Citing his concerns that homeowners across New York State are being held in "legal limbo", the state's Attorney General, Eric T. Schneiderman, has filed suit against HSBC Bank and HSBC Mortgage Corporation. The lawsuit alleges that the two have failed to follow a state law related to foreclosure actions which may have left an estimated 25,000 families trapped in what is called the "shadow docket."
The New York law requires that residential mortgage lenders, servicers and their agents who sue to foreclose on a homeowner file a "Request for Judicial Intervention" (RJI) when they file their proof of service with the county clerk. The RJI initiates a process that mandates the lender attend a settlement conference within 60 days to enable the borrower to negotiate possible alternatives to foreclosure. This could include a loan modification that might make their payments more manageable.
A press release from Schneiderman's office announcing the suit maintains that thousands of foreclosure cases across the state are "languishing for months, even years, because financial institutions delay filing the paperwork that triggers the settlement conference." This creates a backlog of cases (the shadow docket) which has become a major burden on homeowners and the legal system. The estimate of 25,000 affected borrowers comes from New York's Office of Court Administration.
The investigation of HSBC and its subsidiary, the New York AG's office said, showed they "repeatedly failed to timely file the RJI in hundreds of foreclosure cases against New York homeowners, increasing the risk that those homeowners would lose their homes. A sampling of HSBC foreclosure filings from four counties -- Erie, Monroe, Suffolk and Bronx -- identified close to 300 instances where HSBC failed to file the RJI with the proof of service." In some of those cases it is alleged that, homeowners waited for over two years for HSBC to file the RJI while the bank continued to charge interest and assess fees and penalties, adding thousands of dollars to what the homeowner owed. Those additional charges also put homeowners at greater risk that they could not qualify for a loan modification.
"Companies like HSBC are brazenly ignoring state law, leaving homeowners across New York stuck in a legal limbo where they can't even get the legally required settlement conference that could help them keep their homes," Schneiderman said. "For homeowners facing foreclosure, time is their greatest enemy. Every day spent waiting for a settlement conference is a day that the lender piles on additional interest, fees and penalties and the homeowner falls further behind."
He cited specifics of one case in which an Erie County resident fell into delinquency after suffering medical issues and losing her job. HSBC filed the proof of service on November 12, 2010 but did not file the RJI until 19 months later. Fees accrued during that period increased the principal balance on her loan by $23,000 by the time she was able to request a modification.
Schneiderman's suit, filed in New York Supreme Court seeks to compel HSBC to file the RJI immediately in all cases in which it has filed a proof of service, and to file an RJI simultaneously with proof of service in all future cases. In cases where HSBC has already failed to file the RJI the suit also seeks to compel HSBC to prepare an accounting of interest charges, penalties and fees that accrued beginning 60 days after the filing of proof of service on the homeowner and toll and waive those fees. In addition it demands HSBC grant restitution for these charges, fees and penalties that have been paid homeowners, and grant damages to homeowners injured by HSBC's illegal practices.
