The Minnesota Supreme Court recently held that a borrower has standing to sue for damages under Minnesota law against a loan servicer for violation of a HAMP servicer participation agreement and related HAMP guidelines, even though the borrower is not a party to the HAMP servicer participation agreement.
Specifically, the Court held that Minnesota Statutes s. 58.18 provides a borrower a private right of action to claim damages when a servicer fails to follow HAMP guidelines despite the borrower not being a party to the HAMP agreement.
A copy of the opinion is available at: Link to Opinion
As you may recall, Congress authorized the Troubled Asset Relief Program (“TARP”) and the Making Home Affordable Program, which included the Home Affordable Modification Program (“HAMP”). Under HAMP, a non-government entity had the ability enter into a servicer participation agreement (“SPA”) and would receive financial incentives for modifying mortgages. Under the SPA, the servicer is required to follow the HAMP program directives and guidelines.
In 2006, Plaintiff borrower (“Borrower”) entered into a mortgage with a lender to purchase a home. The loan and servicing rights were subsequently transferred to Defendant Loan Servicer (“Servicer”).
In April 2010, Borrower’s prior loan servicer gave her forbearance and payment restructuring under the “Homeowner Unemployment Assistance Forbearance Agreement” which lowered her monthly payments to $300.00 a month. As soon as Borrower’s loan servicing rights were transferred to Servicer, it notified Borrower it would no longer accept the modified monthly payments. Servicer then initiated foreclosure proceedings against Plaintiff.
Borrower filed a class action against Servicer alleging violations of Minnesota’s consumer protection statutes, negligence, and breach of contract. Specifically, Borrower alleged that Servicer violated the SPA it entered into with the Federal National Mortgage Association by failing to follow the applicable guidelines established by HAMP. Servicer filed a motion to dismiss arguing Borrower did not have standing to maintain her complaint.
The trial court granted Servicer’s motion in part “because HAMP does not create a private right of action and because the SPA’s do not give rise to a third party beneficiary claim.” The trial court further concluded that Borrower had no standing to bring suit because there was no breach of contract between Borrower and Servicer, and Borrower was not a party to the SPA allegedly breached. Borrower appealed and the trial court’s ruling was affirmed by the interim appellate court.
Borrower again appealed and the Supreme Court granted review. Borrower argued she had standing under Minnesota Statutes section 58.18 subd. 1 to pursue her claim, while Servicer argued Borrower did have not standing to bring her lawsuit. Servicer further argued federal law preempted Borrower’s state law claims and that section 58.18 was unconstitutional because it violated the U.S. and Minnesota’s constitution’s contracts clauses.
The Court first examined whether Borrower had standing to sue Servicer for breach of the SPA. Minnesota Statute section 58.18 subd. 1 provides that “a borrower injured by a violation of the standards, duties, prohibitions, or requirements of section 58.13… shall have a private right of action.” Section 58.13 subd. 1(a)(5) states a loan servicer shall not “fail to perform in conformance with its written agreements with borrowers, investors, other licensees, or exempt persons.”
Borrower alleged that Servicer breached a written agreement by failing to follow HAMP guidelines, in violation of section 58.13 subd. 1(a)(5), which resulted in a premature home foreclosure. The Court determined Borrower’s allegations fell “within the plain language of section 58.18(1),” and thus Borrower had standing to pursue her claim.
Servicer argued section 58.18 should be construed with existing common law absent “a clear and manifest intent by the legislature to abrogate common law.” Servicer asserted that Borrower could not allege a breach of the SPA because she would not have standing to do so under common law. The Court held that section 58.13 abrogated common law because it expressly gave a third party the right to bring a breach of contract claim.
Servicer next argued that allowing Borrower to bring a cause of action under section 58.18 would open the door to “unlimited and disruptive litigation by parties with no relationship to the myriad agreements that servicers have with other entities.” However, the Court stated the plain language of the statute permits Borrower’s claims and allowing such claims does “not confound the Legislature’s purpose or lead to an absurd result.”
Servicer next argued that the enactment of Minnesota Statutes section 582.043 suggested that section 58.18 did not create a private right of action for HAMP violations. Section 582.043 provides a borrower the ability to enjoin or set aside a foreclosure sale based on a violation of mitigation requirements. The Court rejected Servicer’s for two reasons. First, section 582.043 only allows for an injunction or the setting aside of a foreclosure sale and not any damages or other remedies meaning the two statute’s remedies are not duplicative. Second, the fact the Legislature created a new cause of action does not mean all other statutory causes of action are extinguished. The fact the legislature enacted section 582.043 therefore does not affect Borrower’s section 58.18 claim.
Servicer also argued implied conflict preemption prevented Borrower’s action. Implied conflict preemption occurs when “it is impossible for a private party to comply with both the state and federal requirements, or because the state law stands as an obstacle to the accomplishment and execution of the purpose and objective of Congress.”
Servicer argued section 58.18 created an obstacle to HAMP’s objective of increasing servicer participation and lowering foreclosure rates “because allowing a private right of action to borrowers such as Borrower would ‘have a chilling effect on servicer participation due to fear of exposure to private lawsuits.’”
The Court held that because state law did not impose additional duties on servicers or obligations, state law cannot be said to frustrate congressional purposes in such a way as to provide a basis to conclude that Congress preempted state law. Thus, the Court overruled Servicer’s preemption argument.
Servicer also argued that because HAMP does not provide a private remedy, there cannot be any state remedy, “because it would be an ‘end-run’ around Congress’ decision not to provide a federal cause of action.” The Court quickly rejected Servicer’s argument stating that the “absence of a federal remedy does not support the conclusion that HAMP preempts the private right of action provided for in section 58.18.
Lastly, Servicer argued that section 58.18 violates the “Contracts Clause” because it impairs Servicer’s SPA obligations. However, “[w]hen the statute was in force and effect at the time the contract was made, there is no impairment, because existing statutes are read into future contracts and enter into the contract terms by implication” W. States Utils. Co. v. City of Waseca, 242 Minn. 302, 312, 65 N.W.2d 255, 263 (1954). Section 58.18 went into effect in 2007 and Servicer entered into the SPA in 2009 meaning section 58.18 was read into the SPA. Therefore, the Court determined that section 58.18 did not violate the Contracts Clause of the United States and Minnesota Constitutions.
Accordingly, the Minnesota Supreme Court reversed and remanded.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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