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From Banking and Finance Law Daily, February 10, 2014

Mortgage servicer faces liability under Servicemembers Civil Relief Act

By Thomas G. Wolfe, J.D.

Despite a prior mortgage servicer’s rescission of its “Notice of Default” against a servicemember, an assignee mortgage servicing company that failed to remove certain foreclosure fees from the servicemember’s account was subject to liability for alleged violations of the Servicemembers Civil Relief Act (SCRA). In permitting the servicemember’s SCRA action to proceed against the mortgage servicing company, the U.S. Court of Appeals for the Ninth Circuit determined that the scope of the term “foreclosure” under the SCRA was broad enough to include the company’s alleged attempt to collect the fees while the servicemember was on active duty (Brewster v. Sun Trust Mortgage, Inc., Feb. 7, 2014, Gould, Circuit Judge).

Background. In 2007, the servicemember, a Lieutenant Colonel in the U.S. Marine Corps Reserve, took out a mortgage on his California home. On three different occasions between 2008 and 2011 he was called to active duty service.

In December 2009, the original mortgage loan servicer, Sun Trust Mortgage, Inc., initiated mortgage foreclosure proceedings by filing a Notice of Default; Sun Trust’s Notice of Default was accompanied by various fees. In August 2010, Sun Trust rescinded its default notice but did not remove the associated foreclosure fees from the servicemember’s account. During October of 2010 to March of 2011, the servicemember was deployed overseas, and he failed to make full payments owed on the mortgage on his California home.

In November 2010—during the period of the servicemember’s deployment overseas—Sun Trust transferred the servicing rights on the mortgage to Nationstar Mortgage, LLC. Nationstar also did not remove the fees associated with Sun Trust’s attempted foreclosure. Moreover, Nationstar allegedly attempted to recover those fees for approximately five months of the servicemember’s active-duty service, including three-and-a-half months while he was deployed overseas.

Servicemember’s complaint. In his SCRA lawsuit, filed in the U.S. District Court for the Southern District of California, the servicemember alleged that the assignee mortgage servicer, Nationstar, violated the SCRA while he was on active duty when Nationstar maintained certain fees on his account pertaining to the rescinded Notice of Default. In response, Nationstar asked the federal trial court to dismiss the servicemember’s complaint for failure to state a claim upon which relief could be granted, and the trial court granted that request. The servicemember appealed that ruling to the Ninth Circuit.

SCRA provision. Under the applicable SCRA provision (50 U.S.C. app. §533), a “sale, foreclosure, or seizure of property for a breach of an obligation” of a mortgage that originated before the servicemember’s military service “shall not be valid if made during, or within one year after, the period of the servicemember’s military service” unless the foreclosure is approved by a court.

As articulated by the Ninth Circuit, the SCRA provision “sets a serious prohibition aimed at keeping members of the armed forces free of foreclosures which would be distractions and unfair while they serve their country.” Citing a U.S. Supreme Court case, the Ninth Circuit also observed that the SCRA should “be liberally construed to protect those who have been obliged to drop their own affairs to take up the burdens of the nation.”

Nationstar, as the assignee mortgage servicer, contended that the particular SCRA provision (Section 533) should be construed to apply only to the foreclosure proceeding which was terminated before Nationstar actually assumed the serving rights of the servicemember’s mortgage. The Ninth Circuit disagreed.

Ninth Circuit’s analysis. While the Ninth Circuit noted that it was called upon to determine the scope of the term “foreclosure” for purposes of interpreting Section 533 of the SCRA, the federal appellate court pointed out that “Section 533 does not define the term.” Ultimately, in emphasizing the statute’s broad scope and the underlying purposes of the SCRA, the Ninth Circuit ruled that Nationstar was subject to liability for having violated Section 533 of the SCRA when it did not remove improper foreclosure fees associated with Sun Trust’s Notice of Default, even after the servicemember allegedly complained about the fees that appeared on a statement.

In reaching its decision, the federal appellate court determined that: (i) the SCRA provision refers to foreclosure “proceedings,” a term which generally means a process rather than a single act; (ii) the language of the statute specifically bars a “sale, foreclosure, or seizure of property,” thereby suggesting that foreclosure must mean more than just a sale or seizure; (iii) under California law governing foreclosure proceedings (e.g. California Civil Code, §2924c), there are “numerous requirements relating to fees, establishing the causes for which they can be imposed, creating time limits on their imposition, and requiring them to be in reasonable amounts”; and (iv) even though Nationstar itself did not issue the Notice of Default that launched the foreclosure proceeding, the servicemember’s complaint set forth sufficient facts alleging that Nationstar’s continuing failure to remove the incidental fees was a continuation of that foreclosure proceeding while he was on active-duty service.

Consequently, the Ninth Circuit reversed the decision of the federal trial court and remanded the matter for further proceedings.

The case is No. 12-56560.

Attorneys: Christopher Ayden Brewster and Kenneth Alexander Lee (Brewster & Lee, PC) for plaintiff-appellant.  Regina J. McClendon and Sally W. Mimms (Locke Lord LLP) for defendant-appellee Nationstar Mortgage, LLC.  Nathaniel S. Pollock of the U.S. Department of Justice as Amicus Curiae for the United States of America.

Companies: Nationstar Mortgage, LLC; Sun Trust Mortgage, Inc.

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