Bankruptcy

Foreclosure-Gate Settlement--More Thoughts

By Adam Levitin

[Updated 3.8.11]

Some bloggers on the left (e.g. here) and on the fringe right (see here)  are upset with the servicing standard term sheet that got leaked because they think it just prohibits things that are already illegal.  This is an incorrect reading of the term sheet.  Let me give three examples.

Filing a false affidavit or sworn statement with a court is likely already illegal in every jurisdiction. But what some bloggers have missed is that the definition of "affidavit or sworn statement" in the term sheet is broader than what the law already covers. At best, the law currently covers statements filed with the court--that means in judicial foreclosures. The term sheet mandates certain affidavits and sworn statements in nonjudicial foreclosures and includes them under the definition of "affidavits and sworn statements" to which the false statement prohibition applies. That's an important step.  

2. HAMP requirements.  

The term sheet appears to repeat some existing HAMP requirements.  What bloggers have missed is that the CFPB and AGs currently have no authority to enforce HAMP violations. The inclusion of these terms makes HAMP violations a violation of the settlement with the AGs/CFPB, which means that the AGs and CFPB can enforce these violations. Given Treasury's unwillingness to demand serious HAMP compliance, that too is an important step.  

3.  UDAP and Good Faith/Fair Dealing Requirements

I'm not entirely sure of the purchase of deeming violations of the agreement unfair and deceptive acts and practices (UDAP). It might mean that the penalty for violation would track UDAP penalities for each state or CFPB. Or it might, just might, give homeowners grounds for a suit.

On the "good faith and fair dealing" requirement, yes it is currently an implied term of every contract, but note that this term sheet doesn't define good faith or fair dealing. News flash:  they don't mean a lot under the revised UCC. Good faith is simply "honesty in fact." By leaving the term undefined, it is arguably broader. 

I don't think the AGs and CFPB were just piling on fluff requirements. This settlement is a pretty extensive and well-thought through document designed to give the AGs and CFPB broad ability to reform the servicing industry, and the inclusion of these provisions seems well-thought out (although I haven't cracked the 3d one). 

Full post as published by Credit Slips on March 08, 2011 (boomark / email).