibly the principal sum owed modified for their benefit as well.
As discussed in the article, to which this is a comment, an RJI must be filed with the court or else the case gets put in to the shadow docket, where it is never seen by a court, and fees and interest continue to accrue upon the mortgage. I was not informed if my client had been on the shadow docket, nor how long if they were, but the foreclosing bank was HSBC. One problem with HSBC is the fact that they are not a part of HAMP, or Home Affordable Modification Program. This is a federal program, in which the government provides guidelines for consumer beneficial modifications, when the mortgage holder is a company, such as Freddy or Fannie. This process and modification are not applicable to HSBC, so even if a client meets the HAMP requirements, if the mortgage holder is not in HAMP then it does not matter.
In the case of my client, he met the requirements for a HAMP modification but was not eligible because HSBC held his mortgage. Because of that, when my client gave HSBC his mortgage modification application, he was essentially forced to use HSBC mortgage modification products, which were not nearly as beneficial to him as a HAMP modification. Where it may have been cheaper for him to let his home be foreclosed upon, other factors exist that play a part in that analysis. For instance, he is one of the only members of his community to own a home and feels a great sense of pride in the fact that he owns a home. Therefore, he accepted one of the HSBC loan modification products and the judge allowed for a trial modification period to begin. This experience teaches that the NY Attorney General’s litigation is a good start but it’s not enough.
Foreclosures across Long Island have created a phenomenon called Zombie Houses, foreclosed homes that must be maintained by the owners, or the municipality if the owner cannot be found. This often leads to problems with squatters, pop-up drug labs, warehouses, and dispensaries, as well as increased gang activity and violence, and decreased property value. Recently the Attorney General had the NY legislature pass the Abandoned Neighborhood Property relief act, to make banks accountable for the maintenance of foreclosed homes earlier in the foreclosure process, and allowing residents to remain in the homes until removed by court order, which will hopefully help alleviate the pervasive, societal problems that zombie homes facilitate.
sewellnylaw
New Yorkers are seeing more and more assistance from the State regarding home foreclosures. In June 2013, Eric Schneiderman, the New York Attorney General (“NYAG”), sued HSBC for failure to follow state law related to home foreclosure actions. The NYAG then looked into suits against additional banks failing to follow foreclosure procedures, but no actions were brought. On December 22, 2014, The New York Department of Financial Services issued a press release stating the nation’s largest subprime mortgage servicer will be monitored and required to comply with operational reforms. See NYDFS Announces Ocwen Chairman to Resign From Firm and Related Companies; Ocwen to Provide Direct Homeowner Relief and Undertake Significant Operational Reforms (Dec. 22, 2014).
An investigation by the NYAG confirmed that HSBC regularly failed to file Requests for Judicial Intervention (“RJI”) in hundreds of foreclosure matters increasing the risk homeowners would lose their homes. The delay in filing the RJI left financially unstable homeowners in precarious positions. Homeowners were not able to pay their current mortgage, were not able to renegotiate their current loan because proper paperwork was not filed with the court, and homeowners continued to incur fees and other penalties on unpaid mortgages hampering their ability to renegotiate their loan.
This matter is still active in Erie County Supreme Court. The NYAG seeks the court to order HSBC to immediately file RJIs in all foreclosure cases where documents have been submitted to the court. Where banks have not filed the RJI in timely manner, the NYAG argues that all fees should be waived against the homeowner. The NYAG also seeks unspecified damages payable to the mortgage borrowers.
In addition to the HSBC matter, the New York Department of Financial Services (“NYDFS”) issued a press release in December 2014 stating that Ocwen Financial Corporation (“Ocwen”), the country’s largest servicer of subprime loans, will provide $150 million of direct assistance to homeowner foreclosure relief, undergo operational reforms, and have an NYDFS-selected, independent monitor on location for three years.
From 2010 to 2011, NYDFS participated in an examination of Ocwen and identified major deficiencies in its servicing platform and loss mitigation infrastructure. The deficiencies included robo-signing, inaccurate affidavits, missing documentation, wrongful foreclosures, and initiation of foreclosure actions without proper legal standing among others.
Following the examination, NYDFS and Ocwen entered into compliance and monitoring agreements. The compliance reviews of the agreements identified numerous and significant additional violations of the agreements. Failure to correct and follow the compliance agreements led to the December 2014 decision to overhaul Ocwen and require independent monitoring over the next 3 years.
New York is a judicial intervention foreclosure jurisdiction. The NYAG and NYDFS have put negligent, unscrupulous, and/or unlawful real estate industry participants on notice, and are requiring full compliance with home foreclosures and the laws of New York. Additional suits are likely to be filed in the coming months requiring compliance with New York’s foreclosure laws.
sewellnylaw
Over the past two months, ratings agencies, Morningstar, Inc. and Fitch Ratings, Inc., have downgraded Ocwen’s servicer ratings due to the ongoing improper servicing practices, regulatory scrutiny, and the overall negative future outlook. Morningstar provides independent investment research for the major financial markets while Fitch Ratings is a global leader in credit ratings and research.
In December 2014, Morningstar placed Ocwen’s operational risk assessment ranking on alert. In February, Morningstar lowered Ocwen’s residential non-prime servicer, residential prime servicer, and residential special servicer rankings to MOR RS3 from MOR RS2 and lowered its residential vendor ranking to MOR RV3 from MOR RV2 citing ongoing regulatory scrutiny, additional litigation, and increased costs and pressure of servicing loans amid regulatory settlements.
The rating downgrade was inevitable after the December 2014 New York Department of Financial Services settlement where Ocwen was ordered to pay $150 million to homeowners for improperly handling foreclosures. After the New York settlement, Ocwen reached an agreement with the California Department of Business Oversight to compliance review by a third-party auditor as well as $2.5 million settlement claim. Making matters worse, additional suits have been filed by investors claiming Ocwen failed in its duties as a mortgage servicer.
In the aftermath of the suits and settlements, Ocwen recently announced it would unload approximately 81,000 performing loans with a total principal value of $9.8 billion to Nationstar by March/April 2015.
Bodie
The lawsuit against HSBC Bank USA and HSBC Mortgage Corporation (USA) was part of a larger plan to provide more protection for homeowners by introducing legislation to address the issue as well (A. 5582) and (A.7395). This plan was partially successful in that (A.5582) was passed into law as (S4530A) on July 31, 2013 and went into effect 30 days later. Unfortunately, (A.7395) was not passed. However, (S4530A) was successful and added § 3012-b to the CPLR and amended § 3408 in the CPLR. The updates to the CPLR should be beneficial to homeowners as they require that plaintiffs show that they have standing to commence an action by requiring plaintiffs file a certificate of merit with their complaint, and the updates close the loopholes that require an RJI to be given a settlement conference and punish lenders for not negotiating in good faith.