Thursday, February 7, 2019
Anyone who knows me, knows I've been obsessed over the past few years with mortgage servicers (what I call the "mortgage middlemen"). My beef with them is that they hold enormous power over homeowners, yet homeowners have no choice in their selection (or quality) and servicers are notoriously abusive, negligent, or incompetent when it comes to dealing with homeowners in financial distress. Shameless plug: have you ever wanted to know a lot more about mortgage servicers and the legal and financial issues they present? If so, check out my new book with CUP (just released today!) titled "Foreclosed: Mortgage Servicing and the Hidden Architecture of Homeownership in America."
Interestingly, the U.S. Fifth Circuit recently decided a case called Christina Trust v. Riddle where a homeowner brought a claim against one of our country's most infamous and troubled mortgage loan servers (Ocwen Financial [and lesser known servicer BSI was added as well]) for failing to properly handle the homeowner's loss mitigation application as required under the Real Estate Settlement Procedures Act (another plug: chapter 3 of my book has some really horrific stories of how servicers treated homeowners and "lost" their loss mitigation applications in the wake of the financial crisis):
Riddle asserts that Ocwen and BSI received timely loss-mitigation applications but failed to consider them and notify Riddle of her loss-mitigation options.
. . . Ocwen and BSI failed to comply with their RESPA obligations under 12 C.F.R. § 1024.41. Specifically, Ocwen and BSI violated 12 C.F.R. § 1024.41(c) because they received a complete or facially complete loss mitigation applications [sic] at least 37 days before a scheduled foreclosure sale, and yet failed to consider Mary for all loss mitigation options and notify Mary in writing of all loss mitigation options available to her.
Riddle, our homeowner, also asked the court to impose vicarious liability up from the servicer to the actual owner of the loan (which was Christina Trust - a securitization trust created after the loan was originated by Bank of America). The court stated that:
. . . Riddle's theory of vicarious RESPA liability theory requires pleading facts that suggest an agency relationship between Bank of America and either Ocwen or BSI.
Unfortunately, Riddle's lawyer did not undertake an agency analysis in the pleadings, which the court found problematic:
Without facts suggesting an agency relationship, even if everything Riddle alleges in her complaint is true, her complaint does not "state a [RESPA] claim" against Bank of America at all—let alone one that is "plausible on its face."
What is more problematic, however, is that the court didn't seem to think that, even if the pleading did include an agency analysis, Riddle could prevail in the vicarious liability claim:
Even if Riddle had pleaded facts suggesting such a relationship, we hold in the alternative that the district court appropriately dismissed her RESPA claim for another reason: Bank of America, as a matter of law, is not vicariously liable for the alleged RESPA violations of its servicers. . .
A loan servicer's obligation to follow this regulation derives from RESPA itself, which also confines this obligation to servicers alone. . . The statute prescribes that "[w]hoever fails to comply with any provision of this section shall be liable to the borrower for each such failure[.]" . . . Because only "servicers" can "fail to comply" with 12 U.S.C. § 2605(k)(1)(E), only servicers can be "liable to the borrower" for those failures. . . . The text squarely settles the issue.
I find this case and its analysis troubling for the same reasons I find cases involving servicer liability for their contractors and subcontractors troubling (as I describe in Chapters 6 and 8 of my book and here). Servicers derive their power to deal with homeowners from the trust that owns the mortgage loans (i.e., from the mortgage-backed securities investors). Every pooling and servicing agreement in the country makes this clear. These agreements also give a tremendous amount of discretion to the servicer (which is often ill-equipped and ill-resourced to deal with the high-touch activities that are needed to successfully deal with defaulting and distressed homeowners). However, when servicers misbehave, the investors do not bear the brunt of the conduct of their servicer-servants. This, in my view, gives very little incentive for securitization sponsors and those that select servicers to do a thorough job vetting servicing firms before deciding which ones to manage the loans in various trust pools. It also gives aggrieved homeowners a diminished chance of actual recovery if the litigation results in a judgment against a thinly capitalized servicing firm. Consider that in the UCC article 9 context, creditors who undertake repossession activities cannot relieve themselves of liability by saying that the repossession company they hire is not, in fact, their agent. Rather, creditors are automatically liable (i.e., vicariously liable) for the acts of their agents in undertaking the repossession of collateral if a breach of the peace occurs. See U.C.C. 9-609 cmt 3. So, why not servicers too? In some ways, article 9 debtors are better off than homeowners with a mortgage. As I described in chapter 8, tenants are also given superior protections. So much for the sanctity that the law places on the castle-like home.
In sum, homeowners continue to face legal hurdles in asserting their rights against servicers, driven largely by the fact that current legal regimes are ill-equipped to deal with (or even fully-recognize) the mortgage loan securitization structure. For solutions on reforming mortgage and regulatory law in this space (one last shameless plug), check out Foreclosed: Mortgage Servicing and the Hidden Architecture of Homeownership in America here!