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Fifth Circuit Clarifies Servicer’s Loss Mitigation Obligations

Posted By USFN, Wednesday, July 17, 2019
Updated: Tuesday, July 16, 2019

Shawnika L. Harris, Esq.
Barrett Daffin Frappier Turner & Engel, LLP
BDF Law Group (TX, GA, CO, CA, NV and AZ)

In Germain v. US Bank National Association, an opinion out of the 5th Circuit Court of Appeals, the court clarifies a servicer’s obligations in reviewing multiple loss mitigation applications. Additionally, the court sends a warning to borrowers and attorneys who manipulate statutory and judicial safeguards in order to escape the borrower’s mortgage obligations.

In July of 2012, Ocwen Loan Servicing, LLC (“servicer”) began servicing Germain’s loan. By August, Germain defaulted on the loan and the servicer-initiated foreclosure proceedings. Germain submitted his first request for a loan modification, which was denied on the basis that the owner of the note did not allow for modification. Germain brought the loan out of default, and the servicer did not continue processing the borrower’s loss mitigation application.

Over the next two years, Germain went in and out of default several times, filed for bankruptcy, which was later dismissed, and submitted two more applications for a loan modification. The servicer denied each request and presented alternative loss mitigation options. Germain failed to take advantage of any options presented.

In February 2014, the borrower again submitted a loss mitigation application and requested a loan modification. The request was denied in writing on the grounds that the owner of the loan did not allow for loan modification and other loss mitigation options were presented, including the option of a short sale.

In 2015, the servicer accelerated the loan and Germain filed suit alleging two primary claims: (1) the servicer was in violation of the Real Estate Settlement Procedure Act (“RESPA”) by failing to provide a written explanation of its loss mitigation analysis for all four times the borrower submitted an application, and (2) violating the Texas Debt Collection Act (“TDCA”) by proceeding with foreclosure without complying with RESPA and urging Germain to submit loss mitigation applications knowing that it would be treated as a loan modification and subsequently denied.

Section 1024.41 (c) and (d) of the Code of Federal Regulations, relied on by the borrower, states that the loan servicer must evaluate the borrower for all loss mitigation options and provide a written explanation of all options or the specific reasons the borrower was denied for loss mitigation. Section 1024.41(i), which states the servicer is only required to comply with the requirements of sections (c) and (d) for one complete loss mitigation application for the borrower’s mortgage account came into effect in 2014. The court in Germain ruled that servicers should be credited for its compliance, even if that compliance occurred prior to the effective date of the statute.

The court relies on the analysis in Campbell v. Nationstar Mortgage out of the 6th Circuit and the district court opinion in Allen v. Wells Fargo Bank, N.A to determine whether section 1024.41 should apply retroactively in this instance. In Campbell, the court concluded that 1024.41 could not be applied retroactively because doing so would have imposed a duty on the servicer to not foreclose on the property when no such duty existed at the time of the foreclosure. The court in Allen reasoned that a servicer’s past conduct should apply when reading 1024.41(i) because failing to do so would exclude an entire category of borrowers from the limitation on duplicative requests where there was no intention to exclude such borrowers.

The court in Germain reconciles these seemingly conflicting opinions by delineating the difference between applying 1024.41 retroactively to impose a new duty to prior actions and crediting the servicer for its compliance with 1024.41 prior to the effective date of the statute. In other words, section 1024.41(i) should be retroactively applied because the purpose of the statute was to bring servicers into compliance, not make compliant servicers repeat their compliance.

Germain also raised TDCA violation claims which the court quickly dismantled. Germain alleged that the servicer violated the TDCA by threatening to foreclose on the property without complying with RESPA, and “urging [him] to submit a loss mitigation application, although the Defendants knew that [his] application would be treated as a loan modification and would be summarily denied without consideration.” The first TDCA claim was dismissed by the court based on their findings that the servicer was not in violation of RESPA. Germain’s second TDCA claim relied on language in Tex. Fin. Code § 392.304(a)(14) and (19) which forbids fraudulently, deceptively, or falsely misrepresenting the nature of services rendered by the debt collector or any other false representation to collect a debt or obtain information from the consumer. Germain argued that the servicer violated this provision by encouraging Germain to submit loss mitigation applications that would be treated as a request for loan modification and subsequently denied. The court disagreed, reasoning that the servicer did not promise a loan modification, nor did Germain offer any evidence that the servicer requested loss mitigation materials knowing the application would be denied. Further, the servicer provided Germain with several loss mitigation options other than a loan modification, including the option of a short sale. Germain failed to take advantage of any of the suggested options.  

What does the Germain decision mean for mortgage servicers?
First, servicers are only required to comply with the requirements of 1024.41(i) for a single complete loss mitigation application for the borrower’s mortgage loan account. The purpose of the statute is to eliminate the necessity for servicers to review and advise findings on duplicative loss mitigation applications. To be in compliance with 10241.41 the servicer must provide the borrower with one complete written notification of its loss mitigation determination, an explanation for any rejections, and any available options the servicer will provide the borrower. In addition, the court determined that when a servicer has previously provided the borrower with the name of the owner of the note, and that owner has not changed, the servicer’s compliance with 1024.41 is not defeated because the writing does not include the name of the note holder.

Additionally, servicers are not required to raise section 1024.41(i) as an affirmative defense. Germain argued that he did not receive proper notice and adequate time to prepare for the servicer’s motion to dismiss because 1024.41(i) was not raised as an affirmative defense, relying on Amarchand v. CitiMortgage, Inc. where the court contended that section 1024.41(i) was better raised an affirmative defense. The court in Germain disagreed. The court determined that when the defendant raised section 1024.41(i) in their motion for summary judgment, it was an expansion of the denial in their answer, arguing that they did not violate RESPA because they did, in fact, comply with the statute. Therefore, 1024.41(i) should not be considered an affirmative defense, and servicers are not required to raise it as such.

Finally, section 1024.41(i) should be applied retroactively for servicers who were in compliance with the statute prior to its effective date to eliminate the necessity for repeated compliance. The court looks at whether the statute expressly invokes retroactivity, and if not, the court must determine whether the new provision attaches new legal consequences to events completed prior to enactment. Although the court believes that section 1024.41 is not retroactive as a whole, the language of the statute takes into account the servicers past actions. If the servicer was not in compliance prior to the effective date of the statute, their foreclosures cannot be challenged on the basis of compliance because doing so would impose a duty not present at the time of the foreclosure sale. However, if the servicer provided a complete written explanation of their loss mitigation determination to the borrower, the 5th circuit contends that retroactivity applies in order to credit the servicer for the prior compliance.

In the ad hominem conclusion, the Germain court sends a clear message to borrowers and attorneys using the protections put in place to protect borrower’s interests as a weapon to avoid making payments.


The history of this case demonstrates beyond cavil that Germain has spent the last 10 years gaming the system through a series of applications for loan modification, a flawed bankruptcy filing, and the institution of this lawsuit. Doing so has enabled him to achieve his one overarching goal: The prolonged occupancy of his residence with little or no payment on his mortgage debt. With the help of cunning counsel, Germain used the intended shield of RESPA, TDCA, and various state and federal laws as a sword to avoid (or at least minimize) his mortgage payments while continuing the decade-long occupancy of his encumbered house. Today's termination of Germain's abuse of the system is long overdue. We caution Germain, and his present and future counsel, if any, that further machinations to prolong this litigation or delay foreclosure proceedings could and likely will be met with sanctions.”

Germain is a win for the industry. It eliminates the need for duplicative response and provides protections for servicers who began CFPB compliance prior to the effective date of the rules.  It also eases the pleading requirements in defending suits alleging CFPB violations. The court also makes clear it will not tolerate continued gamesmanship by borrowers and their counsel to delay foreclosures.


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