“[A] mortgagor seeking to set aside a foreclosure by advertisement must allege facts to support three essential aspects of a claim: (1) fraud or irregularity in the foreclosure procedure; (2) prejudice to the mortgagor; and (3) a causal relationship between the alleged fraud or irregularity and the alleged prejudice, i.e., that the mortgagor would have been in a better position to preserve the property interest absent the fraud or irregularity.” Diem v Sallie Mae Home Loans, Inc, 307 Mich App 204, 210-211 (2014), citing Kim v JPMorgan Chase Bank, 493 Mich 98, 115-116 (2012). Accordingly, “defects or irregularities in a foreclosure proceeding result in a foreclosure that is voidable, not void ab initio.” Kim, 493 Mich at 115.
“Generally speaking, any defense against . . . the obligation secured by a mortgage is a defense against, or a permissible objection to, its foreclosure.” 10A Michigan Pleading & Practice (2d ed), § 74:16. However, absent fraud, an unfair proceeding, or improper notice, setting aside a foreclosure sale by advertisement requires “‘a strong case’” and “‘some peculiar exigency[.]’” Detroit Trust Co v Agozzinio, 280 Mich 402, 405-406 (1937), quoting Page v Kress, 80 Mich 85, 89 (1890). See also Cramer v Metro Savings & Loan Ass’n, 401 Mich 252, 261 (1977).
“[T]he mortgagor may hold over after foreclosure by advertisement and test the validity of the sale in the summary proceeding.”1 Mfrs Hanover Mtg Corp v Snell, 142 Mich App 548, 553 (1985), citing Reid v Rylander, 270 Mich 263, 267 (1935). “The mortgagor may raise whatever defenses are available in a summary eviction proceeding.”2 Mfrs Hanover Mtg Corp, 142 Mich App at 553-554, citing MCL 600.5714. However, in Reid, 270 Mich at 267, the Court stated that “underlying equities, if any, bearing on the instrument . . . cannot be made triable issues in a summary proceeding.”
“The district court has jurisdiction to hear and determine equitable claims and defenses involving the mortgagor’s interest in the property.” Mfrs Hanover Mtg Corp, 142 Mich App at 554, citing MCL 600.8302(3) (“In [a summary proceeding], the district court may hear and determine an equitable claim . . . involving a right, interest, obligation, or title in land.”). See also MCR 4.201(H)(1)(a)(ii), which expressly states that in a summary proceeding, a party may join with a complaint or an answer a claim or a counterclaim for equitable relief. MCR 4.201(H)(2)(a) further states that “[a] summary proceedings action need not be removed from the court in which it is filed because an equitable defense or counterclaim is interposed.” Removal is only necessary when a money claim or counterclaim “is introduced”3 and “is sufficiently shown” to exceed the district court’s jurisdictional limit,4 and then, only the money claim or counterclaim need be removed. MCR 4.201(H)(2)(b).
A.Defenses to the Foreclosure Proceedings
1.Noncompliance With Statutory Foreclosure Procedures
Substantial compliance with the statutory requirements is required to properly foreclose a mortgage under a power-of-sale clause. Peterson v Jacobs, 303 Mich 329, 335 (1943). “Such compliance means a strict compliance but does not include something not substantial.” Id. “[S]light and inconsequential irregularities in a foreclosure would not vitiate the sale[.]” Id. at 335. For example, a notice of sale’s failure to comply with the requirement that it indicate the assignment and reassignment of a mortgage did not automatically void the foreclosure sale. Id. at 335-336.
Fault need not be shown to set aside a foreclosure sale that did not substantially comply with the statutory requirements. Grover v Fox, 36 Mich 461 (1877). “[I]n executing the power of sale in a mortgage the statutory proceedings must comply substantially at least with all the conditions set by the legislature, and those who conduct the foreclosure must observe good faith and pay a proper regard to the interests of all who may be affected by the proceedings, and no defect or misstep in matters of substance will be cured or excused by any proof that it happened by mistake and was not induced by a bad purpose.” Id. at 466.
However, a plaintiff is still required to demonstrate prejudice as a result of any statutory noncompliance. Diem v Sallie Mae Home Loans, Inc, 307 Mich App 204, 211 (2014). Even assuming that the foreclosure violated MCL 600.3204, the Court rejected the plaintiff’s wrongful foreclosure claim because the plaintiff failed to allege “a causal connection between the alleged fraud or irregularity in the foreclosure procedure and any ability [the plaintiff] might have had to preserve his property interest.” Diem, 204 Mich App at 212.
2.Length of the Redemption Period
After the foreclosure sale, the mortgagor, his or her heirs or personal representative, or persons with a recorded interest in the property claiming under any of those individuals have a specific period of time in which to redeem the property by paying the amount that was bid for the premises, with interest at the rate set by the mortgage, plus other costs for which the mortgagor would have been responsible if the mortgagee had not foreclosed on the property, including interest on those costs. MCL 600.3240(1)-(2); MCL 600.3240(4). The parties may agree, orally or in writing, to an extension of the redemption period. Macklem v Warren Constr Co, 343 Mich 334, 339 (1955). The statute of frauds does not prohibit oral extensions, and the party claiming an extension has the burden of proving it by a preponderance of the evidence. Id.
“MCL 600.3240 . . . specifies the requirements for redemption, leaving no room for equitable considerations absent fraud, accident, or mistake.” Senters v Ottawa Sav Bank, FSB, 443 Mich 45, 55 (1993).
A mortgagor’s military service tolls the statutory redemption period.5 50 USC App 526(b).
Bankruptcy proceedings do not toll the statutory redemption period. Cain v Wells Fargo Bank, NA (In re Cain), 423 F3d 617, 620-621 (CA 6, 2005). However, a bankruptcy petition filed before a foreclosure sale stays the foreclosure proceedings. Stackpoole v Dep’t of Treasury, 194 Mich App 112, 116 (1992).
Michigan adheres to the doctrine against clogging the equity of redemption; agreements that restrain or impair a mortgagor’s right of redemption may clog the equity of redemption and must be carefully scrutinized.6 Oakland Hills Dev Corp v Lueders Drainage Dist, 212 Mich App 284, 295 (1995). “Clogging occurs only where there exists a contractual provision that could cut off the right of redemption.” Blackwell Ford, Inc v Calhoun, 219 Mich App 203, 213 (1996). “A mortgagor may . . . sell and convey its equity of redemption to the mortgagee in a contract that is separate and distinct from the mortgage agreement and entered into in good faith for good consideration.” Oakland Hills Dev Corp, 212 Mich App at 295. “[A] mortgagor may not, at the [same] time the mortgage is created, surrender his [or her] equitable right to redeem the property following a default.” Blackwell Ford Inc, 219 Mich App at 209.
3.Servicemembers7
Unless ordered by a court, foreclosure by advertisement of a servicemember’s mortgage or sale of a servicemember’s mortgaged property is invalid when the foreclosure or sale takes place during the servicemember’s military service or within six months after the servicemember’s service ends if:
•the servicemember entered into the mortgage before beginning his or her period of service or
•the servicemember is deployed in service overseas.8 MCL 600.3285(1).
“A person shall not, individually or acting through another person, foreclose, sell, or attempt to foreclose or sell real estate with the knowledge that the foreclosure or sale is invalid under [MCL 600.3285].” MCL 600.3285(2). “A person who violates [MCL 600.3285(2)] is subject to a civil fine of $2,000.00.” Id.
4.Loss Mitigation9
Federal regulations prohibit a person from foreclosing on a principal residence without providing the mortgagor with an opportunity to qualify for loss mitigation. See generally, 12 CFR 1024.39–12 CFR 1024.41.10 “Loss mitigation option means an alternative to foreclosure offered by the owner or assignee of a mortgage loan that is made available through the [mortgage] servicer to the borrower.” 12 CFR 1024.31 (emphasis added).
As part of the loss mitigation process, the person foreclosing the mortgage must designate a single contact person or department for a delinquent mortgagor during the loss mitigation process. See 12 CFR 1024.40(a)(1) (contact person must be assigned no later than the 45th day of the mortgagor’s delinquency).
The loss mitigation process requires the person foreclosing on the mortgage to provide a delinquent mortgagor with written notice informing the mortgagor that he or she may be eligible for loan modification in order to avoid foreclosure. 12 CFR 1024.39(b)(2)(iii). According to 12 CFR 1024.39(b)(2)(i)-(v), the written notice must be provided and:
•encourage the mortgagor to contact his or her mortgage servicer,
•include the assigned contact person’s or department’s telephone number and mailing address,
•if applicable, include “a brief description of examples of loss mitigation options that may be available” to the mortgagor from the loan servicer,
•if applicable, include instructions about applying for loss mitigation or information about how the mortgagor may “obtain more information about loss mitigation options[,]” and
•include the website at which the mortgagor may access a “list of homeownership counselors or counseling organizations, and the HUD toll-free telephone number to access homeownership counselors or counseling organizations.”
B.Defenses to the Underlying Mortgage
Committee Tip:
It is not clear whether a mortgagor may challenge the validity of the underlying mortgage during summary proceedings following foreclosure. A mortgagor may challenge the propriety of the proceedings that resulted in foreclosure. See Mfrs Hanover Mtg Corp v Snell, 142 Mich App 548, 553 (1985). A district court may hear any equitable claim or counterclaim arising from the dispute forming the basis of a summary proceeding. See MCR 4.201(H)(1)(a)(ii). However, the Supreme Court stated that “underlying equities, if any, bearing on the instrument . . . cannot be made triable issues in a summary proceeding.” Reid v Rylander, 270 Mich 263, 267 (1935). But see MCL 600.8302(3), which states that in a summary proceeding “[a] district court may hear and determine an equitable claim . . . involving a right, interest, obligation, or title in land.” Because the issue is unclear, a brief discussion of a few of the defenses to foreclosure based on challenges to the validity of the underlying mortgage are included in the benchbook.
1.High-Cost Mortgages11
The Home Ownership Equity Protection Act (HOEPA), an amendment to the Truth in Lending Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act, an act that broadened the scope of HOEPA coverage, were enacted to provide certain protections to mortgagors in cases of high-cost mortgages.12
HOEPA applies to high-cost mortgages and refinance mortgages secured by the mortgagor’s principal residence.13 A mortgage is a high-cost mortgage and merits HOEPA protection if:
•The loan’s APR (annual percentage rate) exceeds specific limits set for first lien mortgages and junior mortgages.14 15 USC 1602(bb)(1)(A)(i)(I)-(II).
•The points and fees exceed specific percentages based on the total loan amount.15 15 USC 1602(bb)(1)(A)(ii)(I)-(II).
•The loan charges a prepayment penalty under certain circumstances.16 15 USC 1602(bb)(1)(A)(iii).
HOEPA prohibits a lender from making a residential mortgage loan unless it “makes a reasonable and good faith determination based on verified and documented information that . . . the consumer has a reasonable ability to repay the loan[.]” 15 USC 1639c(a)(1); 12 CFR 1026.34(a)(4).
HOEPA requires that a lender make specific disclosures to a consumer before a loan is finalized. See 15 USC 1639(a)(1)-(2); 12 CFR 1026.31; 12 CFR 1026.32(c). In addition to required content, HOEPA prohibits certain terms and practices from being included in a mortgage loan and the loan process. Among the terms and practices prohibited by HOEPA are:
•Higher interest rate after default. 15 USC 1639(d).
•Balloon payments more than twice the amount of an average payment (under most circumstances). 15 USC 1639(e).
•Negative amortization. 15 USC 1639(f).
•Extension of credit to a consumer without regard to his or her ability to repay the loan. 15 USC 1639(h).
•Late fees in excess of a certain percentage of the payment amount (unless expressly authorized by the loan documents), late fees imposed before a certain date of the delinquency, and more than one late fee imposed per each late payment. 15 USC 1639(k).
Purchasers or assignees of a high-cost mortgage loan are subject to all claims and defenses that could be brought against the original lender, unless the purchaser or assignee proves “by a preponderance of the evidence[] that a reasonable person exercising ordinary due diligence” could not have determined that the mortgage was a high-cost mortgage. 15 USC 1641(d).
“Michigan’s contract law recognizes several interrelated but distinct common-law doctrines—loosely aggregated under the rubric of ‘fraud’—that may entitle a party to a legal or equitable remedy if a contract is obtained as a result of fraud or misrepresentation.” Titan Ins Co v Hyten, 491 Mich 547, 555 (2012). A mortgagor may challenge a mortgage agreement on the basis of actionable fraud (fraudulent misrepresentation), innocent misrepresentation, or silent fraud (fraudulent concealment). See id. Actual or constructive fraud must be shown in order to set aside a statutory sale of the premises. Postal v Home State Bank for Savings, 284 Mich 220, 226 (1938).
To establish actionable fraud, the mortgagor must show that:
•the mortgagee made a material representation,
•the representation was false,
•the mortgagee knew the representation was false when he or she made it, or the mortgagee made the representation recklessly and as a positive assertion, without knowledge of its truth,
•the mortgagee intended for the mortgagor to act on the representation,
•the mortgagor acted in reliance on the representation, and
•the mortgagor was injured as a result. Titan Ins Co, 491 Mich at 555.
Innocent misrepresentation neither requires knowledge of the falsehood nor the intent that the mortgagor rely on the misrepresentation. Titan Ins Co, 491 Mich at 556 n 5. However, innocent misrepresentation requires “that the misrepresentation be made in connection with making a contract and the injury suffered by the victim must inure to the benefit of the misrepresenter.” Id.
Silent fraud, or suppressing the truth “when there is a legal or equitable duty of disclosure[,]” is just as prejudicial as asserting a falsehood. Titan Ins Co, 491 Mich at 557.
Generally, a party’s mistake in executing a mortgage is not sufficient to set aside a properly executed mortgage agreement. A party has a “duty to ascertain what [he or she is] doing before signing . . . documents.” Roosenraad v Sluiter, 276 Mich 674, 678 (1936). “[I]n the absence of fraud, deceit, misrepresentation or other misconduct, . . . the instrument will be upheld.” Id.
However, “‘[i]f a party’s own wrongful act has brought another into peril, he [or she] is not at liberty to impute the consequences of his [or her] acts to a want of vigilance in the injured party, when his [or her] own conduct and untruthful assertions have deprived the other of that quality and produced a false sense of security.’” John Schweyer & Co v Mellon, 196 Mich 590, 597 (1917), quoting Eaton v Winnie, 20 Mich 156 (1870).
Undue influence is a type of fraud, and “the general rules applicable in cases of fraud . . . apply in cases of undue influence as well[.]” Adams v Adams, 276 Mich App 704, 710 n 1 (2007). The ultimate question in a matter where one party claims another party exerted undue influence over a person is whether the person acted voluntarily despite the party’s influence on him or her. Kouri v Fassone, 370 Mich 223, 233 (1963). Undue influence must be determined by assessing the totality of circumstances on a case-by-case basis. Id.
“Duress exists where one is induced, by another’s unlawful act, to make a contract or perform some act under circumstances which prevent his [or her] exercising his [or her] free will.” Lewis v Doyle, 182 Mich 141, 150 (1914) (emphasis added). To establish a successful claim of duress, a plaintiff must show that the conduct compelling him or her to act was illegal and that the party who caused the duress is also the party who benefited from the transaction. 8 Mich Civ Jur, Duress, § 4; Musial v Yatzik, 329 Mich 379, 383 (1951). See also Farm Credit Servs of Mich’s Heartland, PCA v Weldon, 232 Mich App 662, 681-682 (1998). Factors to be considered in determining whether a person’s conduct resulted from duress include the time that passed between a party’s demand for action and the actual transaction at issue, whether the person had a chance to investigate relevant facts, and whether the person had an opportunity to get independent advice about the transaction. 8 Mich Civ Jur, Duress, § 3.
The statutory provisions governing usury in Michigan are found at MCL 438.31 et seq. Michigan usury law is broader than the law in many jurisdictions and applies to interest on all contracts. Hillman’s v Em ‘N Al’s, 345 Mich 644, 651 (1956).
“‘[T]here is a strong presumption against preemption of state law, and preemption will be found only where it is the clear and unequivocal intent of Congress.’” Konynenbelt v Flagstar Bank, 242 Mich App 21, 26-27 (2000), quoting Martinez v Ford Motor Co, 224 Mich App 247, 252 (1997). Michigan usury law is preempted by federal usury law in certain cases. See Mitchell v Trustees of United States Mut Real Estate Inv Trust, 144 Mich App 302, 307-308 (1985). Most significantly, Michigan usury law does not apply to residential mortgage loans secured by a first lien on the property (purchase money mortgages and any loan by which the lender gains first position), when the mortgage involves a federally related mortgage loan that was made after March 31, 1980, by a lender-creditor whose investments in real estate loans total more than $1,000,000 per year. 12 USC 1735f-7a(a)(1)(A)-(C); 12 USC 1735f-5(b)(2)(D) (Depository Institutions Deregulation and Monetary Control Act (DIDA)). Michigan usury law is also preempted in cases involving sellers who take a mortgage on property owned and previously occupied by the seller. 12 USC 1735f-7a(a)(1)(C)(vi).
Michigan usury law applies to land contracts. MCL 438.31c(6). See generally, Olsen v Porter, 213 Mich App 25, 27 (1995) (usurious land contract subject to reformation).
Usury is a shield rather than a sword; a mortgage with an underlying obligation carrying a usurious rate of interest is not void. Michigan usury law merely bars the lender charging a usurious interest rate from recovering any interest, MCL 438.32, but not from recovering principal payments on a loan with a usurious rate. See Mich Mobile Homeowners Ass’n v Bank of the Commonwealth, 56 Mich App 206, 211-215 (1974).
In determining the rate of interest, the court will look closely at the real nature of the transaction, rather than at its title. A land contract, or even a warranty deed, that is in fact a mortgage will be classified as a mortgage, and its rate of interest will be examined accordingly by the court. Boyd v Layher, 170 Mich App 93, 97 (1988); Grant v Van Reken, 71 Mich App 121, 128 (1976). The “taint of usury” may be purged when the usurious obligation is fully canceled and replaced with a new obligation which is not usurious, executed in legal form, and supported by the borrower’s promise to repay the money actually received, with legal interest. Cullins v Magic Mtg, Inc, 23 Mich App 251, 259 (1970).
A party who has voluntarily satisfied an admitted usurious note may not recover the interest paid. Sienkiewicz v Leonard Mtg Co, 59 Mich App 154, 156-157 (1975). See also Wright v First Nat’l Bank of Monroe, 297 Mich 315, 328 (1941).