Open Source Property

A Free Casebook

  • Harvard Law School Library (Harvard Law School)

This casebook is an adaptation of Open Source Property by Stephen Clowney, James Grimmelmann, Michael Grynberg, Jeremy Sheff and Rebecca Tushnet (original available at https://opensourceproperty.org/).

 

10 Foreclosures and the Mortgage Crisis 10 Foreclosures and the Mortgage Crisis

Contact: Rebecca Tushnet

10.1 Introduction 10.1 Introduction

10.1.1 What is a Mortgage? 10.1.1 What is a Mortgage?

A mortgage is an interest in land. It is not a possessory interest: the owner of a mortgage has no right to use the property, the way the owner of the fee or an easement owner would. Instead, mortgages exist to secure loans. A secured loan is backed, or secured, by a specific asset such as a house or a car, which the lender can seize in case of default. An unsecured loan is not secured by any specific asset – for example, credit card debt and student loans are unsecured. The borrower owes the money, and the lender can go after the borrower’s unsecured assets in case of default, but if those assets are too small, the unsecured lender is out of luck. Secured loans are generally considered less risky than unsecured loans, for obvious reasons, and should bear lower interest rates (absent some foolery on the part of the lender or government intervention into the market, both of which do happen).

Most mortgages are residential mortgages. Usually, homebuyers in the U.S. can’t afford to pay the entire purchase price of a house at the time they buy it. Instead, they take out a loan – a mortgage – to pay the bulk of the purchase price. They will sign a promissory note (the note) that creates personal liability for the borrowers if they fail to pay, and also sets out the terms of the mortgage such as the repayment period and the interest rate. They will also sign a mortgage, a written instrument that grants the lender an interest in their newly purchased land. Usually, this transaction occurs at the time the buyers buy the land, though mortgages can also be refinanced or taken out on already-owned property.

The homebuyers are the mortgagors.The lender is the mortgagee. Over time, the buyers pay off the loan. As they pay off the loan, they build “equity” in their homes. Equity is the difference between what a home is worth and what the homeowners owe on their mortgage.1 As a result of deliberate policy choices, the model residential mortgage in the U.S. is for no more than 80% of the value of the house at time of purchase; has a fixed interest rate; and amortizes over a period of years, usually twenty or thirty.

Amortization means that the payments are the same throughout the period of the mortgage: at the beginning, most of the payments go to interest on the loan, while over time more and more of the payments go to reduce the loan principal.
The mortgagors can transfer the land at will. However, any transfer will not free the land from the mortgage (nor will a transfer free them from their contractual promise to pay the debt); the mortgage runs with the land. Thus, a sensible transferee will not be willing to pay full value for the land – the fair market value of the land is reduced by the amount of the mortgage. A transferee can either take “subject to the mortgage,” which means that the original mortgagors still owe the debt and the transferee is at risk if they don’t pay, or “assuming the mortgage,” which means that the new owner agrees to pay the mortgage directly. When the purchaser assumes the mortgage, the seller still has a duty to pay the mortgage if the buyer doesn’t, but the seller can pursue the buyer for reimbursement if that happens. However, this all risks some big messes; to avoid problems associated with transfers, many mortgages have “due on sale” clauses, which means that the full amount of the mortgage comes due (“accelerates”) when the mortgagor sells the property. One important feature of a due on sale clause is that it enables lenders to reprice loans: if the interest rate has risen since the initial mortgage loan, the buyer can’t just assume the existing loan and receive a lower interest rate than would otherwise be available to him.

Suppose Joan Watson wants to sell her house to Sherlock Holmes. She still owes $400,000 on her house; Holmes will be buying it for $500,000. But she doesn’t have $400,000 in the bank to pay off her mortgage, which has a due on sale clause. How can she accomplish the sale? The answer is that a series of transactions take place together. The day of the sale, Holmes will give Watson a check for $500,000 (most of which will likely come from Holmes’ own new mortgage on the property). Watson will then pay her lender $400,000 and keep $100,000. As you can see, there will be some time at which both Holmes and Watson are relying on the value of the underlying property – Holmes to get his mortgage and Watson to pay hers off. For this reason, real estate transactions regularly involve the use of multiple third parties, including escrow agents, to facilitate and guarantee the sale.

If the mortgagors default on the mortgage by failing to pay the appropriate amounts at the appropriate times, the mortgagee can foreclose. Foreclosure can be time-consuming and expensive, so in some circumstances the mortgagee may accept a “deed in lieu of foreclosure,” by which the mortgagor surrenders the property to the mortgagee and the mortgagee accepts the deed. However, deeds in lieu of foreclosure are relatively rare; most of the time, if a default is not cured and the loan is not modified, the result will be a foreclosure.

Either by a private sale (nonjudicial foreclosure) or under judicial supervision (judicial foreclosure), the mortgagee can have the property sold and apply the proceeds of the sale to the amount due on the note. The foreclosure is so called because it forecloses the mortgagee’s ability to get the property back by paying off the mortgage debt; after the foreclosure, it is too late to become current.2

In a number of states, it is possible to avoid judicial foreclosure – which takes more time and money than nonjudicial foreclosure – through the use of a “deed of trust,” which is recognized in most jurisdictions. Under a deed of trust, the borrower conveys title to the property to a person to hold in trust to secure the debt. If the borrower defaults, the trustee has the power of sale without needing to go to court. However, almost all states that allow this procedure do impose some procedural safeguards, such as notice and public sale. Other than the ability to avoid judicial foreclosure, you can expect a deed of trust to be treated like a mortgage.
In addition, there are two different types of secured loans: recourse and nonrecourse loans. For a nonrecourse loan, the only way the lender can get its money back in case of default is by seizing the asset, and if there’s not enough money to satisfy the debt from the asset, too bad for the lender. The lender has no “recourse” against any of the borrower’s other assets. A recourse loan is different: in case of default, the lender can seize and sell the asset, and if there’s not enough money to satisfy the debt, the lender is now an unsecured creditor for the remaining balance (the deficiency) and can go after any of the borrower’s other assets, such as her bank account. Foreclosure wipes out the lender’s interest in the land, which means that the land can then be resold free of the lender’s interest. However, with a recourse loan, foreclosure will not wipe out the borrower’s debt, if it is greater than the foreclosure sale amount.

Obviously, lenders ordinarily prefer recourse loans, but will grant nonrecourse loans in various circumstances.3 Many businesses can get nonrecourse loans based on their assets. Some states bar deficiency judgments for residential mortgages, which makes them nonrecourse loans. Other states bar deficiency judgments unless there is a judicial foreclosure, with its greater expense and greater procedural protections for the borrower. Still others limit the amount of any deficiency judgment to the difference between the principal balance and the property’s fair market value at the time of foreclosure – this limit recognizes that foreclosed properties often sell for below market value for a variety of reasons, including buyers’ uncertainty about the true condition of the property and the limited number of potential buyers who bid at foreclosure sales. (Historically, the mortgagee is often the only bidder at a foreclosure sale. Why would this be true?)

Even states that allow deficiency judgments generally recognize an exception: if the sale price shocks the conscience, then a deficiency judgment may not be allowed. More generally, even in the absence of a potential deficiency judgment, the foreclosing entity has a limited duty of good faith to the mortgagor in seeking an acceptable price at the sale. However, mere inadequacy of price will not invalidate a sale in the absence of fraud, unfairness, or procedural problems that deterred bidding. As a result, very low sale prices are sometimes accepted by courts. Compare Moeller v. Lien, 30 Cal. Rptr. 2d 777 (Ct. App. 1994) (sale at 25% of market value was acceptable where sale was to bona fide purchaser and there was no irregularity in the sale procedure), with Murphy v. Fin. Dev. Corp., 495 A.2d 1245 (N.H. 1985) (finding that mortgagee violated duty to mortgagor when (1) sale was rescheduled and poorly advertised, (2) sale price was so low that it wiped out substantial equity for homeowners, and (3) mortgagee quickly resold property at substantially higher price).

One final introductory point: it is possible to take out a second and even a third mortgage. The first mortgage has “priority” over the second mortgage: it will be paid first at foreclosure. Only if there is money remaining after the first mortgage is paid off will the holder of the second mortgage be paid. As a result of the greater risk involved in second mortgages, they generally bear higher interest rates than first mortgages.

_________________

1 This terminology has a historical basis in the “equity of redemption,” which was a means by which early chancellors protected early mortgagors from abuses by lenders. Over time, the equitable procedures created by courts gave way to legislation establishing rules for how foreclosures could occur.

2 At common law, the equity of redemption allowed the mortgagor to redeem the property from the mortgagee. This equity of redemption was extinguished by foreclosure sale. In about half of the states, there is also a statutory right to redeem the property from the purchaser at a foreclosure sale for a certain period of time. This right is rarely used, because most people would already have paid, if they could, before the sale.

3 In fact, the basic idea of a corporation is a way of limiting a lender’s recourse: before the corporate form, if a business owner went bust, creditors could go after the owner’s personal assets until they were gone. The corporation allows shareholders/owners to limit their liability to the extent of the corporation’s assets. If a person owned shares of Lehman Brothers, its creditors could make her shares worthless, but they couldn’t make her pay Lehman Brothers’ debts.

 

10.1.2 Mortgage: Problem 10.1.2 Mortgage: Problem

Betty Finn buys a house for $450,000. She puts down $90,000 and takes out a mortgage for $250,000 from Heather Chandler, and a second mortgage for $110,000 from Veronica Sawyer. When Betty defaults, the house is sold for $500,000 at foreclosure. Assuming the amounts due on the mortgages haven’t changed at all, how should the proceeds be distributed? What would the answer be if the house brought $350,000 at foreclosure?

10.2 A. Crystals and Mud in Property Law 10.2 A. Crystals and Mud in Property Law

We have skimped on the history of mortgage law, which is a long struggle between creditors and debtors. Mostly, legislatures and courts act to protect debtors, who are usually seen as the more vulnerable parties, from sharp dealing by creditors. As rules stretch to be more equitable and less hard-edged, pressure grows to create new clear rules, which then grow their own exceptions and qualifications.

Carol Rose describes the legal seesawing in the following excerpt, which has important lessons for property law generally:

10.2.1 Carol M. Rose, Crystals And Mud In Property Law 10.2.1 Carol M. Rose, Crystals And Mud In Property Law

40 STAN. L. REV. 577 (1988) (excerpts reprinted by permission)

Property law, and especially the common law of property, has always been heavily laden with hard-edged doctrines that tell everyone exactly where they stand. Default on paying your loan installments? Too bad, you lose the thing you bought and your past payments as well. Forget to record your deed? Sorry, the next buyer can purchase free of your claim, and you are out on the street. Sell that house with the leak in the basement? Lucky you, you can unload the place without having to tell the buyer about such things at all.

In a sense, hard-edged rules like these – rules that I call ‘crystals’ – are what property is all about. If, as Jeremy Bentham said long ago, property is ‘nothing but a basis of expectation,’ then crystal rules are the very stuff of property: their great advantage, or so it is commonly thought, is that they signal to all of us, in a clear and distinct language, precisely what our obligations are and how we may take care of our interests. Thus, I should inspect the property, record my deed, and make my payments if I don’t want to lose my home to unexpected physical, legal, or financial impairments. I know where I stand and so does everyone else, and we can all strike bargains with each other if we want to stand somewhere else.

Economic thinkers have been telling us for at least two centuries that the more important a given kind of thing becomes for us, the more likely we are to have these hard-edged rules to manage it. We draw these ever-sharper lines around our entitlements so that we know who has what, and so that we can trade instead of getting into the confusions and disputes that would only escalate as the goods in question became scarcer and more highly valued.

At the root of these economic analyses lies the perception that it costs something to establish clear entitlements to things, and we won’t bother to undertake the task of removing goods from an ownerless ‘commons’ unless it is worth it to us to do so. What makes it worth it? Increasing scarcity of the resource, and the attendant conflicts over it. To use the example given by Harold Demsetz, one of the most notable of the modern economists telling this story, when the European demand for fur hats increased demand for (and scarcity of) fur-bearing animals among Indian hunters, the Indians developed a system of property entitlements to the animal habitat. Economic historians of the American West tell a similar story about the development of property rights in various minerals and natural resources. Easy-going, anything-goes patterns of appropriation at the outset came under pressure as competition for resources increased, and were finally superseded by much more sharply defined systems of entitlement. In effect, as our competition for a resource raises the costs of conflict about it, those conflict costs begin to outweigh the costs of taking it out of the commons and establishing clear property entitlements. We establish a system of clear entitlements so that we can barter and trade for what we want instead of fighting.

The trouble with this ‘scarcity story’ is that things don’t seem to work this way, or at least not all the time. Sometimes we seem to substitute fuzzy, ambiguous rules of decision for what seem to be perfectly clear, open and shut, demarcations of entitlements. I call this occurrence the substitution of ‘mud’ rules for ‘crystal’ ones.

Thus, … over time, the straightforward common law crystalline rules have been muddied repeatedly by exceptions and equitable second-guessing, to the point that the various claimants under real estate contracts, mortgages, or recorded deeds don’t know quite what their rights and obligations really are. And the same pattern has occurred in other areas too. …

Quite aside from the wealth transfer that may accompany a change in the rules, then, the change may sharply alter the clarity of the relationship between the parties. But a move to the uncertainty of mud seems disruptive to the very practice of a private property/contractual exchange society. Thus, it is hardly surprising that we individually and collectively attempt to clear up the mud with new crystal rules – as when private parties contract out of ambiguous warranties, or when legislatures pass new versions of crystalline record systems – only to be overruled later, when courts once again reinstate mud in a different form.…

Early common law mortgages were very crystalline indeed. They had the look of pawnshop transactions and were at least sometimes structured as conveyances: I borrow money from you, and at the same time I convey my land to you as security for my loan. If all goes well, I pay back my debt on the agreed ‘law day,’ and you reconvey my land back to me. But if all does not go well and I cannot pay on the appointed day, then, no matter how heartrending my excuse, I lose my land to you and, presumably, any of the previous payments I might have made. As the fifteenth century commentator Littleton airily explained, the name ‘mortgage’ derived from the rule that, if the debtor ‘doth not pay, then the land which he puts in pledge … is gone from him for ever, and so dead.’

This system had the advantage of great clarity, but it sometimes must have seemed very hard on mortgage debtors to the advantage of scoundrelly creditors. Littleton’s advice about the importance of specifying the precise place and time for repayment, for example, conjures up images of a wily creditor hiding in the woods on the repayment day to frustrate repayment; presumably, the unfound creditor could keep the property. But by the seventeenth century, the intervention of courts of equity had changed things. By the eighteenth and nineteenth centuries, the equity courts were regularly giving debtors as many as three or four ‘enlargements’ of the time in which they might pay and redeem the property before the final ‘foreclosure,’ even when the excuse was lame. One judge explained that an equity court might well grant more time even after the ‘final’ order of ‘foreclosure absolute,’ depending on the particular circumstances.
The muddiness of this emerging judicial remedy argued against its attractiveness. Chief Justice Hale complained in 1672 that, ‘[b]y the growth of Equity on Equity, the Heart of the Common Law is eaten out, and legal Settlements are destroyed; . . . as far as the Line is given, Man will go; and if an hundred Years are given, Man will go so far, and we know not whither we shall go.’ Instead of a precise and clear allocation of entitlements between the parties, the ‘equity of redemption’ and its unpredictable foreclosure opened up vexing questions and uncertainties: How much time should the debtor have for repayment before the equitable arguments shifted to favor the creditor? What sort of excuses did the debtor need? Did it matter that the property, instead of dropping in the lap of the creditor, was sold at a foreclosure sale?

But as the courts moved towards muddiness, private parties attempted to bargain their way out of these costly uncertainties and to reinstate a crystalline pattern whereby lenders could get the property immediately upon default without the costs of foreclosure. How about a separate deal with the borrower, for example, whereby he agrees to convey an equitable interest to the lender in case of default? Nothing doing, said the courts, including the United States Supreme Court, which in 1878 stated flatly that a mortgagor could not initially bargain away his ‘equity of redemption.’ Well, then, how about an arrangement whereby it looks as if the lender already owns the land, and the ‘borrower’ only gets title if he lives up to his agreement to pay for it by a certain time? This seemed more promising: In the 1890s California courts thought it perfectly correct to hold the buyer to his word in such an arrangement, and to give him neither an extension nor a refund of past payments. By the 1960s, however, they were changing their minds about these ‘installment land contracts.’ After all, these deals really had exactly the same effect as the old-style mortgages – the defaulting buyer could lose everything if he missed a payment, even the very last payment. Human vice and error seemed to put the crystal rule in jeopardy: In a series of cases culminating with a default by a ‘willful but repentant’ little old lady who had stopped paying when she mistakenly thought that she was being cheated, the California Supreme Court decided to treat these land contracts as mortgages in disguise. It gave the borrower ‘relief from forfeiture’ – a time to reinstate the installment contract or get back her past payments.

With mortgages first and mortgage substitutes later, we see a back-and-forth pattern: crisp definition of entitlements, made fuzzy by accretions of judicial decisions, crisped up again by the parties’ contractual arrangements, and once again made fuzzy by the courts. Here we see private parties apparently following the ‘scarcity story’ in their private law arrangements: when things matter, the parties define their respective entitlements with ever sharper precision. Yet the courts seem at times unwilling to follow this story or to permit these crystalline definitions, most particularly when the rules hurt one party very badly. The cycle thus alternates between crystal and mud.

10.2.2 Crystals and Mud in Property Law: Notes + Questions 10.2.2 Crystals and Mud in Property Law: Notes + Questions

1. Bear in mind that crystals don’t just help lenders, and mud doesn’t just help borrowers. It all depends on the particulars of the situation. In fact, as you read the materials, consider whether insistence on hard-edged rules might aid borrowers under today’s circumstances, and whether this would be justified.

2. Carol Rose later describes the situations in which courts muddy crystalline rules as cases involving “ninnies, hard-luck cases, and the occasional scoundrels who take advantage of them.” As you read through the rest of this chapter, consider whether that is a fair characterization of the parties to the various disputes we will be studying.

10.3 B. The Rise of Mortgage Securitization 10.3 B. The Rise of Mortgage Securitization

10.3.1 Adam J. Levitin, The Paper Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title 10.3.1 Adam J. Levitin, The Paper Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title

63 DUKE L.J. 637 (2013) (excerpts reprinted by permission)

… II. THE SHIFT IN MORTGAGE FINANCING TO SECURITIZATION

Securitization is a relatively recent development in residential mortgage lending. Residential mortgages began to be securitized in 1970, but securitization remained a relatively small part of American housing finance prior to the 1980s. In 1979 only 10 percent of outstanding mortgages by dollar amount were securitized. Instead, mortgage lending was primarily a local affair … so mortgage loans were rarely transferred.

… By 1983, 20 percent of outstanding mortgages by dollar amount were securitized, and a decade later fully half of outstanding mortgages by dollar amount were securitized. Today nearly two-thirds of mortgage dollars outstanding are securitized.

A firm can raise funds on potentially more advantageous terms if it can borrow solely against its assets, not its assets and liabilities. Securitization enabled such borrowing. To do so, a firm sells assets to a legally separate, specially created entity. The legally separate entity pays for the assets by issuing debt. Because the entity is designed to have almost no other liabilities, the debt it issues will be priced simply on the quality of the transferred assets, without any concern about competing claims to those assets. Therefore, ensuring that the assets are transferred and are free of competing claims is central to securitization.

Although residential-mortgage securitization transactions are complex and vary somewhat depending on the type of entity undertaking the securitization, there is still a core standard transaction. First, a financial institution (the “sponsor” or “seller”) assembles a pool of mortgage loans either made (“originated”) by an affiliate of the financial institution or purchased from unaffiliated third-party originators. Second, the pool of loans is sold by the sponsor to a special-purpose subsidiary (the “depositor”) that has no other assets or liabilities and is little more than a legal entity with a mailbox. This is done to segregate the loans from the sponsor’s assets and liabilities. Third, the depositor sells the loans to a passive, specially created, single-purpose vehicle (SPV), typically a trust in the case of residential-mortgage securitization. The trustee will then typically convey the mortgage notes and security instruments to a document custodian for safekeeping. The SPV issues certificated debt securities to raise the funds to pay for the loans. As these debt securities are backed by the cash flow from the mortgages, they are called mortgage-backed securities (MBS). …

10.3.2 Securitization: Notes + Questions 10.3.2 Securitization: Notes + Questions

1. You may not feel that you fully understand securitization. It will get clearer with time. Perhaps the most important thing to understand is that the entity that claims to own, and tries to enforce, the mortgage debt in case of default is usually not the entity that originated the loan. It’s common to discuss “banks” and “lenders” without paying much attention to the details of the actual mortgage transactions, and the problem is worsened because the entities involved are often related and even bear highly similar names. But lawyers often need more precision.

2. Among other things, non-originator owners can claim that equitable defenses – such as fraudulent inducement, which was unconscionably common in the run-up to the mortgage crisis – are unavailable to homeowners/mortgagors under the “holder in due course” doctrine. The holder in due course doctrine is similar to the rule, discussed in O’Keeffe v. Snyder, that a good faith purchaser who buys property from a fraudster acquires good title, even though the fraudster did not have good title. With a mortgage, that means that a homeowner who was deceived into taking a predatory loan, as discussed in the next section, is still bound to pay back the loan according to its terms as long as the mortgage was transferred to a holder in due course. See, e.g., Kurt Eggert, Held Up in Due Course: Predatory Lending, Securitization, and the Holder-in-Due-Course Doctrine, 35 CREIGHTON L. REV. 502 (2002). Recently, some reforms have attempted to limit the holder in due course doctrine, at least with respect to loans with specific bad features.

3. Another important thing to understand about securitization is that it involves the creation of new property rights from old. Investors in mortgage-backed securities do not own individual mortgages. Rather, they own the right to benefit from the stream of payments from mortgagors to the trusts that hold the mortgages. This right has been turned into a separate property right through the magic of securitization. But the value of this right is still, as investors discovered to their sorrow, dependent on the value of the underlying assets.

10.4 C. Predatory Lending 10.4 C. Predatory Lending

10.4.1 McGlawn v. Pennsylvania Human Relations Commission 10.4.1 McGlawn v. Pennsylvania Human Relations Commission

Commonwealth Court of Pennsylvania
891 A.2d 757
2006-01-13

Commonwealth Court of Pennsylvania.

Reginald McGLAWN, Petitioner v. PENNSYLVANIA HUMAN RELATIONS COMMISSION, Respondent. McGlawn & McGlawn, Petitioner v. Pennsylvania Human Relations Commission, Respondent.

Decided Jan. 13, 2006.

Argued Nov. 14, 2005.

Reargument Denied March 6, 2006.

BEFORE: McGINLEY, Judge, and COHN JUBELIRER, Judge, and SIMPSON, Judge.

Jeffry H. Homel, Huntingdon Valley, for petitioner.

Charles L. Nier, III, Asst. Chief Coun­sel, Philadelphia, for respondent.

OPINION BY Judge SIMPSON.

This case involves an issue of first im­pression: whether the Pennsylvania Hu­man Relations Act (Act)1 extends to a mortgage broker’s predatory lending activ­ities known as “reverse redlining.”2 We affirm the Commission’s holding that the Act prohibits reverse redlining. However, we vacate part of the Commission’s award of actual damages and remand for further proceedings.

Respondent McGlawn and McGlawn, Inc. (Broker) a state-licensed mortgage broker, and Respondent Reginald McGlawn (Reginald McGlawn) petition for review of the decision of the Pennsylvania Human Relations Commission (Commis­sion). The decision held Respondents vio­lated Sections 5(h)(4)(loan provision)3 and 5(h)(8)(i)(real estate transaction provi­sion) 4 of the Act by discriminating against Complainants and other similar situated persons (collectively, Complainants),5 in mortgage loan transactions, because of their race and the racial composition of their neighborhoods. The Commission’s final order directed Respondents to (1) cease and desist from discriminating against African Americans because of their race; (2) pay Complainants actual dam­ages; 6 (3) pay Complainants damages for embarrassment and humiliation;7 and (4) pay a civil penalty of $25,000.00. Further, the Commission’s order directed Broker to (5) provide employee training to its em­ployees designed to educate them in their responsibility to treat clients in a non­discriminatory manner consistent with the provisions of the Act; and to (6) develop and implement a record-keeping system designed to accurately record information about Broker’s charges in all mortgage transactions.8 The order also required Respondents to report the means of com­pliance and directed the Commission to contact the Department of Banking so that it may take such licensing action as it deemed appropriate.

I. Background

A.

Broker, a corporation which brokers mortgage loans, refinancing and insurance for its customers, was founded in 1985 by its chief officers, Reginald McGlawn, and his brother, Anthony McGlawn. Reginald McGlawn is Broker’s mortgage loan spe­cialist, and Anthony McGlawn is Broker’s insurance specialist. Broker also employs other McGlawn family members.

Broker specializes in arranging sub-­prime mortgage loans for its customers. The prime lending market provides credit to those considered good credit risks. The sub-prime lending market provides credit to people the financial industry considers enhanced credit risks. These people gen­erally have a flawed credit history or a debt-to-income ratio outside the range the financial industry considers acceptable for prime credit. As discussed hereafter, sub-­prime interest rates are usually two to three percentage points higher than prime rates.

In 1998-2000, Broker arranged sub-­prime mortgage loans for Complainants, who own real property in Philadelphia County. Broker is an African American-­owned company. Complainants are Afri­can Americans who reside in predominant­ly African American neighborhoods.

In April 2001, Complainant Lucrecia Taylor (Taylor) filed a verified complaint with the Commission alleging Broker un­lawfully discriminated against her in the terms and conditions of a real estate-relat­ed transaction and loan of money because of her race and the racial composition of her neighborhood, African American. Specifically, Taylor alleged Broker target­ed her, as an African American, for a mortgage loan transaction containing pred­atory and unfair terms in violation of the Act’s loan and real estate transaction pro­visions. Significantly, Taylor stated her allegations were made not only on her own behalf, but on behalf of all other similarly situated persons affected by Broker’s dis­criminatory practices. After the pleadings were closed, the Commission notified Tay­lor and Broker that probable cause existed to credit Taylor’s allegations.

In August 2002, Complainant Lynn Poindexter (Poindexter) filed a like complaint against Broker on behalf of herself and all other similarly situated persons. The Commission subsequently found probable cause existed to credit Poindexter’s allega­tions. The Commission consolidated the two cases.

Because these complaints alleged Bro­ker committed similar discriminatory acts against other persons, the Commission sought access to Brokers loan records. Broker ignored this request. Thereafter, Broker refused to comply with a Commis­sion subpoena requesting these documents. This Court entered an order directing Bro­ker to produce such documents. Broker complied.

The Commission was thereafter able to identify other individuals affected by Bro­ker’s alleged discriminatory practices. Pursuant to 16 Pa.Code § 42.36(a), Com­mission Counsel,9 representing Complain­ants and the Commonwealth’s interest, filed a confirmation of intention to seek relief for persons other than the named Complainants.

Several weeks later, after failed at­tempts to resolve the matter, hearings were held before a panel of three Commis­sioners. Both Complainants and Broker presented evidence.

Complainants testified and submitted exhibits, including their loan documents. Complainants also presented testimony from a Commission investigator and two experts regarding the rapid growth of the urban sub-prime lending market and the emerging problem of predatory lending targeting segregated urban areas.

In defense, Broker submitted documen­tary evidence and presented testimony from Reginald McGlawn and Anthony McGlawn. Broker also presented testimo­ny from two witnesses satisfied with Bro­ker’s services.

B.

In its decision, the Commission found Broker engaged in predatory brokering activities regarding all Complainants. Those actions resulted in unfair and preda­tory mortgage loans. It also found Broker engaged in an aggressive marketing plan targeting African Americans and African American neighborhoods in the Philadel­phia area. Nearly all of Complainants contacted Broker in response to radio, television and newspaper advertisements.

Broker’s predatory practices, the Com­mission noted, included arranging loans containing onerous terms such as high in­terest rates, pre-payment penalties, bal­loon payments and mandatory arbitration clauses. In addition, Broker charged Complainants high broker fees, undis­closed fees, yield spread premiums and various other additional closing costs. Broker’s predatory practices also included falsification of information on loan docu­ments, failure to disclose information re­garding terms of the loan, and high pres­sure sales tactics.

Because there are no state appellate court decisions addressing the issue of whether reverse redlining and/or predato­ry lending constitutes prohibited housing discrimination under the Act, the Commis­sion relied on several federal court deci­sions. Those decisions hold reverse red­lining and related discriminatory practices violate the Fair Housing Act (FHA), 42 U.S.C. §§ 3601-3631.10

The seminal case prohibiting reverse redlining is Hargraves v. Capital City Mortgage Corp., 140 F.Supp.2d 7 (D.D.C.­2000). There, the United States District Court adopted a two-pronged test for dis­crimination under the FHA based on re­verse redlining. First, the plaintiffs must establish the defendant’s lending practices and loan terms were predatory and unfair. Hargraves. Second, the plaintiffs must establish that defendant intentionally tar­geted them because of their race or that the defendant’s lending practices had a disparate impact on the basis of race. Id.

Citing Hargraves and the opinions of Complainants’ experts, the Commission concluded Complainants established a pri­ma facie reverse redlining claim against Broker under the Hargraves test. The Commission rejected Broker’s arguments that (1) it did not discriminate because it did not arrange loans for non-African Americans on more preferable terms, (2) it had a legitimate business necessity for its actions, (3) it is not responsible for the terms and conditions of the loans or the disclosure of information relating to the loans, and (4) all mortgage brokers are predators.

As a result, the Commission held Respondents violated the loan provisions and the real estate transaction provisions of the Act by unlawfully discriminating against Complainants in the terms and conditions of real estate-related transac­tions. The Commission therefore entered the order previously described, and Re­spondents’ petitioned this Court for rev­iew.11

Before this Court, Respondents raise three primary contentions. First, Respon­dents challenge the Commission’s authori­ty to implement a new cause of action for discrimination for reverse redlining under the loan provisions and real estate transac­tion provisions of the Act. Second, Respon­dents challenge support for the conclusion that Broker engaged in reverse redlining. Third, they challenge the damage award as excessive and not reasonably related to the alleged harm.

II. Cause of Action

Respondents first argue the Com­mission lacked the jurisdiction and authori­ty to create a cause of action for reverse redlining under the Act. They contend the Commission’s authority is limited by the Act. Any doubtful powers do not exist. Respondents maintain it is the responsibil­ity of courts, not the Commission, to recog­nize a new cause of action.

In response, the Commission contends this is a housing discrimination case. Sec­tion 3 of the Act recognizes an individual’s civil right to obtain any housing accommo­dation without discrimination because of race. 43 P.S. § 953. The Act is an exer­cise of the Commonwealth’s police power “for the protection of the public welfare, prosperity, health and peace of the people of the Commonwealth.... ” Section 2(c) of the Act, 43 P.S. § 952(c).

In City of Pittsburgh Comm’n on Human Rels. v. DeFelice, 782 A.2d 586 (Pa.­Cmwlth.2001), we recognized the Commis­sion was established to carry out the pur­poses of the Act. As the Commission’s power is delegated to it by the General Assembly, we must strictly construe the limits of the Commission’s power. Id.

Section 7 of the Act enumerates the Commission’s powers and duties. 43 P.S. § 957. Section 7(f) authorizes the Com­mission to initiate, receive and investigate complaints charging unlawful discriminato­ry practices. 43 P.S. § 957(f). Section 7(g)(1) authorizes the Commission to hold hearings, subpoena witnesses and take tes­timony related to any matter under inves­tigation where a complaint is filed. 43 P.S. § 957(g)(1). See also McGraw-Edison Co. v. Pennsylvania Human Rels. Comm’n, 108 Pa.Cmwlth. 147, 529 A.2d 81 (1987).

In addition, Section 6(b)(1) of the Act authorizes the Commission to investigate whenever a verified complaint indicates there is reason to believe an unlawful dis­criminatory practice was committed. 43 P.S. § 956(b)(1). Section 6(d) authorizes the Commission to prosecute cases of un­lawful discrimination and hold evidentiary hearings. 43 P.S. § 956(d). Section 9(f)(1) authorizes the Commission to enter cease and desist orders, to award damages and to require affirmative remedial action to carry out the Act’s purposes. 43 P.S. § 956(f)(1).

Reverse redlining is a recognized, if new, form of housing discrimination. Har­graves. Section 5(h) of the Act, 43 P.S. § 955(h), addresses housing discrimina­tion. Section 5(h)(4), the loan provision, prohibits discrimination “against any per­son in the terms and conditions of any loan of money, whether or not secured by mort­gage or otherwise for the acquisition, con­struction, rehabilitation, repair or mainte­nance of housing accommodation[s].... ” 43 P.S. § 955(h)(4). Further, Section 5(h)(8)(i), the real estate transaction provi­sion, makes it unlawful for a business en­gaged in real estate-related transactions to discriminate in the terms and conditions of those transactions.

In view of the foregoing, we conclude under the Act, the Commission has both the jurisdiction and the authority to inves­tigate, prosecute and remedy unlawful housing discrimination practices in the Commonwealth, including claims of re­verse redlining. DeFelice. Respondents’ contrary assertion lacks merit.

Respondents contend, however, the Commission impermissibly broadened the scope of the Act by creating a new cause of action for reverse redlining. Conceding this issue is one of first impression in the Commonwealth, the Commission based its decision on federal court decisions on re­verse redlining. As discussed above, fed­eral courts conclude reverse redlining is a form of housing discrimination that vio­lates the FHA and other related civil rights statutes.12 Hargraves.

In DeFelice, this Court recognized it is not bound by federal court decisions. However, in interpreting the Act where no applicable state law exists, “it is appropri­ate to look to federal decisions involving similar federal statutes for guidance.” 782 A.2d at 592, n. 8. Here, based on the similarities between the FHA and the Act, we are persuaded to adopt the reasoning of the federal court and to apply it to the Act.

The FHA and the Act share the objec­tive to prohibit discrimination. In particu­lar, like the FHA, Section 2(a) of the Act recognizes that housing discrimination is injurious to the public health and leads to racial segregation and its related evils. 43 P.S. § 952(a).

Also, the FHA and the Act share lan­guage addressing discrimination in real es­tate transactions. Section 3605(a) of the FHA provides “[i]t shall be unlawful for any person or other entity whose business includes engaging in residential real es­tate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race.... ” 42 U.S.C. § 3605(a). Impor­tantly, the real estate transaction provision of the Act contains identical language.

In Hargraves, the District Court deter­mined housing discrimination in the form of reverse redlining is prohibited under Section 3605(a) of the FHA. In light of the shared objectives of the FHA and the Act, to ban housing discrimination, and the identical language in both statutes prohib­iting discrimination in real estate-related transactions, we agree with the Commis­sion that the Act provides a cause of action for discrimination based on reverse redlin­ing.

Further, given the similarity in statuto­ry language addressing discrimination in loans, the loan provisions of the Act pro­vide a cause of action for reverse redlining. The Act’s loan provisions prohibit discrimi­nation in the terms and conditions of loans for housing construction, rehabilitation, re­pair and maintenance. Correspondingly, Section 3605(b) of the FHA defines a “resi­dential real estate-related transaction” in relevant part as the “making or purchasing of loans or providing other financial assis­tance ... for purchasing, improving, re­pairing, or maintaining a dwelling; ... secured by real estate.” 42 U.S.C. § 3605(b).13

For the foregoing reasons, we reject Respondents’ challenges to the Commis­sion’s decision based on jurisdiction and authority to address a claim of reverse redlining.

III. Substantial Evidence

Respondents next challenge sup­port for the Commission’s findings. They assert the Commission’s conclusion Broker engaged in reverse redlining is not sup­ported by substantial evidence.14 In par­ticular, Respondents maintain the evidence does not show Broker engaged in predato­ry lending practices or targeted African Americans.

“It is well settled that the party asserting discrimination bears the burden of proving a prima facie case of discrimination.” DeFelice, 782 A.2d at 591. “Once a prima facie case is established, a rebutta­ble presumption of discrimination arises.” Id. “The burden then shifts to the defen­dant to show some legitimate, nondiscrimi­natory reason for its action.” Id.

To establish a discrimination claim based on reverse redlining, the plaintiff must show “the defendants’ lending prac­tices and loan terms were ‘predatory’ and ‘unfair.’” Hargraves, 140 F.Supp.2d at 20. The plaintiff must also show “the defen­dants either intentionally targeted on the basis of race, or that there is a disparate impact on the basis of race.” Id.

A. Predatory Lending

Respondents first argue Broker did not engage in predatory or unfair lending practices because it did not approve Com­plainants’ loans or lend them the money. Therefore, they were not responsible ei­ther for the terms and conditions of Com­plainants’ loans or for the disclosure of information related to the loans. Those responsibilities belong to the lending insti­tutions that set the terms and approved the loans.

The Commission accepted the testimony of Complainants’ expert witnesses. Mi­chelle Lewis, President and Chief Execu­tive Officer of Northwest Counseling Ser­vice, Inc. (Complainants’ first expert),15 stated that a mortgage broker is signifi­cantly involved in making the loan. Re­produced Record (R.R.) at 290a. The bro­ker is the middleman who creates the loan opportunity. Id. The broker’s customer relies on the broker’s expertise in lending matters and has an expectation that the broker will be able to obtain the best available deal. R.R. at 294a.

The Commission also relied on Ira Goldstein, Director of Public Policy and Pro­gram Assessment for the Reinvestment Fund (Complainants’ second expert),16 who testified that, in brokered transactions, the broker’s customer-the borrower, never ac­tually meets the lender. R.R. at 1005-06a. As a result, in the borrower’s mind, the broker is the lender. R.R. at 1006a. Complainants’ second expert also testified that in loan transactions where a yield spread premium17 is used, the broker plays a significant role in establishing the interest rate of the loan. R.R. at 1007a.

As additional support for its determina­tion, the Commission cited Reginald McGlawn’s testimony. He testified, “[W]hen people come to us, I provide loans.” R.R. at 1283a. Reginald McGlawn also testified he chooses which lender receives the borrower’s loan appli­cation. R.R. at 1317a. He also stated he sets the broker fee and gives the borrower the option of using a yield spread premi­um, which has the effect of increasing the interest rate. R.R. at 1324-26a.

1.

There is substantial evidence to support the Commission’s determination that Respondents engaged in brokering activities that resulted in predatory and unfair loans.

First, it is noted that a mortgage broker owes a fiduciary duty to its custom­ers. See In re Barker, 251 B.R. 250 (Bankr.E.D.Pa.2000) (mortgage broker is borrower’s agent; borrower has a reason­able expectation broker will attempt to secure the most advantageous loan for bor­rower).

Second, application of the loan and real estate transaction provisions of the Act are not restricted to a lending institution. Rather, the provisions apply to any “per­son,” which is defined to specifically in­clude a “broker, salesman, agent. ... ” Sec­tion 4(a) of the Act, 43 P.S. § 954(a).

Third, Broker’s activities were a sub­stantial part of the loan transactions at issue. In particular, Broker selected which lender received Complainants’ loan applications. Broker was the sole negoti­ator for Complainants with the ultimate lender. Also, Broker influenced the ulti­mate interest rates in loans involving yield spread premiums. Further, Broker re­ceived substantial sums directly from loan proceeds, such as broker fees and insur­ance premiums. As the Commission prop­erly concluded, these items are considered terms of a loan transaction.

Given a broker’s legal duty to its cus­tomers, the specific inclusion of brokers in the scope of the Act, and the way Broker operated here, we discern no error in the Commission’s finding on this issue.

2.

We next review the Commission’s determination that Respondents’ practices were predatory and unfair. Whether lend­ing practices are predatory and unfair is a question for the fact finder. Hargraves.

In finding Broker arranged predatory and unfair loans for Complainants, the Commission applied the Hargraves defini­tion of “predatory lending practices.” The Hargraves Court stated predatory lending practices are indicated by loans with un­reasonably high interest rates and loans based on the value of the asset securing the loan rather than the borrower’s capaci­ty to repay it. The Court also recognized predatory lending practices include “loan servicing procedures in which excessive fees are charged.” 140 F.Supp.2d at 21.

The Commission also noted the New Jersey Superior Court’s decision in Assocs. Home Equity Servs., Inc. v. Troup, 343 N.J.Super. 254, 778 A.2d 529 (2001). The Troup Court explained the term “predato­ry lenders” refers to those lenders who target certain populations for credit on unfair or onerous terms. Characteristical­ly, predatory loans do not fit the borrower either because the borrower’s needs are not met or because the terms are so oner­ous there is a strong likelihood the borrow­er will be unable to repay the loan. Id.

In determining what lending practices are predatory and unfair, the Commission also accepted as credible Complainants’ experts opinions as to what constitutes a predatory loan. Complain­ants’ first expert testified there are a number of loan features which are charac­teristic of a predatory loan. They include high interest rates, paying off a low inter­est mortgage with a high interest mort­gage, payment of points, yield spread pre­miums, high broker fees, undisclosed fees, balloon payments, pre-payment penalties, arbitration clauses and fraud. R.R. at 268-75a. A predatory and unfair loan may include any combination of these characteristics. Id. at 275a. See also In re Barker (Pennsylvania’s Credit Services Act (CSA)18 and Unfair Trade Practices and Consumer Protection Law (UTP-­CPL)19 prohibit loan brokers from making false or misleading representations or en­gaging in deceptive or fraudulent con­duct).

Complainants’ second expert testified that, even assuming a borrower is an en­hanced credit risk, the difference in inter­est rates between a sub-prime and prime market loan is usually no greater than three percentage points. R.R. at 940. Anything higher than a three-point differ­ence is indicative of a predatory loan. R.R. at 940-41. This expert also testified predatory loan practices include, among other things: flipping (successive refinanc­ing of the same loan); hiding critical terms, establishing loan terms the borrow­er cannot meet; packing (including unnec­essary products such as insurance poli­cies); charging improper fees for items outside the settlement sheet; creation of false documents; and failing to advise bor­rowers of their rescission rights. R.R. at 908-13a.

The Commission examined the terms of Complainants’ loans and their experiences with Respondents in light of the foregoing. We briefly review the Commission’s find­ings regarding Complainants Taylor and Poindexter.

Taylor. Taylor contacted Broker in October 2000 in order to obtain a refi­nancing loan of $10,000.00 to make some emergency home repairs (leaky roof, doors and windows, plumbing repair). R.R. at S61-62a. In 2000, she owed $7,300.00 on her home. R.R. at 359a. Her home mort­gage had a 3% interest rate with a month­ly payment of $110.90. Id. Taylor’s sole income source was social security disabili­ty. R.R. at 362a.

Broker arranged a 30-year mortgage loan for Taylor with Delta Funding Corpo­ration (Delta) in the amount of $20,500.00 with a 13.09% interest rate. R.R. at 681-­82a. Taylor was not given an opportunity to review any of the documents before signing them. R.R. at 381-82a. Taylor was told to sign the documents. R.R. at 382a.

The Commission found Taylor’s loan transaction had several predatory charac­teristics. Taylor’s was charged $4,276.60 in total settlement costs, or approximately 20% of the loan.20 R.R. at 682a. Two days after Taylor signed the loan docu­ments, her uncle reviewed them and ad­vised her to cancel the loan. R.R. at 382-­83a. Taylor called Aaron McGlawn, a Bro­ker employee, and stated she did not want the loan. He did not advise Taylor she could legally rescind the loan within a three-day period; rather, he told Taylor she could cancel the loan if she had the money to pay the people Broker already paid. R.R. at 383a.

The settlement sheet indicates Taylor received $8,902.07. R.R. at 681a. At clos­ing, Reginald McGlawn informed Taylor she owed an additional $1,200.00 fee be­cause of where she lived. R.R. at 384a. Anthony McGlawn cashed the check and gave Taylor the money. R.R. at 384-85a. He then asked Taylor for the $1,200.00 fee. R.R. at 385a. Taylor paid the fee out of the cash; but she was not given a receipt. Id. This fee was not reflected on the settle­ment sheet. R.R. at 681-82a.

Complainants’ second expert reviewed Taylor’s loan transaction. He noted sever­al predatory characteristics. First, Tay­lor’s 13.09% interest rate was substantially above the three-point spread between sub-­prime and prime loans. R.R. at 940-41a. The Commission noted Broker arranged a loan for Taylor at twice the amount she requested and increased her interest rate from 3% to 13.09%. Such loans are consid­ered to be deceptive and detrimental.21 In re Barker. In addition, Taylor’s loan in­cluded an additional undisclosed $1,200.00 broker fee. R.R. at 941a.

The Commission found Broker engaged in predatory brokering activities on Tay­lor’s behalf. These Broker actions result­ed in a predatory and unfair refinancing loan. F.F. No. 6. This finding is supported by substantial evidence.

Poindexter. Poindexter testified by deposition that she acquired her home as a gift from her grandfather and owned it free and clear. R.R. at 743a. She de­scribed the neighborhood as being African American. R.R. at 744a.

In response to a radio advertisement, Poindexter contacted Broker to obtain a small loan to pay off her bills; she did not want a mortgage. R.R. at 745-46a. She eventually met with Reginald McGlawn. Id. Poindexter told him she was going to college and working part time at a grocery store. R.R. at 746a.

During their conversations, Reginald McGlawn informed Poindexter she did not make enough money but that he would “take care of things.” R.R. at 747a. Bro­ker subsequently submitted documentation to Gelt Financial Corporation indicating Poindexter had a second job as a recep­tionist with Ivory Towers, Contractors, Inc. R.R. at 762-63a. Poindexter stated she did not prepare these documents, was never employed by Ivory Towers and was unaware of these documents. R.R. at 747-­48a.

Poindexter’s settlement sheet indicates her loan was approved for $22,400.00. R.R. at 764a. It listed a broker fee of $2,240.00 (10% of the loan amount) and a $423.87 charge for a homeowner’s insur­ance policy. Id. Poindexter’s loan also contained a balloon payment of $20,193.79 and a pre-payment penalty. R.R. at 750a, 765a, 766-68a. At the time she signed the documents, Poindexter was unaware of ei­ther the balloon payment or the pre-pay­ment penalty. Id. Prior to settlement, Po­indexter never discussed the interest rate with Respondents. R.R. at 751a. She did not have time to review the loan docu­ments before signing them. Id.

The Commission found Broker engaged in predatory brokering activities regarding Poindexter, which resulted in a predatory and unfair loan. F.F. No. 7. This finding is supported by substantial evidence.

Similarly situated persons. The Com­mission also found Broker engaged in predatory brokering practices on behalf of the eight similarly situated persons (Brunson, Jackson, Slaughter, Jacobs, Hawkins, Miles, Watts and Norwood), which result­ed in unfair and predatory loans. F.F. Nos. 8-15. The Commission noted the terms of these individuals’ mortgage loans, as well as their factual circumstances, were “disturbingly similar” to those of Taylor and Poindexter. Comm’n Dec. at 21. These findings are also supported by substantial evidence.

In view of the foregoing, we conclude Complainants proved Respondents en­gaged in predatory and unfair lending practices. Respondents’ actions resulted in onerous loans containing terms of a predatory nature designed to benefit Bro­ker, not Complainants. Therefore, Com­plainants met the first requirement for proving a reverse redlining claim. Hargraves.

B. Intentional Discrimination

The second element of a re­verse redlining claim is a showing that the defendant either intentionally targeted on the basis of race or that there was a disparate impact on the basis of race. Hargraves. Here, the Commission deter­mined Broker intentionally targeted Afri­can Americans and African American neighborhoods. F.F. No. 29. The Com­mission also found ample evidence of dis­parate impact.

However, Broker contends the record lacks convincing evidence demonstrating either (1) that Broker intentionally target­ed a protected class or (2) that policies and practices had a disparate impact on the basis of race. Rather, Broker maintains, its mission is to provide an opportunity for people with poor credit to obtain funds to get out of debt and keep their homes. Broker claims several of the Complainants first went to other mortgage brokers who turned them down.

“Although evidence of intent is not necessary to show discriminatory im­pact, it can support such a finding.” Har­graves, 140 F.Supp.2d at 21. In reverse redlining cases, evidence of the defendant’s advertising efforts in African American communities is sufficient to show intention­al targeting on the basis of race. Id.

The Commission reviewed Broker’s ad­vertisements. On its website, Broker states “[i]t is one of the first African American owned and operated Mortgage and Insurance Financial Services in Phila­delphia and the surrounding area.” R.R. at 1499a. Broker’s website also states “[o]ur primary focus is to assist financially challenged customers in purchasing and or refinancing their existing mortgage, as well as providing various types of insur­ance.” Id.

In addition, Anthony McGlawn, Broker’s co-founder and insurance specialist, testi­fied Broker engaged in extensive advertis­ing on radio and television, in the newspa­pers and in the yellow pages. R.R. at 1377-89a. Several of these sources are oriented toward African American audi­ences and readers. Id. Reginald McGlawn also testified the majority of Broker’s cus­tomers are African Americans. R.R. at 1296a.

Moreover, Complainants testified they contacted Broker as a result of its adver­tisements. Taylor contacted Broker after viewing one of its television commercials. R.R. at 360a. Poindexter called Broker after listening to one of its radio commercials. R.R. at 744a. Nearly all of the eight similarly situated Complainants also contacted Broker in response to one of its radio, television and newspaper advertise­ments.

Complainants also testified the decision to contact Broker was influenced by the fact that it was an African American com­pany. For example, both Taylor and Poin­dexter testified this fact played a role in their decisions to use Broker’s services. R.R. at 361a; 744-45a.

The record also indicates Broker’s busi­ness activities have a disparate impact on African American neighborhoods. This can be established by statistical evidence. Hargraves. The Commission accepted the testimony of Radcliffe Davis, a Commis­sion investigator (Investigator). In re­sponse to Taylor and Poindexter’s com­plaints, Investigator visited Broker’s office and reviewed 100 customer loan applica­tions for things such as refinancing, debt consolidation and home improvement. R.R. at 524a. Of those 100 applications, 66 identified the race of the applicant. Id. Of those 66 applicants, 65 were African Amer­ican. R.R. at 524-25a.

In addition, Complainants’ second expert testified he prepared a document mapping the 11 properties involved in this matter. R.R. at 1001a. Nine of these properties were in areas that have at least a 90% African American population. R.R. at 1002-03a. The other two areas have a 50-­75% African American population. Id.

Considering the foregoing, the Commis­sion’s conclusion regarding intentional dis­crimination is supported by substantial evi­dence and is in accord with applicable law. Hargraves. Complainants also established by statistical evidence that Broker’s busi­ness activities had a disparate impact on African Americans and African American neighborhoods. Id.

In sum, Complainants met their burden of establishing a prima facie reverse red­lining claim against Broker. Id.

C. Rebuttal

“Once a prima facie case is established, a rebuttable presumption of discrimination arises.” De Felice, 782 A.2d at 591. “The burden then shifts to the defendant to show some legitimate, nondiscriminatory reason for its action.” Id. In predatory lending cases, the finan­cial institution may avoid liability by show­ing its lending practices were legitimate. Hargraves.

Respondents contend Complain­ants did not prove Broker’s business activ­ities were discriminatory because they did not establish Broker made loans to non-­African Americans on more preferable terms. This argument was rejected in Hargraves. Citing Contract Buyers League v. F & F Investment, 300 F.Supp. 210 (N.D.Ill.1969), the Hargaves Court recognized that injustice cannot be permit­ted merely because it is visited exclusively upon African Americans. We adopt this reasoning now.

Respondents also argue that any mort­gage broker which arranges sub-prime loans could be considered a predator. We disagree. The interest rates of Complain­ants’ loans are far in excess of the three-­point difference usually separating prime and sub-prime loans. In addition, Bro­ker’s high broker fees, undisclosed fees and padded closing costs benefited Broker, not Complainants. These types of loans do not serve the borrower’s wants or needs. See In re Barker (broker’s motiva­tion for arranging this type of loan was not to serve borrower’s interest, “but to serve its own interest of obtaining a handsome broker’s fee.”) 251 B.R. at 260. “Such self-dealing constitutes a flagrant violation of the Broker’s fiduciary duties to the [bor­rower].” Id.

Respondents further argue Broker had no legal obligation to ensure Complainants could repay their loans.

Whether or not a broker must ensure a client’s ability to repay a loan, a broker cannot ignore circumstances sug­gesting an inability to repay. Indeed, one of the clearest indicators of a predatory and unfair loan is one which exceeds the borrower’s needs and repayment capacity. Hargraves; Troup.

On several occasions, Broker arranged loans in excess of the amounts Complain­ants sought. Moreover, Broker discour­aged several Complainants from canceling their loans within the three-day rescission period. Broker also submitted falsified documents with Complainants’ loan appli­cations indicating Complainants possessed greater income or assets than they really did. Broker’s disregard of Complainants’ ability to repay their loans strongly sup­ports the Commission’s decision to reject the legitimate practice defense.

Respondents also assert they did not target African Americans or African American neighborhoods. Rather, Re­spondents claim Complainants, who are poor credit risks, came to Broker after being turned down by other brokers.

As discussed above, nearly all Complain­ants contacted Broker in response to one of its radio, television or newspaper adver­tisements targeting individuals with poor credit. Further, Broker concentrated its advertising efforts in the African American media. The Commission did not err in concluding Broker intentionally targeted African Americans for sub-prime mortgage loans. Hargraves.

Accordingly, no error is evident in the Commission’s rejection of the Respon­dents’ legitimate practice defense.

IV. Damage Award

Respondents further contend the Com­mission’s award was excessive and not rea­sonably related to the alleged harm. The Commission’s award of damages, Respon­dents assert, was arbitrary, burdensome and unreasonable.

Respondents maintain the Commission lacks the authority to award compensatory damages, including damages for embar­rassment and humiliation. Citing W. Mid­dlesex Area Sch. Dist. v. Pennsylvania Human Rels. Comm’n, 39 Pa.Cmwlth. 58, 394 A.2d 1301 (1978), Respondents argue the Commission is limited by Section 9 of the Act, 43 P.S. § 959, to reimbursing Complainants for costs they incurred due to discriminatory acts.

Respondents’ reliance on W. Middlesex Sch. Dist. is misplaced. There, the Com­mission awarded as part of back pay the amount spent on hospitalization insurance costs while the complainant was on forced leave. This Court rejected an argument that the Commission exceeded its authori­ty. We recognized Section 9 of the Act grants the Commission discretion to deter­mine what remedial affirmative action is necessary to effectuate the purposes of the Act. Therefore, this case does not support Respondents’ current argument of limited authority to award actual damages.

In Consol. Rail Corp. v. Penn­sylvania Human Rels. Comm’n, 136 Pa.­Cmwlth. 147, 582 A.2d 702 (1990), we rec­ognized “the legislature has given the Commission broad remedial powers to cope with the problem of discrimination.” Id. at 708. “[T]he expertise of the Com­mission in fashioning remedies is not to be lightly disregarded.” Id. “[W]e may only upset the Commission’s award if we find it is an attempt to achieve ends other than the stated purpose of the Act.” Id.

An award under the Act serves not only to restore the injured party to pre-injury status, but also to discourage future discrimination. Parks; Williams­burg Cmty. Sch. Dist. v. Pennsylvania Human Rels. Comm’n, 99 Pa.Cmwlth. 206, 512 A.2d 1339 (1986).

A. Actual Damages

Section 9(f)(1) of the Act provides in relevant part:

If, upon all the evidence at the hear­ing, the Commission shall find that a respondent has engaged in or is engag­ing in any unlawful discriminatory prac­tice as defined in this act, the Commis­sion shall state its findings of fact, and shall issue and cause to be served on such respondent an order requiring such respondent to cease and desist from such unlawful discriminatory practice and to take such affirmative action, in­cluding, but not limited to, reimburse­ment of ... services and privileges or lending money, whether or not secured by a mortgage or otherwise for the ac­quisition, construction, rehabilitation, re­pair or maintenance of housing accom­modations or commercial property, upon such equal terms and conditions to any person discriminated against or all per­sons, and any other verifiable, reason­able out of pocket expenses caused by such unlawful discriminatory practice, provided that, in those cases alleging a violation of section 5(d), (e) or (h) or 5.3, where the underlying complaint is a violation of section 5(h) or 5.3, the Com­mission may award actual damages, in­cluding damages caused by humiliation and embarrassment, as in the judgment of the Commission, will effectuate the purposes of this act, and including a requirement for report of the manner of compliance.

43 P.S. § 959(f)(1) (emphasis added). As this Section provides, the Commission may award compensatory damages where the complainant establishes a violation of Sec­tion 5(h) of the Act, 43 P.S. § 955(h), gen­erally relating to housing discrimination.22 Here, the Commission awarded Complain­ants actual damages, including damages for embarrassment and humiliation. We first review the Commission’s award of special damages, which consisted of two separate components.

1.

The first component of special damages consisted of monies paid to Bro­ker out of the mortgage loan proceeds for items which benefited Broker, but not the borrowers. These items included Broker’s disclosed and undisclosed broker fees, in­surance premiums, and yield spread pre­miums. Complainants submitted docu­mentation setting forth these calculations. See Comm’n Dec., Appendix A; R.R. at 173-74a. Respondents did not introduce any evidence contradicting these calcula­tions.

Section 9(f)(1) of the Act authorizes the Commission to restore Complainants to their pre-injury status. Consol Rail Corp. Thus, the Commission had the authority to award Complainants reimbursement for these actual expenses.

2.

The second component of the spe­cial damage award consisted of the differ­ence between the total amount of interest Complainants will pay as a result of their predatory loans and the total amount of interest they would have paid with a loan at the prevailing mortgage interest rate. The Commission took administrative notice of a 5% prevailing mortgage interest rate for purposes of calculating Complainants’ damages. It explained that the difference in the amount of Complainants’ interest payments is the essence of the predatory impact of these loans. It also noted Com­plainants will have these obligations for the life of the loans, which for most Com­plainants is 30 years.

Respondents contend there are several problems with the Commission’s damage calculation. We agree.

First, the time frame for the interest rate calculation is unclear. The loans in question were made between 1998 and 2000. Complainants’ second expert testi­fied a Department of Housing and Urban Development publication lists the national average interest rates by year. R.R. at 958a.23 However, the Commission did not establish the applicable interest rate at the time Complainants signed their loan docu­ments. In fact, the Commission does not indicate the time period the 5% prevailing interest rate was in effect.

Second, the Commission did not take into account Complainants’ credit ratings. The Commission did not determine wheth­er Complainants had prime credit or sub-­prime credit. Complainants’ second ex­pert testified a non-predatory sub-prime loan to an individual with an enhanced credit risk will be about two to three per­centage points higher than a loan to an individual qualifying for prime credit. R.R. at 940a. The Commission did not take this fact into account in calculating the difference between Complainants’ predatory interest rates and the 5% pre­vailing interest rate. In short, substantial evidence does not support a finding that a 5% interest rate was realistically available to Complainants.

For these reasons, we vacate this com­ponent of the Commission’s damage award. However, we agree that Com­plainants are entitled to recover this dam­age component. Therefore, we remand for a recalculation of these damages based upon (1) an individual assessment of whether Complainants were entitled to prime credit or sub-prime credit, and (2) an accurate assessment of damages based on the difference between Complainants’ loans’ actual interest rates and the interest rates realistically available to them at the times of the loans. If necessary, the Com­mission may take such additional evidence as needed to support its recalculation.

B. Humiliation and Embarrassment

Respondents also contend the award for embarrassment and humiliation exceeded the Commission’s authority un­der the Act. We disagree.

In Allison v. Pennsylvania Human Rels. Comm’n, 716 A.2d 689 (Pa.­Cmwlth.1998), this Court approved an award of $8,000.00 in compensatory dam­ages for humiliation suffered as a result of housing discrimination in violation of Sec­tion 5(h)(1) of the Act, 43 P.S. § 955(h)(1). In determining whether the evidence of emotional distress is sufficient to support an award, we look at both the direct evi­dence of emotional distress and the cir­cumstances of the act that allegedly caused the distress. United States v. Balistrieri 981 F.2d 916 (7th Cir.1992).

Here, Complainants’ testified regarding the emotional distress suffered as a result of their dealings with Broker. Taylor tes­tified she no longer trusts anyone and does not socialize anymore. She further stated she frequently cries and suffers from anxi­ety-related sleep and appetite distur­bances. All of these difficulties resulted from her dealing with Broker. Comm’n Dec. at 47-48. The Commission awarded her $25,000.00. Id.

Poindexter also testified she suffers from depression as a result of her dealings with Broker. Her self-esteem was shat­tered and she relives the experience with every payment. Poindexter further stated she suffers from headaches and sleepless­ness. She feels like she was stabbed in the back by people she trusted. Comm’n Dec. at 48. The Commission awarded Po­indexter $15,000.00. Id.

The Commission reviewed each of the similarly situated Complainants’ testimony regarding the emotional and physical dis­tress they suffered as a result of their experiences with Broker and awarded each of them damages for humiliation and em­barrassment. See Comm’n Dec. at 48-52.

Given the direct evidence of emotional distress as well as the circumstances of fraud, deceit, and betrayal of trust, we conclude the awards for embarrassment and humiliation were within the Commis­sion’s statutory authority.

Respondents also contend the Commission’s award violated their consti­tutional due process rights by awarding damages not only to Complainants Taylor and Poindexter, but to each of the similar­ly situated persons.24 We disagree.

Relief under Section 9 of the Act, 43 P.S. § 959, when granted, is class relief. Pennsylvania Human Rels. Comm’n v. Freeport Area Sch. Dist., 467 Pa. 522, 359 A.2d 724 (1976). There, the Court held the Commission “may order affirmative relief for persons other than the named [complainant] when (1) the complainant al­leges that such other persons have been affected by the alleged discriminatory practice and (2) such other persons enti­tled to relief may be described with speci­ficity.” Id. at 530, 359 A.2d at 728. The specificity requirement may be met by supplying the Commission with the names of other persons affected by the alleged discriminatory action. Id.

“Whenever a person seeks relief for un­named persons, other than a cease and desist order, the complaint shall include an allegation to the effect that the complaint is made on behalf of other persons who have been affected by the alleged unlawful discriminatory practice.” 16 Pa.Code § 42.36(a). Here, Paragraph No. 31 of Taylor’s amended complaint stated her al­legations of discrimination against Broker are made on behalf of herself and “all other persons who have been affected by the aforementioned discriminatory prac­tices.” R.R. at 674a. Paragraph 24 of Poindexter’s complaint contains similar language. R.R. at 734a.

Further, Investigator testified Broker denied his request for documents relating to other persons affected by Broker’s dis­criminatory practices. R.R. at 520-21a. This Court entered an order directing Bro­ker to produce such documents. R.R. at 730a. When Broker produced these docu­ments, the Commission was able to identi­fy with specificity the eight similarly situ­ated persons in this matter.

Respondents were aware Complainants sought relief for similarly persons. Re­spondents were also aware of the names of these persons. Respondents’ due process rights were not violated by the Commis­sion’s award of damages to the eight simi­larly situated persons. Freeport Area Sch. Dist.

C. Civil Penalty

Respondents next contend the Commission erred by awarding a civil pen­alty in favor of each Complainant.

The Commission did not award a sepa­rate civil penalty for each Complainant. Paragraph 3 of the Commission’s final or­der directs that Respondents, “jointly and severally, shall pay a civil penalty to the Commonwealth of Pennsylvania in the amount of $25,000.” R.R. at 170a (empha­sis added).

Section 9(f)(2) of the Act, 43 P.S. § 959(f)(2), authorizes the Commission to assess a civil penalty against recidivist re­spondents in a case of housing discrimina­tion filed under Section 5(h). Subsection (f)(2)(h) permits a penalty in the maximum amount of $25,000.00 “if the respondent has been adjudged to have committed one other discriminatory practice during the five-year period ending on the date of [the Commission’s order].” 43 P.S. § 959(f)(2)(h).

In assessing the $25,000.00 penalty, the Commission noted it considered five fac­tors: (1) the nature of the violation, (2) the degree of culpability, (3) Respondents’ fi­nancial resources, (4) the goal of deter­rence and (5) other matters as justice may require. Comm’n Dec. at 52.

The Commission found Respondents’ discriminatory practices were “particularly heinous” because they involved fraud, de­ceit and the betrayal of trust. Id. The Commission further found Respondents had substantial financial resources. The Commission noted its strong interest in deterring Respondents’ discriminatory practices. Id. at 53, 529 A.2d 571. It further determined Respondents commit­ted at least two discriminatory actions dur­ing the past five years, one each against Taylor and Poindexter. Id. The Commis­sion’s civil penalty award is therefore in accord with applicable law.

V. Conclusion

For the foregoing reasons, the compo­nent of the Commission’s award of actual damages based on the difference between Complainants’ predatory interest rate and a 5% prevailing mortgage interest rate is vacated, and this case is remanded for further proceedings consistent with this opinion. In all other respects, the Com­mission’s order is affirmed.

ORDER

AND NOW, this 13th day of January, 2006, the order of the Pennsylvania Hu­man Relations Commission in the above-­captioned matters is AFFIRMED in part and VACATED and REMANDED in part.

The order is VACATED to the extent it awarded damages based on the difference between Complainants’ predatory interest rates and a 5% prevailing interest rate. This matter is REMANDED for a recalcu­lation of that damage component consis­tent with the foregoing opinion. If neces­sary, the Commission may take additional evidence and make additional findings and conclusions in support of its recalculation.

In all other respects, the Commission’s order is AFFIRMED.

Jurisdiction is relinquished.

1

Act of October 27, 1955, P.L. 744, as amended, 43 P.S. §§ 851-963.

2

In United Cos. Corp. v. Sargeant, 20 F.Supp.2d 192 (D.Mass.1998), the United States District Court defined "redlining" as

the practice of denying the extension of credit to specific geographic areas due to the income, race or ethnicity of its resi­dents. The term was derived from the actu­al practice of drawing a red line around certain areas in which credit would be de­nied. Reverse redlining is the practice of extending credit on unfair terms to those same communities.

Id. at 203, n. 5.

3

Section 5(h)(4) of the Act, 43 P.S. § 955(h)(4), makes it unlawful to

[d]iscriminate against any person in the terms or conditions of any loan of money, whether or not secured by a mortgage or otherwise for the acquisition, construction, rehabilitation, repair or maintenance of housing accommodation or commercial property because of ... race...."

4

Section 5(h)(8)(i) of the Act, 43 P.S. § 955(h)(8)(i), makes it an unlawful to

[d]iscriminate in real estate related transac­tions, as described by and subject to the following: (i)[i]t shall be unlawful for any person or other entity whose business in­cludes engaging in real estate-related trans­actions to discriminate against any person in making available such a transaction or in the terms [or] conditions of such a transac­tion because of race...."

5

Complainants are Lucrecia Taylor and Lynn Poindexter. Similarly situated persons are Hawthorne Brunson, Venice Jackson, Jacqu­line Slaughter, Emma Jacobs, Yvonne Haw­kins, Regina Miles, Alfred Watts and Sophie Norwood.

6

The Commission awarded Complainants ac­tual damages in these amounts: Taylor, $45,770.68; Poindexter, $24,447.80; Brunson, $63,996.34; Jackson, $74,875.74; Slaughter, $29,685.46; Jacobs, $47,549.62; Hawkins, $41,952.72; Miles, $101,562.81; Watts, $116,298.87; and Norwood, $154,209.11. Reproduced Record (R.R.) at 57a.

7

The Commission awarded Complainants damages for embarrassment and humiliation in the following amounts: Taylor, $25,000.00; Poindexter, $15,000.00; Brunson, $15,000.00; Jackson, $20,000.00; Slaughter, $20,000.00; Jacobs, $20,000.00; Hawkins, $20,000.00; Miles, $10,000.00; Watts, $20,000.00; and Norwood, $20,000.00. R.R. at 58a.

8

In particular, Broker must accurately rec­ord the following data for each transaction: (a) the dollar amount and percentage of the broker's fee charged; (b) any other fees paid; (c) the amount and type of the loan; and (d) the employee involved in the transaction. Broker shall submit this information to the Commission on a bi-annual basis for three years.

9

The Commission’s staff, which includes Commission counsel, is responsible for find­ing probable cause and prosecuting com­plaints filed under the Act. George Clay Steam Fire Engine and Hose Co. v. Pennsylvania Human Rels. Comm’n, 162 Pa.Cmwlth. 468, 639 A.2d 893 (1994). Here, Commission Counsel prosecuted this case on behalf of Complain­ants. The Commissioners function as an im­partial tribunal and have no prosecutorial role. Id.

10

In Honorable v. Easy Life Real Estate Sys., 100 F.Supp.2d 885 (N.D.Ill.2000), the Court recognized the FHA prohibits discriminatory practices such as reverse redlining, mortgage redlining, insurance redlining, racial steering and other practices directly affecting the availability of housing to minorities.

11

Our review of a Commission decision is limited to determining whether the Commis­sion’s findings of fact were supported by sub­stantial evidence, whether an error of law was committed or whether constitutional rights were violated. Parks v. Pennsylvania Human Rels. Comm’n, 848 A.2d 204 (Pa.Cmwlth. 2004). Where the Commission's findings are supported by substantial evidence and in ac­cordance with the law, they may not be dis­turbed. Pennsylvania Human Rels. Comm'n v. Johnstown Redevelopment Auth., 527 Pa. 71, 588 A.2d 497 (1991).

12

The federal courts have also determined reverse redlining violates Section 1982 of the Civil Rights Act, 42 U.S.C. § 1982 (all citizens have the same right to purchase lease sell hold and convey real and personal property). Hargraves. In 1994, in order to combat pred­atory lending, the U.S. Congress enacted the Home Ownership and Equity Protection Act, 15 U.S.C. §§ 1602(aa) and 1639.

13

Section 5(h)(4), as the Commission notes, provides broader coverage than Section 3605 of the FHA. It prohibits discrimination in the terms and conditions of loans related to both residential and commercial properties.

14

"Substantial evidence is such relevant evi­dence as a reasonable mind might accept as adequate to support a conclusion.” Assoc. Rubber, Inc. v. Pennsylvania Human Rels. Comm’n, 872 A.2d 864, 870 n. 9 (Pa.Cmwlth.­2005). "Further, substantial evidence sup­porting a finding of racial discrimination may be circumstantial and based on inferences.” Consumers Motor Mart v. Pennsylvania Human Rels. Comm’n, 108 Pa.Cmwlth. 59, 529 A.2d 571, 574 (1987).

15

Complainants' first expert is a real estate broker/appraiser and certified fraud examin­er. She created and served as chairperson of the Philadelphia Predatory Lending Task Force. She has testified numerous times in federal court as an expert on predatory lend­ing.

16

Complainants’ second expert worked for the United States Department of Housing and Urban Development (HUD) as Director of Fair Housing for the Middle Atlantic Region, which included Pennsylvania, Delaware and Maryland. At HUD, Complainants' second expert participated in several predatory lend­ing investigations of corporate entities.

17

In Taylor v. Flagstar Bank, FSB, 181 F.R.D. 509 (M.D.Ala.1998), the United States District Court defined "yield spread premi­ums” as:

payments made by a mortgage lender to a mortgage broker on an "above par” loan brought to the lender by the broker. To be "above par” is to be above the going rate, to be above the lowest rate that a lender will offer without charging "discount points." In crude terms, therefore, the yield spread premium is (allegedly) simply a payment made by the lender to the broker in return for the broker having brought the lender a high, interest loan.

181 F.R.D. at 511.

18

Act of December 16, 1992, P.L. 1144, as amended, 73 P.S. §§ 2181-2192. Section 8(c)(2) of the CSA provides "[n]o loan broker shall ... [m]ake or use any false or mislead­ing representations or omit any material fact in the offer or sale of the services of a loan broker, or engage directly or indirectly in any act that operates or would operate as fraud or deception upon any person in connection with the offer or sale of the services of a loan broker..." 73 P.S. § 2188(c)(2).

19

Act of December 17, 1968, P.L. 1224, as amended, 73 P.S. §§ 201-1—201-9.3.

20

Taylor was charged $440.00 for a broker fee and $410.00 for a yield spread premium. R.R. at 682. Taylor testified she was unaware her loan contained a yield spread premium or that it would raise her interest rate. R.R at 381a. Her loan also included a $370.31 charge for a homeowner's insurance policy even though she was covered by another poli­cy. R.R. at 682a. Taylor was unaware of this charge and stated her house was already in­sured. R.R. at 371a. Taylor’s settlement sheet also reflected charges for debts she did not owe at the time of closing, including a $83.81 water bill and two ambulance bills ($477.50 and $250.00). R.R. at 682a. Though Broker told Taylor this money would be returned to her, she never received it. R.R. at 373-74a.

21

In addition to the higher interest rate, the Commission found Broker’s charges for the homeowners’ policy and broker fees to be predatory and unfair. It also found Broker’s refusal to either inform Taylor of her rescis­sion rights or permit her to cancel her loan within the three-day rescission period was a predatory practice intended to process the loan transaction despite Taylor’s desire to cancel it.

22

Respondents further contend their due process rights were violated because Com­plainants were awarded damages for past losses despite their failure to specifically plead items of special damages. Pursuant to Pa. R.C.P. No. 1019(f), a complaint must spe­cifically aver items of special damages. How­ever, Section 9(e) of the Act provides "[t]he Commission shall not be bound by the strict rules of evidence prevailing in courts of law or equity.” 43 P.S. § 959(e). In addition, "[t]he Pennsylvania Rules of Civil Procedure ... [including Rule 1019(f)], do not apply to proceedings before administrative agencies and commissions.” Freeport Area Sch. Dist. v. Com., Human Rels. Comm’n, 18 Pa.­Cmwlth. 400, 335 A.2d 873, 879 (1975), aff'd as modified, 467 Pa. 522, 359 A.2d 724 (1976).

Neither the Commission's rules, found at 16 Pa.Code § 42, nor the General Rules of Ad­ministrative Practice and Procedure, found at 1 Pa.Code §§ 31-35, require Complainants to specifically plead items of special damages to be entitled to an award of actual damages. A complaint filed under the Act may be amend­ed at any time, by leave of the Commission, to cure technical defects and omissions. 16 Pa. Code § 42.35.

Moreover, Respondents do not explain how they were prejudiced by the absence of spe­cial damage calculations in the complaints. Absence of prejudice is especially relevant here, where most of the information for the damage calculations was present in Respon­dents’ records.

23

For example, he testified the average rate for a 30-year fixed Federal Housing Adminis­tration loan in 1999 was 7.5% with half a point. The average conventional rate in 1999 was 7.44% with one point.

24

Reginald McGlawn, individually, asserts the Commission violated his constitutional due process rights by adding him as a named respondent at the close of the Panel hearing. This issue, although raised in Reginald McGlawn’s petition for review, was not ad­dressed in Respondents' brief. Generally, is­sues not briefed are waived. See Tyler v. Unemployment Comp. Bd. of Review, 139 Pa.­Cmwlth. 598, 591 A.2d 1164 (1991).

Moreover, this contention lacks merit. At the hearing, Reginald McGlawn testified that Broker’s 2000 Annual Report, filed with the Department of Banking, failed to disclose the loans arranged for Complainants Taylor, Hawkins, Watts, Slaughter and Miles. He also stated he collected broker fees in these transactions which were not reported in Bro­ker’s 2000 Annual Report. Reginald McGlawn further testified Broker’s 2000-02 Annual Reports failed to disclose Broker was a defendant in at least five federal actions. Four of these cases involved allegations Bro­ker violated the Truth-In-Lending Act, 15 U.S.C. §§ 1610-1693r. In the other action, In re Barker, the United States Bankruptcy Court held Broker’s conduct in a mortgage loan transaction constituted common-law fraud and violated several Pennsylvania con­sumer protection statutes.

In view of Reginald McGlawn’s admissions, Complainants asserted that Broker’s corpo­rate entity should be disregarded. Thus, Complainants sought to amend their com­plaints to add Reginald McGlawn as a named Respondent. The motion was granted.

Section 9(e) of the Act, 43 P.S. § 959(e), provides:

The Commission or the complainant shall have the power reasonably and fairly to amend any complaint, and the respondent shall have like power to amend his answer.

16 Pa.Code § 42.35 provides:

(a) The complaint or answer maybe amend­ed at any time prior to approval of a hear­ing on the merits and thereafter by leave of the Commissioners, hearing commissioners or permanent hearing examiner.
(b) The complaint may be amended to cure technical defects or omissions, to clarify or amplify allegations made therein, or to add material allegations which are related to or grow out of the subject matter of the original complaint, and these amendments shall re­late back to the original filing date of the complaint. (Emphasis added.)

16 Pa.Code § 42.35(a) gives the Commission discretion to permit amendments to a com­plaint at any time during the proceedings. Due process requirements are met when (1) respondent is informed with reasonable cer­tainty of the nature of the charges against him, (2) respondent has timely notice and an opportunity to answer these charges and de­fend against attempted proof of them and (3) the proceedings are conducted in a fair and impartial manner. Speare v. Pennsylvania Human Rels. Comm’n, 16 Pa.Cmwlth. 502, 328 A.2d 570 (1974).

In some cases, we might question a deci­sion to permit an amendment during hearings adding a principal as a named respondent. Here, however, we discern no error for sever­al reasons. First, Reginald McGlawn was actively involved throughout the litigation. Also, he was personally involved in many of the transactions. Thus, there is no reason to conclude he was unprepared to defend or that the timing of the amendment caused preju­dice. Second, his admissions were the basis for the motion to amend.

10.4.2 Mcglawn v. Penn. Human Relations Commission: Notes + Questions 10.4.2 Mcglawn v. Penn. Human Relations Commission: Notes + Questions

1. Some commentary on unaffordable mortgages asks “why would borrowers take out loans that were doomed to foreclosure?” Does the opinion offer any insights into this question? See Oren Bar-Gill, The Law, Economics and Psychology of Subprime Mortgage Contracts, 94 Cornell L. Rev. 1073 (2009); see also Jeff Sovern, Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers, 71 Ohio St. L.J. 763 (2010) (arguing that the explanation of key terms, even in non-predatory loans, was simply insufficient for ordinary borrowers to understand). Here’s another question: “why would lenders give out loans that were doomed to foreclosure?” As it turns out, given the collapse of the housing market, most foreclosures do not return enough to the lender to pay back the initial loan.

2. Resistance to helping homeowners at risk of foreclosure often focuses on the problem of “moral hazard” – if people weren’t forced either to pay back the loans on the terms on which those loans were granted or to lose their homes, some argued, that would encourage irresponsible borrowing. More broadly: when we seek to hold one party responsible for harm, we often make another party less responsible. As a result of the subprime mortgage collapse, many banks failed or were bailed out by the federal government. However, homeowners generally were not bailed out.

3. For some larger context, consider this excerpt from Ta-Nehisi Coates’ The Case for Reparations, Atlantic, May 2014:

In 2010, Jacob S. Rugh, then a doctoral candidate at Princeton, and the sociologist Douglas S. Massey published a study of the recent foreclosure crisis. Among its drivers, they found an old foe: segregation. Black home buyers – even after controlling for factors like creditworthiness – were still more likely than white home buyers to be steered toward subprime loans. Decades of racist housing policies by the American government, along with decades of racist housing practices by American businesses, had conspired to concentrate African Americans in the same neighborhoods. … [T]hese neighborhoods were filled with people who had been cut off from mainstream financial institutions. When subprime lenders went looking for prey, they found black people waiting like ducks in a pen.

“High levels of segregation create a natural market for subprime lending,” Rugh and Massey write, “and cause riskier mortgages, and thus foreclosures, to accumulate disproportionately in racially segregated cities’ minority neighborhoods.”

Plunder in the past made plunder in the present efficient. The banks of America understood this. In 2005, Wells Fargo promoted a series of Wealth Building Strategies seminars. Dubbing itself “the nation’s leading originator of home loans to ethnic minority customers,” the bank enrolled black public figures in an ostensible effort to educate blacks on building “generational wealth.” But the “wealth building” seminars were a front for wealth theft. In 2010, the Justice Department filed a discrimination suit against Wells Fargo alleging that the bank had shunted blacks into predatory loans regardless of their creditworthiness. This was not magic or coincidence or misfortune. It was racism reifying itself. According to The New York Times, affidavits found loan officers referring to their black customers as “mud people” and to their subprime products as “ghetto loans.”

“We just went right after them,” Beth Jacobson, a former Wells Fargo loan officer, told The Times. “Wells Fargo mortgage had an emerging-markets unit that specifically targeted black churches because it figured church leaders had a lot of influence and could convince congregants to take out subprime loans.”

In 2011, Bank of America agreed to pay $355 million to settle charges of discrimination against its Countrywide unit. The following year, Wells Fargo settled its discrimination suit for more than $175 million. But the damage had been done. In 2009, half the properties in Baltimore whose owners had been granted loans by Wells Fargo between 2005 and 2008 were vacant; 71 percent of these properties were in predominantly black neighborhoods.

 4. African-American and other minority borrowers were disproportionately steered to expensive subprime loans even though they qualified for cheaper conventional loans – high-income African American borrowers were six times as likely to get subprime loans as white borrowers with similar incomes. However, it is not the case, as is sometimes asserted, that unwise loans to African-Americans driven by federal mandates for equality in lending were responsible for the crash. In fact, institutions subject to federal fair lending rules made loans which were less likely to default than loans from institutions that were not subject to such rules. David Min, Faulty Conclusions Based on Shoddy Foundations (Feb. 2011) National Consumer Law Center, Why Responsible Mortgage Lending Is a Fair Housing Issue (Feb. 2012) (https://www.nclc.org/images/pdf/credit_discrimination/fair-housing-brief.pdf).

5. In recent years, legislatures and regulators have attempted to regulate mortgage lending to stamp out the worst origination abuses, such as the yield spread premium. Much regulation focuses on the concept of “suitability”: loans that the borrowers are likely to be able to repay, rather than loans based merely on the market value of the house. Loans based on the value of property alone, without sufficient attention to borrower characteristics, encouraged lenders to believe that they could profit even in case of a default, or sometimes that they could profit even more from default than from payment. In 2014, the Consumer Financial Protection Bureau (CFPB) issued rules on high-cost loans and homeownership counseling, implementing the Home Ownership and Equity Protections Act and subsequent additions. (http://www.consumerfinance.gov/regulations/high-cost-mortgage-and-homeownership-counseling-amendments-to-regulation-z-and-homeownership-counseling-amendments-to-regulation-x/) Under these rules, loans considered “high cost” are subject to a number of limitations; high cost loans are those that specify high interest rates, high fees rolled into the mortgage amount (as in McGlawn), or prepayment penalties that last more than 36 months or exceed more than 2% of the prepaid amount. Under the new rules, for high-cost loans, balloon payments are generally banned, with limited exceptions. Creditors are prohibited from charging prepayment penalties and financing points and fees. Late fees are restricted to four percent of the payment that is past due, and certain other fees are limited or banned. Before a lender gives a high-cost mortgage, they must confirm with a federally approved counselor that the borrower has received counseling on the advisability of the mortgage.

6. Whether or not borrowers are seeking high-cost loans, lenders are now subject to a rule requiring them to assess a borrower’s ability to repay, though that rule does not cover home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans. The lender must not use a “teaser” or introductory interest rate to calculate the borrower’s ability to repay; for adjustable-rate mortgages, it must consider ability to repay under the highest possible rate allowed by the mortgage. Certain so-called “plain vanilla” mortgages – fixed-rate, fully amortized (with no balloon payments) loans for no longer than 30 years – are presumptively acceptable under the regulations. In addition, lenders have to make counseling information available to all borrowers. Although loan information remains complex, the CFPB has tested different versions of mandatory disclosures, trying to find the most understandable ways of communicating the costs and risks of mortgages to non-lawyers. See CFPB Finalizes “Know Before You Owe” Mortgage Forms, Nov. 20, 2013. Take a look at the forms. (http://www.consumerfinance.gov/newsroom/cfpb-finalizes-know-before-you-owe-mortgage-forms/) Now that you have read this far, can you understand them?

10.5 D. The Mortgage Crisis 10.5 D. The Mortgage Crisis

Predatory lending was a significant contributor to the housing crash of 2007-2008. Many people, whether or not they accept this proposition, believe that poor people were taking out the mortgages at issue. However, middle and high income borrowers took on more mortgage debt than poor people, and also contributed most significantly to the increase in defaults after 2007. Manuel Adelino, Antoinette Schoar, & Felipe Severino, Loan Originations and Defaults in the Mortgage Crisis: Further Evidence (NBER Working Paper July 2015).

When home prices started to drop and defaults to accumulate, the mortgage-backed securities that had previously seemed so attractive to investors began to spread the damage widely, as payments dried up. The economic impact was multiplied by a variety of sophisticated financial instruments that, in the end, amounted to little more than bets that U.S. housing prices would never drop. When they did drop, the world economy did as well.

From 1942 to 2005, about 4% of mortgages were delinquent at any given time, and about 1% were in foreclosure. At the peak of the crisis in 2010, up to 15% of mortgages were delinquent, and 4.6% were in foreclosure. Foreclosures Public Data Summary Jan 2015. As of late 2014, less than 8% of mortgages were delinquent and more than 3% were in the foreclosure process, or about one million homes. The good news is that most of the still-troubled loans were originated before 2007, and new foreclosures are now less one-half of one percent of all mortgages. Still, between 2007 and 2015, about six million homes were sold at foreclosure sales. This foreclosure crisis has already outlasted the foreclosure crisis of the Great Depression.

Even homeowners who kept up with their payments often found themselves “underwater”: owing more than their homes were worth. Nearly one-third of mortgaged homes were underwater in 2012, though the number dropped to 15.4% in early 2015. Homes with lower value were more likely to be underwater, contributing to income inequality. Michelle Jamrisko, This Is the Housing Chart That Keeps One Economist Up at Night, BloombergBusiness, Jun. 12, 2015. Unsurprisingly, underwater homeowners are substantially more likely to default on their mortgages than homeowners with equity, no matter the size of their monthly payments or their interest rates. Moreover, underwater homeowners who don’t default find it very difficult to sell their homes, and are therefore constrained in where they can take jobs. This is a problem because job mobility historically has been a major contributor to improved economic prospects in the U.S.

Even when “strategic default” might be in a homeowner’s best interest – where the homeowner is deeply underwater and lives in a non-recourse state, and alternative housing is readily available – Americans remain relatively unlikely to default if they have any alternatives. Most borrowers will run up credit card bills, drain retirement savings, and put off medical care to avoid default for as long as possible. Tess Wilkinson-Ryan, Breaching the Mortgage Contract: The Behavioral Economics of Strategic Default, 64 VAND. L. REV. 1547 (2011) (reporting that even though defaulting on a mortgage may be in an individual’s financial self-interest, feelings of moral obligation may prevent or delay default). Under what circumstances might you counsel a client to engage in a strategic default? Default will have consequences for the defaulter’s credit score and therefore possibly her ability to get other housing or even a job, depending on her location and her field of work. But then again, draining her retirement account, possibly only to postpone and not avoid foreclosure, will have negative repercussions as well.

10.6 E. Foreclosure Abuses 10.6 E. Foreclosure Abuses

One ongoing problem is that the complicated structure of post-securitization mortgage lending left responsibility for problems diffuse, and even put incentives in precisely the wrong places. Because the trusts that own the mortgages and package them into mortgage-backed securities are passive legal vehicles with no employees or activities of their own, they contracted with mortgage servicers, often divisions of the same banks that initially sponsored the mortgage originators. The basic job is straightforward: servicers collect payments from homeowners and pass them along to the trust that represents the investors. Servicers are also responsible for handling foreclosures. In exchange, servicers typically get a small percentage of the value of the outstanding loans each year in fees. For a $200,000 loan to a borrower with good credit, a servicer might collect about $50 per month, with income decreasing as the balance of the loan drops. Servicers also make money from the “float” – interest earned during the short time the servicer holds the loan payment.

It is standard for servicers to be contractually required to keep paying the trust every month, even when there’s a default, until there’s a foreclosure. This would seem a strong incentive to do everything possible to help homeowners avoid a default, which is usually what investors want. The holder of a mortgage loses an average $60,000 on a foreclosure, according to figures announced by the federal government.

But the systems weren’t set up that way. Among other things, servicers hired very few people with the ability to work with borrowers to find an affordable repayment; they were largely set up to take in money and pass it on. When the crisis hit, they were overwhelmed with troubled loans. Further, at the beginning of the foreclosure crisis, servicers often took the position that they were contractually prohibited from negotiating with borrowers by their agreements with the trusts, which allegedly did not allow them to reduce mortgagors’ nominal obligations without the consent of the trust. (Recall that the trusts are not functioning companies with humans making day-to-day decisions, so the servicers’ position meant that no one could agree to a renegotiation.)

Separately, servicers had incentives that conflicted with borrowers’ and investors’ interests. Servicers can charge fees for late payments, title searches, property upkeep, inspections, appraisals and legal fees that can total hundreds of dollars each month and can all be charged against a homeowner’s account. Servicers have first dibs on recouping those fees when a foreclosed home is sold, meaning they usually collect unless the home is essentially worthless. Moreover, when homeowners tried to catch up or make partial payments as they sought a renegotiated loan, servicers applied their payments first to the servicers’ own fees rather than to the underlying loan. These fees can be lucrative. In 2010, major servicer Ocwen reported $32.8 million in revenue from late fees alone, representing 9 percent of its total revenue. Professor Levitin, who has done extensive work on the legal and business structures resulting from securitization, concluded that a loan kept in default for a year or two could prove more profitable to a servicer than a typical healthy, performing loan.

The following case involves a trustee rather than a typical servicer, but otherwise it provides a sense of the problems that can arise when participants in the mortgage transaction are indifferent to the welfare of mortgagors.

10.6.1 Klem v. Washington Mutual Bank 10.6.1 Klem v. Washington Mutual Bank

Washington Supreme Court
176 Wash. 2d 771
No. 87105-1
2013-02-28

En Banc.]

[No. 87105-1.

Dianne Klem, as Administrator, Petitioner, v. Washington Mutual Bank, Defendant, Quality Loan Service Corporation of Washington et al., Respondents.

Decided February 28, 2013.

Argued October 16, 2012.

Owens, Stephens, and González, JJ., and Bridgewater, J. Pro Tem., concur.

C. Johnson and J.M. Johnson, JJ., concur with Madsen, C.J.

Frederick P. Corbit (of Northwest Justice Project), for petitioner.

Edgar I. Hall (of Washington Debt Law PLLC); Kenneth W. Masters and Shelby R. Frost Lemmel (of Masters Law

Group PLLC); and Mary Stearns (of McCarthy & Holthus LLP), for respondents.

Robert W. Ferguson and James T. Sugarman on behalf of Attorney General of the State of Washington, amicus curiae.

Alan L. McNeil on behalf of University Legal Assistance, amicus curiae.

Katherine George and Stephen R. Crossland on behalf of Washington State Bar Association, amicus curiae.

Chambers, J.*

Dorothy Halstien, an aging woman suffering from dementia, owned a home worth somewhere between $235,000 and $320,000. At about the time she developed dementia, she owed approximately $75,000 to Washington Mutual Bank (WaMu), secured by a deed of trust on her home. Because of the cost of her care, her guardian did not have the funds to pay her mortgage and Quality Loan Service Corporation, acting as the trustee of the deed of trust, foreclosed on her home. On the first day it could, Quality sold her home for $83,087.67, one dollar more than she owed, including fees and costs. A notary, employed by Quality, had falsely notarized the notice of sale by predating the notary acknowledgment. This falsification permitted the sale to take place earlier than it could have had the notice of sale been dated when it was actually signed.

Before the foreclosure sale, Halstien’s court appointed guardian secured a signed purchase and sale agreement from a buyer willing to pay $235,000 for the house. Unfor­tunately, there was not enough time before the scheduled foreclosure sale to close the sale with that buyer. In Wash­ington, the trustee has the discretion to postpone foreclo­sure sales. This trustee declined to consider exercising that discretion and instead deferred the decision to the lender, WaMu. Despite numerous requests by the guardian, WaMu did not postpone the sale. A jury found that the trustee was negligent; that the trustee’s acts or practices violated the Consumer Protection Act (CPA), chapter 19.86 RCW; and that the trustee breached its contractual obligations. The Court of Appeals reversed all but the negligence claim. We reverse the Court of Appeals in part and restore the award based upon the CPA. We award the guardian reasonable attorney fees and remand to the trial court to order appro­priate injunctive relief.

FACTS

The issues presented require a detailed discussion of the facts. In 1996, Halstien bought a house on Whidbey Island for $147,500. In 2004, she borrowed $73,000 from WaMu, secured by a deed of trust on her home. That loan was the only debt secured by the property, which otherwise Halstien owned free and clear. Unfortunately, by 2006, when Halstien was 74 years old, she developed dementia. At the time, Halstien’s daughter and her daughter’s boyfriend were living at the home with her.

Washington State’s Adult Protective Services became concerned that Halstien was a vulnerable adult being neglected at home. After an investigation, protective ser­vices petitioned the court for the appointment of a profes­sional guardian to protect Halstien. The court granted the petition, and Dianne Klem, executive director of Puget Sound Guardians, was appointed Halstien’s guardian in January 2007. Klem soon placed Halstien in the dementia unit of a skilled nursing facility in Snohomish County.

Halstien’s care cost between $3,000 and $6,000 a month. At the time, Halstien received about $1,444 a month in income from Social Security and a Teamsters pension. The State of Washington paid the balance of her care and is a creditor of her estate.

Halstien’s only significant asset was her Whidbey Island home, which at the time was assessed by the county at $257,804. WaMu also had an appraisal indicating the home was worth $320,000, nearly four times the value of the outstanding debt. Klem testified that if she had been able to sell the home, she could have improved Halstien’s quality of life considerably by providing additional services the State did not pay for.

Selling the home was neither quick nor easy. Even after Halstien was placed in a skilled care facility, her daughter still lived in the home (without paying rent), and both the daughter and her brother strongly opposed any sale. The record suggests Halstien’s children expected to inherit the home and, Klem testified, getting the daughter and her family to leave “was quite a battle.” Verbatim Report of Proceedings (VRP) (Jan. 13, 2010) at 94. Ulti­mately, Puget Sound Guardians prevailed, but before it could sell the home, it had to obtain court permission (complicated, apparently, by the considerable notice that had to be given to various state agencies and to family members and because some of those entitled to notice were difficult to find), remove abandoned animals and vehicles, and clean up the property.1

During this process Halstien became delinquent on her mortgage. Quality, identifying itself as “the agent for Washington Mutual,” posted a notice of default on Halstien’s home on or around October 25, 2007. Ex. 3, at 3. The notice demanded $1,372.20 to bring the note current. The record establishes that the guardianship did not have available funds to satisfy the demand.

A notice of trustee sale was executed shortly after­ward by Seth Ott for Quality. The notice was dated and, according to the notary jurat of “R. Tassle,” notarized on November 26, 2007. VRP (Jan. 13, 2010) at 89-90. However, the notice of sale was not actually signed that day. The sale was set for February 29, 2008.

This notice of sale was one of apparently many foreclosure documents that were falsely notarized by Qual­ity and its employees around that time. There was consid­erable evidence that falsifying notarizations was a common practice and one that Quality employees had been trained to do. While Quality employees steadfastly refused to specu­late under oath how or why this practice existed, the evidence suggests that documents were falsely dated and notarized to expedite foreclosures and thereby keep their clients, the lenders, beneficiaries, and other participants in the secondary market for mortgage debt happy with their work. Ott acknowledged on the stand that if the notice of sale had been correctly dated, the sale would not have taken place until at least one week later.

On January 10, 2008, Puget Sound Guardians asset manager David Greenfield called Ott in his capacity as trustee. Greenfield explained that Halstien was in a guard­ianship and that the guardianship intended to sell the property. Greenfield initially understood, incorrectly, that the trustee would postpone the sale if Puget Sound Guard­ians presented WaMu with a signed purchase and sale agreement by February 19, 2008. Puget Sound Guardians sought, and on January 31, 2008, received, court permission to hire a real estate agent to help sell the house.

Unknown to Greenfield, Quality, as trustee, had an agreement with WaMu that it would not delay a trustee’s sale except upon WaMu’s express direction. This agreement was articulated in a confidential “attorney expectation document” that was given to the jury. This confidential document outlines how foreclosures were to be done and billed. It specifically states, "Your office is not authorized to postpone a sale without authorization from Fidelity[2] or Washington Mutual.” Ex. 12, at 5. This agreement is, at least, in tension with Quality’s fiduciary duty to both sides and its duty to act impartially. Cox v. Helenius, 103 Wn.2d 383, 389, 693 P.2d 683 (1985) (citing George E. Osborne, Grant S. Nelson & Dale A. Whitman, Real Estate Finance Law § 7.21 (1979) (“[A] trustee of a deed of trust is a fiduciary for both the mortgagee and mortgagor and must act impar­tially between them.”)).3

Regardless of what Washington law expected or required of trustees, David Owen, Quality’s chief operations officer in San Diego, testified that Quality did what WaMu told it to do during foreclosures. Owen testified that there were two situations where Quality would postpone a sale without bank permission: if there was a bankruptcy or if the debt had been paid. Owen could not remember any time Quality had postponed a sale without the bank’s permission.

By February 19, 2008, Puget Sound Guardians had a signed purchase and sale agreement, with the closing date set for on or about March 28, 2008. This was almost a month after the scheduled foreclosure sale but well within the 120 day window a trustee has to hold the trustee’s sale under ROW 61.24.040(6). Quality referred the guardians to the bank “to find out the process for making this happen.” VRP (Jan. 14, 2010) at 127; Ex. 25. Klem testified Quality “told us on two occasions that they unequivocally could not assist us in that area, that only the bank could make the decision.” VRP (Jan. 14, 2010) at 131.

Puget Sound Guardians contacted WaMu, which instructed them to send copies of the guardianship docu­ments and a completed purchase and sale agreement. Over the next few days, WaMu instructed the guardians to send the same documents to WaMu offices in Seattle, Washing­ton, southern California, and Miami, Florida. Klem testified that Puget Sound Guardians called WaMu on “[m]any occasions” and that if the bank ever made a decision, it did not share what it was. VRP (Jan. 14, 2010) at 130-31. The guardian also faxed a copy of the purchase and sale agree­ment to various WaMu offices on February 19, 21, 26, 27, and 28. In all, the guardian contacted Quality or WaMu over 20 times in the effort to get the sale postponed. Simply put, Quality deferred to WaMu and WaMu was unresponsive.

Accordingly, the trustee’s sale was not delayed and took place on February 29, 2008. Quality, as trustee, sold the Halstien home to Randy and Gail Preston for $83,087.67, one dollar more than the amounts outstanding on the loan, plus fees and costs.4 The Prestons resold the house for $235,000 shortly afterward.

Klem later testified it was “shocking when we found out that [the home] had actually been sold for $83,000 .... Because we trusted that they would sell it for the value of the home.” VRP (Jan. 13,2010) at 103. In previous cases where a ward’s home had gone into foreclosure, Klem testified, either the trustee had postponed the sale to allow Puget Sound Guardians to sell the property or had sold the property for a reasonable price. Klem testified that if they had had just one more week, it was “very possible” that they could have closed the sale earlier. VRP (Jan. 14, 2010) at 131.

In April 2008, represented by the Northwest Justice Project, Puget Sound Guardians sued Quality for damages on a variety of theories, including negligence, breach of contract, and violation of the CPA. Later, with permission of the court, Quality’s California sister corporation was added as a defendant. Halstien died that December.

Quality defended itself vigorously on a variety of theories. Initially successfully, Quality argued that any cause of action based on the trustee’s duties was barred by the fact Klem had not sought an injunction to enjoin the sale. The record suggests that it would have been impos­sible for the guardianship to get a presale injunction due to the time frame, the need for court approval, and the lack of assets in the guardianship estate. While Judge Monica Benton dismissed some claims based on the failure of the estate to seek an injunction, she specifically found that the negligence, breach of contract, and CPA claims could go forward.

The case proceeded to a jury trial. The heart of the plaintiff’s case was the theory that Quality’s acts and practices of deferring to the lender and falsifying dates on notarized documents were unfair and deceptive and that the trustee was negligent in failing to delay the sale. David Leen, an expert on Washington’s deed of trust act, chapter 61.24 RCW, testified that it was common for trustees to postpone the sale to allow the debtors to pay off the default. He testified that under the facts of this case, the trustee “would absolutely have to continue the sale.” VRP (Jan. 14, 2010) at 245.

By contrast, Ott, representing Quality as trustee in this case, testified that he did not take into account whether the house was worth more than the debt when conducting foreclosures. When asked why, Ott responded, “My job was to process the foreclosure . . . according to the state statutes.” VRP (Jan. 19, 2010) at 348. When pressed, Ott explained that he counted the days, prepared the forms, saw they were filed, and did nothing more. He acknowl­edged that prior to 2009, he would sometimes incorrectly date documents. He testified that he had been trained to do that. He also testified that Quality, as trustee, would not delay trustee sales without the lender’s permission. And he testified that he had never actually read Washington’s deed of trust statutes.5

The jury found for the plaintiff on three claims: negligence, CPA, and breach of contract.6 On the negligence claim, it found that both sides were 50 percent at fault. The jury determined that the damages on all three claims were the same: $151,912.33 (the difference between the foreclo­sure sale price and $235,000.00).

Judge Barbara A. Mack entered judgment for the full $151,912.33 awarded by the jury. The judge concluded that the 50 percent reduction was only on the negligence claim. She also rejected Quality’s challenges, concluding that the jury’s verdicts on the CPA and breach of contract claims were “clearly supported by the evidence.” VRP (Feb. 4, 2010) at 34, 37-38. She awarded the plaintiff attorney fees on the CPA claim. She declined to issue an injunction against Quality, in part because she believed the threat of endless litigation was sufficient to prevent Quality from continuing its unfair or deceptive practices.

Quality brought a blunderbuss of challenges to the trial court’s decisions. Klem cross appealed Judge Mack’s decision not to enter an injunction. The Court of Appeals concluded Washington courts had jurisdiction, that the guardian’s failure to enjoin the sale did not apply to the damages claims, that the negligence verdict was sustain­able, but that the evidence was insufficient to uphold the breach of contract and CPA claims. Kiem v. Wash. Mut. Bank, noted at 165 Wn. App. 1015, 2011 WL 6382147, 2011 Wash. App. LEXIS 2819. It rejected the remaining argu­ments. Puget Sound Guardians sought, and we granted, review. We received amicus briefing in support of the plaintiff from the Washington State attorney general, the Washington State Bar Association, and University Legal Assistance, a public interest legal clinic at Gonzaga Univer­sity School of Law.

ANALYSIS

Most of the questions before us are questions of law. Our review of those is de novo. Udall v. T.D. Escrow Servs., Inc., 159 Wn.2d 903, 908, 154 P.3d 882 (2007) (citing Berrocal v. Fernandez, 155 Wn.2d 585, 590, 121 P.3d 82 (2005)). We review jury verdicts for substantial evidence, taking all inferences in favor of the verdict. See Indus. Indem. Co. of Nw., Inc. v. Kallevig, 114 Wn.2d 907, 915-16, 792 P.2d 520 (1990) (citing Boeing Co. v. Sierracin Corp., 108 Wn.2d 38, 67, 738 P.2d 665 (1987)).

I. CPA Claims

To prevail on a CPA action, the plaintiff must prove “(1) [an] unfair or deceptive act or practice; (2) occurring in trade or commerce; (3) public interest impact; (4) injury to plaintiff in his or her business or property; (5) causation.” Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 105 Wn.2d 778, 780, 719 P.2d 531 (1986). The plaintiff argues that both Quality’s historical practice of predating notarized foreclosure documents and Quality’s practice of deferring to the lender on whether to postpone most sales satisfies the first element of the CPA. Deciding whether the first element is satisfied requires us to exam­ine the role of the trustee in nonjudicial foreclosure actions. A deed of trust is a form of a mortgage, an age-old mecha­nism for securing a loan. 18 William B. Stoebuck & John W. Weaver, Washington Practice: Real Estate: Transactions § 17.1, at 253, § 20.1, at 403 (2d ed. 2004). In Washington, it is a statutorily blessed “three-party transaction in which land is conveyed by a borrower, the ‘grantor,’ to a ‘trustee,’ who holds title in trust for a lender, the ‘beneficiary,’ as security for credit or a loan the lender has given the borrower.” Id. at 260. If the deed of trust contains the power of sale, the trustee may usually foreclose the deed of trust and sell the property without judicial supervision. Id. at 260-61; RCW 61.24.020; RCW 61.12.090; RCW 7.28.230(1).

Quality successfully challenged the jury’s CPA ver­dict before the Court of Appeals. Primarily, it argued that the plaintiff had waived its claims by not seeking a presale injunction. The Court of Appeals, correctly, rejected that argument, and it is not renewed here.7 Quality also argued that if the court reached the merits of the CPA claim, it failed for three reasons. First, the falsely dated and nota­rized notice of sale caused Halstien no harm because she got her full (albeit minimum) statutory period to avoid foreclosure. Next, it argued that the predated notarized documents had no potential to harm anyone and, thus, the public interest element could not be met. Finally, it argued that deferring to the lender was not an unfair or deceptive practice as a matter of law.

A. Unfair or Deceptive Acts or Practices

The legislature has specifically stated that certain violations of the deed of trust act are unfair or deceptive acts or practices for purposes of the CPA. See RCW 61.24-­.135. At the time, the deed of trust act said:

Consumer protection act—Unfair or deceptive acts or practices.
It is an unfair or deceptive act or practice under the con­sumer protection act, chapter 19.86 RCW, for any person, acting alone or in concert with others, to offer, or offer to accept or accept from another, any consideration of any type not to bid, or to reduce a bid, at a sale of property conducted pursuant to a power of sale in a deed of trust. However, it is not an unfair or deceptive act or practice for any person, including a trustee, to state that a property subject to a recorded notice of trustee’s sale or subject to a sale conducted pursuant to this chapter is being sold in an “as-is” condition, or for the beneficiary to arrange to provide financing for a particular bidder or to reach any good faith agreement with the borrower, grantor, any guarantor, or any junior lienholder.

Former RCW 61.24.135 (1998). There is no allegation in this case that Quality’s conduct violates the provisions of RCW 61.24.135. Quality argues, and the Court of Appeals ap­pears to have agreed, that only an act or practice the legislature has declared to be “unfair” is unfair for purposes of the CPA.8 That is an incorrect reading of the act.

In Hangman Ridge, we observed:

The [first] two elements may be established by a showing that (1) an act or practice which has a capacity to deceive a substantial portion of the public (2) has occurred in the conduct of any trade or commerce. Alternatively, these two elements may be established by a showing that the alleged act consti­tutes a per se unfair trade practice. A per se unfair trade practice exists when a statute which has been declared by the Legislature to constitute an unfair or deceptive act in trade or commerce has been violated.

Hangman Ridge, 105 Wn.2d at 785-86. Several courts, including the Court of Appeals below, seem to have under­stood this language to establish the exclusive ways the first two elements of a CPA claim can be established. Klem, 2011 WL 6382147, at *8, 2011 Wash. App. LEXIS 2819, at *27-28; see also Henery v. Robinson, 67 Wn. App. 277, 289-90, 834 P.2d 1091 (1992) (rejecting plaintiffs’ CPA action against the seller of a defective mobile home because they could not show legislatively declared unfair or deceptive practice); Minnick v. Clearwire US, LLC, 683 F. Supp. 2d 1179, 1186 (W.D. Wash. 2010) (rejecting plaintiff’s CPA action against phone company for imposing an early termination fee on the ground that the legislature had not declared it “‘a per se unfair trade practice’” (internal quotation marks omit­ted) (quoting Saunders v. Lloyd’s of London, 113 Wn.2d 330, 344, 779 P.2d 249 (1989))).

But, as we noted in Saunders, “[b]ecause the act does not define ‘unfair’ or ‘deceptive,’ this court has allowed the definitions to evolve through a ‘gradual process of judicial inclusion and exclusion.’” Saunders, 113 Wn.2d at 344 (quoting State v. Reader’s Digest Ass’n, 81 Wn.2d 259, 275, 501 P.2d 290 (1972), modified in Hangman Ridge, 105 Wn.2d at 786). That “gradual process of judicial inclusion and exclusion” has continued to take place in cases that, properly, did not read Hangman Ridge as establishing the only ways the first two elements could be met. See, e.g., State v. Kaiser, 161 Wn. App. 705, 708, 721, 254 P.3d 850 (2011) (finding a company that “preyed on property owners” by “falsely offering to help save the property from foreclo­sure” had committed an unfair and deceptive act under the CPA without reference to any specific statutory provision); Magney v. Lincoln Mut. Sav. Bank, 34 Wn. App. 45, 57, 659 P.2d 537 (1983) (holding that an act is unfair under the CPA if it offends public policy as established “‘by statutes [or] the common law’” or is “‘unethical, oppressive, or unscru­pulous,’” among other things (quoting Fed. Trade Comm’n v. Sperry & Hutchinson Co., 405 U.S. 233, 244 n.5, 92 S. Ct. 898, 31 L. Ed. 2d 170 (1972))).

Any doubt should have been put to rest in Panag v. Farmers Ins. Co. of Wash., 166 Wn.2d 27, 48, 204 P.3d 885 (2009), where we discussed both per se and unregulated unfair or deceptive acts. The primary issue in Panag was whether a collection agency that used deceptive mailers could be liable to debtors. Id. at 34. We quoted with approval language from the congressional record on the federal consumer protection act:

“‘It is impossible to frame definitions which embrace all unfair practices. There is no limit to human inventiveness in this field. Even if all known unfair practices were specifically defined and prohibited, it would be at once necessary to begin over again. If Congress were to adopt the method of definition, it would undertake an endless task. It is also practically impossible to define unfair practices so that the definition will fit business of every sort in every part of this country.’”

Panag, 166 Wn.2d at 48 (quoting State v. Schwab, 103 Wn.2d 542, 558, 693 P.2d 108 (1985) (Dore, J., dissenting) (quoting H.R. Rep. No. 1142, at 19 (1914) (Conf. Rep.))).9 Given that there is “no limit to human inventiveness,” courts, as well as legislatures, must be able to determine whether an act or practice is unfair or deceptive to fulfill the protective purposes of the CPA.

To resolve any confusion, we hold that a claim under the Washington CPA may be predicated upon a per se violation of statute, an act or practice that has the capacity to deceive substantial portions of the public, or an unfair or deceptive act or practice not regulated by statute but in violation of public interest.

We note in passing that an act or practice can be unfair without being deceptive, and Klem and the Washing­ton State attorney general also argue it is sufficient that Quality’s conduct was unfair. They point out that the CPA itself declares “unfair acts or deceptive acts or practices” are sufficient to satisfy the acts or practices prong of a CPA action. The “or” between “unfair” and “deceptive” is disjunc­tive. Washington’s CPA is modeled after federal consumer protection laws and incorporates many of provisions of the federal acts. Panag, 166 Wn.2d at 48; Hangman Ridge, 105 Wn.2d at 783. The legislature declared the CPA was in­tended “to complement the body of federal law governing restraints of trade, unfair competition and unfair, deceptive, and fraudulent acts or practices in order to protect the public and foster fair and honest competition.” RCW 19.86-­.920. The Washington Legislature instructed courts to be guided by federal law in the area. Id. Although we have been guided by federal interpretations, Washington has developed its own jurisprudence regarding application of Washington’s CPA. Current federal law suggests a “practice is unfair [if it] causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consum­ers themselves and not outweighed by countervailing ben­efits.” 15 U.S.C. § 45(n).

Our statute clearly establishes that unfair acts or practices can be the basis for a CPA action. See RCW 19.86.020 (“[U]nfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.”), .090 (“Any person who is injured in his or her business or property by a violation of RCW 19.86.020 . . . may bring a civil action in superior court.”). This case does not give us an opportunity to explore in detail how to define unfair acts for the purposes of our CPA. That must wait for another day.

B. Failure To Exercise Independent Discretion To Post­pone Sale

Until the 1965 deed of trust act, there was no provi­sion in Washington law for a nonjudicial foreclosure. See Laws of 1965, ch. 74. In 1965, the legislature authorized nonjudicial foreclosure for the first time, subject to strict statutory requirements. Laws of 1965, ch. 74, codified as ch. 61.24 RCW. Because of the very nature of nonjudicial fore­closures, Washington courts have not shied away from pro­tecting the rights of the parties. The paradigmatic case, of course, is Cox, 103 Wn.2d 383, where this court found multiple, independent reasons to void a foreclosure. In Cox, the trustee was well aware of a pending legal action on the alleged debt, meaning one of the statutory prerequisites had not been met. Id. at 388. As we noted, though, “[e]ven if the statutory requisites to foreclosure had been satisfied and the Coxes had failed to properly restrain the sale, this trustee’s actions, along with the grossly inadequate purchase price, would result in a void sale.” Id. (citing Lovejoy v. Americus, 111 Wash. 571, 574, 191 P. 790 (1920)). In Cox, the trustee consistently favored the beneficiary, who was also his client, over the homeowner, to whom of course he had a fiduciary duty. The trustee did not tell the Coxes that their initial attempt to restrain the sale had failed, and sold the property for a grossly inadequate price. Id. at 388-89. We had no difficulty voiding the sale and quieting title in the home­owner. Id.; accord Walcker v Benson & McLaughlin, PS, 79 Wn. App. 739, 746, 904 P.2d 1176 (1995) (quieting title in homeowner after beneficiary sought to enforce a promissory note after the statute of limitations had run); Albice v. Premier Mortg. Servs. of Wash., Inc., 174 Wn.2d 560, 568, 276 P.3d 1277 (2012) (quieting title in original owner after a foreclosure after trustee exceeded his powers).

The power to sell another person’s property, often the family home itself, is a tremendous power to vest in anyone’s hands. Our legislature has allowed that power to be placed in the hands of a private trustee, rather than a state officer, but common law and equity requires that trustee to be evenhanded to both sides and to strictly follow the law. Albice, 174 Wri.2d at 568 (citing Udall, 159 Wn.2d at 915-16); Cox, 103 Wn.2d at 389 (citing Osborne, Nelson & Whitman, supra). This court has frequently emphasized that the deed of trust act “must be construed in favor of borrow­ers because of the relative ease with which lenders can forfeit borrowers’ interests and the lack of judicial oversight in conducting nonjudicial foreclosure sales.” Udall, 159 Wn.2d at 915-16 (citing Queen City Sav. & Loan Ass’n v. Mannhalt, 111 Wn.2d 503, 514, 760 P.2d 350 (1988) (Dore, J., dissenting)). We have invalidated trustee sales that do not comply with the act. See Albice, 174 Wn.2d at 575.

As a pragmatic matter, it is the lenders, the ser­vicers, and their affiliates who appoint trustees. Trustees have considerable financial incentive to keep those appoint­ing them happy and very little financial incentive to show the homeowners the same solicitude. Bain v. Metro. Mortg. Grp., Inc. 175 Wn.2d 83, 95-97,285 P.3d 34 (2012). However, despite these pragmatic considerations and incentives

under our statutory system, a trustee is not merely an agent for the lender or the lender’s successors. Trustees have obligations to all of the parties to the deed, including the homeowner. RCW 61.24.010(4) (“The trustee or successor trustee has a duty of good faith to the borrower, beneficiary, and grantor.”); Cox v. Helenius, 103 Wn.2d 383, 389, 693 P.2d 683 (1985) (“[A] trustee of a deed of trust is a fiduciary for both the mortgagee and mortgagor and must act impartially between them.” (citing George E. Osborne, Grant S. Nelson & Dale A. Whitman, Real Estate Finance Law § 7.21 (1979))).

Id. at 93. In a judicial foreclosure action, an impartial judge of the superior court acts as the trustee and the debtor has a one year redemption period. RCW 61.12.040; RCW 4.12.010; RCW 6.23.020(1). In a nonjudicial foreclosure, the trustee undertakes the role of the judge as an impartial third party who owes a duty to both parties to ensure that the rights of both the beneficiary and the debtor are protected. Cox, 103 Wn.2d at 389. While the legislature has established a mechanism for nonjudicial sales, neither due process nor equity will countenance a system that permits the theft of a person’s property by a lender or its beneficiary under the guise of a statutory nonjudicial foreclosure.10 An independent trustee who owes a duty to act in good faith to exercise a fiduciary duty to act impartially to fairly respect the interests of both the lender and the debtor is a mini­mum to satisfy the statute, the constitution, and equity, at the risk of having the sale voided, having title quieted in the original homeowner, and subjecting itself and the benefi­ciary to a CPA claim.11

The trustee argues that we “should not hold that it is unfair and deceptive either to honor a beneficiary’s instruc­tions not to postpone a sale without seeking its authoriza­tion, or to advise a grantor to contact her lender.”12 Suppl. Br. at 6. We note that Quality contends that it did not have a practice of deferring to the lender but merely followed its “legally-mandated respect for its Beneficiary’s instructions” and asserts that “[s]imply put, no competent Trustee would fail to respect its Beneficiary’s instructions not to postpone a sale without first seeking the Beneficiary’s permission.” Resp. to Amicus Att’y General at 2. We disagree. The record supports the conclusion that Quality abdicated its duty to act impartially toward both sides.

Again, the trustee in a nonjudicial foreclosure action has been vested with incredible power. Concomitant with that power is an obligation to both sides to do more than merely follow an unread statute and the beneficiary’s directions. See VRP (Jan. 19,2010) at 393 (Ott admitting he had not read the statute he purported to follow); Albice, 174 Wn.2d at 568 (citing Udall, 159 Wn.2d at 915-16); Cox, 103 Wn.2d at 389. If the trustee acts only at the direction of the beneficiary, then the trustee is a mere agent of the benefi­ciary and a deed of trust no longer embodies a three party transaction.13 If the trustee were truly a mere agent of the beneficiary there would be, in effect, only two parties, with the beneficiary having tremendous power and no incentive to protect the statutory and constitutional property rights of the borrower.

We hold that the practice of a trustee in a nonjudicial foreclosure deferring to the lender on whether to postpone a foreclosure sale and thereby failing to exercise its independent discretion as an impartial third party with duties to both parties is an unfair or deceptive act or practice and satisfies the first element of the CPA. Quality failed to act in good faith to exercise its fiduciary duty to both sides and merely honored an agency relationship with one.

C. Predating Notarizations

Klem submitted evidence that Quality had a prac­tice of having a notary predate notices of sale. This is often a part of the practice known as “robo-signing.”14 Specifi­cally, in this case, it appears that at least from 2004-2007, Quality notaries regularly falsified the date on which documents were signed.

Quality suggests these falsely notarized docu­ments are immaterial because the owner received the minimum notice required by law. This no-harm, no-foul argument again reveals a misunderstanding of Washington law and the purpose and importance of the notary’s ac­knowledgment under the law. A signed notarization is the ultimate assurance upon which the whole world is entitled to rely that the proper person signed a document on the stated day and place. Local, interstate, and international transactions involving individuals, banks, and corporations proceed smoothly because all may rely upon the sanctity of the notary’s seal. This court does not take lightly the importance of a notary’s obligation to verify the signor’s identity and the date of signing by having the signature performed in the notary’s presence. Werner v. Werner, 84 Wn.2d 360, 526 P.2d 370 (1974). As amicus Washington State Bar Association notes, “The proper functioning of the legal system depends on the honesty of notaries who are entrusted to verify the signing of legally significant docu­ments.” Amicus Br. of WSBA at 1. While the legislature has not yet declared that it is a per se unfair or deceptive act for the purposes of the CPA, it is a crime in both Washington and California for a notary to falsely notarize a document. In Washington:

Official misconduct—Penalty
(1) A notary public commits official misconduct when he or she signs a certificate evidencing a notarial act, knowing that the contents of the certificate are false. Official misconduct also constitutes unprofessional conduct for which disciplinary action may be taken.
(2) A notary public who commits an act of official misconduct shall be guilty of a gross misdemeanor.

RCW 42.44.160; see also Cal. Gov’t Code § 6203 (criminal) (“Every officer authorized by law to make or give any certificate or other writing is guilty of a misdemeanor if he or she makes and delivers as true any certificate or writing containing statements which he or she knows to be false.”). A notary jurat is a public trust, and allowing it to be deployed to validate false information strikes at the bed­rock of our system. We note that Washington State asserts criminal jurisdiction over any person “who commits in the state any crime, in whole or in part” or “commits an act without the state which affects persons or property within the state, which, if committed within the state, would be a crime,” among many other things. RCW 9A.04.030(1), (5). Gross misdemeanors are crimes under our criminal code as long as “a sentence of imprisonment is authorized.” RCW 9A.04.040(1) (“Crimes are classified as felonies, gross mis­demeanors, or misdemeanors.”). RCW 9.92.020 assigns a penalty of up to 364 days for gross misdemeanors not otherwise classified, like this one.

This court has previously considered cases with striking similarities. Meyers v. Meyers, 81 Wn.2d 533, 534, 503 P.2d 59 (1972) (notary who notarized forged signatures on a forged deed answerable in negligence to subsequent purchasers). In Werner, California notaries affixed their jurats to forged documents conveying real property situated in Washington. An issue before us in Werner was whether Washington had jurisdiction over the California notaries in a civil suit to hold them accountable for their actions. We held that Washington did have jurisdiction and that a notary may be personally liable to those injured by the notary’s failure to determine the identity of those whose signatures they notarize. We observed:

The whole of our system of title registration hinges upon the integrity of the documents which comprise it. As in the instant case, the corruption of that system may cause substantial economic loss to the parties involved. The notary, as a public officer, has a duty to take reasonable precautions to assure that his seal will not be the vehicle by which a fraudulent transac­tion is consummated. In our opinion, therefore, the State of Washington has the power to extend its jurisdiction to reach the nonresident notaries in this action. We hold that, consistent with due process, [former] RCW 4[2].28.185(l)(b) [(1959)] en­compasses the tortious actions of nonresident notaries when a notarized forgery is affixed to a document affecting interests in immovables. Cf. Golden Gate Hop Ranch, Inc. v. Velsicol Chem. Corp., 66 Wn.2d 469, 403 P.2d 351 (1965).

Werner, 84 Wn.2d at 367. We noted that without the notary’s acknowledgement, the documents would not have been valid.15 Id. at 366.

We hold that the act of false dating by a notary employee of the trustee in a nonjudicial foreclosure is an unfair or deceptive act or practice and satisfies the first three elements under the Washington CPA.

The trustee argues as a matter of law that the falsely notarized documents did not cause harm. The trustee is wrong; a false notarization is a crime and under­mines the integrity of our institutions upon which all must rely on the faithful fulfillment of the notary’s oath. There remains, however, the factual issue of whether the false notorization was a cause of plaintiff’s damages. That is, of course, a question for the jury. Wash. State Physicians Ins. Exch. & Ass’n v. Fisons Corp., 122 Wn.2d 299, 314, 858 P.2d 1054 (1993) (citing Ayers v. Johnson & Johnson Baby Prods. Co., 117 Wn.2d 747, 753-56, 818 P.2d 1337 (1991)). We note that the plaintiff submitted evidence that the purpose of predated notarizations was to expedite the date of sale to please the beneficiary. Given the evidence, if the documents had been properly dated, the earliest the sale could have taken place was one week later. The plaintiff also submitted evidence that with one more week, it was “very possible” Puget Sound Guardians could have closed the sale. This additional time would also have provided the guardian more time to persuade WaMu to postpone the sale. But given the trustee’s failure to fulfill its fiduciary duty to postpone the sale, there is sufficient evidence to support the jury’s CPA violation verdict and we need not reach whether this deceptive act was a cause of plaintiff’s damages.16

II. Injunction

Puget Sound Guardians unsuccessfully moved for an injunction below requiring Quality to follow Wash­ington law relating to foreclosures and notarizing docu­ments. Judge Mack declined to enter the injunction, in part, because she found the plaintiff’s request was “overly broad and unenforceable” relating to the deed of trust act, because she accepted Quality’s assurances that it no longer falsely notarized documents, and because the deed of trust act had been significantly amended since the Halstien foreclosure. Clerk’s Papers at 1586-88. We disagree. Quality is a com­pany that does business in California and Washington and has demonstrated little understanding or regard for Wash­ington law. Quality continues to function as a trustee and to conduct sales in Washington. Injunctive relief is appropri­ate, and we remand to the trial court to fashion an appro­priate injunctive order.

III. Attorney Fees

The trial judge granted the plaintiff’s attorney fees under the CPA for the work done forwarding that claim. We affirm and hold that the plaintiff is also entitled to attorney fees on appeal relating to that CPA claim. RCW 19.86.090.

CONCLUSION

We hold that the right to enjoin a foreclosure sale is an equitable remedy and the failure to enjoin a sale does not operate to waive claims based on the foreclosure process where it would be inequitable to do so. Where applicable, waiver applies only to actions to vacate the sale and not to damages actions. We hold that it is an unfair or deceptive act or practice under the CPA for a trustee of a nonjudicial foreclosure to fail to exercise its authority to decide whether to delay a sale. We hold the practice of falsely notarizing a notice of sale is an unfair or deceptive practice under the CPA. We affirm the Court of Appeals in part and reverse in part. We remand to the trial court for further proceedings consistent with this opinion.

*

Justice Tom Chambers is serving as a justice pro tempore of the Supreme Court pursuant to Washington Constitution article IV, section 2(a).

1

Puget Sound Guardians advanced the costs and, as of trial, had not been reimbursed.

2

Fidelity National Foreclosure & Bankruptcy Solutions is not a party to this case. It appears it assisted WaMu in processing foreclosures and providing documentation, not unlike Lender Processing Service, which that we discussed in Bain v. Metropolitan Mortgage Group, Inc., 175 Wn.2d 83, 107 n.13, 285 P.3d 34 (2012). See Ex. 12.

3

Since then, the legislature has amended the deed of trust act to provide that the trustee owes a duty of good faith to both sides. Laws of 2008, ch. 153, § 1; RCW 61.24.010(4) (effective June 12, 2008).

4

As of trial, Quality had not delivered that one dollar to the Halstien estate.

5

5 This inspired a juror’s question, “If you never read the statute, how did you know you were following it, following Washington law?” VRP (Jan. 19, 2010) at 393. Ott responded that he relied on his training. Judge Barbara A. Mack also asked a question:

THE COURT: And finally, did you have the authority to postpone the sale if requested to do so?
THE WITNESS: Yes, if the lender had requested us to postpone the sale, the sale would be postponed.

Id.

6

The jury found for the defendant on the claims of negligent misrepresentation and failure to make an accommodation.

7

Both at the trial court and before the Court of Appeals, Quality vigorously argued that the guardian had waived all claims by failing to seek an injunction to stop the sale. We have said that “[t]he failure to take advantage of the presale remedies under the deed of trust act may result in waiver of the right to object to the sale.” Plein v. Lackey, 149 Wn.2d 214, 227, 67 P.3d 1061 (2003) (emphasis added) (citing RCW 61.24.040(1)(f )(EX)). We found in Plein it did result in waiver. We emphasized that “Plein received notice of his right to enjoin the sale, had knowledge of his asserted defense before the sale . . . and failed to obtain a preliminary injunction.” Id. at 229. Accordingly, “Plein waived any objections to the foreclosure proceedings.” Id. But we have rejected the argument that under Plein, the failure to seek a presale injunction acts as a per se bar to any postsale challenge. As we noted recently, waiver is an equitable doctrine and “we apply waiver only where it is equitable under the circumstances and where it serves the goals of the act.” Albice v. Premier Mortg. Servs. of Wash., Inc., 174 Wn.2d 560, 570, 276 P.3d 1277 (2012). We note with approval that the Court of Appeals rejected Quality’s waiver argument. We also note that Quality has not sought review of that issue. Here, there are ample reasons why a presale injunction was not an available remedy and thus application of the equitable doctrine of waiver would be inappropriate. Klem was unaware that the notice of sale was falsely notarized or that the trustee had agreed to defer to the lender on whether to postpone a foreclosure sale until after the sale had taken place. The fact the guardian was required to give the Department of Social and Health Services 21 days’ notice to obtain authorization to seek an injunction may also have made a presale injunction impossible to acquire.

8

We say “appears to have agreed” because it is not completely clear the Court of Appeals relied upon the reasoning that only per se statutory violations could violate the CPA. Klem, 2011 WL 6382147, at *8-9, 2011 Wash. App. LEXIS 2819, at *27-28.

9

We also clearly noted:

A CPA claim may be predicated on either a per se violation of the statute or on deceptive practices unregulated by statute but involving the public interest. Anhold v. Daniels, 94 Wn.2d 40, 614 P.2d 184 (1980); Lidstrand v. Silvercrest Indus., 28 Wn. App. 359, 623 P.2d 710 (1981). Here, the claims are predicated on deceptive practices.

Panag, 166 Wn.2d at 37 n.3.

10

Washington courts have a long tradition of guarding property from being wrongfully appropriated through judicial process. When “a jury . . . returned a verdict which displeased [Territorial Judge J.E. Wyche] in a suit over 160 acres of land” he threatened to set aside their verdict and remarked, "'While I am judge it takes thirteen men to steal a ranch.’” 2 Wilfred A. Airey, A History of the Constitution and Government of Washington Territory 312 (June 5, 1945) (unpublished PhD thesis, University of Washington) (on file with Washington State Law Library), cited with approval in Cox, 103 Wn.2d at 385.

11

We have not had occasion to fully analyze whether the nonjudicial foreclosure act, ch. 61.24 RCW, on its face or as applied, violates article I, section 3 of our state constitution’s command that “[n]o person shall be deprived of life, liberty, or property, without due process of law.” While article I, section 3 was mentioned in passing in Kennebec, Inc. v. Bank of the West, 88 Wn.2d 718, 565 P.2d 812 (1977), where we joined other courts in concluding that the Fourteenth Amendment to the United States Constitution does not bar nonjudicial foreclosures, no independent state constitutional analysis was or has been done since. Cf. State v. Gunwall, 106 Wn.2d 54, 720 P.2d 808 (1986). Certainly, there are other similar “self help” statutes for creditors that are subject to constitutional limitations despite the State’s limited involvement. See, e.g., Culbertson v. Leland, 528 F.2d 426 (9th Cir. 1975) (innkeeper’s use of Arizona’s innkeeper’s lien statute to seize guest’s property was under color of law and subject to a civil rights claim). “‘Misuse of power, possessed by virtue of state law and made possible only because the wrongdoer is clothed with the authority of state law, is action taken “under color of” state law.’” Id. at 428 (quoting United States v. Classic, 313 U.S. 299, 325-26, 61 S. Ct. 1031, 85 L. Ed. 1368 (1941)); accord Smith v. Brookshire Bros., 519 F.2d 93, 95 (5th Cir. 1975) (exercise of statute that allowed merchant to detain suspected shoplifters subject to civil rights claim); Adams v. Joseph F. Sanson Inv. Co., 376 F. Supp. 61, 69 (Nev. 1974) (finding Nevada’s landlord lien act violated due process because it allowed landlord to seize tenant property without notice); Collins v. Viceroy Hotel Corp., 338 F. Supp. 390, 398 (N.D. Ill. 1972) (finding Illinois innkeepers’ lien laws, which allowed an innkeeper to seize guest’s property without notice, violated due process); Hall v. Garson, 430 F.2d 430, 440 (5th Cir. 1970) (exercise of a statute giving a landlord a lien over the tenant’s property gave rise to a civil rights claim against private party).

12

Where the beneficiary so controls the trustee so as to make the trustee a mere agent of the beneficiary, then as principal, the beneficiary may be liable for the acts of its agent. However, WaMu is in receivership and is not a party to this lawsuit.

13

Prior to 1975, the deed of trust act strictly forbade agents, employees, or subsidiaries of a beneficiary to act as a trustee. Former RCW 61.24.020 (1965). The 1975 legislature saw fit to remove that limitation, but neither did it expressly authorize agents of beneficiaries to act as trustees. Laws of 1975, 1st Ex. Sess., ch. 129, § 2; Cox, 103 Wn.2d at 389 (citing Osborne, Nelson & Whitman, supra). As we have said, without an independent trustee, the nonjudicial foreclosure process is subject to challenges based upon constitutional and equitable grounds.

14

Generally, robo-signing refers to “assembly-line signing and notarizing of affidavits for foreclosure cases, mortgage assignments, note allonges and related documents, all filed in courts and deed recorders in counties across the United States.” Alan M. White, Losing The Paper—Mortgage Assignments, Note Transfers and Consumer Protection, 24 Loy. Consumer L. Rev. 468, 470 (2012).

15

The question of whether or not a falsely notarized notice of sale is valid is not before us.

16

The Court of Appeals also reversed the jury’s verdict on breach of contract on the ground that the defendant breached the law, not the contract. The deed of trust provided:

16. Governing Law; Severability; Rules of Construction. This Security Instrument shall be governed by federal law and the law of the jurisdiction in which the Property is located. All rights and obligations contained in this Security Instrument are subject to any requirements and limitations of Applicable Law. Applicable Law might explicitly or implicitly allow the parties to agree by contract or it might be silent, but such silence shall not be construed as a prohibition against agreement by contract.

Ex. 9, at 17. Inasmuch as the parties devote little time on the issue and its resolution will not provide additional damages to the plaintiff, we decline to reach the issue.

Madsen, C.J.

(concurring) — I concur in the majori­ty’s determination that the jury’s award under the Con­sumer Protection Act (CPA), chapter 19.86 RCW, should be upheld. I write separately because there are many aspects of the majority opinion that I cannot join. I especially disagree with the majority’s own creation of confusion about how a plaintiff may establish a cognizable claim in a private action under the CPA and the majority’s attempt to resolve this so-called “confusion.”

The majority incorrectly states that Quality Loan Service Corporation of Washington “argues ... that only an act or practice the legislature has declared to be ‘unfair’ is unfair for purposes of the CPA.” Majority at 784. Quality does not make any such argument. Quality quite clearly recognizes that under the CPA, the first two elements of the cause of action can be established either by showing a “per se” violation or by showing an unfair or deceptive act or practice that has the capacity to deceive a substantial part of the public. Suppl. Br. at 3. Similarly, Quality’s response to amicus memorandum of Washington State attorney gen­eral, at 4-6, clearly shows Quality’s understanding of the correct analysis. Quality never makes the argument that the majority says that it does; its briefing indisputably shows that the majority is simply wrong.

Unfortunately the majority’s misstatement of Quali­ty’s argument leads it to a discussion of whether there must be a legislative determination of the unfair or deceptive act or practice and to the conclusion that a court can also make such a determination. But it is well settled that both legislatively designated and court-determined unfair or deceptive acts or practices may support private CPA ac­tions, as explained fully in Hangman Ridge Training Stables, Inc. v. Safeco Title Insurance Co., 105 Wn.2d 778, 785-86, 719 P.2d 531 (1986), and its progeny. If in fact Quality had actually made the argument that the majority says that it makes, all that the majority would need to do would be to cite Hangman Ridge and point out that it has been settled for over a quarter century that both the court and the legislature have this authority.

Regrettably, the majority itself creates the problem that it purports to resolve. As noted, the majority ascribes an argument to Quality that has not been made. Then the majority exacerbates the problem by attempting to show a split in the case law about whether a court can determine whether an act or practice is unfair or deceptive, but the cases relied on by the majority to show the supposed split are not in conflict.

The majority begins with this seemingly straightfor­ward description of two ways in which a plaintiff can establish the first two elements of a CPA claim:

“The [first] two elements may be established by a showing that (1) an act or practice which has a capacity to deceive a substantial portion of the public (2) has occurred in the conduct of any trade or commerce. Alternatively, these two elements may be established by a showing that the alleged act consti­tutes a per se unfair trade practice. A per se unfair trade practice exists when a statute which has been declared by the Legislature to constitute an unfair or deceptive act in trade or commerce has been violated.”

Majority at 784-85 (alteration in original) (quoting Hang­man Ridge, 105 Wn.2d at 785-86). Thus, the first of the two ways that a plaintiff can establish the first two elements is by producing evidence that shows the act or practice, whatever it is, has the capacity to deceive a substantial portion of the public and that this act or practice occurred in trade or commerce. This method does not require a legisla­tively declared unfair act or practice. Rather, a court con­siders the evidence produced and makes the determination whether the plaintiff has established the requisite unfair or deceptive act or practice occurring in trade or commerce.

The second method of proving the first two elements is to prove an act or practice that violates a statute, where the legislature has declared that violation of the statute is an unfair act or practice in trade or commerce. If the plaintiff establishes the statutory violation, the plaintiff establishes the first two elements of a private CPA claim per se.

The majority maintains that confusion exists about the meaning of the above quoted language from Hangman Ridge and cites two sets of cases in an attempt to show that courts have split on the issue whether only a legislative designation of an unfair act or practice can support a CPA claim. Majority at 785. But in the cases cited where the courts supposedly read Hangman Ridge to require a statu­torily based violation, the courts in fact recognized that the first two elements can be established by evidence without any legislative declaration of an unfair or deceptive act or practice.

The first case is Henery v. Robinson, 67 Wn. App. 277, 834 P.2d 1091 (1992). The majority offers in the parentheti­cal attached to this case that the court “reject[ed] plaintiffs’ CPA action against the seller of a defective mobile home because they could not show legislatively declared unfair or deceptive practice.” Majority at 785.

However, in Henery, the court correctly stated that under Hangman Ridge, “[t]he plaintiff may establish the first two elements by showing either that the alleged act constitutes a per se unfair trade practice or that it occurred in the conduct of a trade or commerce and has a capacity to deceive a substantial portion of the public.” Henery, 67 Wn. App. at 289 (emphasis added). The court then correctly stated that “[a] defendant commits a per se unfair trade practice when his actions violate a statute describing an unfair or deceptive act in trade or business.” Id. The court concluded that the evidence did not show that the defen­dants committed a per se unfair trade practice under RCW 46.70.180, and thus no per se CPA violation occurred. The court then turned to the alternative method of proof and the question whether there was evidence that “the defendants engaged in an unfair act or practice which has a capacity to deceive a substantial portion of the public.” Id. at 290. The court examined the record and concluded that plaintiffs’ evidence was insufficient. Id. at 291. Therefore, because there was no basis for a per se claim based on violation of a statute and because the plaintiffs also failed to produce evidence otherwise satisfying the first two elements of a CPA claim, the court reversed an award of attorney fees based on a CPA claim. Id.

Obviously, the court in Henery did not read Hang­man Ridge to say that only a legislatively based unfair or deceptive act or practice would suffice.

The next case the majority cites is Minnick v. Clearwire US, LLC, 683 F. Supp. 2d 1179, 1186 (W.D. Wash. 2010). Majority at 785. Here, the majority’s parenthetical explanation tells us that the court rejected the “CPA action against phone company for imposing an early termination fee on the ground that the legislature had not declared it ‘a per se unfair trade practice.’” Majority at 785 (internal quotation marks omitted) (quoting Minnick, 683 F. Supp. 2d at 1186 (quoting Saunders v. Lloyd’s of London, 113 Wn.2d 330, 334, 779 P.2d 249 (1989))).

However, this is not an accurate explanation of what occurred in Minnick, either. There, the plaintiffs urged a per se claim but did not base it on a legislative determination. Rather, relying on pre-Hangman Ridge case law, the plain­tiffs argued a CPA claim based on violation of a common law principle, not violation of a statute. The court correctly recognized the ways the first two elements of a CPA claim can be satisfied, set out in Hangman Ridge and quoted above. Minnick, 683 F. Supp. 2d at 1186. Then, as to per se declarations of unfair acts or practices, the court observed that in Hangman Ridge the court held that a per se claim can be made out only with respect to practices that the legislature had declared unfair and rejected the premise that there can be court-determined per se unfair trade practices. Id. Because the plaintiffs did “not identif[y] a Legislatively recognized per se unfair practice that would state a claim,” and given that the plaintiffs had argued a per se violation, this disposed of plaintiffs’ CPA claim. Id.

To show the “conflict” between these cases and others, the majority then cites two cases that, the majority says, “properly, did not read Hangman Ridge as establish­ing the only ways the first two elements could be met.” Majority at 785 (emphasis added). The parenthetical expla­nations of these two cases are to the effect that in these cases the courts did not require a legislatively determined unfair or deceptive act or practice.

But cases that do not require a legislative determi­nation do not show that any confusion exists. Such deci­sions would not conflict with the cases just discussed because the courts in those cases recognized that Hangman Ridge contains alternative methods of proof. Further, in accord with Hangman Ridge, when the plaintiff’s evidence establishes that particular acts or practices are unfair or deceptive acts or practices occurring in trade or commerce, a judicial determination may be made that the first two elements of the private cause of action are satisfied. Thus, not requiring a legislatively determined unfair or deceptive act or practice is entirely consistent with Hangman Ridge and not in conflict with the first set of cases the majority cites.

In any event, the second set of cases the majority cites are not particularly relevant. The first, State v. Kaiser, 161 Wn. App. 705, 254 P.3d 850 (2011), majority at 785, does not address how a private plaintiff must prove a CPA claim at all. Instead, Kaiser was an action brought by the attorney general to enforce the CPA under RCW 19.86.080. The second case cited, Magney v. Lincoln Mutual Savings Bank, 34 Wn. App. 45, 57, 659 P.2d 537 (1983), majority at 786, was decided three years before Hangman Ridge was issued. Magney therefore cannot show any confusion supposedly engendered by Hangman Ridge.

The majority does not show any confusion about whether courts may determine whether an act or practice is unfair or deceptive.

Nonetheless, the majority attempts “[t]o resolve” the supposed “confusion” about what acts or practices can be actionable in an action under the CPA. Majority at 787. This “resolution” is itself confusing and unnecessary. The major­ity says:

[W]e hold that a claim under the Washington CPA may be predicated upon a per se violation of statute, an act or practice that has the capacity to deceive substantial portions of the public, or an unfair or deceptive act or practice not regulated by statute but in violation of public interest.

Majority at 787.

To recap, what precedent establishes is that to prove a private-action CPA claim the plaintiff must establish an “unfair or deceptive act or practice.” Sing v. John L. Scott, Inc., 134 Wn.2d 24, 30, 948 P.2d 816 (1997); Hangman Ridge, 105 Wn.2d at 785. A per se violation occurs when the legislature declares in a statute that certain acts or omis­sions constitute violations of the CPA. For example, RCW 19.190.030 makes it a per se violation of the CPA to violate our state’s commercial electronic mail act, chapter 19.190 RCW. See State v. Heckel, 143 Wn.2d 824, 828, 24 P.3d 404 (2001). If the plaintiff establishes a violation of this act, the first two elements of the CPA claim are established.

A violation can also be based upon unfair or decep­tive acts in the absence of such a legislative declaration. Here, the plaintiff could base the action on conduct that did deceive the public, but is not required to do so. Instead, as Hangman Ridge says, showing that the conduct had or has the capacity to deceive a substantial portion of the public is sufficient. Thus, under Hangman Ridge there is no doubt that courts can determine that particular acts or practices violate the CPA.

But confusion may be the result of the majority’s statement that a CPA claim may be predicated on “unfair or deceptive act[s] or practice[s] not regulated by statute but in violation of public interest.” Majority at 787. The re­quired public interest impact was addressed in Hangman Ridge, where this court noted that in State v. Reader’s Digest Ass’n, 81 Wn.2d 259, 501 P.2d 290 (1972), modified by Hangman Ridge, 105 Wn.2d 778, the court had concluded that lotteries were unfair under the CPA because lotteries were prohibited by state statute and the state constitution. The court had stated that “‘[w]hat is illegal and against public policy is per se an unfair trade practice.’” Hangman Ridge, 105 Wn.2d at 786 (quoting Reader’s Digest, 81 Wn.2d at 270).

The court concluded, however, that such judicial determinations of per se violations would no longer be recognized. First, the use of “‘public policy’” in the context of an “‘unfair trade practice’” was a reference to “‘public interest’” and the court replaced this aspect of a CPA claim by a separate element requiring impact on the public interest. Id. (quoting Reader’s Digest, 81 Wn.2d at 270). Second, in the more than 13 years between the time Reader’s Digest had been decided and Hangman Ridge, the legislature had declared violations of numerous consumer protection statutes to constitute unfair or deceptive acts or practices for purposes of the CPA. Id. at 786-87. These legislative designations defined the relation between con­duct made illegal by statute and the CPA. Id. at 786.

The court directed that consideration of the public interest occurs as a third element of the private cause of action and requires that in every private CPA action the consumer must show that the unfair or deceptive acts or practices affect (or impact) the public interest. See id. at 787; accord Bain v. Metro. Mortg. Grp., Inc., 175 Wn.2d 83, 117-18, 285 P.3d 34 (2012). This element is required in part because RCW 19.86.920 states the legislature’s intent that the CPA not be construed to prohibit acts or practices not injurious to the public interest. Hangman Ridge, 105 Wn.2d at 788.

Basing a CPA violation on violation of public policy as the majority suggests is thus in tension with Hangman Ridge. It is also incompatible with the legislature’s enact­ment addressing the role of the public interest in the private CPA action. The legislature has recently codified the requirement that the unfair act or practice be injurious to the public interest and specifically set out how this element may be satisfied. RCW 19.86.093 provides that

a claimant may establish that the act or practice is injurious to the public interest because it:
(1) Violates a statute that incorporates this chapter;
(2) Violates a statute that contains a specific legislative declaration of public interest impact; or
(3) (a) Injured other persons; (b) had the capacity to injure other persons; or (c) has the capacity to injure other persons.

The statute applies to all causes of action that accrue on or after its effective date of July 26, 2009. Laws of 2009, ch. 371, § 3.

The first two subsections of this statute reflect the court’s view in Hangman Ridge, 105 Wn.2d at 791, that the public interest element can be satisfied per se where the plaintiff shows violation of a statute that contains a specific legislative declaration of public interest impact. RCW 19-­.86.093(1)-(2). Subsection (3) bases public interest impact on actual injury and capacity to injure. Significantly, capac­ity to injure is not the same thing as capacity to deceive. Capacity to injure can establish the public interest element under the statute. Capacity to deceive a substantial portion of the public may be relevant in establishing the first two elements of the claim in the absence of a legislative deter­mination that the challenged acts or practices are per se unfair or deceptive trade practices.

Given the court’s rejection in Hangman Ridge of “public interest” or “public policy” as part of the first two elements of the private CPA claim, and the legislature’s express statutory directions for how public interest impact is to be established, the public policy aspect of the private CPA claim is already sufficiently addressed. Given that there is no confusion as identified by the majority, there is no need to alter Hangman Ridge’s explanation of how the first two elements of the private CPA claim may be estab­lished. There is no reason to suggest an amorphous “public interest” basis for the first two elements of the claim.

Given the majority’s identification of issues that are not truly raised here and that are in any event already resolved, its misreading of Hangman Ridge, and its puz­zling attempt to resolve “confusion” that does not exist, the majority should not be read as altering the settled analysis in Hangman Ridge and its progeny.

Next, the majority appears to believe there is a question whether either an unfair or a deceptive act or practice can be the basis for a CPA claim. As is apparent from the discussion above, I believe the statutory language clearly provides that either may be sufficient to describe the character of an act or practice that may be challenged under the CPA.

The majority repeatedly refers to the fiduciary duty of the trustee. In the present case, the trustee owed fidu­ciary duties because, among other things, the nonjudicial foreclosure sale occurred early in 2008. However, the judi­cially imposed “fiduciary” standard applies, at the latest, only in cases arising prior to the 2008 amendment of RCW 61.24.010. The 2008 amendment expressly rejected the “fiduciary” standard. See Laws of 2008, ch. 153, § 1, codified at RCW 61.24.010(3) (“[t]he trustee or successor trustee shall have no fiduciary duty or fiduciary obligation to the grantor or other persons having an interest in the property subject to the deed of trust”) (effective June 12, 2008). In 2009, the legislature amended the statute again, deleting language stating that the trustee had to act impartially and replacing it with: “The trustee or successor trustee has a duty of good faith to the borrower, beneficiary, and grantor.” Laws of 2009, ch. 292, § 7.17

The majority nevertheless seems to perpetuate a “fiduciary” standard that incongruously is merged with other standards. The majority states, “An independent trustee who owes a duty to act in good faith to exercise a fiduciary duty to act impartially to fairly respect the interests of both the lender and the debtor is a minimum to satisfy the statute, the constitution, and equity.” Majority at 790. I cannot agree with this broad amalgam of standards that actually have appeared at different times in RCW 61.24.010. While the majority acknowledges at one point that the statute presently states a “good faith” standard, majority at 778 n.3, the majority then muddies the waters considerably.

I also cannot agree with the extensive dicta appearing in footnotes. As examples, the majority discusses whether failure to seek a presale injunction waives all claims even though Quality did not seek review of the Court of Appeals’ rejection of the waiver argument. Majority at 783 n.7. The majority also appears to question the nonjudicial foreclo­sure act on due process grounds, while assuming that an independent state constitutional due process analysis must be applied. Majority at 790 n.11. However, until issues such as these are squarely before the court the majority should not speculate about how this court might rule after we have engaged in the careful, considered decision-making process that results in holdings of this court.

Despite a number of disagreements with the major­ity, I concur in the result because I believe that Quality’s failure to exercise its own judgment on the matter of whether the sale should be postponed and its deferral to the beneficiary on this matter was an unfair or deceptive act or practice that supports Puget Sound Guardians’ private CPA action. I agree that the jury award under the CPA should be reinstated.

17

The majority mistakenly says that the “duty of good faith” was added to the statute in 2008. Majority at 778 n.3. This change was made in 2009.

Fairhurst, J.

(concurring) — I concur in the majori­ty’s clarification that the judiciary retains the power to determine that an act is unfair within the meaning of the Consumer Protection Act, chapter 19.86 RCW, and the result it reaches in this case. However, this court has long avoided analysis of constitutional issues when it can avoid doing so. Footnote 11 needlessly, and likely incorrectly, appears to cast doubt on the deed of trust act, chapter 61.24 RCW. Majority at 790 n.11. Consequently, I join the major­ity opinion except for footnote 11.

10.6.2 Klem v. Washington Mutual: Notes + Questions 10.6.2 Klem v. Washington Mutual: Notes + Questions

1. What, if anything, is the relevance of the sale price of the home to the court’s decision? Why would the bank bid a dollar more than what was owed on the loan?

2. Klem involves a variant on what is known as “robo-signing” – the creation of documents with important legal effects on foreclosure, without sufficient personal knowledge or even understanding by the person signing the document.

Jay Patterson, a forensic accountant who has examined hundreds of mortgage loans in bankruptcy or foreclosure, concluded that “95 percent of these loans contain some kind of mistake,” from an unnecessary $15 late fee to thousands of dollars in fees and charges stemming from a single mistake that snowballed into a wrongful foreclosure. Most of these cases resulted in defaults, but when they were litigated, the facts could be telling. For example, one bankruptcy case, In re Stewart, involved a home in Jefferson Parish, New Orleans. Wells Fargo was the servicer. The debtor fell behind in her payments, and on September 12, 2005, Wells Fargo agents generated two opinions on the value of the home. Opinions require at least minimal inspection of the property. Stewart was charged $125 for each opinion. However, on September 12, 2005, Jefferson Parish was under an evacuation order due to the devastation then being wrought by Hurricane Katrina. These were only two of the numerous fees the bankruptcy judge found had been wrongly charged to Stewart.

What ought to be done to rein in servicer misbehavior of this sort?

10.7 F. Chain of Title Problems 10.7 F. Chain of Title Problems

Klem features a foreclosure sale that did nothing to preserve the equity of the homeowner, as well as backdated documents that changed the time of sale. But documentation problems go much, much deeper than that evidenced in Klem – perhaps to the foundation of land title in the U.S.

10.7.1 U.S. Bank National Ass'n v. Ibanez 10.7.1 U.S. Bank National Ass'n v. Ibanez

Massachusetts Supreme Judicial Court
458 Mass. 637
2011-01-07

Suffolk.

U.S. Bank National Association, trustee,1 vs. Antonio Ibanez (and a consolidated case2,3).

January 7, 2011.

October 7, 2010.

R. Bruce Allensworth (Phoebe S. Winder & Robert W. Sparkes, III, with him) for U.S. Bank National Association & another.

Paul R. Collier, III (Max W. Weinstein with him) for Antonio Ibanez.

Glenn F. Russell, Jr., for Mark A. LaRace & another.

The following submitted briefs for amici curiae:

Martha Coakley, Attorney General, & John M. Stephan, As­sistant Attorney General, for the Commonwealth.

Kevin Costello, Gary Klein, Shennan Kavanagh & Stuart Rossman for National Consumer Law Center & others.

Ward P. Graham & Robert J. Moriarty, Jr., for Real Estate Bar Association for Massachusetts, Inc.

Marie McDonnell, pro se.

1

For the Structured Asset Securities Corporation Mortgage Pass-Through Certificates, Series 2006-Z.

2

Wells Fargo Bank, N.A., trustee, vs. Mark A. LaRace & another.

3

The Appeals Court granted the plaintiffs’ motion to consolidate these cases.

Gants, J.

After foreclosing on two properties and purchasing the properties back at the foreclosure sales, U.S. Bank National Association (U.S. Bank), as trustee for the Structured Asset Securities Corporation Mortgage Pass-Through Certificates, Series 2006-Z; and Wells Fargo Bank, N.A. (Wells Fargo), as trustee for ABFC 2005-OPT 1 Trust, ABFC Asset Backed Cer­tificates, Series 2005-OPT 1 (plaintiffs), filed separate complaints in the Land Court asking a judge to declare that they held clear title to the properties in fee simple. We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure. As a result, they did not demonstrate that the foreclosure sales were valid to convey title to the subject properties, and their requests for a declaration of clear title were properly denied.5

Procedural history. On July 5, 2007, U.S. Bank, as trustee, foreclosed on the mortgage of Antonio Ibanez, and purchased the Ibanez property at the foreclosure sale. On the same day, Wells Fargo, as trustee, foreclosed on the mortgage of Mark and Tammy LaRace, and purchased the LaRace property at that foreclosure sale.

In September and October of 2008, U.S. Bank and Wells Fargo brought separate actions in the Land Court under G. L. c. 240, § 6, which authorizes actions “to quiet or establish the title to land situated in the commonwealth or to remove a cloud from the title thereto.” The two complaints sought identical relief: (1) a judgment that the right, title, and interest of the mortgagor (Ibanez or the LaRaces) in the property was extin­guished by the foreclosure; (2) a declaration that there was no cloud on title arising from publication of the notice of sale in the Boston Globe; and (3) a declaration that title was vested in the plaintiff trustee in fee simple. U.S. Bank and Wells Fargo each asserted in its complaint that it had become the holder of the respective mortgage through an assignment made after the fore­closure sale.

In both cases, the mortgagors—Ibanez and the LaRaces—did not initially answer the complaints, and the plaintiffs moved for entry of default judgment. In their motions for entry of default judgment, the plaintiffs addressed two issues: (1) whether the Boston Globe, in which the required notices of the foreclosure sales were published, is a newspaper of “general circulation” in Springfield, the town where the foreclosed properties lay. See G. L. c. 244, § 14 (requiring publication every week for three weeks in newspaper published in town where foreclosed property lies, or of general circulation in that town); and (2) whether the plaintiffs were legally entitled to foreclose on the properties where the assignments of the mortgages to the plaintiffs were neither executed nor recorded in the registry of deeds until after the foreclosure sales.6 The two cases were heard together by the Land Court, along with a third case that raised the same issues.

On March 26, 2009, judgment was entered against the plaintiffs. The judge ruled that the foreclosure sales were invalid because, in violation of G. L. c. 244, § 14, the notices of the foreclosure sales named U.S. Bank (in the Ibanez foreclosure) and Wells Fargo (in the LaRace foreclosure) as the mortgage holders where they had not yet been assigned the mortgages.7 The judge found, based on each plaintiff’s assertions in its complaint, that the plaintiffs acquired the mortgages by assign­ment only after the foreclosure sales and thus had no interest in the mortgages being foreclosed at the time of the publication of the notices of sale or at the time of the foreclosure sales.8

The plaintiffs then moved to vacate the judgments. At a hear­ing on the motions on April 17, 2009, the plaintiffs conceded that each complaint alleged a postnotice, postforeclosure sale assign­ment of the mortgage at issue, but they now represented to the judge that documents might exist that could show a prenotice, preforeclosure sale assignment of the mortgages. The judge granted the plaintiffs leave to produce such documents, provided they were produced in the form they existed in at the time the foreclosure sale was noticed and conducted. In response, the plaintiffs submit­ted hundreds of pages of documents to the judge, which they claimed established that the mortgages had been assigned to them before the foreclosures. Many of these documents related to the creation of the securitized mortgage pools in which the Ibanez and LaRace mortgages were purportedly included.9

The judge denied the plaintiffs’ motions to vacate judgment on October 14, 2009, concluding that the newly submitted docu­ments did not alter the conclusion that the plaintiffs were not the holders of the respective mortgages at the time of foreclosure. We granted the parties’ applications for direct appellate review.

Factual background. We discuss each mortgage separately, describing when appropriate what the plaintiffs allege to have happened and what the documents in the record demonstrate.10

The Ibanez mortgage. On December 1, 2005, Antonio Ibanez took out a $103,500 loan for the purchase of property at 20 Crosby Street in Springfield, secured by a mortgage to the lender, Rose Mortgage, Inc. (Rose Mortgage). The mortgage was re­corded the following day. Several days later, Rose Mortgage executed an assignment of this mortgage in blank, that is, an as­signment that did not specify the name of the assignee.11 The blank space in the assignment was at some point stamped with the name of Option One Mortgage Corporation (Option One) as the assignee, and that assignment was recorded on June 7, 2006. Before the recording, on January 23, 2006, Option One executed an assignment of the Ibanez mortgage in blank.

According to U.S. Bank, Option One assigned the Ibanez mortgage to Lehman Brothers Bank, FSB, which assigned it to Lehman Brothers Holdings Inc., which then assigned it to the Structured Asset Securities Corporation,12 which then assigned the mortgage, pooled with approximately 1,220 other mortgage loans, to U.S. Bank, as trustee for the Structured Asset Securi­ties Corporation Mortgage Pass-Through Certificates, Series 2006-Z. With this last assignment, the Ibanez and other loans were pooled into a trust and converted into mortgage-backed securities that can be bought and sold by investors—a process known as securitization.

For ease of reference, the chain of entities through which the Ibanez mortgage allegedly passed before the foreclosure sale is:

Rose Mortgage, Inc. (originator) 
Option One Mortgage Corporation (record holder) 
Lehman Brothers Bank, FSB 
Lehman Brothers Holdings Inc. (seller) 
Structured Asset Securities Corporation (depositor) 

U.S. Bank National Association, as trustee for the Structured Asset Securities Corporation Mortgage Pass-Through Certificates, Series 2006-Z

According to U.S. Bank, the assignment of the Ibanez mortgage to U.S. Bank occurred pursuant to a December 1, 2006, trust agreement, which is not in the record. What is in the record is the private placement memorandum (PPM), dated December 26, 2006, a 273-page, unsigned offer of mortgage-backed secur­ities to potential investors. The PPM describes the mortgage pools and the entities involved, and summarizes the provisions of the trust agreement, including the representation that mortgages “will be” assigned into the trust. According to the PPM, “[e]ach transfer of a Mortgage Loan from the Seller [Lehman Brothers Holdings Inc.] to the Depositor [Structured Asset Securities Corporation] and from the Depositor to the Trustee [U.S. Bank] will be intended to be a sale of that Mortgage Loan and will be reflected as such in the Sale and Assignment Agreement and the Trust Agreement, respectively.” The PPM also specifies that “[e]ach Mortgage Loan will be identified in a schedule appear­ing as an exhibit to the Trust Agreement.” However, U.S. Bank did not provide the judge with any mortgage schedule identify­ing the Ibanez loan as among the mortgages that were assigned in the trust agreement.

On April 17, 2007, U.S. Bank filed a complaint to foreclose on the Ibanez mortgage in the Land Court under the Servicemembers Civil Relief Act (Servicemembers Act), which restricts foreclosures against active duty members of the uniformed services. See 50 U.S.C. Appendix §§ 501, 511, 533 (2006 & Supp. II 2008).13 In the complaint, U.S. Bank represented that it was the “owner (or assignee) and holder” of the mortgage given by Ibanez for the property. A judgment issued on behalf of U.S. Bank on June 26, 2007, declaring that the mortgagor was not entitled to protection from foreclosure under the Service-­members Act. In June, 2007, U.S. Bank also caused to be pub­lished in the Boston Globe the notice of the foreclosure sale required by G. L. c. 244, § 14. The notice identified U.S. Bank as the “present holder” of the mortgage.

At the foreclosure sale on July 5, 2007, the Ibanez property was purchased by U.S. Bank, as trustee for the securitization trust, for $94,350, a value significantly less than the outstanding debt and the estimated market value of the property. The fore­closure deed (from U.S. Bank, trustee, as the purported holder of the mortgage, to U.S. Bank, trustee, as the purchaser) and the statutory foreclosure affidavit were recorded on May 23, 2008. On September 2, 2008, more than one year after the sale, and more than five months after recording of the sale, American Home Mortgage Servicing, Inc., “as successor-in-interest” to Op­tion One, which was until then the record holder of the Ibanez mortgage, executed a written assignment of that mortgage to U.S. Bank, as trustee for the securitization trust.14 This assignment was recorded on September 11, 2008.

The LaRace mortgage. On May 19, 2005, Mark and Tammy LaRace gave a mortgage for the property at 6 Brookbum Street in Springfield to Option One as security for a $103,200 loan; the mortgage was recorded that same day. On May 26, 2005, Option One executed an assignment of this mortgage in blank.

According to Wells Fargo, Option One later assigned the LaRace mortgage to Bank of America in a July 28, 2005, flow sale and servicing agreement. Bank of America then assigned it to Asset Backed Funding Corporation (ABFC) in an October 1, 2005, mortgage loan purchase agreement. Finally, ABFC pooled the mortgage with others and assigned it to Wells Fargo, as trustee for the ABFC 2005-OPT 1 Trust, ABFC Asset-Backed Certificates, Series 2005-OPT 1, pursuant to a pooling and servicing agreement (PSA).

For ease of reference, the chain of entities through which the LaRace mortgage allegedly passed before the foreclosure sale is:

Option One Mortgage Corporation (originator and record holder) 
Bank of America
Asset Backed Funding Corporation (depositor) 

Wells Fargo, as trustee for the ABFC 2005-OPT 1, ABFC Asset-­Backed Certificates, Series 2005-OPT 1

Wells Fargo did not provide the judge with a copy of the flow sale and servicing agreement, so there is no document in the record reflecting an assignment of the LaRace mortgage by Option One to Bank of America. The plaintiff did produce an unexecuted copy of the mortgage loan purchase agreement, which was an exhibit to the PSA. The mortgage loan purchase agreement provides that Bank of America, as seller, “does hereby agree to and does hereby sell, assign, set over, and otherwise convey to the Purchaser [ABFC], without recourse, on the Clos­ing Date ... all of its right, title and interest in and to each Mortgage Loan.” The agreement makes reference to a schedule listing the assigned mortgage loans, but this schedule is not in the record, so there was no document before the judge showing that the LaRace mortgage was among the mortgage loans as­signed to the ABFC.

Wells Fargo did provide the judge with a copy of the PSA, which is an agreement between the ABFC (as depositor), Op­tion One (as servicer), and Wells Fargo (as trustee), but this copy was downloaded from the Securities and Exchange Com­mission Web site and was not signed. The PSA provides that the depositor “does hereby transfer, assign, set over and otherwise convey to the Trustee, on behalf of the Trust ... all the right, title and interest of the Depositor ... in and to . . . each Mortgage Loan identified on the Mortgage Loan Schedules,” and “does hereby deliver” to the trustee the original mortgage note, an original mortgage assignment “in form and substance acceptable for recording,” and other documents pertaining to each mortgage.

The copy of the PSA provided to the judge did not contain the loan schedules referenced in the agreement. Instead, Wells Fargo submitted a schedule that it represented identified the loans assigned in the PSA, which did not include property ad­dresses, names of mortgagors, or any number that corresponds to the loan number or servicing number on the LaRace mortgage. Wells Fargo contends that a loan with the LaRace property’s zip code and city is the LaRace mortgage loan because the payment history and loan amount matches the LaRace loan.

On April 27, 2007, Wells Fargo filed a complaint under the Servicemembers Act in the Land Court to foreclose on the LaRace mortgage. The complaint represented Wells Fargo as the “owner (or assignee) and holder” of the mortgage given by the LaRaces for the property. A judgment issued on behalf of Wells Fargo on July 3, 2007, indicating that the LaRaces were not beneficiaries of the Servicemembers Act and that foreclosure could proceed in accordance with the terms of the power of sale. In June, 2007, Wells Fargo caused to be published in the Boston Globe the statutory notice of sale, identifying itself as the “present holder” of the mortgage.

At the foreclosure sale on July 5, 2007, Wells Fargo, as trustee, purchased the LaRace property for $120,397.03, a value significantly below its estimated market value. Wells Fargo did not execute a statutory foreclosure affidavit or foreclosure deed until May 7, 2008. That same day, Option One, which was still the record holder of the LaRace mortgage, executed an assign­ment of the mortgage to Wells Fargo as trustee; the assignment was recorded on May 12, 2008. Although executed ten months after the foreclosure sale, the assignment declared an effective date of April 18, 2007, a date that preceded the publication of the notice of sale and the foreclosure sale.

Discussion. The plaintiffs brought actions under G. L. c. 240, § 6, seeking declarations that the defendant mortgagors’ titles had been extinguished and that the plaintiffs were the fee simple owners of the foreclosed properties. As such, the plaintiffs bore the burden of establishing their entitlement to the relief sought. Sheriff’s Meadow Found., Inc. v. Bay-Courte Edgartown, Inc., 401 Mass. 267, 269 (1987). To meet this burden, they were required “not merely to demonstrate better title . . . than the defendants possess, but ... to prove sufficient title to succeed in [the] action.” Id. See NationsBanc Mtge. Corp. v. Eisen­hauer, 49 Mass. App. Ct. 727, 730 (2000). There is no question that the relief the plaintiffs sought required them to establish the validity of the foreclosure sales on which their claim to clear title rested.

Massachusetts does not require a mortgage holder to obtain judicial authorization to foreclose on a mortgaged property. See G. L. c. 183, § 21; G. L. c. 244, § 14. With the exception of the limited judicial procedure aimed at certifying that the mortgagor is not a beneficiary of the Servicemembers Act, a mortgage holder can foreclose on a property, as the plaintiffs did here, by exercise of the statutory power of sale, if such a power is granted by the mortgage itself. See Beaton v. Land Court, 367 Mass. 385, 390-391, 393, appeal dismissed, 423 U.S. 806 (1975).

Where a mortgage grants a mortgage holder the power of sale, as did both the Ibanez and LaRace mortgages, it includes by reference the power of sale set out in G. L. c. 183, § 21, and further regulated by G. L. c. 244, §§ 11-17C. Under G. L. c. 183, § 21, after a mortgagor defaults in the performance of the under­lying note, the mortgage holder may sell the property at a public auction and convey the property to the purchaser in fee simple, “and such sale shall forever bar the mortgagor and all persons claiming under him from all right and interest in the mortgaged premises, whether at law or in equity.” Even where there is a dispute as to whether the mortgagor was in default or whether the party claiming to be the mortgage holder is the true mortgage holder, the foreclosure goes forward unless the mortgagor files an action and obtains a court order enjoining the foreclosure.15 See Beaton v. Land Court, supra at 393.

Recognizing the substantial power that the statutory scheme affords to a mortgage holder to foreclose without immediate judicial oversight, we adhere to the familiar rule that “one who sells under a power [of sale] must follow strictly its terms. If he fails to do so there is no valid execution of the power, and the sale is wholly void.” Moore v. Dick, 187 Mass. 207, 211 (1905). See Roche v. Farnsworth, 106 Mass. 509, 513 (1871) (power of sale contained in mortgage “must be executed in strict compli­ance with its terms”). See also McGreevey v. Charlestown Five Cents Sav. Bank, 294 Mass. 480, 484 (1936).16

One of the terms of the power of sale that must be strictly adhered to is the restriction on who is entitled to foreclose. The “statutory power of sale” can be exercised by “the mortgagee or his executors, administrators, successors or assigns.” G. L. c. 183, § 21. Under G. L. c. 244, § 14, “[t]he mortgagee or person hav­ing his estate in the land mortgaged, or a person authorized by the power of sale, or the attorney duly authorized by a writing under seal, or the legal guardian or conservator of such mortgagee or person acting in the name of such mortgagee or person” is empowered to exercise the statutory power of sale. Any effort to foreclose by a party lacking “jurisdiction and authority” to carry out a foreclosure under these statutes is void. Chace v. Morse, 189 Mass. 559, 561 (1905), citing Moore v. Dick, supra. See Davenport v. HSBC Bank USA, 275 Mich. App. 344, 347-348 (2007) (attempt to foreclose by party that had not yet been as­signed mortgage results in “structural defect that goes to the very heart of defendant’s ability to foreclose by advertisement,” and renders foreclosure sale void).

A related statutory requirement that must be strictly adhered to in a foreclosure by power of sale is the notice requirement articulated in G. L. c. 244, § 14. That statute provides that “no sale under such power shall be effectual to foreclose a mortgage, unless, previous to such sale,” advance notice of the foreclosure sale has been provided to the mortgagor, to other interested par­ties, and by publication in a newspaper published in the town where the mortgaged land lies or of general circulation in that town. Id. “The manner in which the notice of the proposed sale shall be given is one of the important terms of the power, and a strict compliance with it is essential to the valid exercise of the power.” Moore v. Dick, supra at 212. See Chace v. Morse, su­pra (“where a certain notice is prescribed, a sale without any notice, or upon a notice lacking the essential requirements of the written power, would be void as a proceeding for fore­closure”). See also McGreevey v. Charlestown Five Cents Sav. Bank, supra. Because only a present holder of the mortgage is authorized to foreclose on the mortgaged property, and because the mortgagor is entitled to know who is foreclosing and selling the property, the failure to identify the holder of the mortgage in the notice of sale may render the notice defective and the foreclosure sale void.17 See Roche v. Farnsworth, supra (mort­gage sale void where notice of sale identified original mortgagee but not mortgage holder at time of notice and sale). See also Bottomly v. Kabachnick, 13 Mass. App. Ct. 480, 483-484 (1982) (foreclosure void where holder of mortgage not identified in notice of sale).

For the plaintiffs to obtain the judicial declaration of clear title that they seek, they had to prove their authority to foreclose under the power of sale and show their compliance with the requirements on which this authority rests. Here, the plaintiffs were not the original mortgagees to whom the power of sale was granted; rather, they claimed the authority to foreclose as the eventual assignees of the original mortgagees. Under the plain language of G. L. c. 183, § 21, and G. L. c. 244, § 14, the plain­tiffs had the authority to exercise the power of sale contained in the Ibanez and LaRace mortgages only if they were the assignees of the mortgages at the time of the notice of sale and the sub­sequent foreclosure sale. See In re Schwartz, 366 B.R. 265, 269 (Bankr. D. Mass. 2007) (“Acquiring the mortgage after the entry and foreclosure sale does not satisfy the Massachusetts statute”).18 See also Jeff-Ray Corp. v. Jacobson, 566 So. 2d 885, 886 (Fla. Dist. Ct. App. 1990) (per curiam) (foreclosure action could not be based on assignment of mortgage dated four months after commencement of foreclosure proceeding).

The plaintiffs claim that the securitization documents they submitted establish valid assignments that made them the hold­ers of the Ibanez and LaRace mortgages before the notice of sale and the foreclosure sale. We turn, then, to the documenta­tion submitted by the plaintiffs to determine whether it met the requirements of a valid assignment.

Like a sale of land itself, the assignment of a mortgage is a conveyance of an interest in land that requires a writing signed by the grantor. See G. L. c. 183, § 3; Saint Patrick’s Religious, Educ. & Charitable Ass’n v. Hale, 227 Mass. 175, 177 (1917). In a “title theory state” like Massachusetts, a mortgage is a transfer of legal title in a property to secure a debt. See Faneuil Investors Group, Ltd. Partnership v. Selectmen of Dennis, 458 Mass. 1, 6 (2010). Therefore, when a person borrows money to purchase a home and gives the lender a mortgage, the homeowner-­mortgagor retains only equitable title in the home; the legal title is held by the mortgagee. See Vee Jay Realty Trust Co. v. Di­Croce, 360 Mass. 751, 753 (1972), quoting Dolliver v. St. Joseph Fire & Marine Ins. Co., 128 Mass. 315, 316 (1880) (although “as to all the world except the mortgagee, a mortgagor is the owner of the mortgaged lands,” mortgagee has legal title to prop­erty); Maglione v. BancBoston Mtge. Corp., 29 Mass. App. Ct. 88, 90 (1990). Where, as here, mortgage loans are pooled together in a trust and converted into mortgage-backed securities, the underlying promissory notes serve as financial instruments generat­ing a potential income stream for investors, but the mortgages securing these notes are still legal title to someone’s home or farm and must be treated as such.

Focusing first on the Ibanez mortgage, U.S. Bank argues that it was assigned the mortgage under the trust agreement described in the PPM, but it did not submit a copy of this trust agreement to the judge. The PPM, however, described the trust agreement as an agreement to be executed in the future, so it only furnished evidence of an intent to assign mortgages to U.S. Bank, not proof of their actual assignment. Even if there were an executed trust agreement with language of present assignment, U.S. Bank did not produce the schedule of loans and mortgages that was an exhibit to that agreement, so it failed to show that the Ibanez mortgage was among the mortgages to be assigned by that agreement. Finally, even if there were an executed trust agree­ment with the required schedule, U.S. Bank failed to furnish any evidence that the entity assigning the mortgage—Structured Asset Securities Corporation—ever held the mortgage to be assigned. The last assignment of the mortgage on record was from Rose Mortgage to Option One; nothing was submitted to the judge indicating that Option One ever assigned the mortgage to anyone before the foreclosure sale.19 Thus, based on the documents submitted to the judge, Option One, not U.S. Bank, was the mortgage holder at the time of the foreclosure, and U.S. Bank did not have the authority to foreclose the mortgage.

Turning to the LaRace mortgage, Wells Fargo claims that, be­fore it issued the foreclosure notice, it was assigned the LaRace mortgage under the PSA. The PSA, in contrast with U.S. Bank’s PPM, uses the language of a present assignment (“does hereby . . . assign” and “does hereby deliver”) rather than an intent to assign in the future. But the mortgage loan schedule Wells Fargo submitted failed to identify with adequate specificity the LaRace mortgage as one of the mortgages assigned in the PSA. Moreover, Wells Fargo provided the judge with no document that reflected that the ABFC (depositor) held the LaRace mortgage that it was purportedly assigning in the PSA. As with the Ibanez loan, the record holder of the LaRace loan was Option One, and nothing was submitted to the judge which demonstrated that the LaRace loan was ever assigned by Option One to another entity before the publication of the notice and the sale.

Where a plaintiff files a complaint asking for a declaration of clear title after a mortgage foreclosure, a judge is entitled to ask for proof that the foreclosing entity was the mortgage holder at the time of the notice of sale and foreclosure, or was one of the parties authorized to foreclose under G. L. c. 183, § 21, and G. L. c. 244, § 14. A plaintiff that cannot make this modest show­ing cannot justly proclaim that it was unfairly denied a declara­tion of clear title. See In re Schwartz, supra at 266 (“When HomEq [Servicing Corporation] was required to prove its author­ity to conduct the sale, and despite having been given ample op­portunity to do so, what it produced instead was a jumble of documents and conclusory statements, some of which are not supported by the documents and indeed even contradicted by them”). See also Bayview Loan Servicing, LLC v. Nelson, 382 Ill. App. 3d 1184, 1188 (2008) (reversing grant of summary judg­ment in favor of financial entity in foreclosure action, where there was “no evidence that [the entity] ever obtained any legal interest in the subject property”).

We do not suggest that an assignment must be in recordable form at the time of the notice of sale or the subsequent foreclosure sale, although recording is likely the better practice. Where a pool of mortgages is assigned to a securitized trust, the executed agreement that assigns the pool of mortgages, with a schedule of the pooled mortgage loans that clearly and specifically identi­fies the mortgage at issue as among those assigned, may suffice to establish the trustee as the mortgage holder. However, there must be proof that the assignment was made by a party that itself held the mortgage. See In re Samuels, 415 B.R. 8, 20 (Bankr. D. Mass. 2009). A foreclosing entity may provide a complete chain of assignments linking it to the record holder of the mortgage, or a single assignment from the record holder of the mortgage. See In re Parrish, 326 B.R. 708, 720 (Bankr. N.D. Ohio 2005) (“If the claimant acquired the note and mort­gage from the original lender or from another party who acquired it from the original lender, the claimant can meet its burden through evidence that traces the loan from the original lender to the claimant”). The key in either case is that the foreclosing entity must hold the mortgage at the time of the notice and sale in order accurately to identify itself as the present holder in the notice and in order to have the authority to foreclose under the power of sale (or the foreclosing entity must be one of the par­ties authorized to foreclose under G. L. c. 183, § 21, and G. L. c. 244, § 14).

The judge did not err in concluding that the securitization documents submitted by the plaintiffs failed to demonstrate that they were the holders of the Ibanez and LaRace mortgages, respectively, at the time of the publication of the notices and the sales. The judge, therefore, did not err in rendering judgments against the plaintiffs and in denying the plaintiffs’ motions to vacate the judgments.20

We now turn briefly to three other arguments raised by the plaintiffs on appeal. First, the plaintiffs initially contended that the assignments in blank executed by Option One, identifying the assignor but not the assignee, not only “evidence[ ] and confirm[ ] the assignments that occurred by virtue of the securi­tization agreements,” but “are effective assignments in their own right.” But in their reply briefs they conceded that the assign­ments in blank did not constitute a lawful assignment of the mortgages. Their concession is appropriate. We have long held that a conveyance of real property, such as a mortgage, that does not name the assignee conveys nothing and is void; we do not regard an assignment of land in blank as giving legal title in land to the bearer of the assignment. See Flavin v. Morrissey, 327 Mass. 217, 219 (1951); Macurda v. Fuller, 225 Mass. 341, 344 (1916). See also G. L. c. 183, § 3.

Second, the plaintiffs contend that, because they held the mort­gage note, they had a sufficient financial interest in the mortgage to allow them to foreclose. In Massachusetts, where a note has been assigned but there is no written assignment of the mortgage underlying the note, the assignment of the note does not carry with it the assignment of the mortgage. Barnes v. Boardman, 149 Mass. 106, 114 (1889). Rather, the holder of the mortgage holds the mortgage in trust for the purchaser of the note, who has an equitable right to obtain an assignment of the mortgage, which may be accomplished by filing an action in court and obtaining an equitable order of assignment. Id. (“In some jurisdictions it is held that the mere transfer of the debt, without any assignment or even mention of the mortgage, carries the mortgage with it, so as to enable the assignee to assert his title in an action at law. . . . This doctrine has not prevailed in Massachusetts, and the tendency of the decisions here has been, that in such cases the mortgagee would hold the legal title in trust for the purchaser of the debt, and that the latter might obtain a conveyance by a bill in equity”). See Young v. Miller, 6 Gray 152, 154 (1856). In the absence of a valid written assignment of a mortgage or a court order of assignment, the mortgage holder remains unchanged. This common-law principle was later incorporated in the statute enacted in 1912 establishing the statutory power of sale, which grants such a power to “the mortgagee or his executors, admini­strators, successors or assigns,” but not to a party that is the equitable beneficiary of a mortgage held by another. G. L. c. 183, § 21, inserted by St. 1912, c. 502, § 6.

Third, the plaintiffs initially argued that postsale assignments were sufficient to establish their authority to foreclose, and now argue that these assignments are sufficient when taken in conjunc­tion with the evidence of a presale assignment. They argue that the use of postsale assignments was customary in the industry, and point to Title Standard No. 58 (3) issued by the Real Estate Bar Association for Massachusetts, which declares: “A title is not defective by reason of . . . [t]he recording of an Assign­ment of Mortgage executed either prior, or subsequent, to fore­closure where said Mortgage has been foreclosed, of record, by the Assignee.”21 To the extent that the plaintiffs rely on this title standard for the proposition that an entity that does not hold a mortgage may foreclose on a property, and then cure the cloud on title by a later assignment of a mortgage, their reliance is misplaced, because this proposition is contrary to G. L. c. 183, § 21, and G. L. c. 244, § 14. If the plaintiffs did not have their assignments to the Ibanez and LaRace mortgages at the time of the publication of the notices and the sales, they lacked author­ity to foreclose under G. L. c. 183, § 21, and G. L. c. 244, § 14, and their published claims to be the present holders of the mortgages were false. Nor may a postforeclosure assignment be treated as a preforeclosure assignment simply by declaring an “effective date” that precedes the notice of sale and foreclosure, as did Option One’s assignment of the LaRace mortgage to Wells Fargo. Because an assignment of a mortgage is a transfer of legal title, it becomes effective with respect to the power of sale only on the transfer; it cannot become effective before the transfer. See In re Schwartz, supra at 269.

However, we do not disagree with Title Standard No. 58 (3) that, where an assignment is confirmatory of an earlier, valid assignment made prior to the publication of notice and execu­tion of the sale, that confirmatory assignment may be executed and recorded after the foreclosure, and doing so will not make the title defective. A valid assignment of a mortgage gives the holder of that mortgage the statutory power to sell after a default regardless whether the assignment has been recorded. See G. L. c. 183, § 21; MacFarlane v. Thompson, 241 Mass. 486, 489 (1922). Where the earlier assignment is not in recordable form or bears some defect, a written assignment executed after fore­closure that confirms the earlier assignment may be properly recorded. See Bon v. Graves, 216 Mass. 440, 444-445 (1914). A confirmatory assignment, however, cannot confirm an assign­ment that was not validly made earlier or backdate an assign­ment being made for the first time. See Scaplen v. Blanchard, 187 Mass. 73, 76 (1904) (confirmatory deed “creates no title” but “takes the place of the original deed, and is evidence of the making of the former conveyance as of the time when it was made”). Where there is no prior valid assignment, a subsequent assignment by the mortgage holder to the note holder is not a confirmatory assignment because there is no earlier written as­signment to confirm. In this case, based on the record before the judge, the plaintiffs failed to prove that they obtained valid written assignments of the Ibanez and LaRace mortgages before their foreclosures, so the postforeclosure assignments were not confirmatory of earlier valid assignments.

Finally, we reject the plaintiffs’ request that our ruling be pro­spective in its application. A prospective ruling is only appropri­ate, in limited circumstances, when we make a significant change in the common law. See Papadopoulos v. Target Corp., 457 Mass. 368, 384 (2010) (noting “normal rule of retroactivity”); Payton v. Abbott Labs, 386 Mass. 540, 565 (1982). We have not done so here. The legal principles and requirements we set forth are well established in our case law and our statutes. All that has changed is the plaintiffs’ apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities.

Conclusion. For the reasons stated, we agree with the judge that the plaintiffs did not demonstrate that they were the holders of the Ibanez and LaRace mortgages at the time that they fore­closed these properties, and therefore failed to demonstrate that they acquired fee simple title to these properties by purchasing them at the foreclosure sale.

Judgments affirmed.

5

We acknowledge the amicus briefs filed by the Attorney General; the Real Estate Bar Association for Massachusetts, Inc.; Marie McDonnell; and the National Consumer Law Center, together with Darlene Manson, Germano De­Pina, Robert Lane, Ann Coiley, Roberto Szumik, and Geraldo Dosanjos.

6

The uncertainty surrounding the first issue was the reason the plaintiffs sought a declaration of clear title in order to obtain title insurance for these properties. The second issue was raised by the judge in the LaRace case at a January 5, 2009, case management conference.

7

The judge also concluded that the Boston Globe was a newspaper of general circulation in Springfield, so the foreclosures were not rendered invalid on that ground because notice was published in that newspaper.

8

In the third case, LaSalle Bank National Association, trustee for the certificate holders of Bear Stearns Asset Backed Securities I, LLC Asset-­Backed Certificates, Series 2007-HE2 vs. Freddy Rosario, the judge concluded that the mortgage foreclosure “was not rendered invalid by its failure to record the assignment reflecting its status as holder of the mortgage prior to the foreclosure since it was, in fact, the holder by assignment at the time of the foreclosure, it truthfully claimed that status in the notice, and it could have produced proof of that status (the unrecorded assignment) if asked.”

9

On June 1, 2009, attorneys for the defendant mortgagors filed their appear­ance in the cases for the first time.

10

The LaRace defendants allege that the documents submitted to the judge following the plaintiffs’ motions to vacate judgment are not properly in the record before us. They also allege that several of these documents are not properly authenticated. Because we affirm the judgment on other grounds, we do not address these concerns, and assume that these documents are properly before us and were adequately authenticated.

11

This signed and notarized document states: “FOR VALUE RECEIVED, the undersigned hereby grants, assigns and transfers to _ all beneficial interest under that certain Mortgage dated December 1,2005 executed by Antonio Ibanez . . . .”

12

The Structured Asset Securities Corporation is a wholly owned direct subsidiary of Lehman Commercial Paper Inc., which is in turn a wholly owned, direct subsidiary of Lehman Brothers Holdings Inc.

13

As implemented in Massachusetts, a mortgage holder is required to go to court to obtain a judgment declaring that the mortgagor is not a beneficiary of the Servicemembers Act before proceeding to foreclosure. St. 1943, c. 57, as amended through St. 1998, c. 142.

14

The Land Court judge questioned whether American Home Mortgage Ser­vicing, Inc., was in fact a successor in interest to Option One. Given our affirmance of the judgment on other grounds, we need not address this question.

15

An alternative to foreclosure through the right of statutory sale is foreclosure by entry, by which a mortgage holder who peaceably enters a property and remains for three years after recording a certificate or memorandum of entry forecloses the mortgagor’s right of redemption. See G. L. c. 244, §§ 1, 2; Joyner v. Lenox Sav. Bank, 322 Mass. 46, 52-53 (1947). A foreclosure by entry may provide a separate ground for a claim of clear title apart from the foreclosure by execution of the power of sale. See, e.g., Grabiel v. Michelson, 297 Mass. 227, 228-229 (1937). Because the plaintiffs do not claim clear title based on foreclosure by entry, we do not discuss it further.

16

We recognize that a mortgage holder must not only act in strict compli­ance with its power of sale but must also “act in good faith and . . . use reasonable diligence to protect the interests of the mortgagor,” and this responsibility is “more exacting” where the mortgage holder becomes the buyer at the foreclosure sale, as occurred here. See Williams v. Resolution GGF Oy, 417 Mass. 377, 382-383 (1994), quoting Seppala & Aho Constr. Co. v. Petersen, 373 Mass. 316, 320 (1977). Because the issue was not raised by the defendant mortgagors or the judge, we do not consider whether the plaintiffs committed a breach of this obligation.

17

The form of foreclosure notice provided in G. L. c. 244, § 14, calls for the present holder of the mortgage to identify itself and sign the notice. While the statute permits other forms to be used and allows the statutory form to be “altered as circumstances require,” G. L. c. 244, § 14, we do not interpret this flexibility to suggest that the present holder of the mortgage need not identify itself in the notice.

18

The plaintiffs were not authorized to foreclose by virtue of any of the other provisions of G. L. c. 244, § 14: they were not the guardian or con­servator, or acting in the name of, a person so authorized; nor were they the attorney duly authorized by a writing under seal.

19

Ibanez challenges the validity of this assignment to Option One. Because of the failure of U.S. Bank to document any preforeclosure sale assignment or chain of assignments by which it obtained the Ibanez mortgage from Option One, it is unnecessary to address the validity of the assignment from Rose Mortgage to Option One.

20

The plaintiffs have not pressed the procedural question whether the judge exceeded his authority in rendering judgment against them on their motions for default judgment, and we do not address it here.

21

Title Standard No. 58 (3) issued by the Real Estate Bar Association for Massachusetts continues: “However, if the Assignment is not dated prior, or stated to be effective prior, to the commencement of a foreclosure, then a foreclosure sale after April 19, 2007 may be subject to challenge in the Bankruptcy Court,” citing In re Schwartz, 366 B.R. 265 (Bankr. D. Mass. 2007).

Cordy, J.

(concurring, with whom Botsford, J., joins). I concur fully in the opinion of the court, and write separately only to underscore that what is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosure in Massachusetts, but rather the utter carelessness with which the plaintiff banks documented the titles to their assets. There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure. Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order. Although there was no apparent actual unfairness here to the mortgagors, that is not the point. Fore­closure is a powerful act with significant consequences, and Massachusetts law has always required that it proceed strictly in accord with the statutes that govern it. As the opinion of the court notes, such strict compliance is necessary because Mas­sachusetts both is a title theory State and allows for extrajudi­cial foreclosure.

The type of sophisticated transactions leading up to the ac­cumulation of the notes and mortgages in question in these cases and their securitization, and, ultimately the sale of mortgage-­backed securities, are not barred nor even burdened by the require­ments of Massachusetts law. The plaintiff banks, who brought these cases to clear the titles that they acquired at their own foreclosure sales, have simply failed to prove that the underlying assignments of the mortgages that they allege (and would have) entitled them to foreclose ever existed in any legally cognizable form before they exercised the power of sale that accompanies those assignments. The court’s opinion clearly states that such as­signments do not need to be in recordable form or recorded before the foreclosure, but they do have to have been effectuated.

What is more complicated, and not addressed in this opinion, because the issue was not before us, is the effect of the conduct of banks such as the plaintiffs here, on a bona fide third-party purchaser who may have relied on the foreclosure title of the bank and the confirmative assignment and affidavit of foreclosure recorded by the bank subsequent to that foreclosure but prior to the purchase by the third party, especially where the party whose property was foreclosed was in fact in violation of the mortgage covenants, had notice of the foreclosure, and took no action to contest it.

10.7.2 US Bank Nat'l Ass'n v. Ibanez: Notes + Questions 10.7.2 US Bank Nat'l Ass'n v. Ibanez: Notes + Questions

1. In a “title” theory state like Massachusetts, the mortgagee in theory has legal title to the property, though the mortgagee holds it in trust for the mortgagor, who has equitable title. The alternative “lien” theory holds that legal title remains in the mortgagor, and the mortgage is merely a lien on the property. Does the difference between title theory and lien theory make any difference in this case? (Because of the mortgagor’s equitable title in title theory states, the general modern answer is that there is no difference in the governing legal principles, but the reasoning may vary from state to state.) What about the fact that the foreclosure was done through a nonjudicial power of sale – should that make a difference?

2. One of the reasons the court gives for its judgment is that, in Massachusetts, assignment in blank isn’t allowed for an interest in land. Why might the legislature make such a rule? This is not the rule in all states, but amazingly the originators didn’t pay much attention to state by state variations.

3. Who owns the houses at issue, after the opinion? What steps should the banks take now? What is the effect of Massachusetts’ recording statute on a scenario in which a third party buys the property at the foreclosure sale and records?

4. Consider the following excerpt from Paul McMorrow, A new act in foreclosure circus, January 14, 2011, Boston Globe:

According to the real estate tracker the Warren Group, there have been more than 44,000 residential foreclosures recorded in Massachusetts since 2006. In the majority of those cases, the foreclosing bank turned around and re-sold the seized property. So there are now tens of thousands of Massachusetts residents living in homes that, until relatively recently, belonged to somebody else.

… I took a random sample of 30 foreclosure deeds from Chelsea (one of the cities hit hardest by foreclosures) since the beginning of 2006. Of those 30 foreclosure cases, 10 had paperwork on file with the Registry of Deeds that raised the sort of chain-of-custody concerns at the heart of the Ibanez decision. In one case, no mortgage was on file with the registry. Another showed no paperwork assigning the note to a mortgage servicer. In other cases, mortgage originators didn’t sign off on documents transferring the notes into mortgage pools, or transfer paperwork was filed after a foreclosure occurred. All of the properties have since been re-sold.

That’s not to say any of those foreclosures will or should be overturned in court. But it is an indication of how pervasive sloppy record-keeping was, and how many foreclosures could be challenged on technical grounds based on the recent SJC decision. And it presents a series of terrible questions to anyone who bought a foreclosed house from a big bank. Among them: Is my mortgage valid? Will I be able to refinance or sell my home? Do I even really own my house?

 How would you go about answering McMorrow’s questions for a client?

5.Consider also Abigail Field, Lawyers’ Carelessness Was Key to the Mortgage Mess, DailyFinance, Feb. 1, 2011:

The Ibanez case highlighted a basic, non-due-diligence problem too -- one that, according to bankruptcy and legal-aid attorneys I speak with, is occurring across the country. The banks’ lawyers can’t produce complete sets of securitization contracts even after being given the specific opportunity to do so. In various cases, the banks have submitted unsigned drafts. They’ve submitted signed copies of some contracts, but not even drafts of others. And they’ve submitted contracts without their exhibits, like a list of the mortgages being securitized.

Every corporate deal I was ever involved with resulted in “closing sets,” a series of binders containing every contract with each exhibit. … [A] key part of the value lawyers add is keeping the documents in good order and accessible to their clients when needed.

So, the issue of partial deal documents that came to light in Ibanez and continues to crop up elsewhere means one of three things:

1. Securitization deals were so carelessly done that, despite all the proper documents being created, closing sets don’t exist.

2. Securitization deals were so carelessly done that not all the proper documents were created (such as lists of the mortgages involved) and so closing sets don’t exist.

3. All the documents and closing sets are fine, and the big banks have grown so incompetent they can’t give their foreclosure attorneys deal documents that they do have or could get from their securitization counsel.

I’m not sure which of these is worst.

 What should the banks’ lawyers have done with the documents they had available to use in the foreclosure process?

6. Review the alleged chain of title for the Ibanez/US Bancorp mortgage. US Bancorp took the mortgage from a now-bankrupt subsidiary of the now-bankrupt firm Lehman Brothers. Getting an assignment from Lehman may be difficult or even impossible. Among other things, because Lehman is bankrupt, it may not transfer assets out of its estate to particular creditors without going through extensive proceedings that are designed to be fair to all the creditors. Regardless, an assignment from Lehman would be insufficient: there is still the undocumented Option One-Lehman transfer. It might be simplest for US Bancorp to go straight to Option One and ask for an assignment. But US Bancorp didn’t buy the mortgage from Option One. There is no contractual relationship between those two entities and thus no duty on Option One to do everything necessary to ensure that US Bancorp has good title. Even if US Bancorp asks Option One for an assignment, Option One likely regarded the mortgage as sold to Lehman many years back and may not have appropriate records. Furthermore, Option One may consider any attempt to assign a mortgage that was already sold to Lehman to be legally risky; it will certainly want US Bancorp to indemnify it and likely to pay extra for the privilege of getting the assignment. This problem is not confined to loans that passed through Lehman (though there were a great many that did) – many companies involved in the mortgage bubble have entered bankruptcy or changed ownership, making documentation of the assignments all but impossible.

7. Given that the mortgages were concededly in default, is there any reason to insist on the formalities in cases like this? After all, the one thing we know is that the homeowners weren’t paying what they owed. See, e.g., Editorial, The Politics of Foreclosure, WALL ST. J., Oct. 9, 2010. But see Miller v. Homecomings Financial, LLC, 881 F. Supp. 2d 825, 832 (S.D.Tex. 2012) (“Banks are neither private attorneys general nor bounty hunters, armed with a roving commission to seek out defaulting homeowners and take away their homes in satisfaction of some other bank’s deed of trust.”); David A. Dana, Why Mortgage “Formalities” Matter, 24 LOY. CONSUMER L. REV. 505 (2012) (given the importance of the home, and of the rule of law, formalities matter, and may also deter future careless lending).

8. Sometimes the sloppiness in record-keeping led to truly astonishing errors. In a random audit on WaMu Mortgage Pass-Through Certificates, Mortgage Loan Trusts, one loan was found in 6 different trusts, another loan was found in five trusts’ original SEC loan level data, 39 were listed in 3 trusts, and 503 were listed in two separate trusts. The most extreme example, a New York condo, appeared in 6 different trusts from May through November 2006. Gary Victor Dubin, Securitized Distrust, Mar. 15, 2012 (https://deadlyclear.wordpress.com/2012/03/15/securitized-distrust/).

9. Occasionally, evidence of these careless procedures appears in official title records. Recall that, in order to move the mortgage from its originator to its ultimate holder, an assignment was required – usually more than one, with a chain going from the originator, to the sponsor who lent the originator money to make the loan, to the depositor that funded the sponsor, to the trust that ultimately held the mortgages as assets underlying the mortgage-backed securities it issued. Who exactly is the assignee in this record from Nassau County, New York?

10.7.3 Notes on Subsequent Purchasers 10.7.3 Notes on Subsequent Purchasers

Bevilacqua v. Rodriguez, 460 Mass. 762, 955 N.E.2d 884 (2011), dealt with property owners with defective title resulting from Ibanez-style foreclosure problems earlier in the chain. In other words, the mortgagee (or, realistically, its representative/putative representative) had foreclosed in a manner held unlawful by Ibanez, then had sold the house again to a new buyer. The Massachusetts high court held that the new buyers could not clear title under the Massachusetts “try title” procedure, which is a way that an owner can quiet title and establish which of competing claims is valid. However, the court ruled, that procedure is only available to people who can plausibly claim to be owners. In Bevilacqua, the chain of title had been broken by the unsuccessful foreclosure before the purchase, and so the new buyer couldn’t bring a plausible claim. This is not a terribly surprising result: if someone records a deed to the Brooklyn Bridge, then brings a try title claim to confirm her ownership, title to the bridge is not conveyed magically even if the true owner fails to show up.

The Bevilacqua court left open the possibility that owners/lenders could try to put the chain of title back together and conduct a new, valid foreclosure, though this will certainly prove complicated in practice, as the notes above suggest. Another possibility is to track down the old preforeclosure owner (who is still the owner because of the Ibanez problem) and obtain a quitclaim deed from her. If you represented an old owner in this situation, what would you counsel? What if you represented a new buyer?

Is it fair to strip the new buyer of title, when the buyer is unlikely to have any responsibility (or even much understanding of) the shoddy recording practices that caused the problem? How else should we resolve the problem? Bevilacqua/his title insurer will have a claim against the seller, but we still need to know who gets the house – you should be able to see similarities from our discussion of stolen property.

10.8 G. MERS and Other Title Workarounds 10.8 G. MERS and Other Title Workarounds

10.8.1 Adam J. Levitin, The Paper Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title 10.8.1 Adam J. Levitin, The Paper Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title

63 DUKE L.J. 637 (2013) (excerpts reprinted by permission)

SECURITIZATION-ERA MORTGAGE TITLE SYSTEMS

…MERS [Mortgage Electronic Registration Systems, Inc.] is a private, contractual superstructure that is grafted onto the public land-recordation system. Financial institutions that are members of MERS register the loans they service (but do not necessarily own) with the MERS System electronic database. Each loan receives a unique identifier known as a MERS Identification Number (MIN). The MIN is sometimes stamped on the note or sometimes simply recorded in the lender’s own records. MERS is then inserted in the local land records as the mortgagee, instead of the actual lender. Sometimes this involves an assignment of the mortgage from the lender to MERS, but the more prevalent arrangement has MERS recorded as the original mortgagee, thereby obviating any recordation of assignments. MERS serves as the mortgagee of record, but only as a nominee for the actual lender and supposedly for its successors and assigns. The language included in MERS mortgages is that MERS is acting “solely as nominee for Lender and Lender’s successors and assigns.” MERS claims no beneficial interest whatsoever in the loan.

MERS’s goal is to immobilize mortgage title through a common-agency structure by acting as nominee for the lender and those subsequent transferees of the lender that are members of MERS. Although legal title remains in MERS’s name, subsequent transfers are supposed to be tracked in MERS’s database.

Thus, MERS aims to achieve the priority and enforcement benefits of public recordation while tracking beneficial ownership title in its own database. MERS’s operation has two important implications. First, instead of paying county recordation and transfer fees, financial institutions pay only for MERS membership and MERS transaction fees. MERS thus offers potential cost savings in the securitization process through the avoidance of local recording fees. Second, MERS’s electronic database, not the county land records, represents the main evidentiary source for determining who is currently the real party in interest on a mortgage.

In theory, MERS’s database tracks two distinct characteristics: the identity of the party with the rights to service the mortgage (often an agent for the trustee for the trust created for the ultimate beneficial owners of the mortgage loan) and the legal title to mortgages (for example, the trustee for the trust created for the ultimate beneficial owners of the mortgage). MERS’s publicly available records do not track chain of title. It is impossible for outsiders to determine if transfers were made in the MERS system and when. Instead, MERS publicly tracks only the current servicer and sometimes the current beneficial owner of a loan.

A major problem with MERS as a title system is that it is not accurate and reliable in terms of what it reports. MERS’s members are nominally required to report transfers of mortgage servicing rights to MERS, but MERS does not actually compel reporting of servicing-rights transfers, and there is little incentive to be punctual with reporting. Indeed, the lack of record validation combined with voluntary reporting has led a federal judge to describe MERS as “the Wikipedia of land registration systems.” Not surprisingly, the information in the MERS database is often inaccurate or incomplete.

MERS does not even formally require any reporting of legal title to the mortgages, much less of transfers of legal title; any information about legal title is supplied through strictly voluntary reporting. …

MERS’s database functions as a do-it-yourself private mortgage recordation system. Historically, MERS itself has had only around fifty employees who perform corporate and technology support functions. Employees of MERS’s members carry out most of the tasks done in MERS’s name, including the making of entries in the MERS database. These employees of MERS’s members are listed as assistant secretaries or vice presidents of MERS, but they have no actual employment relationship with MERS. There are over twenty thousand of these “corporate signing officers.” Accordingly, a transfer of either servicing or legal title in the MERS system involves nothing more than an employee of a MERS member entering the transfer in the MERS database.

A transfer within the MERS system involves voluntary self-reporting and nothing more and therefore fails to incentivize timely, accurate reporting. There are no formalities to a transfer in the MERS system. As a result, MERS may not in fact know who its principal is within the common-agency arrangement at any given point in time because MERS is relying on reporting from its members.

10.8.2 Securitization and MERS: Notes + Questions 10.8.2 Securitization and MERS: Notes + Questions

1. Along with the “Wikipedia” characterization of MERS as freely editable, a Reuters investigation used a different metaphor: “MERS has served in effect as an instant teller machine for mortgage assignments. Servicers simply have their own employees sign the needed documents as MERS officials.” At least one bank has sued another bank for allegedly assigning the first bank’s mortgages to itself using MERS.

2. According to Donald J. Kochan, public recording serves a number of important purposes:

Recording creates a network of information supporting a network of transactions. Property recording systems offer information to a number of constituencies, including: (1) owners, acting as sellers or as borrowers; (2) lenders, including mortgage providers; (3) other providers of capital; (4) buyers; (5) leaseholders; (6) title insurance companies; (7) governmental entities, such as police, regulators, and taxing authorities; and (8) other parties who may need to interact with the property at some time and know who the law deems to have ownership of the property. Recording allows all of these market and legal participants to connect. It is imperative that we recognize the variety of market players that use and benefit from the recording statutes and from the existence of reliable, verifiable records of ownership.

It is not just the owner and the most immediate lender that care about proper recording. Those who wish to invest in, contract with, lease from, or provide capital to property owners demand the existence of a recording system so that they can identify the ownership interests associated with the property, including determining whether and to what extent that property is encumbered by a mortgage. So, too, do prospective buyers of property require a verifiable repository of title information to guide their purchasing decisions. These other players must be able to discover the limits on title with a level of clarity. Similarly, those who wish to provide loans secured by property or to make other capital investments in property need assurances that the owner owns the property that he says he owns and that the system reflects all competitive claims to or liens on title.

… At the very least, fragmentation of interests by securitization makes ownership interests in real property harder to identify, necessitating the existence of an accurate and complete means for tracking and recording these interests. … [Securitization] is an important financial mechanism for the efficient provision of capital and should not be sacrificed in an effort to resolve the mortgage crisis or to prevent future crises. In fact, it is difficult to see the provision of loans in today’s financial system without some reliance on securitization.

To make securitization effective, the loan-granting institution typically assigns its rights in both the note and the mortgage, sometimes to different parties. Due to transfers to the secondary market, securitization, and multiple assignments of notes and mortgages, it can become difficult to trace all of the steps along the way. This flurry of activity – and the number and variety of participants involved – can lead to problems in the chain of title and identifying who ultimately and currently holds the enforceable note and mortgage interests against the property owner. These problems are especially evident when the formalities of transfer, such as required endorsements of notes, are not satisfied and when the transfers are not recorded in some central repository.

 Donald J. Kochan, Certainty of Title: Perspectives after the Mortgage Foreclosure Crisis on the Essential Role of Effective Recording Systems, 66 Ark. L. Rev. 267 (2013). Could MERS fulfill the functions of recording in such a system? What would need to change?

3. Many laws require notice to be given to anyone with a properly recorded interest in property. If MERS is listed as the “nominee” of the lender, does it have such an interest? Suppose the mortgagor failed to pay county property taxes and her home was subject to a tax sale. The county sent notice to the mortgagee for whom MERS was listed as nominee, but that entity had long ago sold the mortgage and subsequently went out of business, so it didn’t respond. If the county had sent notice to MERS, it’s at least possible that MERS would have informed the current owner of the mortgage, which would have participated in the tax sale to protect its interest. Instead, because no representative of the mortgagee showed up at the tax sale, the property was sold to a new owner free of the mortgage. Did MERS suffer a redressable injury? See Mortgage Elec. Regis. Sys., Inc. v. Ditto, No. E2012-02292-SC-R11-CV (Tenn. Dec. 11, 2015) (MERS had none of the rights or duties of an owner; the fact that it wasn’t entitled to notice might cause harm to its business model, but that wasn’t enough to provide it a right to notice).

4. Why were large institutions so cavalier about record-keeping? Fannie Mae is a government-backed, now government-run institution that bought many mortgages. A 2006 internal Fannie Mae investigation explained:

Fannie Mae’s position is that it does not need to appear in the land records in order to have the benefit of the security provided by the mortgage…. [T]he transfer of an obligation secured by a security interest also transfers the security interest. Thus, the transfer of the promissory note, which is the obligation, also transfers the mortgage, which is the security interest. Once the note is sold to Fannie Mae, the mortgage also transfers, despite the fact that the servicer, lender, or MERS’ name appears in the land records. Borrowers thus cannot determine the chain of owners from public records….

Fannie Mae believes that lost note affidavits are the servicer’s responsibility and can not be effectively reviewed under the current system. Fannie Mae has delegated the execution of lost note affidavits to servicers. It does not believe that it is in a position to make a subjective call as to whether a servicer has lost a note…. Fannie Mae views such an investigation as unnecessary because document custodians are responsible for retaining mortgage documents and must bear an expense if they are unable to locate mortgage documents. For these reasons, Fannie Mae believes that servicers are not likely to state that the notes are lost, stolen or missing if they in fact are not. (emphasis added)

 Can you spot the problem here? One entity, Lender Processing Services, at one point had a price list for “recreating” mortgage-related documents. A lost note affidavit was $12.95, as was a note allonge (a document that is supposed to be stapled to the original note documenting a transfer); an intervening assignment to fill a gap in the record chain of title was $35, and “recreating” an entire file was $95.

An important point to remember here is that recording usually only matters when there’s a bona fide purchaser contesting ownership. As long as the originator didn’t sell the mortgage twice, an unrecorded interest is still valid against the mortgagor, assuming the claimant can prove that it owns the interest. That may be a faulty assumption, but Fannie Mae figured that risk was low.

5. The toxic brew of carelessness, unprecedented volume of foreclosures, and disregard for the rights of borrowers has finally begun to attract judicial attention. A bankruptcy judge recently identified

a general willingness and practice on Wells Fargo’s part to create documentary evidence, after‐the‐fact, when enforcing its claims, WHICH IS EXTRAORDINARY. Moreover, [the Wells Fargo employee’s] testimony does not stop at describing manufactured mortgage assignments. … [T]he “assignment team” included people tasked with endorsing notes [from other entities to Wells Fargo]… Frankly, it does not appear that [the Wells Fargo employee] understood the difference between preparing legitimate assignments and indorsements by Wells Fargo and improper assignments and indorsements to Wells Fargo. (emphasis in original)

 In re Carrsow-Franklin, No. 10‐20010 (S.D.N.Y. Bkcy. Jan. 29, 2015). What responsibility do lawyers have to train employees in charge of tasks with such legal relevance?

10.9 H. An Additional Puzzle Piece: The Mortgage and the Note 10.9 H. An Additional Puzzle Piece: The Mortgage and the Note

As previously discussed, what we conventionally call a “mortgage” actually has two parts. The “note” is the borrower’s promise to repay the debt: the note is governed by contract law, or more specifically commercial law. The note specifies the terms of the debt, including late fees and how interest is calculated. It can be replaced by a “Lost Note Affidavit,” but that’s supposed to be for special circumstances. The “mortgage” is the interest in land associated with the loan. It is a lien, governed by real estate law. The mortgage is the thing that should be filed and recorded. The mortgage is what gives the lender the right to take the collateral (the house) if the note isn’t paid by the borrower.

Why split things up in this way? It seems to offer more opportunities for things to go wrong. Is there a reason not to put the two documents together and require the “mortgage” to contain all the terms of the debt? What happens if the ownership of the two legal interests, and custody of the two documents, becomes separated? The standard rule is that “[t]he note is the cow and the mortgage the tail. The cow can survive without a tail, but the tail cannot survive without the cow.” Best Fertilizers of Ariz., Inc. v. Burns, 571 P.2d 675, 676 (Ariz. Ct. App. 1977), rev’d on other grounds, 570 P.2d 179 (Ariz. 1977) (quoting Professor Chester Smith). That is, the note is the real debt; a mortgage with no associated note is worthless. However, a note with no associated mortgage is just an unsecured loan.

Because of this, the law does not favor separation of the note and the mortgage, and works very hard to impute a relationship between them that makes the mortgage enforceable. The Restatement (Third) of Property (Mortgages) states that “in general a mortgage is unenforceable if it is held by one who has no right to enforce the secured obligation.” As a result, if the mortgagee transfers the mortgage to A and the note to B, neither can foreclose unless A can foreclose on B’s behalf. Thus, the Restatement concludes,

The [necessary] trust or agency relationship may arise from the terms of the assignment, from a separate agreement, or from other circumstances. Courts should be vigorous in seeking to find such a relationship, since the result is otherwise likely to be a windfall for the mortgagor and the frustration of B’s expectation of security.

 See also Eaton v. Federal National Mortgage Association, 462 Mass. 569 (2012) (mortgage foreclosure may only be carried out by one who holds the mortgage and also either holds the note or acts on behalf of the note holder).

Most of our discussion, and most of the litigation over chain of title, has focused on problems with the mortgages, not the notes. It seems undeniable, however, that there are similar if not worse issues with the notes (and MERS never purported to track notes). Some have argued that transfers of the notes are governed by the Uniform Commercial Code’s provisions for negotiable instruments, not by state foreclosure statutes. See, e.g., Dale A. Whitman & Drew Milner, Foreclosing on Nothing: The Curious Problem of the Deed of Trust Foreclosure Without Entitlement to Enforce the Note, 66 ARK. L. REV. 21 (2013). A number of states seem to agree that the mortgagor has nothing to complain about if she’s in default, and that she lacks standing to challenge ownership of the note. If the wrong claimant takes the property, the right claimant can sue.

The contrary position relies on relativity of title: peaceable possessors have legitimate rights until someone proves better title. Just because a possessor doesn’t have a right to be on the property doesn’t mean that she can be ejected by someone with no better claim. See Tapscott v. Lessee of Cobbs, 11 Gratt. 172, 52 Va. 172 (1854); see also Yvanova v. New Century Mortgage Corp., No. S218973 (Cal. Feb. 18, 2016) (borrower has standing to sue for wrongful foreclosure when the foreclosing party allegedly didn’t own the note and deed of trust; “[t]he borrower owes money not to the world at large but to a particular person or institution, and only the person or institution entitled to payment may enforce the debt by foreclosing on the security”).

10.10 I. What Now? 10.10 I. What Now?

Despite all these flaws in the system, shouldn’t the borrowers just have paid? After all, if they hadn’t defaulted, they wouldn’t have entered into the resulting hellscape.

Even if you excuse the victims of fraud from this claim – and there were many – it is important to remember that the mortgage contract is not just an agreement that the home may be sold upon a default on the loan. It’s an agreement that if the homeowner defaults on the loan, the mortgagee may sell the property following the required legal procedure. A mortgage loan involves a bundle of rights, including procedural rights. These rights have a price: for example, loans in judicial foreclosure states have historically been more expensive than loans in nonjudicial foreclosure states. When the lender (or someone claiming rights as successor of the lender) ignores the rights, it’s getting something it hasn’t paid for.
Entirely separately, we might want people to be able to renegotiate their deals when renegotiation makes everyone better off – but with the system the way it is, that’s proven extremely difficult. Procedural protections provide both time and negotiating leverage.

For an eye-opening account by one young lawyer of the messy process of seeking a loan modification for a borrower, see Wajahat Ali, Could It Be That the Best Chance To Save a Young Family from Foreclosure Is a 28-Year-Old Pakistani American Playright-Slash-Attorney Who Learned Bankruptcy Law on the Internet?, McSweeney’s (Jan. 2010) (http://www.mcsweeneys.net/articles/could-it-be-that-the-best-chance-to-save-a-young-family-from-foreclosure-is-a-28-year-old-pakistani-american-playright-slash-attorney-who-learned-bankruptcy-law-on-the-internet). Essentially, Ali could never get the same answer twice from the servicer; it repeatedly denied receiving documents supporting his clients’ request for modification; it denied modifications based on completely mistaken premises; and it didn’t even tell him or his clients when it finally did grant a modification, leaving them expecting foreclosure. It took multiple threats to file bankruptcy, which would have automatically stayed a foreclosure, to induce the servicer to respond.
Federal bank regulators signed settlements in March 2011 with 14 loan servicers, who promised further internal investigations, remediation for some who were harmed, and a halt to the filing of false documents. The servicers claimed to have ended this behavior in late 2010. Reuters examined a large number of foreclosure filings and concluded that, to the contrary, robo-signing was ongoing. In February 2012 the servicers promised to stop again. There’s very little indication that they’ve stopped. However, the major servicing companies did enter into a $25 billion settlement with federal and many state officials that was supposed to compensate homeowners for servicing errors and require better behavior going forward. In response, property professor Mark Edwards wrote:

Let’s say I hire an armed gang to expel you from your house. My gang removes all of your belongings, changes the locks, and warns you that you'd better not try to come back. I then sell your house to someone else. You might have called the police, but the armed gang I hired actually are the police. You might have gone to court to stop me, but the court is on my side, because I deliberately mislead the courts. Now let’s say I did the same thing thousands and thousands of times to other people as well. And you can prove it. I'd be in pretty big trouble, wouldn’t I? ….

[The settlement provides for] $1500 to $2000 per home…. $1500-2000 is less than the legal expenses banks incur when a foreclosure is challenged. It’s less than title insurance on homes worth over $200K.

Why would regulators agree to a settlement of this magnitude? What were the alternatives?

Mortgage crisis-related disputes continue. For example, in March 2015, the Department of Justice’s U.S. Trustee Program (USTP), which oversees bankruptcy estates, entered into a national settlement agreement with JPMorgan Chase Bank N.A. requiring Chase to pay more than $50 million to over 25,000 homeowners who are or were in bankruptcy. Among other things, Chase acknowledged that it filed more than 50,000 payment change notices that were improperly signed, under penalty of perjury, by persons who had not reviewed the accuracy of the notices.

In 2013, the Consumer Finance Protection Bureau issued national rules on mortgage servicing standards. Except for smaller servicers, mortgage servicers must make good-faith efforts to contact borrowers by the 36th day of delinquency and tell them about loss mitigation options, such as short sales and loan modifications. By day 45, servicers must send written notice of these options and the name of a contact person. Servicers may only begin foreclosures if a homeowner is over 120 days delinquent, and a borrower’s pending loss mitigation application precludes the initiation of a foreclosure. If the foreclosure has been initiated when a borrower submits a loss mitigation application, the servicer may not move for final judgment or sale as long as the application is complete 37 days before the sale. Servicers may not “double-track” – pursue mitigation measures with a borrower while also continuing the foreclosure process. If the servicer denies the borrower’s application, it must give specific reasons and afford a right of appeal. Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X), 78 Fed. Reg. 10696 (codified at 12 C.F.R. §1024) (2013).

As a result of changes in foreclosure procedures and servicer behavior, the average time between the beginning of a foreclosure and its end has increased substantially. In 2007, a foreclosure in New York took less than 300 days, while it took 1089 days by the end of 2012. California, which more commonly uses the speedier nonjudicial foreclosure process, experienced a more than doubled time of 347 days. RealtyTrak, 2013 Short Sale Trends (2013) (http://www.slideshare.net/fullscreen/RealtyTrac/2013-short-sale-trends/1).

What are the possible benefits of delay for homeowners? What about the possible risks? In some cases, servicers initiate foreclosures but do not complete them, leading to so-called “zombie foreclosures.” Completing the foreclosure would make the mortgagee the legal owner of the property, subject to property taxes and to the duty to avoid creating a nuisance condition on the property. In markets with many empty houses, the mortgagee may well wish to avoid this outcome, because it won’t be able to sell the house quickly or otherwise recoup its maintenance costs. In addition, when people believe that they will soon be kicked out, they tend not to maintain the property, and some even deliberately inflict damage. However, the mortgagors are often unaware of their continuing legal duties, and abandon the property in the belief that the foreclosure will occur, exposing themselves to unforeseen liability and their communities to further deterioration of the tax base and the physical condition of homes. Is there anything law could do to mitigate the problem of such “zombie foreclosures”?

Various programs have attempted to help homeowners at risk of foreclosure, with generally modest results. The federal government set up the Home Affordable Modification Program (HAMP), which was supposed to keep four million homeowners in their homes by reducing interest rates and extending repayment times, though not by forgiving principal. Six years later, under 900,000 homeowners were participating in modifications. Servicers rejected four million applications, or 72% of requests. The main culprits were the fact that the program was voluntary, and that the servicers were allowed to run the process on their own. In 38% of cases, the servicers claimed that the borrowers failed to supply all the paperwork or to make the first modified payment. Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), Quarterly Report to Congress (July 29, 2015). Not all of that paperwork was actually absent. In 2014, SIGTARP found that the employees of one servicer piled so many unopened Federal Express packages from homeowners containing their HAMP supporting documents into one room that eventually the floor buckled. SIGTARP also found that this servicer denied homeowners from HAMP en masse, without reviewing their applications at all.

Incompetence plays a large role, but that incompetence also may redound to the benefit of servicers: in one case, for example, a servicer delayed responding to a HAMP modification request four times over nearly two years, adding $40,000 in interest, fees, and costs to the amount the borrower allegedly owed. The servicer first mistakenly denied a modification because it inexplicably decided that the borrower didn’t live at the residence. Then it mistakenly denied a modification as unaffordable because it inexplicably used the wrong figures to calculate the borrower’s income despite extensive documentation of the correct figures. Then it mistakenly denied a modification because the borrower allegedly had too much money in the bank to qualify; this money was in fact the amount the borrower had set aside in escrow to pay the mortgage, as directed by the court-appointed referree. The servicer also maintained that the borrower hadn’t submitted complete documentation for his modification application, though when the referree directed a representative of the servicer to appear at a hearing, the representative (who had just testified to her personal knowledge of this incompleteness) was able to pull up the full application on her laptop. Finally, the servicer denied a modification as unaffordable, without further explanation of how it calculated affordability. See US Bank N.A. v Sarmiento, 121 A.D.3d 187 (N.Y. App. Div. 2014). The court found that the servicer’s lack of good faith disqualified it from claiming the additional amount owed. As the lawyer for the borrower, how would you have dealt with two years of delay by the servicer?

In the absence of further federal legislation, states may have more options in dealing with foreclosure abuses, because foreclosure procedure is a state-law matter. See CENTER FOR RESPONSIBLE LENDING AND CONSUMERS UNION, CLOSING THE GAPS: WHAT STATES SHOULD DO TO PROTECT HOMEOWNERS FROM FORECLOSURE (May 2013). The most effective programs seem to be those that require mandatory mediation between the mortgagee and the homeowner before a foreclosure can proceed. The most effective of those require the mortgagee to send a representative with (1) authority to negotiate a modification and (2) proof of the chain of title to the mortgage. Why do you think that voluntary programs, under which homeowners are entitled to mediation but must affirmatively request it, are less effective than mandatory programs? What effects will requiring proof of the chain of title have on the parties’ negotiations? If you were an attorney for a servicer, what would you ask for from homeowners in return for a modification that left them with the ability to stay in their homes?

Massachusetts law now prohibits a creditor from publishing notice of an intended foreclosure sale for many residential mortgages unless the creditor “has first taken reasonable steps and made a good faith effort to avoid foreclosure.” Mass. Gen. L. ch. 244 §35B. The creditor must calculate the relative benefits of foreclosure and modification, and must offer the borrower a modified mortgage loan with an affordable payment (if the net present value of such a loan exceeds the anticipated recovery from foreclosure) or notify the borrower that he is not eligible for a modification and provide the borrower with copies of the creditor’s net present value and affordable payment analyses. One might think that no law would be required to require creditors to maximize their profits from a loan, but creditors didn’t want to engage in individualized determinations. Is the Massachusetts model a good one?

In New York, the courts implemented a requirement that lawyers filing for foreclosure had to certify that they had taken “reasonable” measures to verify the accuracy of documents submitted to the court, under penalty of sanctions. The month before this requirement went into place, roughly 100-200 foreclosures were filed each day. The next month, no more than 5 foreclosures were filed on any given day, with the exception of one day in which 22 foreclosures were filed. Amazingly, this requirement replaced a previous order requiring attorneys for foreclosing entities to certify that to the best of their knowledge there weren’t any false statements of fact or law in their documents.

New York’s system also includes pre-foreclosure conferences; although they are voluntary, they are encouraged, and the courts presently get 80% of foreclosure defendants to show up for a pre-foreclosure conference session. Thus, there is a real risk that someone will challenge the foreclosure documents if they’re not in order. In order to make such programs work, it is important to convince homeowners that there is some hope – many have engaged in futile attempts to get a modification before. If they aren’t encouraged, many of them believe that the judicial procedure is just another runaround. Is the New York model a good one?

10.11 J. Concluding Thoughts 10.11 J. Concluding Thoughts

The history of mortgages includes many episodes in which financial and legal innovations hurt borrowers by undercutting the various protections they traditionally could depend on, such as clarity in knowing who they were dealing with in a loan transaction. In the most recent iteration of the cycle, the same financial and legal innovations created systematic trouble on the lender side. This too is a property story: the securitized pools (a new kind of property distinct from the property rights in the underlying mortgages) helped create the moral hazard that led brokers to make bad loans and stick the mortgage-backed security buyers with toxic junk. The investors in the securities were unwilling or unable, or sometimes both, to examine individual loans and instead invested on the theory that enough loans in the pool would pay off to justify the investment, so they didn’t pay enough attention to the quality of the individual underlying loans. Is it possible to split property up in so many ways that the new rights become dangerous instead of productive?

Finally: Frederic Bastiat wrote, “When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it.” Does his claim help explain MERS? What about Johnson v. M’Intosh?