A New York Lawsuit With Promising Implications for Chicago Homeowners
January 6
Posted In: Foreclosure Defense, In The News, Mortgage Foreclosure Update
By Sulaiman & Associates on January 6 9:27 AM | Permalink
In November the Legal Aid Society of New York filed a class action suit against Aurora Loan Services, L.L.C., Timothy Geithner, and other Federal officials. The suit, filed in the U.S. District Court for the District of Columbia, takes an interesting approach.
First and foremost, any individual who is eligible for a loan under the Federal Home Affordable Modification Program (HAMP), and whose loan is serviced by Aurora is likely a member of the class. This means that an untold number of borrowers in Chicago, greater Cook County, and across the state of Illinois may be part of the class. Some of our own clients may very well fall within the class. At some point in the future, those whose loans are serviced by Aurora may very well receive a notice telling them that they may opt-out of the class if they wish to pursue their own lawsuit.
More thoughts on the complaint after the jump.
The complaint itself is fifty-one pages of light reading.in order to spare you the full read, here's our back-of-the-napkin take on what the Legal Aid Society is claiming.
HAMP is a program that stems from the Troubled Asset Relief Program (TARP). Its goal is to get eligible borrowers into trial loan modifications, that ultimately convert to permanent loan modifications.in turn, this allows borrowers to keep their homes. As we've mentioned before, the HAMP program hasn't been a resounding success so far. A very small number of applications actually convert to permanent modifications. According to the Treasury, only 31,382 mortgages out of 759,058 trial modifications have converted to a permanent modification.
The Legal Aid Society's complaint places the burden of this failure on lenders like Aurora and Federal officials. It notes that mortgage servicers that participate in HAMP must sign a contract with Fannie Mae "as Financial Agent of the United States Government." (Complaint p. 3-4.) This contract describes the process and guidelines for the HAMP program. Among other obligations, servicers must evaluate non-Governmental Sponsored Enterprise loans for the program, forestall any foreclosure filings for home owners attempting to participate in the program, and must not offer forebearance agreements or require borrowers to waive legal rights. (Complaint p. 3-4). The complaint continues to outline ways in which Aurora allegedly violated its contract.
The complaint also takes Treasury and Fannie Mae officials to task for failing to implement procedures that protect the due process rights of borrowers. It points to a supplemental directive that only took effect on 1 January as evidence of this lack of procedural protection. Prior to the beginning of this year, servicers that had signed a HAMP contract were not required to provide detailed reasons for denial of a loan modification. This, in turn, has made it difficult for borrowers to challenge such a determination. Given the nature of the contract and the relationship of the parties, the complaint further alleges that all of this activity took place under the color of federal law. This key phrase is how the complaint attaches its due process claims to a private entity (Aurora) and a quasi-Governmental entity (Fannie Mae).
All of this background leads up to what I consider the most interesting and novel approach the complaint takes — establishing standing for the named plaintiffs and the rest of the class. Since home owners do not sign this HAMP contract, they cannot normally enforce that contract. However, the complaint argues that the home owners are the intended third party beneficiaries of the contract. The contract may provide some benefit to the servicers and Fannie Mae, but the intention of HAMP was to assist home owners.in turn, this makes the home owners intended beneficiaries of the contract. Because the home owners have a vested interest in the benefits of the contract, they also have a right to sue to enforce the contract.
This represents a very interesting legal argument — something that would likely have been poo-pooed as interesting legal theory, the domain of a student comment in a law review, not the lynch pin of a Federal class action lawsuit. It also begs the question — what other servicers have signed these HAMP contracts? The complaint mentions that 60 banks have signed up. If this has legs, it is very much worth pursuing on a local level. Suing Federal officials may not ever lead to their personal liability (the immunity of Federal officials is a pretty specific area of Constitutional law), but holding the lenders accountable for their often byzantine approach to the HAMP process may create some leverage for individuals seeking to keep their homes.
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