May 6, 2014
by Christina M. Snow & Eric D. Cook
Wilford Geske & Cook, P.A. – USFN Member (Minnesota)
The Minnesota Supreme Court continues providing the mortgage industry with a mixed bag of rulings, based in part on failing to fully understand mortgage servicing. Since 2009, this state’s Supreme Court has ruled favorably on MERS standing issues, favorably on GSE exemptions from taxation, but has imposed a “strict compliance” standard for some foreclosure procedures. Lower appellate courts in Minnesota have misconstrued the scope of the “strict compliance” standard and are expected to continue their trend of unpredictable rulings for the default servicing industry. In view of that, it is important to consider removing actions to Minnesota’s federal courts whenever possible on the basis of diversity or federal question. A consistent pattern of predictable, industry-friendly rulings has emerged from these federal courts.
Recently, the Minnesota Supreme Court ruled that a borrower may assert a private cause of action for damages against a mortgage servicer for failing to follow HAMP directives. Even though HAMP regulations, themselves, do not provide a borrower with standing to sue for damages, Chapter 58 of the Minnesota statutes, governing residential mortgage servicers, now provides a borrower with standing to sue a mortgage servicer for an alleged breach of “written agreements with borrowers, investors, licensees, or exempt persons.” Gretsch v. Vantium Capital, Inc., 2014 WL 1304990 (Minn. Apr. 2, 2014). The Supreme Court also held that HAMP did not impliedly preempt Minn. Stat. § 58.18, subd. 1, or violate other constitutional provisions. The court reasoned that the lack of a federal cause of action to enforce HAMP directives did not prohibit a state from providing a private cause of action.
The loan at issue in Gretsch was a non-GSE loan under a Servicer Participation Agreement (SPA) between the servicer and Fannie Mae. The U.S. Department of Treasury created HAMP and appointed Fannie Mae to administer the program for non-GSE loans. Erroneously, the Supreme Court reasoned that Fannie Mae is an “agency” of the federal government, which is at odds with Fannie Mae’s legal position and its status as a publicly traded corporation in conservatorship. The court’s mistaken belief about Fannie Mae led to its ruling that, “we cannot conclude, as a matter of law, that Fannie Mae is not an exempt person.” The appeal was before the court on a motion to dismiss, which also means that there has been no ruling on the merits finding that Fannie Mae is an agency of the federal government. In future cases, servicers must immediately seek competent legal advice to accurately portray Fannie Mae’s role and correctly identify the programs, guidelines, or contracts that are at issue to avoid the risk of bad case law or increasing litigation costs due to confusion or misinformation.
The Gretsch decision may lead to an increase in lawsuits against servicers for alleged breaches of pooling and servicing agreements and the servicing contracts and guides with the GSEs. The decision, however, was not a ruling on the merits, and should not mean that loan servicers automatically lose these challenges. The decision, however, may lead to more expensive and protracted litigation arising out of alleged breaches of a servicer’s contract with “borrowers, investors, other licensees, or exempt persons.” Minnesota courts have occasionally allowed challenges under HAMP based on state common law theories such as equitable estoppel, so the full impact of this ruling remains to be seen. At a minimum, a servicer’s litigation risk will be greater after Gretsch due to the statutory basis for a borrower to recover attorneys’ fees, court costs, statutory damages and even punitive damages, if appropriate, in a successful action.
On the bright side, Minnesota’s federal courts continue to rule favorably in the area of failed loan modifications, and recently relied on Minnesota’s Credit Agreement Statute to dismiss an action alleging an oral promise to postpone a foreclosure sale after the servicer proceeded with the sale. The Eighth Circuit Court of Appeals agreed with the Minnesota federal district court’s decision, and reaffirmed the longstanding principle that claims based upon oral promises are barred under Minnesota’s Credit Agreement Statute unless reduced to writing and signed by the creditor. Bracewell v. U.S. Bank National Association, No. 13-1164, WL 1356850 (8th Cir. Apr. 4, 2014). This issue has been litigated and won in dozens of cases in Minnesota courts. The Eighth Circuit’s holding, just two days after the Gretsch decision, provides another layer of protection for the industry in the context of assisting borrowers with loss mitigation.
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