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Banking & Mortgage Litigation Involving Missing Loan File Documents and Foreclosure Errors

A renowned nationwide mortgage banking expert witness explains that mistakes occur in banking, like all businesses. When a missing documentation or foreclosure error is found, it should be corrected as quickly and accurately as possible. Like other businesses, banks follow established industry standard procedures utilizing the universal economic principle of division of labor in correcting documentation problems, and follow up with a ratifying, authorizing signature on the foreclosure documents.

Here is a quick analysis of some of the important issues and considerations in handling litigation that involves disputed foreclosures.

Missing Mortgage File Documents

There is no doubt that there are instances when a mortgage loan file is missing a single document, but it has been my experience that there are very, very few instances when there are a significant number of documents missing in any particular loan file or even single documents throughout a particular portfolio.

My first experience with this was years ago in my first banking job when we had to call the repairman out to the bank to repair our electric rotating filing cabinet. As soon as the repairman took off the front cover of the electronic filing cabinet, I instantly became a bank hero by pulling out several notes that had fallen out of their file jacket and had been missing Expert Witness: Don Coker
since before I started working at the bank. I am sure that some of these currently missing promissory notes or other mortgage loan documents are in similar easily-resolvable situations.

The mortgage loan business has developed into a very document-intensive business. Consider that every loan file has an extensive checklist of documents that have to be generated, signed, many of them sent out for recordation, and all of them maintained for the life of the mortgage loan, which typically can be up to thirty years. And as we all know, mortgage loan files are sometimes shipped from one location to another, increasing the chances of a lost document.

I recently attended a closing of the sale of a small rental house, and the stack of documents was approximately four inches thick. I would estimate that at least sixty documents were signed at that closing transferring title to a small house and initiating a new mortgage loan for the purchasers. Therein lies a great part of the problem: that we have to have so many documents for a simple sale and mortgage transaction. How many disclosures and acknowledgments do we really need? More documents increase the likelihood that one of them may become misplaced or lost. Some legal relief is greatly needed in this area.

Another document problem source is that promissory notes, which are widely considered to be the most important document and also the one most frequently misplaced or lost, are generally filed separately from the rest of the mortgage documents since the note is a negotiable instrument. (Of course, the mortgage is important as well since it is the security interest in the collateral; but it is recorded at the courthouse and the note is not.) You may have loan files filed in a walk-in file vault, and the promissory notes filed in a locked cabinet within the walk-in file vault. Unfortunately, sometimes when the loan file gets shipped out, such as to a new servicer, the promissory note is shipped out separately, and that is the last time that they see each other.

Surely some smart attorney will tell me someday why this is not a good idea, but I have always wondered why they don’t routinely record notes just like they record mortgages and deeds of trust? Alternatively, I don’t understand why there cannot be an Internet-based solution where promissory notes are scanned and securely stored online, or alternatively, a book-entry-type solution such as is used in the securities industry? Something like MERS but encompassing more documents would be helpful.

Resolving Missing Mortgage File Document Problems

Lenders should never “manufacture” a missing document, and I can say that in my banking and lending career that spans over forty years (which includes 2¼ years as a governmental banking regulator running two insolvent institutions that had previously been run by incompetent idiots) that I have never actually experienced any bank or mortgage company “manufacturing” a document that is missing.

All lenders that I have ever encountered - and I have worked for several major lenders and have consulted for well over 75 lenders - take a missing document very seriously, and not “lackadaisically” as is suggested in the current media.

Depending on which document is missing, the correct way to handle a missing document situation is to produce a duplicate of the missing document, mark it as a duplicate, and have it executed by the borrower. Sometimes an affidavit is generated stating what has happened. If the missing document is the promissory note, then some indemnification language may be found in the correcting document, or in an associated affidavit. There are appropriate ways to handle this matter depending on where you are located.

Whenever a substitute document or affidavit is used in place of a lost or misplaced original document, it is not considered a “fraudulent” document. (An example of a fraudulent document would be a promissory note to which a borrower’s name has been forged; and I have never seen nor heard of such an example.)

Commerce cannot grind to a halt just because a document has been misplaced or lost. In the case of an impending foreclosure, the controlling facts are that a borrower clearly acknowledges a debt by virtue of having paid on it for some time in the past and having signed all of the other documents that remain in the mortgage loan file, and the debt is now past due and has to be dealt with by the mortgage lender or mortgage servicer. That does not mean that the borrower gets to live in the house without having to make any more mortgage payments until the missing document is found nor does it mean that they get a free house at the expense of the mortgage lender or mortgage servicer.

Mass Signings of Foreclosure Authorizations

The business press loves to pick up on a catch-phrase and ride it to death, and the catch-phrase du jour is “robo-signer.” This is a made-up term for an overblown situation that any experienced business person should instantly recognize as nothing more than affixing an official signature to a document that has been processed by the appropriate staff in a company or an organization.

As an example, an experienced executive that has check signing authority for a corporation of any reasonable size regularly has his or her day interrupted by having to sign a stack of checks that are going out to pay all types of company bills, purchase equipment, purchase office supplies, purchase investments, pay salaries, etc.; but no one pretends that the executive signing the checks has made himself or herself comfortable that the billing that supports each and every one of the checks that is being signed is 100% accurate. How could they? At the most, the executive signing the checks (or documents) makes sure that the amount on the billing matches the amount on the check, and relies upon the people that prepared the checks (or documents) to do their job of verifying whatever they have to verify before the checks (or documents) get to the signer. This is called “division of labor” and was recognized as far back as Plato in the 4th century BC, and it has been around in its more modern interpretation since Adam Smith’s time – the 18th century – when he wrote the venerable Wealth of Nations. Furthermore, this is an industry standard practice not only in banking and mortgage lending and mortgage servicing but in all areas of business, and applies to the foreclosure procedure as well.

Having been in the executive position of having to sign a stack of checks a couple of times each week for longer than I would like to remember, I can assure you that the invoice or other document verifying the legitimacy of the payment typically is looked at briefly by the signer, the check amount may be compared to the amount on the supporting invoice, additional documentation is requested if necessary, and the check is signed and sent on its way. Personally, I did this for many years, and never had even one problem. We all rely on a competent staff. It’s a nationwide industry standard way of doing all types of business.

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (a/k/a FrankenDodd) tops 2,300 pages and passed both houses of Congress. Do you really think that all 535 Congressmen that voted one way or the other on it read all 2,300 pages before they voted on it? The President signed it into law, and do you think that the President really read all 2,300 pages of it before he signed it? They rely on their staffs to do the heavy lifting of reading a behemoth like FrankenDodd, and then vote on the document or sign it into law (or not) based upon the work of their staff. That’s often how it’s done in business as well, and that is a nationwide industry standard practice.

The same basic procedure is used in processing foreclosures. Staff people work up the various items that need to be accomplished in order for a foreclosure to proceed, and then an authorized person signs the operative document as somewhat of a ratification of the work that has been accomplished by the staff. No one in banking realistically expects that the person signing the document authorizing the foreclosure to proceed will have run down and verified every item that has to be dealt with in order to prepare a foreclosure. That’s not the way that the system is set up, and I have never seen a system like that in my forty-plus years in the lending industry. Staff people do the various items of required work, and then an authorized person signs the actual document initiating the foreclosure. Again, division of labor.

The Bigger Picture

It seems that many borrowers and consumer advocates out there today are looking for an excuse for delinquent borrowers to simply stop paying on their mortgage. You cannot just have a situation where borrowers get a free house just because their mortgage lender or mortgage servicer makes a minor error or cannot find a particular document. The simple fact remains that the borrower borrowed the money from the lender, signed numerous mortgage loan documents that ARE in the file, acknowledges the debt by having made past payments over some period of time, occupies the collateral property, and clearly owes the debt. If there is a documentation problem, then that problem has to be resolved; but the reasonable resolution of a missing document problem is never that the borrower gets a free house because of a mistake or a lost or misplaced document. What business has never lost or misplaced a document? The answer is “None.” It’s a simple fact that all businesses lose and misplace documents from time to time. (Once, the truck moving my car loan file from one bank to another turned over; and my car title was blown to the four winds on the Southwest Freeway in Houston, Texas, never to be seen again. We worked out a substitute document, and the problem was solved with no drama and no repercussions for anyone. That’s how it’s done.)

Mortgage Loan Servicing Responsibilities

More often than not, mortgage loans are owned by one entity and serviced by another entity. All servicing agreements require the servicer of a mortgage to take prompt action to collect all that is owed on the mortgage, and this includes acting promptly to repossess the collateral if it comes to that. This means that mortgage loan servicers are contractually obligated to take action to correct promptly any documentation deficiencies that might surface when a mortgage loan goes seriously delinquent and has to be foreclosed.


The simple inconvenient fact that is often overlooked these days is that banks and mortgage companies do a lot more things right than they do wrong. However, doing things right does not generate headlines and stories. Yet, doing something that is right but that is simply even perceived as wrong DOES generate headlines and stories. Nevertheless, a documentation problem is a problem that has to be dealt with in the proper manner; and no mortgage lender or loan servicer likes encountering or dealing with these problems, but they do it.

In much the same way that a mortgage loan is usually the largest financial transaction for a typical borrower, every mortgage loan represents a sizable investment for a mortgage lender; and mortgage lenders must continue earning a return on their investments in mortgage loans in order to sustain profitability. When a missing document problem surfaces for a loan that is headed for foreclosure, it is imperative that the mortgage remains on track for foreclosure, and that the missing document problem is dealt with promptly as described earlier. Establishing an arbitrary moratorium for a seriously delinquent mortgage loan while a missing document problem is discussed, pondered, fought, and dragged into court simply worsens the economics of a troubled loan transaction and foreclosure situation not only for the lender but also for the borrower since it results in a larger deficiency position.

ABOUT THE AUTHOR: Banking and Mortgage Banking Expert Witness Don Coker
Expert witness and consulting services. Over 500 cases for plaintiffs & defendants nationwide, 120 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ.

Clients have included numerous individuals, over 75 banks, and governmental clients such as the IRS, FDIC.

Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a two-year term as a high-level governmental banking regulator.

BA degree from the University of Alabama. Postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School.

Called on by clients in 31 countries for work involving 61 countries.

Widely published, often called on by the media.

Copyright Don Coker

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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