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Palo Alto real estate attorney Julia Wei providing commentary & insight into trends in California real estate law & lending law, mortgages & foreclosures.

When Lender Collection Goes Too Far

November 24th, 2010 · 1 Comment · California Judgment Enforcement/Collection, California Lending & Mortgage Law, Creditor's Rights in Bankruptcy, Current Affairs

I have always thought it was unfair to consumers that banks would appear to work with the servicer and the borrower to accept forbearance payments or loan modification paperwork, yet another department from the same bank would tell the servicer or trustee to continue with the foreclosure process.  The larger the institution, the more rampant the breakdown in communication.

One thing I often remind borrowers is that when they have a junior loan (such as Home Equity Line of Credit), after a foreclosure, the junior loan will likely be assigned to a collection agency or sold to a scavenger fund who buys those notes for pennies on the dollar.  That's when the phone calling begins.

Today I read about the nightmare story of a couple in bankruptcy (Eastern District of North Carolina, Case No. 08-00120-8) who worked out a plan with Countrywide, essentially allowing the foreclosure of two of their properties--but Countrywide's successor (Bank of America) continuing to harass them.  This was memorialized by a court Order around October of 2008.  Apparently Bank of America took their sweet time too in actually conducting the foreclosure so the Homeowner's Association fees and property taxes continued to accrue.  In fact, the bank has yet to foreclose on one of the properties.  Instead, the bank commenced a two year campaign of trying to collect a debt that it had already compromised. 

The debtor, Ms. Kirkbride did send a copy of the court's order to BofA and they acknowledge receipt but did not reply.  Additionally, BofA continued to report the debt as being owed to the credit reporting agencies.

The bankruptcy judge sanctioned Bank of America $63,000.00 on November 19, 2010. 

What really happened here? I think there must have been a breakdown in communication where the legal counsel who sends the copy of the Order to one department does not know that the debt collection has already been outsourced to a subsidiary or other agent who continues to try to collect the debt.

Takeaway lesson for lenders - comply with court orders, as the penalties for failure to do so can be harsh.  Communicate with all divisions to ensure compliance.

Takeaway lessons for borrowers - take notes and document the collection attempts.





One Comment so far ↓

  • Betty

    Ms Wei,

    A recent and very disturbing trend is the practice of junk debt collectors to attempt to collect on non-recourse, 100% purchase money loans. Case in point is a debt collecting firm called “Heritage Financial” which uses scare tactics and accuses borrowers of “mortgage fraud” when it first buys a sold out junior loan. At first instance, they apparently demand that the borrower fill out a 4506-T or face a lawsuit for “mortgage fraud”. There is more detailed about this agency and its practice here:

    and a follow-up here:

    Apparently, they are banking on the fact that the borrower – already emotionally drained from the nightmare of losing their home – would not wish to spend time and energy and money (that they probably don’t have) in defending against a baseless lawsuit, preferring to settle instead and move on with their lives.

    Or, they are hoping (as the site suggests) that a borrower may have been pressured into over-stating his or her income at the time of the loan application, thereby creating fraud, making the loans ‘recourse’, which the debt collector then attempts to exploit.

    My question is simply this. As unfair as this practice may seem and as dumb as my question may sound, are lenders – esp. wiped out second lenders in a foreclosure scenario – legally able to sell their non-recourse loans to scavengers when they (lenders) know full-well that, per California law, all they get in the event of a default is a share of the proceeds from the foreclosure?

    If a junk debt collector were to attempt to collect on a non-recourse loan stating any reason (as Heritage Financial attempts above), would a borrower then have cause for a lawsuit against not just the collections agency for harassment and unfair debt collection practices,but also against the wiped out junior lender for knowingly selling a non-recourse, purchase money loan to a third party, thereby exposing a borrower to unnecessary harassment and threats?

    Thank you for your feedback in this regard.


    Betty M

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