Large financial institutions servicing mortgages encountered extensive criticism for their handling of the housing crisis. That criticism has manifested itself in the form of major lawsuits, some of which have ended with high profile, expensive settlement agreements. ((Jennifer Bjorus, Wells Fargo Settling Robo-Signing Lawsuit, StarTribune (May 24, 2014, 7:47 AM), http://www.startribune.com/business/260489421.html.)) The most recent innovative attempt to hold these servicers accountable for alleged improper acts in the foreclosure process or violations of loan modification agreements comes from a legal aid group in Ohio. ((Peter Eavis, U.S.-Backed Mortgages Put to Test in an Innovative Lawsuit, N.Y. Times Dealbook (Nov. 27, 2014, 8:11 PM), http://dealbook.nytimes.com/2014/11/27/u-s-backed-mortgages-put-to-test-in-a-lawsuit.)) The suit against U.S. Bank alleges that the servicer did not follow the loss mitigation procedure set out by the Department of Housing and Urban Development (HUD) when issuing FHA loans. ((Id.)) When dealing with a loan backed by the Federal Housing Administration, the loan servicer must take steps to work with borrowers in default in order to get those borrowers back on track to make their mortgage payments. ((General Servicing Frequently Asked Questions, HUD.gov, http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/nsc/faqgnsrv (last visited Dec. 1, 2014).))
FHA mortgage loans are insured by the Federal Housing Administration. The borrower must pay mortgage insurance premiums, but the loans are still attractive to borrowers because they may be able to secure a lower interest rate and make a lower down payment. ((Marcie Geffner, 7 Crucial Facts About FHA Loans, bankrate.com (Last visited Dec. 1, 2014) http://www.bankrate.com/finance/mortgages/7-crucial-facts-about-fha-loans-1.aspx.)) As the loans are insured by the FHA, there is less risk of loss for issuers and servicers in the event of default. However, the FHA requires that servicers take certain steps to work with borrowers in default before going through with the foreclosure process. ((HUD.gov, supra note 4.)) Specifically, the servicer must arrange a face-to-face meeting with the borrower or make a reasonable effort to arrange such a meeting before the borrower is three full months behind on payments. ((Id.)) The lawsuit alleges that U.S. Bank did not attempt to set up these face-to-face meetings to work with borrowers in default. ((Eavis, supra note 2.))
This suit may not be a major threat to U.S. Bank due to the procedural posture of the case. ((Id.)) The case was brought under the False Claims Act, but this case lacks some of the factors that usually make a False Claims Act case succeed. ((Id.)) Especially important in this case is that the Justice Department has declined to intervene. ((Id.)) Whichever way the suit turns out, this case provides yet another example of how careful loan servicers need to be when dealing with borrowers in default going forward, given the missteps that have occurred in dealing with the foreclosure crisis in the past few years.
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