Make 'em Find the Note!

By Lisa A. Tyler
National Escrow Administrator

This year we've seen a number of billboards, flyers and Internet advertisements targeting delinquent borrowers by law firms willing to help them force their lenders to completely forgive the balance of the mortgage. The law firms are using RESPA and TILA Rules as the backbone of their action to force the lenders to forgive the debt if the lenders are unable to produce the original promissory note!

The process begins by the attorney writing a letter to the mortgage servicer, beneficiary under the deed of the trust/mortgage and the trustee under the deed of trust. In this letter the attorney demands the production of more than 100 excessively broad and burdensome documents, including the original executed promissory note. Some of the other documents included in the demand are assignments and servicing agreements executed between the lenders and investors throughout the life of the loan. Read about this latest scheme in "Make 'em Find the Note!"

"Fix-Up Fraud" is a short story about ill-informed buyers wanting to capitalize on a down market by purchasing foreclosed and short sale properties. In some markets, listing agents are insisting the buyer fix these homes in advance of purchase to ensure the property qualifies for government financing. In many cases, however, the buyer loses the money spent fixing up the property when the REO seller either can't perform under the contract or the short sale negotiator refuses the buyer's offer. We have received reports of buyers losing $8,500 and more!

We reported in the December 2009 edition of Fraud Insights, through a story entitled "Counterfeit Checks Plague Colorado," about two offices that had received counterfeit checks – one of which was drawn from a Canadian Bank. Since then we've seen the same type of counterfeit checks show up at our offices in California, New Mexico, Nevada, Oklahoma and Texas. Armed with the knowledge of what the Colorado operation went through, our operations are refusing the counterfeit items and turning the crooks away.

In this month's edition of Fraud Insights be sure to read "You Can't Teach Instinct" to discover how Tracy Spigener, an escrow officer with Fidelity's Las Vegas operation, recently detected a counterfeit check issued from a domestic bank – Citibank™!




Make 'em Find the Note!

Our offices are being inundated with notices from delinquent borrowers, obviously drafted by attorneys, demanding the lender and/or title company (as trustee for the lender) produce the original promissory note. The notice stipulates the borrower will pay the loan in full upon presentment of the original promissory note, but if the lender can not produce the note, the debt is forgiven!

Borrowers are contacting law firms across the nation that are advertising on billboards, the Internet and flyers on traffic signs with messages such as "Make 'em find the Note!" The law firm promises to help delinquent borrowers retain their home by sending legal notification to the trustee, beneficiary or mortgagee stating the borrower is in receipt of the notice of default or foreclosure notice from the trustee or lender's attorney. The notice states the borrower is an "acceptor" of the offer to foreclose or collect a payoff demand, but that they have the right to dictate terms under protections they have under the law.

The borrower signs the notice stating they will put up the full amount to payoff the debt with a Notary Public. Once the lender finds the original promissory note the Notary Public will be instructed to release the funds on hold.

Commentary from Lisa Tyler
First of all, if the borrower had the money to pay off the loan, wouldn't they be making their monthly payments in the first place? Secondly, why would they give hundreds of thousands of dollars to a Notary Public to hold? Notary Publics typically have no net worth to back the funds if they are misappropriated.

In addition to producing the original promissory note, the borrower, at the advice of his/her attorney, demands written clarification of various elements related to the servicing of the account from its origination to the present date, which can include:

  • Sale
  • Transfer
  • Funding source
  • Legal and beneficial ownership
  • Charges
  • Credits
  • Debits
  • Transaction
  • Reversals
  • Actions
  • Payments
  • Analyses
  • Records and more

The notice from the homeowner makes the claim that they might have been victim of predatory lending and until the lender can produce an accounting of the servicing of the loan from its inception, it can not report any derogatory items against the borrower's credit.

The notice is sent to the beneficiary, servicer and trustee via certified mail and quotes the Real Estate Settlement Procedures Act (RESPA) Title 12 section 2605(e) and the Truth in Lending Act (TILA) 15 USC SECTION 1601. The notice requires that the lender respond within sixty days of its receipt of the notice from the borrower. Most importantly, the notice declares that if the lender fails to respond within the time frame allowed the loan will be completely set off or forgiven, because of the lender's breach of responsibility.

After the sixty day period lapses the attorney drafts additional documents, such as a Constructive Notice from the borrower, stating the original trustee has been relieved of his/her duties and substituting himself/herself as the new trustee. These additional documents further state the beneficiary has been relieved of his/her duties and the new beneficiary is the attorney! After the Notice is drawn, the attorney draws a Substitution of Trustee and Full Reconveyance. The attorney signs the document as the new beneficiary releasing the deed of trust of record. The attorney then delivers the original signed and notarized documents to a title company to record on his/her behalf as an accommodation. Of course, our title company branches have refused to record the documents, which are usually delivered as a bundle of more than 60 documents at a time, affecting 30 loans.

Moral of the Story
If your office receives the notice, you have no obligation to pull the file. The burden of proof is on the lender, not the settlement agent.

According to 12 USC Section 2605 Servicing of Mortgage Loans and Administration of Escrow Accounts there is no provision for cancellation of the debt if the lender fails to provide the requested information within the time frame allowed. Consequences for noncompliance with the requirements is the reimbursement to the borrower for any damages they might have suffered and any additional damages, the court deems necessary, but not to exceed $1,000 – certainly not cancellation of the note balance!

Find out more at HUD's Web site using the link provided below:

Lenders found violating the rules, as set forth in TILA, are subject to a fine not more than $5,000 or imprisoned not more than one year, or both. Nowhere in the rule does it stipulate the borrower's debt is then automatically forgiven.

The details about the Truth in Lending Act (TILA) 15 USC 1601 can be found using the below link:

If a law firm delivers documents to your office for an "accommodation" recording, remember we are not a recording service and we should not record documents that are not specifically related to a transaction we are closing and/or insuring.



Fix Up Fraud

Buyers are taking full advantage of a down market by purchasing homes at low, low prices after foreclosure or through short sales. The problem is most of the homes have either been neglected or damaged and no longer qualify for government financing, such as an FHA Loan. As a result, some real estate agents are requiring the buyer to pay for repairs up-front.

In some markets the listing agents are advising potential buyers to pay for up-front repairs to abandoned REO and short sale properties during the offer and closing process to ensure the property will qualify for government financing. As a result, the buyer pays for repairs to get the home ready for appraisal. In one recent transaction the buyer paid $8,500 up-front to have termite damage and other items repaired in anticipation of qualifying for FHA financing.

The property was an REO property owned by a bank – post foreclosure. During repair to the property a contract was presented and accepted by the bank. An escrow was opened and a title report ordered that uncovered a defective trustee's sale. The bank ultimately had to re-start the noticing period and the entire foreclosure process!

The REO bank had to pull out of the contract, since it could not deliver free and clear marketable title to the buyer. The buyer received a full refund of her earnest money deposit, but not the $8,500 spent repairing the home.

The buyer asked the title company what she could do to collect her up-front cost of repairing a home she ultimately could not purchase. Our response was to consult an attorney, since she might have the ability to file a mechanics' lien in order to recoup her costs.



You Can't Teach Instinct

We've seen a lot of counterfeit cashier's checks showing up in our offices drawn from foreign banks, but now we have counterfeit checks being deposited from domestic banks as well. One of our escrow officers just detected a $525,000 counterfeit cashier's check supposedly drawn from a Citibank account. It was her gut instinct that told her to keep inquiring about the check and ultimately it was her gut instinct that saved the Company from a potential $525,000 loss!

Tracy Spigener opened a sale transaction on Thursday, March 4, 2010 for a selling agent she regularly did business with. When the selling agent dropped off the purchase contract and earnest money with Tracy he mentioned he was leery of the buyer because of the following:

  • The buyer bought the property sight unseen
  • The agent had only communicated with the buyer via e-mail and had never actually visited the buyer
  • The sale price for the property was $480,000, but the buyer sent a cashier's check in the amount of $525,000, representing the full purchase price plus $45,000
  • The buyer insisted on a quick close on or before March 31, 2010

Taking all those facts into account, Tracy proceeded cautiously. She reviewed the earnest money deposit, which was a cashier's check drawn from Citibank. She opened the escrow and deposited the earnest money with specific instructions to her Operational Accounting Center (OAC) to notify her if and when the cashier's check cleared the trust bank, which for Tracy's office is with Bank of America™.

The very next day, Friday, the OAC saw a credit for the deposited item using the online banking system and notified Tracy the item had cleared the bank. Tracy was very suspicious, but called the selling agent to let him know the check had cleared and provided a list of the information she needed in preparation for the closing.

On Monday, the selling agent reluctantly called Tracy to let her know the buyers were backing out of the transaction and were demanding a full refund of the funds they had deposited. The sellers were furious, because they took their house off the market for this pending sale and had already packed the entire house in anticipation of the move. Tracy prepared the cancellation instructions and sent them out.

She trusted her instincts about this buyer and placed a call to the manager at Fidelity's OAC. She asked him to obtain verification directly from Citibank that the cashier's check actually paid before she refunded the money to the buyer.

The OAC manager was unsuccessful at obtaining the verification from any branch of Citibank, who simply refused to provide any information regarding the cashier's check. The OAC manager escalated the matter to FNF's Banking Administration team. They were able to confirm through their relationships with Citibank that the cashier's check was indeed a counterfeit!

Tracy notified the selling and listing agents that the cashier's check was counterfeit and ended up cancelling her transaction. Tracy only had the right to retain that portion of the funds that were considered "earnest money" pending the execution of the cancellation instructions by buyer and seller. If she had released the balance of the funds to the buyer, it would have been a dollar-for-dollar escrow loss for her office. Tracy's instincts were right and for following those instincts she has been rewarded a $1,000 from the Company as well as a letter of recognition.