Recently, R. Scott Adams authored the following article for DRI's Commercial Litigation Committee.
The Servicemembers Civil Relief Act (“SCRA”) was signed into law in 2003, greatly expanding prior legislation in order to better assist servicemembers in avoiding default and foreclosure while they are on active duty. The SCRA has been expanded several times over the last decade, and there are many compliance obligations for financial institutions that service loans issued to servicemembers. A recent decision from the United States Court of Appeals for the Ninth Circuit explains that mortgage servicers can be held responsible under the SCRA for collecting improper fees that a prior servicer imposed. Also, a recent study by the federal government explains the apparent benefits of the SCRA.
Brewster v. Sun Trust Mortgage, Inc.
In a recent decision filed on February 7, 2014, the Ninth Circuit Court of Appeals held that the attempted collection of fees related to a pre-foreclosure Notice of Default from a servicemember on active duty constitutes a violation of section 553 of the Servicemembers Civil Relief Act (the “SCRA”), even where the fees were imposed by a prior servicer. Brewster v. Sun Trust Mortg., Inc., No. 12-56560, WL No. (9th Cir. Feb. 7 2014). The case began when Brewster, a Lieutenant Colonel in the United States Marine Corps Reserve, failed to make the full mortgage payments owed on his home mortgage while serving on active duty between 2008 and 2011. Sun Trust Mortgage, Inc. (“Sun Trust”), the initial loan servicer, initiated foreclosure proceedings by filing a Notice of Default and paying various foreclosure-related fees. Sun Trust later rescinded the Notice of Default, but did not remove the associated foreclosure fees from Brewster’s account. The servicing rights on Brewster’s mortgage were subsequently transferred from Sun Trust to Nationstar Mortgage, LLC (“Nationstar”), which also failed to remove and attempted to recover the fees while Brewster was on active-duty service.
Brewster filed suit alleging that Nationstar violated section 533 of the SCRA by not removing these improper foreclosure fees. Nationstar asked the District Court to dismiss the case for failure to state a claim upon which relief could be granted, and the District Court granted the motion.
In reviewing the district court’s decision, the Court of Appeals relied on the United States Supreme Court’s unambiguous requirement that courts liberally construe the limitations on judicial proceedings that can take place while a servicemember is on active duty that are provided by the SCRA. In addition, the Court looked at the California state-law definition of “foreclosure,” which includes the attempted collection of specified fees as part of the foreclosure proceeding. The Court concluded that Nationstar’s failure to remove the fees related to the Notice of Default constituted a continuation of the foreclosure proceeding while Brewster was on active duty service in violation of the SCRA. As a result, the Court reversed the district court’s dismissal under Federal Rule of Civil Procedure 12(b)(6) and remanded the case for further proceedings.
Although this case is from only one circuit and involves a unique set of facts, the lesson is important. Servicers often change over the life of a mortgage, and it is important to recognize fees imposed by prior servicers that could now be part of the total amount of the obligation. Even more serious, the current servicer can held responsible for conduct stemming from a prior servicer’s actions. Despite indemnification provisions that would likely shift liability, servicers should review new loans for such fees, and attorneys working on litigation matters should also be aware of the potential for liability.
A new study conducted by the United States Government Accountability Office (the “GAO”) revealed that the SCRA appears to be effective in assisting servicemembers to avoid defaults and foreclosures during their military service. The study examined (1) the available information regarding changes in the financial well-being of servicemembers who received foreclosure and mortgage interest rate protections under the SCRA, including the extent to which servicemembers became delinquent and the impact of protection periods, and (2) the Department of Defense’s (the “DOD’s) partnerships with public and private sector entities to provide financial education and counseling to servicemembers regarding SCRA’s mortgage related protections, and the DOD’s views on the effectiveness of these partnerships. The study was conducted by reviewing data received from three large mortgage services and one large credit union, by reviewing documentation regarding DOD’s partnerships and SCRA mortgage education efforts, and by interviewing DOD officials and partners who provide SCRA mortgage education and counseling.
The GAO study found that the information regarding servicemembers with mortgages eligible for the SCRA is limited and nongeneralizeable. However, based on the limited information available, the study found that delinquency rates were higher for military borrowers identified as SCRA-eligible than for other military borrowers. Although some servicemembers appeared to have benefitted from the SCRA interest rate cap, many eligible borrowers had not taken advantage of this protection and still had mortgage rates above 6 percent. Further, the limited and insufficient data available indicated that military borrowers are at a higher risk of delinquency within the first year after leaving active duty, but that borrowers with SCRA protections are more likely to cure delinquencies within this one year period than other military borrowers.
The study further found that limited information exists regarding the effectiveness of the DOD’s many partnerships with federal agencies and nonprofit organizations to provide financial education to servicemembers. The information available shows that the DOD’s education partnership initiatives have primarily focused on providing information regarding general financial fitness instead of SCRA protections. Although the interviews showed that views of these educational partnerships are generally favorable, the study illustrated that additional information and evaluations would significantly help improve the effectiveness of these programs.