Adma Levitin: Mortgage Servicer Privity with Borrowers

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Adma Levitin: Mortgage Servicer Privity with Borrowers

Adma Levitin: Mortgage Servicer Privity with Borrowers

Credit Slips-

A lot of the mortgage servicing litigation over the past seven years has faltered on standing issues. Does the borrower have standing to sue the servicer? This has been a problem for RESPA and HAMP suits, where there are questions about whether there is a private right of action, as well as for plain old breach of contract actions. The point I make in this post is that borrowers almost always have standing to sue the servicer for a breach of contract action arising out of the mortgage loan contract itself because the servicer is an assignee of part of the mortgage note. This was an issue that lurked in the background of a case I recently testified in, and I think it’s worth highlighting for the Slips readers.

A lot of courts have misunderstood the nature of the servicing relationship vis-a-vis the borrower and assumed that because the servicer is not expressly a party to the note and security agreement that there is no privity between the borrower and servicer and hence the borrower cannot maintain a breach of contract suit. That’s wrong. The servicer is not on the note or the security agreement, but the servicer is an assignee of the note, just like the securitization trust, and that provides all the privity needed for a breach of contract suit.

Legal scholarship has long understood that property can be conceptualized as a bundle of separate rights. Thus, if I sell you Blackacre in fee simple, absolute, I am conveying to you the right to use Blackacre currently, the right to use it in the future, the right to the products and profits from the land, the right to reconvey it, etc. These rights could be split up: I could sell you the right to use Blackacre for a year, with the property reverting to me thereafter. That’s just a lease. Likewise, the mineral rights and the air rights to Blackacre could be sold separately from the surface rights. The same can be done with a mortgage note.

[CREDIT SLIPS]

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