QUESTION
We are servicing a loan portfolio of $2 billion. All we do is service loans belonging to lenders. We do not originate loans.
Last week, we got a lawyer's letter that says we are a creditor. She represents the borrowers on a loan we service. She claims that we are responsible for errors in the escrow analysis.
Our outside counsel tells us she doesn't have a case. He says we're not creditors. But he won't go into the details with us. I am the Compliance Manager. I may not be a lawyer, but I think I am entitled to an explanation. Hopefully, you can provide some feedback that we are not getting from our own lawyer.
Is a servicer a creditor?
ANSWER
Let's start with a brief definition of the term "creditor."
For purposes of our discussion here, the term "creditor" means a person who regularly extends credit that is subject to a finance charge or payable by a written agreement in more than four installments (not counting a down payment) and to whom the obligation is initially payable, either on the face of the note or contract, or by agreement when no note or contract exists.
In general, TILA imposes liability only on creditors for violations of its provisions.
Some exceptions include the requirement that servicers provide notices of transfer or assignment of mortgage loans, certain obligations of loan originators,[i] and liability of assignees for violations apparent on the face of a disclosure statement, except when the assignment was involuntary.[ii]
So, typically, a borrower who sues a defendant for violating TILA must tie the violation to the creditor (or, in the exceptions just mentioned, the servicer, loan originator, or assignee).
A federal district court in Maryland recently addressed this requirement succinctly in Ayres v. PHH Mortgage Corp.[iii]
In 1991, Ayres financed the purchase of a home by borrowing $72,660 from Market Street Mortgage Corporation. Ocwen became the loan servicer in 2011, and PHH took over servicing in 2019. Successive lawsuits followed, and Ayres entered into a loan modification agreement at some point.
What made me think of this lawsuit is that, like your situation, disputes arose regarding the escrow account maintained in connection with the loan.
In 2021, Ayres sued Ocwen, PHH, and the trustee for the securitization trust that held Ayres's loan, alleging that the defendants had engaged in misconduct related to the loan modification and overcharged the escrow account.
Among other claims, Ayres alleged violations of the Home Ownership and Equity Protection Act (HOEPA, part of TILA) and Regulation Z. Importantly, Ayres alleged in her complaint that the trustee was the owner of the loan.
The defendants moved to dismiss the HOEPA claim because:
(1) they were not "creditors" under TILA;
(2) TILA, HOEPA, and Regulation Z do not apply to loan modifications;
(3) the loan modification was not a high-cost mortgage loan under TILA;
(4) the loan was not negatively amortized; and
(5) nothing in an existing consent order prohibited the loan modification.
Ayres responded that:
(1) the defendants were "creditors;"
(2) HOEPA applies to loan modifications;
(3) the mortgage loan under the modification agreement was a high-cost
mortgage loan;
(4) the loan was negatively amortized; and
(5) Ocwen was not licensed under an applicable Maryland statute and, therefore, could not enter into the loan modification.
The court dismissed the complaint because Ayres failed to allege that Ocwen had been involved with the origination of the loan or was the party to whom the loan was initially payable. Instead, Ayres simply alleged that Ocwen was the loan's servicer and that someone else was the owner or assignee.
Thus, Ayres failed to state a claim because none of the defendants was a "creditor" within the meaning of TILA, which, by extension, disposed of the need to address items (2) through (5).
Jonathan Foxx, Ph.D., MBAChairman & Managing Director
[i] See 15
U.S.C. §1639b regarding duty of care and the prohibition of steering incentives.
[ii] 15
U.S.C. §1641(a)
[iii] Ayres
v. PHH Mortgage Corp., 2022 U.S. Dist. (D. Md. Sept. 19, 2022)
