Banking and Business Monthly – October 2017

ATTACHING A BLANK-INDORSED PROMISSORY NOTE IN A MORTGAGE FORECLOSURE CASE IS SUFFICIENT TO SHOW STANDING; OCC RELEASES UPDATED LIST OF PERMISSIBLE ACTIVITIES FOR NATIONAL BANKS AND FEDERAL SAVINGS ASSOCIATIONS

A. ATTACHING A BLANK-INDORSED PROMISSORY NOTE IN A MORTGAGE FORECLOSURE CASE IS SUFFICIENT TO SHOW STANDING

In U.S. Bank Trust National Association v. Hernandez, 2017 IL App (2d) 160850, the Second District of the Illinois Appellate Court recently held that a foreclosing lender can establish its standing to sue by attaching a blank-indorsed promissory note to its complaint. However, the court reversed and remanded the case back to the trial court to determine whether the lender dispatched a letter to the borrowers in accordance with regulations promulgated by the Secretary of Housing and Urban Development (HUD) for mortgages insured by HUD.

The borrowers raised two defenses: (1) whether the lender lacked standing to foreclose the mortgage, and (2) whether lender complied with HUD’s regulation prior to filing suit (24 C.F.R. § 203.604 (2014)), which requires, among other things, that a lender send a letter to a delinquent borrower offering to have a face-to-face interview.

As for the standing issue, the court held summary judgment in favor of the lender was proper, reasoning that because Section 3-205(b) of the Illinois Uniform Commercial Code, 805 ILCS 5/3-205(b), provides that a note indorsed in blank is payable to the bearer and may be negotiated by transfer of possession alone until specifically indorsed, and that a transfer of the note constitutes an assignment of the mortgage securing the debt (citing the definition of “mortgagee” under the Illinois Mortgage Foreclosure Law, 735 ILCS 5/15-1208), “[t]he presumption of ownership conferred by the indorsement meant that plaintiff could sue on the Note without setting forth its history.” Rather, the borrowers had the burden to provide as much of that history as necessary to demonstrate that the transfer of the note did not occur before the lender filed the complaint. In other words, upon attaching the blank-indorsed note, the lender establishes a prima facie case of standing, and the borrowers must rebut the presumption that the lender held the note before filing suit.

Regarding the second issue, the Second District reversed the judgment of the trial court in favor of the lender and remanded the case back to it. Lenders must comply with 24 C.F.R. § 203.604’s requirements before foreclosing a HUD-insured mortgage. The requirement at issue here was whether the lender attempted by letter to arrange a face-to-face meeting. The lender’s affidavit at the trial court had attached to it a copy of the required letter and a Federal Express shipping label. The borrowers argued the letter was defective because the HUD regulation required the letter to be sent via certified mail from the U.S. Postal Service. The borrowers denied they received a certified letter.

The court sidestepped the argument of whether the letter was defective because it was sent by Federal Express and not by U.S. certified mail, holding instead that, regardless of how it was sent, the HUD regulation requires the letter to be “dispatched.” Here, there was a material question of fact as to whether the lender’s letter offering a face-to-face meeting was dispatched. The Federal Express label was not indubitable proof of dispatch, because the shipper might not actually ship the item after generating the label.

This case offers two lessons for lenders prosecuting mortgage foreclosure cases: (1) a lender can establish its standing to sue by attaching a blank-indorsed promissory note to its complaint, and (2) for HUD-insured mortgages, if a borrower raises the lack of 24 C.F.R. § 203.604’s face-to-face meeting letter as a defense, lenders must provide adequate proof of its dispatch.

B. OCC RELEASES UPDATED LIST OF PERMISSIBLE ACTIVITIES FOR NATIONAL BANKS AND FEDERAL SAVINGS ASSOCIATIONS

The Office of the Comptroller of the Currency (OCC) regulates and supervises national banks and federal savings associations. It recently released its updated list of permissible activities for these entities.

Users of the list are cautioned as follows from page 1 of the list: “This list of permissible activities is not exclusive; the OCC may permit national banks and federal savings associations to conduct additional activities in the future. This edition updates the list of permissible activities to: reflect precedent issued since the last edition as well as other relevant precedent not included in previous editions; streamline certain entries for readability; and specifically, for federal savings associations, include applicable interpretive letters and corporate decisions issued by the OCC after the transfer date….It is ultimately the responsibility of the user of this list to determine whether changes to applicable laws and regulations impact the permissibility of an activity. As noted in earlier editions, previously permissible activities may become impermissible as a result of statutory or regulatory changes. National banks and federal savings associations should not engage in activities in reliance on this document and instead should review the authorities cited and other relevant precedent before engaging in an activity [footnotes omitted].”

Finally, any activity in the list permissible for a national bank or federal savings association is also permissible for its operating subsidiary.

 

Steven A. Migala is a partner at Lavelle Law and possess over 20 years of providing excellent representation to banks, businesses and individuals in a variety of matters. He can be contacted at (847) 705-7555 and smigala@lavellelaw.com.