Pub. 11 2014 Issue 3

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S Fall • 2014 9 “ The business records exception allows the records themselves to be admissible but not simply statements about the purported contents of the records. ” 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 plain- tiff 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 prob- lem? 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 knowl- edge 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 ad- missible. The plaintiff argued that his testimony should be ad- mitted 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 admissi- ble 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 evi- dence, but because it did not introduce the actual business re- cords 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 to Romero, the plaintiff must have standing at the time the complaint is filed. The fore- closure 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 stand- ing to pursue the foreclosure action, the Supreme Court could easily have remanded the case with an order that the foreclo- sure 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 pro- vide 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: TERM ORIGINAL LOAN EQUITY ONE LOAN Interest Rate 7.71 % 8.1% increasing to 14% Payment $1,256.39 $1,683.00 Total Loan Amount $176,450.00 $227,240.00 Additional Fees ---- $12,000 Romero, ¶3. 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 re- quires certain loans to show a “reasonable, tangible net benefit” to the borrowers. In Romero, the loan described above was de- termined 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, 12.15.5.9 (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 com- plaint. That has been true forever, so nobody should be sur- prised. Second, lenders need to follow their procedures when mak- ing 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 underwrit- ing practices. So, in some sense Romero simply reaffirms that bad underwriting and a failure to follow underwriting proce- dures will lead to bad loans. n William R. Keleher is a shareholder in the law firm of Modrall, Sperling, Roehl, Harris & Sisk, P.A. in Albuquerque, NewMexico. A substantial portion of Bill’s practice involves representation of creditors in bankruptcy, Fair Debt Collection Practices Act (FDCPA) claims, real property disputes, equipment and vehicle financing and general collection and defense work. Bill has been recognized in Best Lawyers in America® in Bankruptcy and Creditor Rights/Insolvency and Reorganization, Arbitration, Litigation-Bankruptcy and Mediation since 2003; in addition, he was selected 2015 Mediation “Lawyer of the Year” by Best Lawyers. Bill has an AV® rating from Martindale-Hubbell, he is listed by Southwest Super Lawyers® and was selected “Best of the Bar in Bankruptcy” by the New Mexico Business Weekly in 2011.