Banking and Finance Law Daily Wrap Up, TOP STORY—2d Cir.: RESPA’s catch-all provision covers loan servicer’s mishandling of loan documents, (Jan 10, 2022)

By Sherri M. Schroeder, J.D.

The court found that the failure to record instruments “relates to” loan servicing as covered under the regulation.

After a New York district court dismissed her claims against Ocwen Loan Servicing, LLC, on summary judgment, a borrower appealed. She had sued under the Real Estate Settlement Procedures Act (RE ...

By Sherri M. Schroeder, J.D.

The court found that the failure to record instruments “relates to” loan servicing as covered under the regulation.

After a New York district court dismissed her claims against Ocwen Loan Servicing, LLC, on summary judgment, a borrower appealed. She had sued under the Real Estate Settlement Procedures Act (RESPA), alleging that Ocwen’s failure to record her mortgage instruments and its loss of key mortgage documents constituted covered errors under the catch-all provision of RESPA’s implementing regulation, Regulation X. The district court granted Ocwen summary judgment, holding the asserted errors did not fall within the catch-all provision because they related to loss mitigation options rather than to errors relating to loan servicing. The appeals court disagreed, finding that where a loan servicer mishandles loan documents in the manner alleged in this case, a covered error has occurred. (Naimoli v. Ocwenn Loan Servicing, Jan. 7, 2022, Parker, B.).

Loan modification. The borrower took out a mortgage loan to finance the purchase of her home in 2008. In 2010, she defaulted on her loan. To avoid foreclosure, she requested a loan modification from Ocwen, her loan servicer. Although she successfully completed her approved trial period, Ocwen denied her loan modification because it had failed to record her mortgage and because it had lost key documents it had required the borrower to re-execute in order to implement the modification.

To secure the loan modification, the borrower sued Ocwen under RESPA’s Regulation X, which allows borrowers to notify mortgage servicers of possible account errors. Although her claim was not one of the listed “covered errors,” the borrower alleged her situation was covered by Regulation X’s “catch-all” provisions covering “[a]ny other error relating to the servicing of a borrower’s mortgage loan....” After Ocwen denied her loan modification, she submitted a Notice of Error (NOE) to Ocwen; when that was denied, she commenced action. The district court granted Ocwen summary judgment and dismissed her claim, concluding that the asserted errors challenged the denial of her loan modification, which did not relate to the servicing of the loan and was, therefore, not covered by the catch-all provision. The borrower appealed.

“Relating to.” The appeals court first looked to the language of Regulation X’s catch-all provision. Regulation X requires loan servicers to respond to a NOE if the asserted error is covered by 12 C.F.R. section 1024.35(b)’s 10 listed errors or falls under the catch-all provision, which covers “[a]ny other error relating to the servicing of a borrower’s mortgage loan.” In this case, the appeals court’s decision hinged on the meaning of “relating to.” The court read the term broadly and took it to mean “any error that has some connection with or pertains to loan servicing” except if specifically excluded. Finding that RESPA’s definition of “servicing” essentially meant that an error would be covered by the catch-all provision “if it relates to or is connected with either (a) the loan servicer’s receipt of payments from borrowers or (b) the loan servicer’s making of payments to the loan’s owners or third parties.”

In this case, the borrower’s NOE implicated both of these definitions. The NOE related to Ocwen’s receipt of payments from borrowers because its loss of the loan documents made the borrower ineligible for the loan modification and a new, lower interest rate. The NOE also related to the loan servicer’s making of payments to the loan’s owners or third parties because Ocwen’s failure to record the documents and thereby preserve the priority of the mortgage lien jeopardized Ocwen’s ability to make payment to the loan’s owners in the event of a foreclosure.

Pursuit of loss mitigation. The fact that the errors in question were identified while the borrower was in pursuit of a loss mitigation option did not impair the court’s ability to see the connection to the servicing of her loan. Although all could agree that a loan servicer’s failure to properly evaluate a borrower for a loss mitigation option was not one of Regulation X’s covered errors, the fact that the borrower was seeking loss mitigation did not mean that the errors she identified were unrelated to servicing. In fact, the court stated that erroneous loss mitigation eligibility determinations were excluded under Regulation X not because loss mitigation is unrelated to servicing, but rather because when the RESPA final rule was released the Consumer Financial Protection Bureau determined that “allowing consumers to enforce the loss mitigation standards set by the loan’s owner against a servicer would perversely risk discouraging consumer-friendly loss mitigation standards.” It was of no import to the appeals court that the borrower’s asserted errors accompanied a complaint about Ocwen’s determination of her loss mitigation application. Furthermore, the errors were correctable by Ocwen without overturning its determination regarding the loss mitigation application, because Ocwen could have located and recorded the documents without changing its decision regarding loss mitigation.

Outcome. Concluding that the catch-all provision of Regulation X covered the borrower’s asserted errors, the appeals court reversed the district court’s decision and remanded the case for further proceedings consistent with its opinion.

This case is No. 20-1683-cv.

Attorneys: Javier Luis Merino (The Dann Law Firm) for Kim Naimoli. Patrick G. Broderick (Greenberg Traurig, P.A.) for Ocwen Loan Servicing, LLC.

Companies: Ocwen Loan Servicing, LLC

MainStory: TopStory CFPB Mortgages Loans RESPA