On March 21, 2011, a Columbus, Georgia jury sent a very loud message to loan servicers in the form of a $21 million verdict and punitive damage award against PHH Mortgage, an affiliate of Coldwell Banker Mortgage.
David Brash, a sergeant in the United States Army, bought a home in 2007, and obtained a $161,000 mortgage loan from Coldwell Banker Mortgage. The loan was serviced by PHH Mortgage. Sergeant Brash had his monthly payments set on autopay out of his US Army paycheck. (In fact, Sgt. Brash overpaid each month.) Things went along swimmingly for about a year and a half, until PHH began losing track of the payments, which then triggered the phone calls and letters telling him that he was delinquent. A mortgage lender losing track of payments and blaming the consumer? Say it ain’t so. (The Complaint filed by Sgt. Brash’s lawyers in the case, David Brash v. PHH Mortgage (U.S.D.C., M.D. Georgia) case no. 4-09-CV-146 (CDL) is available for viewing here.)
Anyhow, that started a series of very patient efforts by Sgt. Brash to resolve the issue, all of which are thoroughly described in the Complaint. The servicer’s call center was outsourced to India. (No comment on that. I very seriously doubt that Sgt. Brash would have received better treatment from his fellow countrymen.) But in an amusing instance of what’s-good-for-the-goose-is-good-for-the-gander, Sgt. Brash actually recorded the phone calls with the servicer (for quality assurance purposes right?), and the tapes of the phone calls were played to the jury. Transcripts of the calls were also admitted into evidence. I pulled the actual transcript of the phone calls from the Court’s docket, and you can review it for a good example of how to handle your own such calls. Very good evidentiary material that.
The upshot of the story? After multiple attempts to sort things out, PHH assured Sgt. Brash that things were resolved, and that the erroneously designated “late” payments had been properly credited. But then what did they do? You guessed it. They reported the false delinquencies to the Credit Cops, Equifax, TransUnion and Experian. This, in turn, caused Sgt. Brash to be denied credit. As stated in the Complaint, “Coldwell Banker Mortgage has refused to answer Plaintiff’s legitimate inquiries, and has refused to correct and straighten out Plaintiff’s account.” (See Complaint, ¶48.)
Other than the obvious appeal of David taking on and beating up on Goliath–the sheer joy of seeing an abusive loan servicer get hit–the other appeal of this case is how meticulously Sgt. Brash documents his odyssey through this experience. If you’re having trouble with your bank or loan servicer, read the Complaint that Charles Gower (Sgt. Brash’s lawyer) drafted, and review the list of trial exhibits. They are a roadmap for how to build and maintain a paper trail and document abusive loan servicer practices. This is the kind of evidence that wins lawsuits.
For lawyers who are keeping track, it appears that the gravamen of the legal theory was a violation of §2605 of RESPA. (12 USC §2605.)
The attacks on the Mortgage Electronic Registration System (“MERS”) continues unabated at all levels. In the case MERS v. Johnston (Rutland County Superior Court case no. 420-6-09 Rdcv) another Court had held that MERS doesn’t have standing to complete a foreclosure of a mortgage which did not specifically name it as the mortgagee, or which secures a promissory note that didn’t specifically name MERS as payee. The opinion relied heavily on the Landmark National Bank v. Kesler decision from the Kansas Supreme Court that was issued in September of this year. The Kesler decision, in turn, relied heavily on the 2005 Nebraska Supreme Court decision Mortgage Elec. Reg. Systems v. Nebraska Dept. of Banking, 270 Neb. 529, 530, 704 N.W.2d 784 (2005).
It is still unclear just how much damage this line of cases will do to the infrastructure of the MERS nominee system. But at least one Federal Court has seemingly upheld the MERS system for at lease some purposes. On September 24, 2009, the US District Court for the District of Arizona handed down its trial court decision in Cervantes v. Countrywide (Case No. CV 09-517 PHX-JAT) in which the trial court determined that MERS is “not a sham,” as had apparently been alleged by the plaintiffs. This Arizona decision is only a trial court decision, however, and is not binding on any other court.
On August 28, 2009 the Kansas Supreme Court handed foreclosure advocates a major victory in the case Landmark National Bank v. Kesler. The decision appears to be a fairly wonkish and dryly academic legal essay–and it is–but the implications could be monumental and could have some effect on more than 60 million mortgages in the United States.
Warning to the non-lawyer: What follows is a somewhat technical discussion, and is probably more appropriate for lawyers or other mortgage industry professionals. The upshot of the Kansas decision is, well, it’s too soon to tell. It is clear that the MERS problem is growing, and will likely require some significant mortgage industry intervention to fix. Whether this decision offers any help to any particular person will depend on your situation. Obviously, a decision by the Kansas Supreme Court is binding only on Kansas courts, but this is a significant decision and may influence courts in other states. To my knowledge, no California court has yet dealt with the problem head on, though there have been some trial court decisions. (See, for example, Saxon Mortgage Services v. Ruthie B. Hillery, USDC, ND Cal. case no. C-08-4357 EMC. This decision is unpublished and not binding on any court, but it does suggest activity in the Northern District, and is probably just the beginning.)
So with that disclaimer out of the way…first some background.
MERS stands for Mortgage Electronic Registration System, and is a privately owned company that purports to acts as a “nominee” for millions of loans originated by lenders around the country. (For the MERS home page, go here. For a Wikipedia post on what MERS is, go here.) I say “purports,” because that relationship is increasingly under attack in courtrooms great and small around the USA. Notably, the case referred to above, Landmark National Bank v. Kesler, Kansas Supreme Court, Case No. 98,489.
MERS was created in an attempt to simply the processes by which loans and mortgages are sold, securitized, assigned and enforced. Basically the idea was to create a single “nominee” that would act in the place and stead of any one lender, so that when the need to enforce the loan terms or foreclose on the mortgage arose, the lenders wouldn’t have to chase around figuring out who owned what notes; they could just have MERS handle the entire transaction.
The Kansas Court, quoting a Nebraska court, described MERS as follows:
MERS is a private corporation that administers the MERS System, a national electronic registry that tracks the transfer of ownership interests and servicing rights in mortgage loans. Through the MERS System, MERS becomes the mortgagee of record for participating members through assignment of the members’ interests to MERS. MERS is listed as the grantee in the official records maintained at county register of deeds offices. The lenders retain the promissory notes, as well as the servicing rights to the mortgages. The lenders can then sell these interests to investors without having to record the transaction in the public record. MERS is compensated for its services through fees charged to participating MERS members.” Mortgage Elec. Reg. Sys., Inc. v. Nebraska Depart. of Banking, 270 Neb. 529, 530, 704 N.W.2d 784 (2005)
Good idea in principle. The problem that has come to the fore, however, is that MERS doesn’t actually own anything; it is just a named agent with a contractual power to enforce. And this is the problem that the Kansas Supreme Court addressed…and which has more than a few mortgage-industry Chicken Little-sorts presaging that the sky will be falling soon.
The crux of the problem seems to be the pesky requirement that borrowers are entitled to know the identity of the person or lender to whom they owe money. That doesn’t seem unreasonable. If Larry lends money to Bob, and takes a promissory note, and Larry later sells that Note to Artie, Bob is entitled to know that, and only Artie can have the legal right to enforce the Note. If Bob has a problem with his loan, he needs to know the actual identity of the person with whom is in in a contractual relationship.
But the MERS system essentially does an end run around that requirement by saying that, “since we put MERS into the original note and deed of trust as a lender nominee, we don’t need to satisfy those notice and registration requirements. Courts around the country are increasingly saying “foul” top that arrangement.
Again, quoting from portions of the Landmark decision, in which that court quotes from other courts around the country…
The legal status of a nominee, then, depends on the context of the relationship of the nominee to its principal. Various courts have interpreted the relationship of MERS and the lender as an agency relationship. See In re Sheridan, ___ B.R. ___, 2009 WL 631355, at page 4 (Bankr. D. Idaho March 12, 2009) (MERS “acts not on its own account. Its capacity is representative.”); Mortgage Elec. Registration System, Inc. v. Southwest, ___ Ark. ___, ___, ___ S.W.3d ___, 2009 WL 723182 (March 19, 2009) (“MERS, by the terms of the deed of trust, and its own stated purposes, was the lender’s agent”); LaSalle Bank Nat. Ass’n v. Lamy, 2006 WL 2251721, at *2 (N.Y. Sup. 2006) (unpublished opinion) (“A nominee of the owner of a note and mortgage may not effectively assign the note and mortgage to another for want of an ownership interest in said note and mortgage by the nominee.”)
The relationship that MERS has to Sovereign is more akin to that of a straw man than to a party possessing all the rights given a buyer. A mortgagee and a lender have intertwined rights that defy a clear separation of interests, especially when such a purported separation relies on ambiguous contractual language. The law generally understands that a mortgagee is not distinct from a lender: a mortgagee is “[o]ne to whom property is mortgaged: the mortgage creditor, or lender.” Black’s Law Dictionary 1034 (8th ed. 2004). By statute, assignment of the mortgage carries with it the assignment of the debt. K.S.A. 58-2323. Although MERS asserts that, under some situations, the mortgage document purports to give it the same rights as the lender, the document consistently refers only to rights of the lender, including rights to receive notice of litigation, to collect payments, and to enforce the debt obligation. The document consistently limits MERS to acting “solely” as the nominee of the lender.
Indeed, in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable.
“The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. [Citation omitted.] Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. [Citation omitted.] The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.” Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo. App. 2009).
The Arkansas Supreme Court has noted:
“The only recorded document provides notice that [the original lender] is the lender and, therefore, MERS’s principal. MERS asserts [the original lender] is not its principal. Yet no other lender recorded its interest as an assignee of [the original lender]. Permitting an agent such as MERS purports to be to step in and act without a recorded lender directing its action would wreak havoc on notice in this state.” Southwest Homes, ___ Ark. at ___.
In any event, the legislature has established a registration requirement for parties that desire service of notice of litigation involving real property interests. It is not the duty of this court to criticize the legislature or to substitute its view on economic or social policy. Samsel v. Wheeler Transport Services, Inc., 246 Kan. 336, 348, 789 P.2d 541 (1990).
Essentially, the Court is saying that MERS has no rights to enforce. Of course, that could wind up being an overbroad interpretation, but the drums are beating nonetheless. More will be revealed.