By Thomas G. Wolfe, J.D.
In a recent case, Ouch v. Federal National Mortgage Association, the U.S. Court of Appeals for the First Circuit was called upon to address a unique appeal by a proposed class of borrowers who, despite being delinquent on their mortgage loan payments, contended that certain loan servicers made payments on their respective mortgage debts by making a number of contractually mandated "delinquency advances" to certain trustees who held the promissory notes and mortgages under trusts generated by pooled, mortgage-backed securities. Notably, the borrowers argued that the mortgage-holders and loan servicers lacked the power to foreclose against them because the borrowers had not technically defaulted on their respective mortgage loans as a result of the loan servicers' "delinquency advances."
While the First Circuit characterized the borrowers' theory as "crafty," the court ultimately rejected their argument that the mortgage servicers' "delinquency advances" correspondingly relieved the borrowers of making payments on the mortgage debt in those same amounts. Rather, the First Circuit agreed with the federal trial court that the mortgage loan servicers did not make any payments “on behalf of” the borrowers.
Because the pertinent promissory notes in the case qualified as negotiable instruments, the federal appellate court construed the Massachusetts Uniform Commercial Code provision (§3-602) governing the payment of negotiable instruments. The court determined that the loan servicers did not act with the requisite intent to satisfy the borrowers' applicable debts. Moreover, in reviewing the applicable trust agreements and the factual record, the court further determined that the "delinquency advances" were clearly viewed by the loan servicers and trustees as "temporary, stop-gap measures to keep principal and interest flowing to the trustees and the investors."
Consequently, the First Circuit determined that the borrowers' clever theory did not prevail. Because the court ruled that the loan servicers' "delinquency advances" were not made on behalf of the borrowers and the borrowers were not relieved from their obligation to pay those mortgage debts, the borrowers were in default on their loans. In turn, given those defaults, the loan servicers and/or trustees were entitled to foreclose. As the First Circuit related, without the underpinning that the servicers' payments were made "on behalf of" the borrowers, "the rest of the borrowers' argument falls like a house of cards."
For more information about mortgage loan servicing, subscribe to the Banking and Finance Law Daily.
