The Supreme Court of Minnesota last week reversed the dismissal of a borrower’s action against a loan servicer arising out of the servicer’s alleged breach of its Servicer Participation Agreement (SPA) with Fannie Mae under the federal Home Affordable Modification Program (HAMP). The court rejected the argument that HAMP federally preempted the state law cause of action asserted by the borrower.
The borrower contended that a Minnesota statute gave him a private right of action against a loan servicer for the servicer’s alleged failure “to perform in conformance with its written agreements with borrowers, investors, other licensees, or exempt persons.” After initially concluding that the statute did create a cognizable cause of action under state law, the Minnesota Supreme Court then turned to whether federal law preempted the state law claim.
The servicer argued for application of the doctrine of “implied conflict preemption.” Under this doctrine, federal law preempts state law either because it is impossible for a private party to comply with both the state and federal requirements, or because the state law stands as an obstacle to the accomplishment and execution of the purpose and objective of Congress. Specifically, the servicer argued that the Minnesota law posed an obstacle to the federal objective under HAMP of increasing servicer participation and lowering foreclosure rates because allowing a private right of action to borrowers would have a chilling effect on servicer participation due to fear of exposure of private lawsuits.
The Minnesota Supreme Court disagreed. Initially, the court noted that “[u]nder the terms of the SPA, servicers who violate their SPAs are already open to suit for breach by the other contracting parties.” Consequently, the court reasoned, the Minnesota law providing borrowers with a private right of action “does not impose any obligations on servicers beyond those that contracting parties can enforce and it does not require that servicers do more than what they have already undertaken in their written agreements.” Because the state law did not impose additional duties on servicers inconsistent with those set forth in HAMP or the SPA, the court concluded, the Minnesota state law does not frustrate congressional purposes.
As part of its analysis, the court further observed that HAMP regulations specifically require that programs be implemented in compliance with state law and that the Secretary of the Treasury “expressly instructed mortgage servicers to comply with state laws when the Secretary promulgated administrative guidance for the HAMP program.”
Finally, the court rejected the servicer’s argument that, because HAMP did not provide a private right of action, permitting a state remedy would be an “end-run” around Congress’s decision not to provide a federal right of action. Noting that the issue is whether federal law bars remedies otherwise available, rather than whether there is a federal right of action, the court reasoned that “Congress, by not providing a federal remedy, could have determined that widely available state causes of action provide appropriate relief for injured borrowers.” Accordingly, the court held, the absence of a federal remedy does not support the proposition that HAMP preempts the private right of action provided by Minnesota law.
This recent decision adds to a still-developing body of state law permitting borrowers to predicate state law causes of action on alleged HAMP violations, even though no private right of action exists under federal law for HAMP violations.