FYI: 8th Cir Rules Loan Purchaser's Exclusive Right to Deem Event of Default in Loan Purchase Agreement Not Subject to Review

The U.S. Court of Appeals for the Eighth Circuit recently upheld the district court's entry of summary judgment against a loan originator who refused to repurchase thirteen loans under the terms of its agreement with its loan purchaser. 

 

In so ruling, the Eighth Circuit held that the client guide, which governed the terms of loan sales between the parties and was specifically incorporated into the parties' contract, granted the loan purchaser the exclusive right to determine whether an event of default had occurred.  Accordingly, the Court held that the district court properly concluded it could not independently review the loan purchaser's determination of the occurrence of an event of default.

 

A copy of the opinion is available at:  http://media.ca8.uscourts.gov/opndir/13/08/122569P.pdf.

 

Plaintiff loan purchaser ("Purchaser") entered into a contract with defendant loan originator ("Originator") allowing Originator to sell Purchaser mortgage loans it originated.  The contract incorporated a seller and servicer guide ("Client Guide") that contained certain representations and requirements relating to the mortgage loans sold to Purchaser.  Among other requirements, the Client Guide provided that Originator would repurchase certain loans within thirty days of demand if Purchaser determined that an event of default had occurred.  The Client Guide allowed Originator to appeal Purchaser's determination as to whether an event of default occurred, but retained for Purchaser sole discretion to determine any appeals.  The Client Guide additionally specified that Purchaser was not required to demand repurchase within any particular period of time, and that any delay in making a demand would not constitute a waiver of any of Purchaser's rights and remedies.

 

In 2008, Purchaser demanded that Originator repurchase thirteen loans for various determined events of default.  When Originator refused, Purchaser sued Originator for breach of contract and indemnification relating to Purchaser's attorneys' fees and costs incurred in pursuing the suit.  Purchaser moved for summary judgment as to both counts, and the district court granted Purchaser's motion.  The district court found that Originator was solely responsible for misrepresentations and inaccuracies in the loans it sold to Purchaser, and that Purchaser was authorized to determine whether those misrepresentations and inaccuracies existed.  The district court further found that the contract required Originator to indemnify Purchaser for all attorney's fees and costs.  The district court ultimately awarded Purchaser over $200,000.00 in attorneys' fees and costs.

 

Originator appealed, and the Eighth Circuit affirmed the district court's ruling -- upholding the district court's finding that Originator breached the terms of the parties contract, rejecting Originator's arguments concerning waiver, and holding that the district court did not err in its determination of Purchaser's attorneys' fees and costs.

 

The Court rejected Originator's position that the district court was required to determine whether Originator breached a representation or warranty that would require Originator to repurchase the loan, and instead approved the district court's holding that the only issues it could review were (1) whether Purchaser notified Originator that an event of default occurred, thereby obligating Originator to repurchase the loan; and (2) whether Originator refused to honor its obligation. 

 

The Court found that the Client Guide -- which was expressly incorporated into the parties' contract -- unambiguously gave Purchaser sole discretion to determine whether an event of default occurred, and held that "[Originator] cannot contract away judicial review by granting [Purchaser] the exclusive right to determine [whether] an 'Event of Default' has occurred, only to later ask a court to independently review [Purchaser's] determination."  The Court similarly rejected Originator's argument that this "on-demand repurchase provision" made the contract unenforceable for lack of consideration, as well as Originator's implied argument that the on-demand provision made the terms of the contract unconscionable.  Finally, the Court found that Purchaser did not act in bad faith in demanding that Originator repurchase the loans -- recognizing that "[a] party to a contract does not act in bad faith by asserting or enforcing its legal and contractual rights."

 

The Court next rejected Originator's arguments that Purchaser waived its right to demand repurchase of the thirteen loans in question by not demanding repurchase for other loans throughout the parties' ten plus year relationship.  Though acknowledging that the mere presence of a nonwaiver clause such as the one present here would not automatically bar a waiver, the Court found that Originator provided no evidence that Purchaser intended to relinquish its rights under the contract, as would be required to establish a waiver by Purchaser's. 

 

The Court noted that Purchaser had no incentive to waive a highly advantageous contract providing, and held that Purchaser's history of working out informal resolutions to prior breach of warranty was not contrary to the terms of the contract, and was instead merely declining the option to pursue a remedy for which the contract allowed.  For the same reasons, the Court also rejected Originator's argument that Purchaser waived its ability to demand repurchase of so-called stated income loans by never demanding repurchase of a stated income loan "in the first decade of the parties' relationship." 

The Court also upheld the district court's award to Purchaser of over $200,000.00 in attorneys' fees and costs. 

 

Originator argued that, under Minnesota law, a party is entitled to recover only the fees it necessarily incurred in pursuing its claim.  According to Originator, therefore, if the district court's interpretation were correct that the only issues it could consider were whether Purchaser demanded repurchase, and whether Originator thereafter complied, then Purchaser needlessly took several depositions and wrote an overly long summary judgment brief.  Noting that the parties' contract unambiguously provided fees to Purchaser "without limitation," the Court stated that Originator's position was wrong.  The Court held that, as with the other disputed issues in the case, the district court correctly relied on the language of the contract that the parties freely signed, and did not err in its calculation of Purchaser's attorneys' fees and costs.

 

Accordingly, the Eighth Circuit affirmed the district court's ruling.

 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

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FYI: Ill Fed Ct Holds Chicago Vacant Housing Ordinance Does Not Apply to Fannie/Freddie

The US. District Court for the Northern District of Illinois recently held that the City of Chicago's ordinance requiring mortgagees to register vacant properties unlawfully attempts to regulate the Federal Housing Financing Agency, Fannie Mae, Freddie Mac and those acting on behalf of those entities.

 

Accordingly, the Court granted the FHFA's request for a declaratory judgment that it is exempt from the Ordinance, and an injunction against the enforcement of said ordinance against the FHFA, the GSEs, and those acting on their behalf.    A copy of the opinion is attached. 

 

As you may recall, the City of Chicago (the "City") enacted an ordinance (the "ordinance") requiring among other things that mortgagees register vacant buildings with the City and pay a $500 fee, where the owners of such buildings failed to do the same.  Municipal Code of Chicago, Sec. 13-12-126(a)(1).  The ordinance also provides that mortgagees secure and maintain vacant buildings in accordance with the City's requirements.  Id.  at Sec. 13-12-126(b). 

 

The Federal Housing Financing Agency ("FHFA"), acting in its capacity as conservator for Fannie Mae and Freddie Mac, filed a lawsuit against the City, contending that the ordinance unlawfully attempts to regulate it and was preempted by federal law.  The FHFA also argued that the $500 registration fee violates its immunity from state and local taxation.  The FHFA sought a declaratory judgment that it is exempt from the ordinance, and an injunction preventing the City from enforcing the ordinance against the FHFA, Fannie Mae, Freddie Mac, and those acting on the behalf of those entities.

 

The City filed a motion to dismiss, attacking the FHFA's claims on four grounds:  (1) that the FHFA's claims were not ripe; (2) that the FHFA lacked standing to sue, as only the Director of the FHFA is authorized to initiate litigation on its behalf, and the current FHFA director was not validly appointed; (3) that the statute relied upon by FHFA in connection with its preemption argument does not apply to municipalities; and (4) that the FHFA's claim related to its immunity from state and local taxation was not applicable here.  The FHFA filed a cross motion for summary judgment. 

 

The Court had little difficulty in rejecting the City's first two arguments.  The Court observed that counsel for the City confirmed the City's intent to enforce the ordinance against FHFA, and that there was not dispute that the FHFA had already reimbursed servicers for registration fees as to numerous properties.  Accordingly, the Court held that FHFA's claims were ripe and properly before the Court. 

 

Similarly, the Court found little merit in the City's contention that the FHFA lacked standing to sue consequent to the allegation that the FHFA's director was not validly appointed.  In rejecting this claim, the Court relied on a recent determination by the Second Circuit that the FHFA's director was properly appointed.  See Federal Housing Finance Agency v. UBS Americas, Inc., 712 F.3d 136, 144 (2d Cir. 2012).  The Court scrutinized the Second Circuit's reasoning in reaching that determination, and found it to be persuasive.  Emphasizing that "Congress could not have intended for FHFA to take over the business of Fannie and Freddie but then have no ability to seek court action on their behalf," the Court held that the director was validly appointed, and accordingly rejected the City's related arguments. 

 

Next, the Court considered the FHFA's arguments concerning preemption.  It began its analysis by reviewing the language of the Housing and Economic Recovery Act of 2008 ("HERA"), noting that it provides that "[w]hen acting as conservator or receiver, [FHFA] shall not be subject to the direction or supervision of any other agency of the United States or any State in the exercise of the rights, powers and privileges of [FHFA]."  12 U.S.C. Sec. 4617(a)(7).  

 

The Court then analyzed whether the ordinance might be expressly preempted by Congress.  It answered in the negative, holding that "because the express language of Sec. 4617(a)(7) does not contain any reference to local or municipal laws, HERA does not expressly preempt the Ordinance." 

 

The Court then considered whether preemption might be implied - either in the form of field preemption, or conflict preemption - as to the ordinance.  The Court determined that HERA occupied the field, noting that its provisions make clear that "Congress intended FHFA to assume complete control of [Fannie Mae and Freddie Mac]..." 

 

The City argued against that conclusion, contending that courts have found a presumption against preemption in cases involving local governments exercising traditional police powers.  The Court disagreed, emphasizing that HERA explicitly precluded other federal agencies and states from regulating the FHFA.  Accordingly, the Court observed that in enacting HERA, "Congress could not have intended to preclude other federal agencies and states from regulating FHFA's operations, but permit thousands of municipalities all over the country to impose varying ordinances and obligations on FHFA."

 

The Court also analyzed the parties' arguments concerning conflict preemption.  Because "the Ordinance obstructs Congress's intent to have one conservator take control of Fannie Mae and Freddy Mac...", the Court determined that "conflict preemption exists in this case."

 

Finally, the Court addressed the FHFA's argument that registration fee and related fines and penalties violate the FHFA's immunity from such charges.  The Court explained that to differentiate between impermissible state taxes and permissible fees, courts must look to whether the revenue will be used to provide a general benefit to the public,  or whether it defrays an agency's cost of regulation and/or provides a narrow benefit to a regulated company. 

 

The FHFA argued that the registration fee constituted an impermissible tax, because the City's ordinance does not provide a benefit to the FHFA.  The City argued that the fee was permissible because it was connected to the City's costs incurred in monitoring vacant properties. 

 

The Court again sided with the FHFA, emphasizing that "the FHFA does not receive any service from the City in exchange for the registration fee, and that vacant property is not a necessary consequence of FHFA's mortgage lending business."  Accordingly, the Court determined that "it is not permissible for the City to require FHFA to bear the costs associated with the City's regulation of vacant buildings."

 

Based on the reasoning above, the Court denied the City's motion to dismiss, and granted FHFA's motion for summary judgment.   

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

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FYI: 5th Cir Confirms That, When Secured Creditor Does Not "Participate" in Chpt 11 Reorg, Its Lien Survives Confirmation of Plan

The U.S. Court of Appeals for the Fifth Circuit recently ruled that a secured creditor that received notice of a debtor's Chapter 11 bankruptcy, but was not otherwise involved in the bankruptcy, did not "participate" in the reorganization and its lien accordingly survived confirmation of the debtor's reorganization plan.  

 

A copy of the opinion is available at:  http://www.ca5.uscourts.gov/opinions/pub/12/12-60648-CV0.wpd.pdf.

 

A lender ("Lender") extended a loan to a business ('Debtor") that was secured against Debtor's office building.  After Lender perfected its security interest in the building, three other entities perfected security interests in the same building. 

 

Debtor later filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code, acknowledging the other security interests, but listing Lender's lien as "disputed."  Lender received several notices of Debtor's bankruptcy, but never filed a proof-of-claim in the bankruptcy proceedings or otherwise involved itself in the reorganization.  Debtor's eventual reorganization plan provided no recovery for Lender. 

 

The Bankruptcy Court confirmed the plan.  Lender subsequently moved for a declaratory judgment that its lien had survived plan confirmation, or for an order amending the confirmation plan to provide for Lender's lien.  Denying Lender's motion, the Bankruptcy Court ruled that the plan's confirmation voided Lender's lien.  See 11 U.S.C. § 1141(c).

 

Lender appealed.  The district court reversed, ruling that mere notice to Lender did not constitute "participation" in the reorganization so as to void its lien.   Debtor appealed.  The Fifth Circuit affirmed.

 

As you may recall, the Bankruptcy Code provides that "after confirmation of a plan, the property dealt with by the plan is free and clear of all claims and interests of creditors, equity security holders, and of general partners in the debtor."   11 U.S.C. § 1141(c).

 

Noting the so-called default rule that a secured creditor may ignore the bankruptcy proceeding and look to the lien for satisfaction of the debt as long as the lien is not invalidated through some other provision of the Bankruptcy Code, the Fifth Circuit pointed out its holding that section 1141(c) only voids liens held by a lien holder who actually participates in the bankruptcy reorganization.  See Elixir Indus., Inc v. City Bank & Trust Co. (In re Ahern Enters, Inc.), 507 F.3d 817, 822 (5th Cir. 2007)("In re Ahern Enterprises") (requiring four conditions to void a lien under Section 1141(c):  (1) plan confirmation; (2) the property subject to the lien must be dealt with by the plan; (3) the lien holder must participate in the reorganization; and (4) the plan must not preserve the lien).   

 

The Fifth Circuit observed that "participation" connoted activity, not mere nonfeasance, and that other federal appellate courts have similarly required more than notice to have "participated" for purposes of section 1141(c).  See, e.g., In re Penrod, 50 F.3d 459, 461 (7th Cir. 1995); FDIC v. Union Entities (In re Be-Mac Transp. Co.), 83 F.3d 1020, 1023 (8th Cir. 1996). 

 

The Court thus concluded that mere receipt of notice of a bankruptcy filing was not "participation" in the reorganization so as to void a lien under Section 1141(c).  In so doing, the Fifth Circuit pointed out that Lender never filed a proof of claim in this case, concluding that In re Ahern Enterprises required affirmative conduct on the part of a secured creditor in the reorganization, such as filing a proof of claim, or serving on a creditors' committee.   In the Court's view, mere passive receipt of notice was insufficient to void a lien under section 1141(c).

 

Accordingly, because Lender never "participated" in Debtor's bankruptcy reorganization, the Fifth Circuit affirmed the district court's ruling.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

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FYI: 5th Cir Rejects "Robo-Signing" and "Faulty Securitization" Challenges to Foreclosure

The U.S. Court of Appeals for the Fifth Circuit recently rejected a group of borrowers' claims that two assignments of a note and deed of trust were void as "robo-signed." 

 

The Fifth Circuit held, in part, that defects to acknowledgements to the assignments would not affect the mortgagee's rights against the borrowers themselves, but the rather mortgagee's rights against a third-party. 

 

Additionally, the Fifth Circuit rejected the borrowers' claims that the assignments were void due to alleged violations of the Pooling and Servicing Agreement related to their loan, reasoning that the borrowers were neither parties nor intended beneficiaries of the agreement.

 

A copy of the opinion is available at: http://www.ca5.uscourts.gov/opinions/pub/12/12-50569-CV0.wpd.pdf

 

 

Plaintiff-appellants ("Borrowers") had refinanced their home, obtaining a $360,000 home-equity loan secured by a deed of trust.  The loan was subsequently sold to defendant-appellee ("Mortgagee"), and was pooled with other mortgage loans in a securitization transaction. 

 

The Borrowers alleged that the Pooling and Servicing Agreement (PSA) which governed the trust in which the subject loan was held did not allow new loans to be transferred into the trust after October 1, 2006.  The Borrowers also alleged that, notwithstanding the PSA, the sale of the loan was not formally documented until January 23, 2008, when an agent of the original lender ("First Agent") allegedly executed an instrument assigning the deed of trust to Mortgagee (the "First Assignment").  The First Assignment, which was notarized, did not reference the promissory note secured by the deed of trust.

 

In addition, the Borrowers alleged that on February 13, 2009, another agent of the original lender ("Second Agent") executed an assignment (the "Second Assignment"), which was also notarized.  The Second Assignment expressly transferred to Mortgagee "the certain note(s) described [in the deed of trust] together with all interest secured thereby, all liens, and any rights due or to become due thereon."

 

After Borrowers defaulted on the note, Mortgagee sought and was granted a judicial order authorizing foreclosure.  However, the Borrowers filed suit in Texas state court claiming that the assignments were "robo-signed" and therefore void.  As you may recall, "robo-signing" is a colloquial term used to describe an array of practices which lenders have allegedly used to perfect their right to foreclose.  The state court granted the Borrowers' request for a temporary injunction and Mortgagee removed the case to federal court.

 

Elaborating on their allegations of "robo-signing" in their amended complaint, Borrowers claimed that the First Assignment was void because First Agent was not an employee of the original lender.  Similarly, the Second Assignment was supposedly void because Second Agent was an employee of a third-party contractor.  The Borrowers also asserted that the Second Assignment was void as a forgery.  Finally, the Borrowers challenged both assignments as void as they supposedly violated the PSA's provision that no mortgage loan could be transferred into the trust after October 1, 2006.

 

The district court granted Mortgagee's motion to dismiss the Borrowers' amended complaint, ruling among other things that the Borrowers lacked standing to challenge the validity of the assignments.  Borrowers appealed.

 

Under the law of the state of Texas, a non-party to a contract cannot enforce the contract unless she is an intended third-party beneficiary.  See Tex. Water Auth. v. Lomas, 223 S.W.3d 304, 306 (Tex. 2007).  This issue is sometimes couched in terms of "standing."  Likewise, it is "settled that the obligors of a claim… may not defend [against an assignee's effort to enforce the obligation] on any ground which renders the assignment voidable only."  Tri-Cities Const., Inc. v. Am. Nat. Ins. Co., 523 S.W.2d 426, 430 (Tex. Ct. App. 1975).  However, Texas courts have followed the majority rule that the obligor may defend "on any ground which renders the assignment void."  Id.

 

The first issue considered by the Fifth Circuit was whether Borrowers had standing to challenge the validity of the transaction by which the original lender purportedly assigned the deed of trust and the corresponding promissory note to Mortgagee.  Although Mortgagee urged that Borrowers had no standing to challenge the assignment as "stranger[s] to [the] contract," the Fifth Circuit disagreed.  According to the Fifth Circuit, under Texas law, an obligor may defend on any ground which renders the assignment void.  Here, because Borrowers were not attempting to enforce the terms of the assignment, but rather were arguing that the assignment was "void ab initio," the Fifth Circuit held that the Borrowers had standing.

 

The second issue considered was whether Borrowers' allegations, taken as true, establish that Mortgagee lacks authority to foreclose.

 

As a preliminary matter, the Fifth Circuit considered whether the first assignment itself was sufficient to convey authority to foreclose or whether both assignments were necessary.  Under the Restatement (Third) of Property: Mortgages, the transfer of a mortgage presumptively includes the note secured by the mortgage, whether or not the instrument of assignment expressly references the note.  RESTATEMENT (THIRD) OF PROPERTY: MORTGAGES, §5.4(b).  However, some states have recognized a common-law rule providing that the assignment of a mortgage alone is a nullity.  See e.g. Best Fertilizers of Ariz., Inc. v. Burns, 571 P.2d 675, 676 (Ariz. Ct. App. 1977).  According to the Fifth Circuit, although Texas courts tend to follow the Restatement, see e.g. Conversion Props., LLC v. Kessler, 994 S.W.2d 810, 813 (Tex. Ct. App. 1999), none have expressly adopted the Restatement's "note-follows-the-mortgage presumption."  Therefore, the Fifth Circuit turned to the Borrowers' objections.

 

As to the First Assignment, the Fifth Circuit held that the Borrowers' challenge to its validity to fail on its own terms.  Although the Borrowers implied that First Agent lacked authority to execute the assignment, they never directly asserted a lack of authority – let alone plead facts to support such an allegation.

 

As to the Second Assignment, the Borrowers challenged its validity on the basis that Second Agent was actually an employee of a third-party contractor.  However, according to the Fifth Circuit, a contract executed on behalf of a corporation by a person fraudulently purporting to be a corporate officer is – like any other unauthorized contract – not void, but merely voidable at the election of the defrauded party.  Therefore, the Fifth Circuit concluded that Second Agent's lack of authority, even accepted as true, did not furnish the Borrowers with a basis to challenge the Second Assignment.

 

The Borrowers also asserted that the Second Assignment was void as a "forgery," claiming that Second Agent had testified that "his signature was scanned onto documents and then notarized as an original."  In rejecting Borrowers' claim, the Fifth Circuit held that "Texas recognizes type or stamped signatures – and presumably also scanned signatures – so long as they are rendered by or at the direction of the signer."  Here, Borrowers failed to allege that Second Agent's signature was signed without his authorization.  Additionally, the Fifth Circuit noted that there is no requirement that the affiant affix his signature in wet ink for a valid acknowledgment to exist.

 

Moreover, the Fifth Circuit held that, although defects in the acknowledgement might prevent Mortgagee from foreclosing if a third-party had purchased the underlying property from Borrowers without actual knowledge of the mortgage, such defects would not affect Mortgagee's rights against the Borrowers themselves.  According to the Fifth Circuit, although Texas's recording statute requires mortgage assignments to be acknowledged in order to be recorded, it only protects subsequent purchasers for value and without notice.

 

Finally, the Borrowers claimed that both assignments were void because they violated the PSA.  However, because they conceded that they are not parties to the PSA, the Fifth Circuit rejected this claim, ruling that the Borrowers failed to state any facts which indicated that the parties to the PSA intended to benefit the Borrowers.  The Court further held that, even assuming Borrowers were third-party beneficiaries, the fact that the assignments violated the PSA would not render the assignments void, but would "merely entitle [Borrowers] to sue for breach of the PSA."

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
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FYI: 11th Cir Rejects Borrower's Claim That Servicer Violated TILA By Failing to Provide 1641(g) Notice w/ Assignment of Mortgage for Foreclosure

The U.S. Court of Appeals for the Eleventh Circuit recently ruled that where a mortgage loan servicer is granted assignment of a mortgage for the purposes of instituting foreclosure, the "safe harbor" exception of the federal Truth in Lending Act ("TILA") 15 U.S.C. § 1641(f) applies, such that the servicer is exempt from the § 1641(g) disclosure requirements relating to the transfer of ownership of the loan because the assignment is "solely for the administrative convenience of the servicer in servicing the obligation." 15 U.S.C. § 1641(f)(2).

 

In so ruling, the Eleventh Circuit affirmed the district court's grant of summary judgment in favor of the servicer, where the borrower alleged the servicer failed to comply with TILA's disclosure requirements.

 

A copy of the opinion is available at:  http://www.ca11.uscourts.gov/opinions/ops/201215755.pdf

 

In November 2006, the borrowers refinanced their mortgage.  After closing, ownership of the promissory note and servicing responsibilities were transferred.  Ultimately, the defendant became the servicer of the mortgage loan in September 2007.  Subsequently, the borrowers missed several mortgage payments.

 

On September 3, 2010, the servicer notified the borrower that it would foreclose.  Four days later, an "assignment of Mortgage" (the Assignment) was executed, transferring the mortgage to the servicer.

 

The borrowers filed suit against the servicer, contending that the Assignment made the servicer the new owner of the debt, and therefore, this triggered the servicer's obligation under section 1641(g) to inform them that the servicer was the new owner of the debt.  The servicer argued that it was assigned an interest in the mortgage in order that it could service the loan, and that the servicer could not have completed "a core servicing duty" without assignment of the mortgage.  In sum, the servicer argued that the assignment was "solely for the administrative convenience of the servicer" within the meaning of section 1641(f), and therefore that there was no duty to inform the borrowers of the assignment.

 

The district court granted summary judgment in favor of the servicer, ruling that as servicer of the loan, the bank fell within the safe harbor provision, and was exempt from the disclosure requirements under section 1641(g).  The borrowers appealed.

 

As you may recall, section 1641(g) provides in relevant part: "[N]ot later than 30 days after the date on which a mortgage loan is sold or otherwise transferred or assigned to a third party, the creditor that is the new owner or assignee of the debt shall notify the borrower in writing of such transfer." 15 U.S.C. § 1641(g)(1).  Section 1641(f)(2) provides that a servicer is exempt from these requirements when the assignment is "solely for the administrative convenience of the servicer in servicing the obligation."

 

The Eleventh Circuit began its analysis by first noting that TILA does not define the term "administrative convenience."  As such, the Eleventh Circuit looked to the ordinary meaning of the term.  United States v. Silvestri, 409 F.3d 1311, 1333 (11th Cir. 2005)("Courts must assume that Congress intended the ordinary meaning of the words it used." (quotation marks omitted)).

 

The word "convenience" is defined by Merriam-Webster as "fitness or suitability for performing an action or fulfilling a requirement."  The word "administrative" connotes the act or process of managing or supervising. Id. Thus, the Eleventh Circuit ruled that the ordinary meaning of "administrative convenience" is that which allows performance of a managerial action or requirement.

 

Because it was undisputed that the purpose of the Assignment was to allow the servicer to foreclose on the borrowers' property and it was also undisputed that the servicer could not have foreclosed on the property without the Assignment, the Eleventh Circuit concluded that the Assignment was an ""administrative convenience" within the meaning of § 1641(f) because the Assignment allowed the servicer to perform foreclosure, a requirement of servicing the loan." Therefore, the Eleventh Circuit held that the servicer was not subject to § 1641(g)'s disclosure requirements.

 

Accordingly, the Eleventh Circuit affirmed the district court's ruling, granting summary judgment in the servicer's favor.

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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