Fraud and Prevention

The Foreclosure Delay Game - Preventative Measures

Perspectives by Denis Brosnan
September 9, 2009

Unfortunately, some consumer attorney firms and sole practitioners are taking advantage of the "anti-foreclosure" sentiment to bring in defaulting borrowers as clients. In some cases, nonlegal storefronts or online businesses are advertising their ability to delay or prevent home foreclosures.

Although blatantly fraudulent schemes of this kind are being uncovered and the perpetrators prosecuted by state attorney generals and state bar panels across the country, there are many who walk the fine line between improper or disingenuous pursuit of frivolous lawsuits and vigorous representation of their clients based on questionable claims.

A common practice these days is the issuance of prelitigation demand letters or the filing of litigation in order to delay the foreclosure process, whether or not there is actually a legitimate or legal basis to challenge the foreclosure. These attorneys and non-attorney "counseling" shops base their demands to lenders, servicers and foreclosure trustees on a variety of state and federal statutes.

With the recent proliferation of legislation imposing new restraints or due diligence requirements on the foreclosure process, many see an opportunity to file lawsuits alleging noncompliance with the newly enacted legislation as a way to further delay foreclosure proceedings.

Another claim that is prevalent in the realm of challenging foreclosures is the assertion that the foreclosure trustee or the servicer processing the foreclosure is not the holder of the note. A common tactic used by these attorneys, or borrowers representing themselves, is to send a demand or inquiry letter under the Fair Debt Collection Practices Act, requesting information regarding the original creditor or regarding the assignments or endorsements of the promissory note to the current beneficiary.

In many instances, these letters will contain allegations of various violations of foreclosure statutes, such as failure to grant a loan modification request consistent with the new federal programs. Regrettably, overburdened servicers or trustees may not respond in a timely manner, resulting in lawsuits being filed by the borrower, alleging liability for failure to respond in addition to the underlying supposed violations.

This sequence of events may be enough for a judge to issue a temporary restraining order against a foreclosure sale, causing substantial delays and additional expenses in the form of legal fees and costs to the lender or servicer.

One way to minimize or prevent delays resulting from litigation intended to stall foreclosure is for lenders, servicers and foreclosure trustees to ensure proper procedures are in place to review and respond to the pre-litigation demand or inquiry letters. If a written demand or inquiry is submitted to the lender, servicer or trustee, a written response should always be issued to prove the company was responsive to the borrower's request.

This can best be accomplished by referring all such correspondence to the company's in-house legal department, to a special division of the customer service or foreclosure department, or to outside counsel specializing in regulatory issues or litigation defense.

Another pre-emptive measure is to ensure statutory compliance on the front end. The lender, servicer or foreclosure trustee should periodically consult with regulatory agencies or outside counsel specializing in default loan servicing. This ensures the company's policies and procedures are up to date regarding newly enacted legislation.

Additionally, companies should develop and implement training programs aimed at increasing employee awareness of these issues and the importance of responding to borrower correspondence, as well as the escalation process for handling correspondence received from an attorney on the borrower's behalf.

Denis Brosnan is the CEO of Prommis Solutions, an Atlanta-based provider of foreclosure and bankruptcy processing services for mortgage servicers. Mr. Brosnan began his professional career as a practicing attorney, representing mortgage servicers in lender liability, foreclosure and bankruptcy eviction actions. For more information, visit http://www.prommis.com.