The U.S. District Court for the District of Massachusetts recently rejected a loan servicer's argument that, under the Financial Institution Supervisory Act, the court lacked subject matter jurisdiction over a consolidated group of lawsuits stemming from allegations regarding supposed errors in the loan modification process. A copy of the opinion is attached.
Various homeowners initiated lawsuits against their mortgage servicer (the "servicer"). These lawsuits were consolidated, and the plaintiffs divided their claims into four groups: Group 1 alleged that the servicer "breached obligations set forth in form contracts that it send to its borrowers pursuant to HAMP;" Group 2 alleged violations, among other things, of state consumer protection statutes, on the basis that the servicer "strung along and misled" them; Group 3 claimed that the servicer breached their negotiated "Loan Modification Agreements," and Group 4 asserted allegations under the Fair Debt Collection Practices Act ("FDCPA").
The servicer moved to dismiss most of the claims involved in the instant litigation, arguing that the Financial Institution Supervisory Act ("FISA") precludes subject matter jurisdiction. The servicer also attacked the specific allegations made by Groups 1-4, discussed in greater detail below.
As you may recall, FISA provides the Office of the Comptroller of the Currency ("OCC") with the authority to issue consent orders to address "unsafe or unsound" practices by the financial industry. 12 U.S.C. Sec. 1818(b), 1813(q). Further, FISA prohibits any action that could affect the enforcement of an OCC consent order. Id. at Sec. 1818(i)(1).
The servicer entered into a consent order with the OCC requiring it among other things to devote financial and other resources to the loss mitigation process sufficient to "ensure compliance with all applicable federal and state laws..." The servicer is also required pursuant to the OCC consent order to "remediate all financial injury to borrowers cause by any errors, misrepresentations or other deficiencies..."
In the instant litigation, the servicer argued that it was taking the necessary actions to comply with the consent order, and that the court's review of the plaintiffs' allegations could affect the enforcement and other aspects of the consent order.
The court disagreed. It noted that FISA's "primary purpose is to prevent federal courts from usurping the OCC's power to enforce its own consent orders against parties to the orders," rather than non-parties who may have separate remedies at law.
The court also scrutinized the text of FISA, as well as related documents, observing that although FISA includes a mechanism by which parties to consent orders may challenge those orders, there is no similar mechanism for non-parties. Therefore, the court held that "it follows that the jurisdiction bar is not meant to displace a non-party's right to present its claims to a federal court..." Similarly, the court observed that a publication from the OCC encouraged borrowers to use "every avenue possible" to prevent a foreclosure sale -- which the court stated "would hardly be necessary" if the OCC construed FISA as precluding subject matter jurisdiction from state and federal courts.
Therefore, the court held that the consent order and related documents "do not establish an exclusive remedy for plaintiffs' financial injuries," and accordingly denied the servicer's related motion to dismiss under FISA.
Having determined that it had subject matter jurisdiction, the court turned to the breach of contract claims of the Group 1 plaintiffs. The Group 1 plaintiffs alleged that form trial payment plan ("TPP") agreements provided to them by the servicer constituted an offer which they accepted; that the servicer allegedly breached the agreements; and that these breaches allegedly cost the plaintiffs the opportunity to pursue other options to save their homes, and caused the plaintiffs to incur additional fees and costs. The servicer cited precedent from another jurisdiction providing that TPP plans are not binding contracts. See Nungaray v. Litton Loan Servicing, LP, 200 Cal. App. 4th 1499 (Cal Ct. App. 2011) ("Nungaray"). However, the court found that case distinguishable, in that it was undisputed that the Nungaray plaintiffs did not provide documentation required by the TPP agreement at issue in that case, which was alleged to have occurred here. Therefore, the court denied the servicer's motion to dismiss the claims of the Group 1 plaintiffs.
Next, the court considered the servicer's argument that several of the state UDAP allegations of the Group 2 plaintiffs were preempted by the National Bank Act ("NBA"). The court found that claims based on "fraud or misrepresentation" were not preempted, but that several allegations based on "procedures that [the servicer] devised to service its mortgage loans" were preempted.
Next, the court addressed the allegations based on the California Rosenthal Fair Debt Collection Practices Act (the "Rosenthal Act"), wherein the plaintiffs argued that the servicer violated the Rosenthal Act by making false and misleading statements in connection with the collection of mortgage debts. The servicer countered these arguments by pointing out that in each case it was the plaintiff who contacted the servicer. However, the court again sided with the plaintiffs. It noted that upon being contacted by a borrower to obtain a loan modification, the servicer typically sent out a forbearance agreement providing that if a signed agreement or payment was not received, foreclosure activities would resume. The court found that this "could have misled the recipients as to the true range of options available to them," and thus declined to dismiss these claims.
Finally, the court considered the Group 4 FDCPA allegations. The servicer responded with a similar argument to the one it asserted against the Rosenthal Act allegations. The court again disagreed. It relied upon a recent Sixth Circuit decision providing that an entity such as the servicer is either a creditor or a debt collector, and cannot "define itself out of either category" in order to avoid being subject to the FDCPA's prohibitions. Bridge v. Ocwen Fed. Bank, FSB, 681 F. 3d 355, 359 (6th Cir. 2012).
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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Email: RWutscher@mtwllp.com
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