Need to Foreclose a Mortgage Securing an eNote?

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Indiana case may provide guidance

South Carolina has no reported opinions concerning mortgage foreclosures involving eNotes, and little authority exists elsewhere on what a holder must prove to successfully foreclose a mortgage secured by an electronic note in a judicial state. Until we see opinions closer to home, an Indiana case may provide the best guidance. Solid evidence of control of the note seems to be the key factor, according to this case.

In Good v. Wells Fargo Bank, 18 N.E.3d 618court money 4 (Ind. App. 2014), Wells Fargo acted as servicer for Fannie Mae, the owner of an eNote that was registered with MERS. The original lender had been Synergy Mortgage Group, Inc.  MERS, as nominee for Synergy, had assigned the mortgage to Wells Fargo.

An officer of Wells Fargo executed an affidavit in support of summary  judgment stating that Wells was the servicer, that it maintained a copy of the note, that its systems provided controls to assure that each note was maintained accurately and protected against alteration, and that the paper copy of the note attached to the affidavit was a true and correct copy.

The affidavit was bolstered by testimony at the bench trial that Wells Fargo controlled the note and was entitled to enforce it as the holder pursuant to 15 U.S.C §7021 (a section of the eSign legislation).  Wells’ underlying position appeared to be that the normal requirements of the UCC-3 governing negotiable instruments (delivery, possession and an endorsement), were not required in the case of an electronic note.

15 U.S.C. §7021 creates the concept of a note as a “transferable record”, a single authoritative copy, which is unique, identifiable, and unalterable. The legislation establishes that the holder must have control of the note in the sense that the system for tracking it must reliably establish that the person seeking to enforce it is the person to whom the record was transferred. Also, the authoritative copy of the record itself must indicate the identity of the most recent transferee.

The Indiana appellate court found Wells’ affidavit insufficient to support a grant of summary judgment on the issue of Wells’ holder status and its evidence on the matter at trial “conclusory”. 

The court said it was unclear from the affidavit whether Wells was claiming to have possession of an endorsed paper copy or the electronic note itself. The affidavit was also found lacking because it did not assert that Wells had control of the record (the eNote), either by maintaining the single authoritative copy in its own system, or by being identified as having control of the single authoritative copy in the MERS system.

The court indicated the eSign statutes require the party enforcing the note to provide reasonable proof of its control of the note through detailed evidence, not merely “conclusory statement”. The court specifically pointed to the lack of evidence in the Wells’ affidavit as it related to a transfer or assignment to Wells Fargo or Fannie Mae of the note from the original lender.

We are likely to see similar cases from other jurisdictions, including South Carolina, with the increasing use of eNotes. Stay tuned!stay tuned

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Homeowners Win U.S. Supreme Court Mortgage Rescission Case

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money puzzleThe Court holds borrowers must only notify the lender, not sue, within three years

Larry and Cheryle Jesinoski refinanced their home in Eagan, Minnesota on February 23, 2007, by borrowing $611,000 from Countrywide Home Loans, Inc. The borrowers received a Truth-in-Lending Act (“TILA”) disclosure and a Notice of Right to Cancel at the closing.

TILA allows a borrower to rescind a refinance loan on the borrower’s home within three days of the transaction, or until the lender has delivered the required number of disclosures. But there is a three-year time limit even if the lender still hasn’t provided the necessary loan disclosure documents.

Exactly three years after the closing, the Jesinoskis sent theright to cancel lender written notice that they wanted to rescind, saying they hadn’t received the required number of copies of the notice. The property was underwater at the time. The lender refused to cancel the mortgage, and the Jesinoskis sued.

On January 13, 2015, the Court ruled unanimously in an opinion written by Justice Antonin Scalia, that the borrowers need only notify the lender of the intent to rescind. The Court rejected the lender’s position that the borrower must take the additional step of filing suit within three years.

This issue is one that has arisen frequently in recent years with borrowers who are in default and facing foreclosure, and this case settles a split in lower courts over steps borrowers must take within the time limit.

house parachuteThe lending industry had supported the lender in this case, indicating the Jesinoskis’ position could cloud titles to properties and require lenders to sue borrowers instead of trying to work with them. Consumer groups had supported the Minnesota couple, indicating the right to rescind is an important protection for consumers against abusive lending practices.

The case was remanded to the Eighth Circuit for further proceedings. The ruling does not mean the borrowers will escape paying their mortgage, but this lawsuit has delayed the inevitable for many years. It is possible that the property is no longer underwater and that the borrowers may be able to refinance in this improving economy.

SCDOR Issues Revenue Rulings On Same-Sex Marriage Tax Issues

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rainbow stateOn December 31, 2014, the South Carolina Department of Revenue issued two Revenue Rulings (14-8 and 14-9) addressing same-sex marriage tax issues. These Revenue Rulings were necessary because South Carolina’s ban on same sex marriage was held unconstitutional in November of 2014.

Revenue Ruling 14-8 states that same-sex couples who are legally married in any state must file their South Carolina income tax returns, beginning with tax year 2014, using a married filing status, either “married filing jointly” or “married filing separately”.  Same-sex couples legally married before 2014 may amend their South Carolina income tax returns for any taxable year within the statutory time limitations to a married filing status, but they are not required to take this action.

Revenue Ruling 14-9 has more impact for real estate practitioners. It states that same-sex couples who are legally married under any state law will now be treated as married and as “spouses” for all South Carolina tax purposes.

Revenue Ruling 14-9 provided examples:

Ad valorem property taxes:

  • A same-sex legally married couple may be able to qualify their home for the 4% assessment ratio.
  • If each member of a same-sex legally married couple owns a residence, only one of those residences may qualify for the 4% assessment ratio since as a married couple they may have only one legal residence.
  • Same-sex legally married couples may now qualify for the homestead exemption.
  • A person in a same-sex marriage now qualifies as a “spouse” for purposes of exemptions for the homes of certain disabled veterans, law enforcement officers and firefighters.
  • A person in a same-sex marriage now qualifies as a “spouse” for the purposes of exemptions for the home of a paraplegic or hemiplegic person.
  • Transfers of real property between spouses of a same-sex couple may now be exempted from the assessable transfer of interest rules.

Deed recording fee

  • Transfers of real property from one same-sex spouse to the other will now be exempted from the deed recording fee.
  • Transfers of real estate to a former same-sex spouse pursuant to the terms of a divorce decree or settlement will now be exempted from the deed recording fee.
  • Deeds from a family partnership (one in which all partners are members of the same family) to one of the partners are exempt from the deed recording fee as long as no consideration is paid for the transfer other than a reduction in the grantee’s interest in the partnership. Since the definition of “family” in this exemption includes a “spouse”, the exemption now applies to family partnerships that include same-sex spouses.

Refunds

The recognition in South Carolina of same-sex marriages may allow a same-sex couple, or a same-sex spouse or surviving spouse, to be eligible for a refund of previously paid property taxes or deed recording fees if the same-sex couple was considered legally married under any state law for the period for which the refund is requested and the refund request is made within the applicable statutory time limitation.

SC’s Mortgage Satisfaction Law Was Amended in 2014

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South Carolina’s mortgage satisfaction law changed last year, mostly for the better, but with a few snags. Effective June 2, 2014, Section 29-3-330 of the South Carolina Code was amended to remove the requirement for a “lost mortgage affidavit”, a document that mostly mystified out-of-state lenders and practitioners.

While most states allow a mortgage to be satisfied by a simple document stating, in effect, that the loan is paid in full and the mortgage is satisfied, our statute required either satisfaction by writing on the face of the original mortgage, satisfaction by affidavit of a closing attorney who paid off the mortgage, or satisfaction by a document accompanied by an affidavit from the lender stating that the mortgage was lost.

In most commercial closings, the lender being paid off did not want to deface the original mortgage for fear that the new transaction might fall apart. The attorney handling the closing did not want to sign an affidavit. And nobody wanted to swear that a mortgage in hand was lost.  Closing attorneys and title companies were asked to take mortgage satisfaction documents that clearly did not comply with our statute, but clearly made more sense than our law.

After the amendment, mortgages in South Carolina can be satisfied by four methods:

  1. On the face of the original mortgage in the  presence of the ROD. This is one of the snags. Mortgagees are finding it cumbersome to actually appear before the ROD to satisfy their mortgages.
  2. Onsignature 2 the face of the original mortgage in the presence of two witnesses. This is another snag. The number of witnesses has been increased from one to two, a requirement that some are finding difficult;
  3. By a document in “substantially” the form set out in the statute (that does not require an affidavit that the mortgage is lost); or
  4. By affidavit of a South Carolina licensed attorney who can provide proof of payment and (under penalty of perjury) certifies that he or she was given written payoff information, made the payoff and is in possession of the canceled check or wire confirmation.

Another concern is the mention of the term “deed of trust” in the statute, despite the fact that South Carolina is clearly a mortgage state.

Palmetto Land Title Association is working on some technical amendments. But, generally, the fact that a lost mortgage affidavit is no longer required has made transactions across state lines easier.