This is a law review article by John Campell entitled “Can We Trust Trustees? Proposals for Reducing Wrongful Foreclosures” An excerpt on the complicated role that trustees play in modern foreclosures:
In many states, trustees are deeply imbedded in every step of the foreclosure process. The trustee is a sort of chameleon who takes on multiple roles, many of which are contradictory, all while the law requires the trustee to act as a neutral.255 In any given transaction, it is not uncommon for the trustee to serve as a debt collector, the attorney for the bank,256 the party with the power to appoint a successor trustee, the successor trustee, an agent for MERS who assigns mortgage documents during the foreclosure, the attorney who opposes the homeowner if he or she seeks to stop the foreclosure, the coordinator and direct or indirect provider of title services, the attorney who represents the new buyer after foreclosure in the lawsuit to remove the homeowner, and the coordinator of “default services – the process of removing the homeowner from the home, cleaning up the home, and preparing it for sale.257 This is a staggering number of hats to wear, and one can probably already sense that the inherent conflicts are legion.258 These conflicts are at the heart of some of the most egregious foreclosure problems and are precisely what this article seeks to highlight and then cure.
The first time a homeowner hears from someone besides the lender/servicer about their loan is usually when the homeowner receives a debt collection notice.
259 This notice is often sent by a law firm who is either 1) a trustee too, or 2) owns a trustee corporation.260 If the homeowner does not dispute the debt or reinstate, the next document the homeowner receives is often foreclosure notice from the trustee.261 Ironically, in many cases, the trustee and the debt collector are the same law firm.
How can the attorney for the bank possibly become the trustee? Things get even more bizarre. A deed of trust, which is created at the time a loan is made, lists a third party trustee.262 That is the trustee that homeowner and the lender agreed to at the time of contract. However, that trustee almost never oversees the foreclosure. Instead, the deed of trust also contains a provision that allows the lender to appoint a successor trustee.263 As mentioned, this power is often delegated to the bank’s attorney, who then appoints itself the trustee.264 Accordingly, the successor trustee is almost always either 1) the foreclosure attorney for the bank who works for a foreclosure mill,265 or 2) a trustee who works for a trustee company that is wholly owned by the attorneys for the bank. In either case, the conflict is obvious. But in the modern mortgage era, things get even stranger. Not only does the bank hand pick the trustee who is supposed to be “neutral” in carrying out foreclosure, the bank in some cases provides the successor trustee the power to appoint itself. This is accomplished by giving the law firm a limited power of attorney which includes the power to self-appoint. The law firm then, as attorney for the bank, files a document appointing itself the successor trustee.
If a homeowner believes that the foreclosure is improper either because the homeowner does not believe he or she is in default or because the homeowner does not believe the party foreclosing has the right to do so, they often raise these concerns to the trustee.269 Yet, since the trustee works for the bank, the calls often go unreturned, letters are unanswered, and serious factual complaints are ignored.270 In fact, in the case of Ron Meehow, it is alleged in the lawsuit that the trustee affirmatively told Ron’s attorney that they “do what the bank tells them.” This is a questionable statement from the only neutral in a non-judicial foreclosure.
In even more extreme cases, trustees have actually advocated against homeowners who have filed for temporary restraining orders with courts.271 The homeowners affirmatively assert that the foreclosure is wrongful, often because the homeowners assert that they were current on their payments or were promised a modification that they never received. In this setting, it is hard to understand how a trustee, who owes a duty of neutrality, would show up and oppose the temporary restraining order. But they do show up in many states.
If the foreclosure sale goes forward, the trustee carries out the sale. The trustee has a legal duty to get the highest price for the property. But it is entirely common for there to be only one bid at the foreclosure sale, and that bid is placed by the bank that foreclosed, the trustee’s client.
272 In fact, that bid is often placed by the trustee on behalf of the bank; the bank doesn’t even send a representative.273 In still other cases, the home is bought by Fannie Mae or another large institution.274 Fannie Mae is also often a client of the trustee law firm.275 These sorts of conflict call into question whether the trustee would ever postpone the foreclosure sale in order to get a higher price, as allowed by most state laws.276 It also calls into question whether the trustee, who has discretion in where and how publication notice of the sale will be made, will actually work to obtain the highest price, which likely involves bringing in bidders who would compete with the trustee’s own clients.
Once the home is sold, the trustee files a trustee’s deed.277 This deed affirms that the underlying conditions for foreclosure, as set out in the deed of trust, were met.278 It affirms that the property was sold at sale and vests title in the new buyer.279 The trustee’s affirmative attestation that the homeowner defaulted and the proper party foreclosed is potentially improper, given that it is likely the trustee has no actual knowledge of whether default occurred or not. And, in cases liked Ron’s, the trustee has ample reason to question default.
As part of wrapping up the foreclosure, the trustee charges a “trustee fee” that is paid by the homeowner.280 This is sometimes in addition to attorney’s fees that are charged to the homeowner.281
The result is that the homeowner is sometimes paying the trustee for being both an attorney and for being the trustee.
After foreclosure, the new buyer of the foreclosed property typically retains a law firm to file a lawsuit to evict the homeowner.282 It isn’t difficult to guess who is routinely retained. The new owner, often a large bank and sometimes the same bank that foreclosed, hires the same attorney that served as the trustee (or in some cases just owned the trustee company).283 The result: the trustee who owed a duty of neutrality to the homeowner is now representing the new buyer (often the old lender) against the homeowner.
The former trustee turned new buyer attorney shows up in court, seeks to evict the homeowner, and then asks the court for damages against the homeowner for living in the home. This routinely occurs despite the fact that the homeowner may have complained to the trustee, prior to foreclosure, that the foreclosure was unjustified and illegal. It occurs even if the trustee was given affirmative information that should have called any number of fundamental of foreclosure into questions, including whether default occurred, whether the lender induced the default, and whether the lender has standing to foreclose at all.
When the court orders the homeowner to vacate, some foreclosure firms then provide “default servicing” which involves coordinating with companies who remove any remaining belongings from the home and prepare the house for sale.284 This often includes throwing out whatever the homeowner did not have the time or money to remove.
Reasons the trustee is ineffective as a neutral:
There are several reasons the trustee is ineffective.
First, there is the repeat player effect. Trustees, even if they didn’t work for banks, regularly see the banks and deal with them. For the homeowners, their relationship with the trustee is one and done. It is widely accepted in cognitive science that repetition builds trust.285
Second, trustees are unregulated and untrained. Since no law describes what they must review in order to proceed with a foreclosure, since no one is watching what they do, and since they are not formally trained, it is unlikely that even a well-meaning trustee could or would ask the right questions. As documented in the sections describing the modern mortgage era, foreclosure is no longer a simple matter. It involves complex transfers of notes and deeds of trust,286 complicated servicing records, and a variety of other matters.
Third, the economic structure as it exists today does not encourage careful work as a trustee. It doesn’t encourage fair work either. Instead, all the economic incentives encourage down-and-dirty foreclosures in the absence of documented proof.287 All the incentives encourage ignoring complaints from homeowners and the obvious conflicts that arise when one firm tries to be all things to all people.
There are both external and internal financial pressures. Externally, the bank is paying the foreclosure firm. The bank wants fast, easy foreclosures. It wants to reduce cost. It also knows that there are often a number of foreclosure firms available. It has the option of firing one and hiring another. In addition, the bank pays the foreclosure mill for the debt collection work, the appointment of successor trustee work, the trustee work itself, and for unlawful detainer work. In addition, the foreclosure mill may be receiving payment for title work and default servicing. All of this is built on a model that requires volume. Foreclosure mills openly advertise bulk rates for foreclosures. These costs are surprisingly low. For example, a conventional foreclosure was quoted as costing $650 and an unlawful detainer might cost $350.288 The attorneys won’t get rich doing one foreclosure, but they are getting rich doing thousands. If the firm were to start asking hard questions of banks, such as, “Where is the proof that this note was transferred to you,” or “Why is the homeowner providing payment records that don’t match yours,” or “Why aren’t you the party that appears in the recording records,” or “Are you sure that using MERS is appropriate,” they would risk losing the repeat business that is making them millions. As a result, their interests align with the banks at the expense of homeowners.
Internally, there are additional pressures. Foreclosure firms, often called “foreclosure mills” because of their bulk work,289 function on a model that has a relatively low number of attorneys and a larger support staff.290 The foreclosure process is meant tobe form driven and the unlawful detainer work is largely a matter of taking defaults. Many foreclosure firms hire attorneys with limited experience in other fields of law, and young attorneys hungry for work, are often assigned to attend the bulk docket calls related to evictions. These attorneys lack the time, inclination, incentives, and resources to investigate each foreclosure and to consider factual disputes raised by homeowners. In fact, based on personal experience, these attorneys often lack the time and inclination to even return calls to homeowners or their attorneys when foreclosure is imminent.
The author of this article proposes legislation as a solution, namely:
As a result of the myriad of problems relating to who can foreclose and whether payment is owed, the first thing a trustee reform statute must do is explicitly require trustees to receive physical records that verify these essential facts. Specifically, a statute would require:
1. Proof of the transfer of the original note from the original lender to the current party who seeks to foreclose, including any and all intervening assignments. The foreclosing party should be required to produce a copy of the original note and attest in a sworn affidavit that the original note exists in its original form. 323
2. Proof that the party who seeks to foreclose is the party who is recorded in the public records as the secured party, along with all the recordings that show how that party came to be secured.
3. Detailed financial records that show when default occurred and precisely how much money the homeowner currently owes.324
4. Documents detailing any modification discussions that occurred and documents showing the results of each modification review.
5. Documents proving that the bank had the power to appoint the successor trustee.
Insulate from other parties
The checklist described above is most effective if the party acting as trustee is truly neutral. Otherwise, close questions (which could always arise), will be resolved in favor of the banks. Insulation is relatively easy to achieve. A trustee reform statute should prohibit any attorney who has served as counsel for either party in the foreclosure from serving as trustee. This ensures that the party who serves as trustee does not have a dog in the fight. It leaves a vast array of attorneys who can do the job. This statutory requirement could well give rise to trustee firms who make solid livings overseeing foreclosures. They could still handle them in bulk, but they would now have clear requirements for what documentation is required.
c. Prohibit foreclosure when legal or factual disputes arise
Requiring trustees to cease foreclosure activity when legal or factual disputes arise should be common sense, but there are very few cases, and no statutes, that explicitly require this result. Trustees are not trained to resolve disputes that arise between the parties, but in reality, trustees do it every time they select the bank’s version of the story over the borrowers.325
The takeaway from Washington’s two leading trustee cases is important. The cases lay out fundamental principles that, if accepted in other states, would change the way foreclosures happen. The most important principles are 1) the deed of trust laws should be construed in favor of the borrower, 2) trustees are required to exercise independent discretion as a true third party, and 3) a trustee’s close ties to the lender give rise to serious concerns about impartiality, requiring careful scrutiny by courts.
. . .
[I]f the homeowner is not represented, what should an attorney/trustee do? If they have the trustee hat on, then they are supposed to be neutral and in some states even owe a fiduciary duty to the homeowner. If they have the attorney hat on, their interests are adverse to that of the homeowner. If the homeowner is represented, the trustee probably should not talk to them. Yet, they owe a duty under the law to talk to them. If the person is unrepresented, the trustee needs to make clear that they cannot help (at least with the attorney hat on) and that there interests are adverse. Then, the only advice they could give, is for the homeowner to seek counsel. Telling the homeowner to reinstate the loan by paying the back due amounts, if the homeowner does not believe he is in default, could be giving legal advice (and bad legal advice at that). Telling the homeowner to call the bank seems equally inappropriate. This scenario, of the ethical duties related to talking to an unrepresented party, is perhaps the best illustration of the untenable schizophrenia that exists when an attorney for the bank is also charged with being the neutral trustee in a disputed matter.
He suggests that state ethics boards should address the following inquiries:
1. Can a trustee who is an attorney and is required by law to be neutral, decide an issue in favor of its client and against a homeowner to whom the attorney owes a fiduciary duty if there is a dispute between the parties as to law or fact?
2. Can an attorney hold a duty of zealous advocacy for one party while simultaneously owing a duty of neutrality to a party whose interests are adverse to the attorney’s client? Would this require written disclosure to one or both parties?
3. Can a trustee for a homeowner in a foreclosure also appear in court to advocate against the homeowner and in favor of foreclosure?
4. Does an attorney who serves as a trustee and has a legally recognized fiduciary duty to a borrower enter into an attorney/client relationship when 1) the borrower shares information with the trustee, or 2) if the borrower seeks advice from the trustee because the borrower believes the trustee is 1) an attorney and 2) supposed to be fair to the borrower?
5. If an attorney agrees to serve as a trustee in a foreclosure, and in the process of that foreclosure, obtains information from a borrower to whom the trustee owes a fiduciary duty, is the trustee prohibited from later using that information in a subsequent action against the borrower?
6. If an attorney agrees to serve as a trustee in a foreclosure, and in the process of that foreclosure, obtains information from a borrower to whom the trustee owes a fiduciary duty, is the trustee prohibited from later representing another party against the borrower in a related transaction?