Law Reflects Advances in Technology

Shortly after the financial crisis in 2008, many homeowners were faced with foreclosure. Around the same time, and perhaps as a result of the unprecedented amount of foreclosure actions that were commenced, it was discovered that many of the foreclosing entities could not prove themselves to be the owner of the mortgage to be foreclosed. Many of the loans that were in foreclosure had been bundled as securities to be sold to investors; investigations showed that, in selling off these bundles, many of the assignments of the individual mortgages had been “robo signed”, i.e., they were not signed by an officer of the assigning lender and the note (if it could be found) had not been endorsed and delivered to the assignee. The situation was further exacerbated when lenders commenced foreclosure actions, alleging themselves to be the owner of the note and mortgage, when in fact the loan had not been assigned to the foreclosing lender until after the action had begun.

In response to all of this, legislation was passed, court rules were promulgated and lack of standing became the standard defense for borrowers finding themselves in the unfortunate situation of foreclosure. The law became clear that a lender seeking to foreclose would establish its standing by proving that it was in physical possession of the endorsed note prior to commencement of the foreclosure action even in the absence of an assignment of the mortgage.

Recently, in the case of New York Community Bank v. McClendon, the defendant’s motion to dismiss the complaint for lack of standing was granted by the Supreme Court but reversed on appeal. The note (eNote) secured by the mortgage was signed by the defendant electronically. AmTrust, the original mortgagee, was closed and the FDIC, as receiver for AmTrust, sold the mortgage to the plaintiff. In opposition to the defendant’s motion to dismiss, the plaintiff submitted a copy of the eNote, the eNote Transfer History and an affidavit of its assistant vice president.

In reversing the lower court, the appellate court looked to various sections of 15 USC 7021 and the Uniform Commercial Code Section 1-201 regarding transferable records. The court determined that the eNote is a transferable record. The eNote transfer history established that the plaintiff acquired the note prior to the foreclosure action. The eNote and the transfer history were sufficient to review the terms of the transferable record in order to identify the entity having control of it and thus establish plaintiff’s standing. Unlike the rules for paper documents, delivery, possession and endorsement of the eNote were not required.

While the advent of electronic signatures does not abrogate the need for a plaintiff to prove its standing, it does change the type of proof that is presented to establish a plaintiff’s standing.

Underwriting Tip: Standing is an affirmative defense which, if not raised, is waived. However, if you are insuring out of foreclosure and the defendant defaulted, plaintiff’s lack of standing should be raised as an exception to coverage, particularly if the property is occupied and/or the defendant was not personally served.

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