On February 13, 2014, the New Mexico Supreme Court filed its Opinion in Bank of New York v. Romero, 2014-NMSC-007. The opinion in BNY v. Romero describes a case which started badly and ended terribly. The case grew out of an unnecessary, expensive, poorly documented loan to two small business people living and working in an economically depressed and poverty-ridden county in New Mexico. The silver lining to the case, aside from employing a few attorneys, is that the Supreme Court reviewed and restated some valuable rules that all foreclosure counsel should review before filing their next complaint. It also serves as a very powerful reminder that lenders must follow their own underwriting policies. In Romero, the failure to follow those policies made a bad situation worse.
Put Your Ducks in a Row Before Filing Suit
The time for client and counsel to "put their ducks in a row" is before filing the complaint. In a foreclosure action, the plaintiff will have to prove that the plaintiff is entitled to enforce the note and mortgage and that the defendant has defaulted on the note and mortgage. The rest, such as the priority of other claims to the property, the amount due on the note and refuting any defenses will also be critical, but before even arguing about that, the plaintiff must show it is authorized to enforce the note.
The right to enforce any claim is known as "standing." As the Court pointed out, "the lack of [standing] is a potential jurisdictional defect which may not be waived and may be raised at any stage of the proceedings, even sua sponte by the appellate court." 2014-NMSC-007, 15. In Romero, the Supreme Court found that the plaintiff did not have standing at the time the complaint was filed so the case was dismissed. The plaintiff had spent time and money, gone through discovery, one trial, an appeal and then it was told, after all that effort and time, that it did not have authority to file in the first place. If you are the plaintiff, that is what we call a "bad result."
The Court found the plaintiff did not have standing because it could not prove that it was authorized, either as the holder or as the transferee, to enforce the note at the time the case was filed. The most straightforward way to prove standing is to show the Plaintiff is the "holder" of the note. In order to be the "holder", the Plaintiff must show it has possession of the note and, if it is not the original lender that the note is either indorsed to the Plaintiff, or the note is indorsed in blank. So, to be a holder, the Plaintiff must show it has possession of the original note and, if required, the proper indorsement.See, §55-3-301 NMSA 1978.
In Romero, the original note introduced into evidence at trial had two undated indorsements. One was a blank indorsement by the original payee on the note and second was a special indorsement by Equity One to JP Morgan Chase. Of course, if the note had only had one blank indorsement, the plaintiff could have prevailed as the holder of the note. The problem, of course, was the special indorsement made to JP Morgan Chase. 2014 NMSC-007, 26. Apparently, there was no evidence introduced at trial to show that either JP Morgan Chase had transferred the note to the plaintiff or adequately explaining that the indorsement to JP Morgan Chase was invalid for some other reason. In other words, the original note showed, on its face that it might be owned by two different parties. Accordingly, the Supreme Court found that the Plaintiff had not proven it was the holder of the note.
If the Plaintiff is not a holder (that is, if it does not have the right kind of endorsement) the plaintiff will need to prove it was authorized to enforce the note as a "non-holder in possession of the instrument who has the rights of a holder." Id. The plaintiff attempted to make such a showing but did so using hearsay evidence. The plaintiff called an employee of the loan servicer to testify that the servicer's records "indicated that the Bank of New York was the transferee of the note." So, what is the problem? The witness had clearly looked at the bank's records and the bank's records said the bank owned the note. The problem with the testimony was the witness lacked personal knowledge that the note had been transferred. His only personal knowledge was that he had seen the business records. So his personal knowledge was based on hearsay. The fact that the records he had seen were business records did not make his testimony admissible. The plaintiff argued that his testimony should be admitted under the business records exception to the hearsay rule but the New Mexico Supreme Court pointed out "the business records exception allows the records themselves to be admissible but not simply statements about the purported contents of the records." Romero, ¶ 33. In other words, the Plaintiff might have prevailed if it had introduced the actual records into evidence, but because it did not introduce the actual business records into evidence, the Plaintiff lost.
Other evidence at trial showed that the alleged transfer of the note had not even occurred until months after the foreclosure complaint had been filed. According toRomero, the plaintiff must have standing at the time the complaint is filed. The foreclosure practitioner in New Mexico should be sure that all the transfers are complete and provable before the complaint is filed. In other words, the plaintiff needs to put its ducks in a row before filing the complaint. In Romero, the plaintiff filed the complaint without first being sure that it would be able to prove that it was a holder, or otherwise entitled to enforce the note and mortgage.
A Bad Situation Gets Worse
After the Supreme Court found that the plaintiff lacked standing to pursue the foreclosure action, the Supreme Court could easily have remanded the case with an order that the foreclosure judgment be vacated and the case dismissed. The plaintiff could then have put its ducks in a row and refiled the case. The court, however, decided to address other issues presented in the case. One of those issues concerned the New Mexico Home Loan Protection Act, NMSA 1978, §§58-21A-1 to -14 (2003, as amended through 2009) ("HLPA"). The Court opined that the HLPA "prohibits home mortgage refinancing that does not provide a reasonable, tangible net benefit to the borrower." In this case, the borrowers had an existing home loan but they were approached by Equity One, Inc. to refinance their home. Here is a summary of the differences in the two loans:
Click here for the table
As can be seen, it is easy to see how a consumer, court, or other observer would consider the increase in interest rate, increase in total payment and opportunity to pay $12,000 in origination fees and closing costs as a bad deal. Of course the Romeros did receive a $30,000 cash payment, but that payment did not automatically fix all of the problems with the loan. HLPA requires certain loans to show a "reasonable, tangible net benefit" to the borrowers. In Romero, the loan described above was determined not to be a net benefit. In reaching that conclusion, the Court found that the lender has to consider the borrower's ability to repay a loan in determining whether there was a net benefit. The lender, of course, argued that the $30,000 cash payment to the borrower (after paying $12,000 closing costs) was a "net benefit" to the borrower. The Court found, however, that because the lender failed to follow its own procedures in underwriting the loan and confirming that the borrower had an ability to repay, indicated that the net benefit was not real. The Court rejected the contention that the lender could rely upon the borrowers' claim that they earned $5,600 a month. The Court held "a lender cannot avoid its own obligation to consider real facts and circumstances that might clarify the inaccuracy of a borrowers' income claim." Citing, 126.96.36.199 (G) NMAC.
Romero Is Not the End of the World
When first published, Romero caused some initial concern among lenders and their counsel. Really, though, the case stands for two propositions.
First, the plaintiff must have standing before it files its complaint. That has been true forever, so nobody should be surprised.
Second, lenders need to follow their procedures when making loans. The lender in Romero had procedures designed to require the originator to be sure the loan complied with the HLPA. Those procedures were consistent with good underwriting practices. So, in some sense Romero simply reaffirms that bad underwriting and a failure to follow underwriting procedures will lead to bad loans.