United States of America v. Bank of America Corporation

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
____________________________________
)
UNITED STATES, et al., )
)
Plaintiffs, )
)
v. ) Civil Action No. 12-361 (RMC)
)
BANK OF AMERICA, et al., )
)
Defendants. )
____________________________________)
OPINION
The United States and numerous states sued Wells Fargo & Company and Wells
Fargo Bank N.A. (collectively, Wells Fargo), as well as other major mortgagee banks, alleging
misconduct in their home mortgage practices. All parties agreed to a national settlement,
resulting in multiple consent judgments. In its consent judgment, Wells Fargo agreed to pay
approximately $5.9 billion (including over $100 million to the State of New York), without
admitting fault, in exchange for the release of certain liabilities. Now, the Attorney General for
the State of New York (NYAG) moves to enforce the Consent Judgment against Wells Fargo.
Before the Court can decide the motion, however, it must determine whether NYAG can seek
enforcement of the Consent Judgment when only the court-appointed Monitor has authority to
enforce certain terms. The Court finds that NYAG may seek enforcement of the Consent
Judgment with limitations described in this Opinion. Even so, because NYAG’s allegations of
noncompliance are so insubstantial, NYAG has failed to allege breach of the Consent Judgment.
1
I. FACTS
On March 12, 2012, the United States, the District of Columbia, and forty-nine
States 1 filed this case alleging that Wells Fargo and other major mortgagee banks (collectively,
Banks) engaged in misconduct in making Federal Housing Administration (FHA) insured
mortgage loans. 2 See Compl. [Dkt. 1]. Plaintiffs complained that the Banks’ activities related to
loan “servicing conduct” and loan “origination conduct” violated a host of federal laws. See id.
¶¶ 47-64 (servicing misconduct); id. ¶¶ 65-89 (origination misconduct). The Complaint set forth
the following eight counts:
Count I – unfair and deceptive consumer practices with respect to loan servicing;
Count II – unfair and deceptive consumer practices with respect to foreclosure
processing;
Count III – unfair and deceptive consumer practices with respect to origination;
Count IV – violation of the False Claims Act (or FCA), 31 U.S.C.
§§ 3729(a)(1)(A)-(C) & (G), 3729(a)(1), (2), (3) & (7);
Count V – violation of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA), 12 U.S.C. § 1833a;
Count VI – violation of the Servicemembers Civil Relief Act, 50 U.S.C. § App.
501, et seq.;
Count VII – declaratory judgment under 28 U.S.C. §§ 2201, 2202; and
1
The State of Oklahoma did not participate in this suit.
2
The Banks who are named as defendants in the Complaint are: Bank of America Corporation;
Bank of America, N.A.; BAC Home Loans Servicing, LP; Countrywide Home Loans, Inc.;
Countrywide Financial Corporation; Countrywide Mortgage Ventures, LLC; Countrywide Bank,
FSB; Citigroup, Inc.; Citibank, N.A.; Citimortgage, Inc.; J.P. Morgan Chase & Company;
JPMorgan Chase Bank, N.A.; Residential Capital, LLC; Ally Financial, Inc.; GMAC Mortgage,
LLC; GMAC Residential Funding Co., LLC; Wells Fargo & Company; Wells Fargo Bank N.A.
Subsequently, Green Tree Servicing LLC and Ocwen Loan Servicing LLC became successors by
assignment from Residential Capital, Ally Financial, and GMAC Mortgage. See Notice [Dkt.
193]; Notice [Dkt. 194].
2
Count VIII – abuse of the bankruptcy process under common law.
Id. ¶¶ 102–137.
On April 4, 2012, all parties agreed to a national settlement and entered into five
separate consent judgments, together valued at $25 billion. See Consent Js. [Dkts. 10-14]
(commonly, the National Mortgage Settlement). One of the consent judgments relates to Wells
Fargo, see Consent J. [Dkt. 14], and this Court retained jurisdiction to enforce its terms for the
duration of the Consent Judgment. See id. ¶ 13. The Consent Judgment and all Exhibits remain
in full force for a term of three and one-half years from the date it was entered (March 12, 2012),
unless otherwise specified. See Consent J., Ex. E (Enforcement Terms) § K.
Under its Consent Judgment, Wells Fargo agreed to pay $5 billion and to take
various actions beneficial to homeowners, including setting up programs to assist mortgagors at
risk of foreclosure. Id. In exchange, the United States and the States released Wells Fargo from
certain types of liability. See id., Ex. F (Federal Release) & Ex. G (State Release).
The Consent Judgment also requires Wells Fargo to comply with 304 defined
business practice requirements called “Servicing Standards,” including several regarding the loan
modification process. Consent J. ¶ 2; id., Ex. A (Settlement Term Sheet). A “loan modification”
is a permanent change in the terms of a homeowner’s mortgage loan in order to lower the
homeowner’s monthly mortgage payment to an affordable amount and to bring the loan current
so that foreclosure can be avoided. See Mem. in Support of Mot. to Enforce Consent J. [Dkt. 86-
1] (NYAG Mem.) at 4. Some of the Servicing Standards impose deadlines intended to ensure
that Wells Fargo makes prompt decisions on applications for loan modification, such as:
3
1. Servicer 3 shall provide written acknowledgment of the receipt
of documentation submitted by the borrower in connection with a
first lien loan modification application within 3 business days. In
its initial acknowledgement, Service shall briefly describe the loan
modification process and identify deadlines and expiration dates
for submitted documents.
Ex. A § IV(F)(1) (3-day Acknowledgment).
2. Servicer shall notify borrower of any known deficiency in
borrower’s initial submission of information, no later than 5
business days after receipt, including any missing information or
documentation required for the loan modification to be considered
complete.
Ex. A § IV(F)(2) (5-day Deficiency Notice).
3. Subject to section IV.B, Servicer shall afford borrower 30 days
from the date of Servicer’s notification of any missing information
or documentation to supplement borrower’s submission of
information prior to making a determination on whether or not to
grant an initial loan modification.
Ex. A § IV(F)(3) (30-day Notice of Missing Information).
4. Servicer shall review the complete first lien loan modification
application submitted by borrower and shall determine the
disposition of borrower’s trial or preliminary loan modification
request no later than 30 days after receipt of the complete loan
modification application, absent compelling circumstances beyond
Servicer’s control.
Ex. A § IV(F)(4) (30-day Notice of Disposition).
5. Servicer shall promptly send a final modification agreement to
borrowers who have enrolled in a trial period plan under current
HAMP guidelines (or fully underwritten proprietary modification
programs with a trial payment period) and who have made the
required number of timely trial period payments, where the
modification is underwritten prior to the trial period and has
received any necessary investor, guarantor or insurer approvals.
The borrower shall then be converted by Servicer to a permanent
modification upon execution of the final modification documents,
consistent with applicable program guidelines, absent evidence of
fraud.
Ex. A § IV(A)(4) (Prompt Delivery of Final Modification
Agreement).
3
“Servicer” in this Consent Judgment refers to Wells Fargo; the terms are the same in each
bank’s judgment, except for the dollar amount.
4
The Attorney General for the State of New York filed a Motion to Enforce
Consent Judgment, alleging that Wells Fargo failed to comply with the five servicing standards
detailed above: (1) the 3-day Acknowledgment; (2) the 5-day Deficiency Notice; (3) the 30-day
Notice of Missing Information; (4) the 30-day Notice of Disposition; and (5) the Prompt
Delivery of Final Modification Agreement (collectively, Loan Modification Timeline
Requirements). NYAG alleges that Wells Fargo failed to comply with these Servicing Standards
in 97 out of the roughly 450,000 loans that Wells Fargo services in the State of New York. This
amounts to less than .022% of the New York loans serviced by Wells Fargo. Despite this small
number, NYAG alleges that Wells Fargo repeatedly failed to comply with these Loan
Modification Timeline Requirements, subjecting numerous New York homeowners to
“Kafkaesque delays and obstructions in the loan modification process.” NYAG Mem. at 2. For
example, NYAG alleges that Wells Fargo required many homeowners to resubmit documents
that they had already provided months earlier, that often Wells Fargo’s demands were cryptic
and confusing, and that after many rounds of requests for documents already provided, Wells
Fargo would declare the application for loan modification to be stale and the process would
begin all over again. Id. at 2-4. Delays in the loan modification process cause fees and interest
to grow, making it more difficult to modify a loan and thus to avoid foreclosure. NYAG seeks
an order requiring that:
(1) Wells Fargo comply with the Loan Modification Timeline
Requirements;
(2) Wells Fargo take such additional steps as are necessary to
ensure compliance with the Loan Modification Timeline
Requirements; 4
4
NYAG states that it seeks an order requiring Wells Fargo to take certain “commonsense steps
that will help ensure the Bank’s compliance, such as requiring that the Bank assign key staff and
5
(3) Wells Fargo provide relief from foreclosure for New York
borrowers harmed by Wells Fargo’s breaches of the Consent
Judgment;
(4) Wells Fargo provide relief from assessments due to Wells
Fargo’s violations of the rights of New York borrowers; and
(5) Wells Fargo provide such other relief as the Court may deem
just and proper.
Mot. to Enforce J. [Dkt. 86] at 3; NYAG Mem. at 29-31.
The Court stayed discovery and briefing on the factual issues presented in
NYAG’s Motion to Enforce Consent Judgment to consider the threshold legal issue presented:
whether NYAG’s motion is barred by terms of the Consent Judgment that give certain
enforcement rights to the Monitor. See Minute Order Oct. 16, 2013. The issue is fully briefed. 5
II. STANDARD FOR REVIEWING A CONSENT DECREE
A consent decree must be construed according to principles of contract
interpretation. Segar v. Mukasy, 508 F.3d 16, 21 (D.C. Cir. 2007). The meaning of a consent
decree, like a contract, should be determined within its “four corners.” United States v. W. Elec.
Co., 894 F.2d 1387, 1390 (D.C. Cir. 1990). When a contract is clear and unambiguous, courts
presume that the words in the contract have their ordinary meaning. Mesa Air Grp., Inc. v. Dep’t
of Transp., 87 F.3d 498, 503 (D.C. Cir. 1996). “Under general contract law, the plain and
unambiguous meaning of an instrument is controlling.” WMATA v. Mergentime Corp., 626 F.2d
959, 960-61 (D.C. Cir. 1980). “Where the contract is unambiguous, as evidenced by the plain
language of the contract, the court’s inquiry is at an end, and the plain language of the contract
decision-makers early in the loan modification review process for New York homeowners.”
NYAG Reply [Dkt. 116] at 8. This claim for injunctive relief is vague.
5
See NYAG Mot. to Enforce J. [Dkt. 86]; Wells Fargo Opp’n [Dkt. 114]; NYAG Reply [Dkt
116]; Monitoring Committee Brief [Dkt. 176]; U.S. Brief [Dkt. 177]; Banks’ Brief [Dkt. 183].
6
controls.” Red Lake Band of Chippewa Indians v. Dep’t of Interior, 624 F. Supp. 2d 1, 15
(D.D.C. 2009). A contract is unambiguous when there is only one reasonable interpretation. Id.The question of whether an agreement is clear or ambiguous is one of law for the court. NRM
Corp. v. Hercules, Inc., 758 F.2d 676, 682 (D.C. Cir. 1985).
A contract is not rendered ambiguous merely because the parties disagree over its
proper interpretation. A contract is deemed ambiguous only when it can be reasonably construed
to have two or more different meanings. Tillery v. Dist. of Columbia Contract Appeals Bd., 912
A.2d 1169, 1176 (D.C. 2006). If a contract is ambiguous, then the court should be guided by
extrinsic evidence such as “the circumstances surrounding the formation of the consent order,
any technical meaning words used may have had to the parties, and any other documents
expressly incorporated in the decree.” W. Elec. Co., 894 F.2d at 1390; see also Tillery, 912 A.2d
at 1177 (extrinsic evidence may include the circumstances of contract formation, custom, and
course of conduct).
In the case of ambiguity of an ordinary contract, courts look to extrinsic evidence
in order to determine what a reasonable person in the position of the parties would have thought
the disputed language meant. Tillery, 912 A.2d at 1176; see WMATA v. Georgetown Univ., 347
F.3d 941, 945-46 (D.C. Cir. 2003) (under District of Columbia law, contracts are construed in
accord with the intention of the parties insofar as it can be discerned from the text of the
instrument). In the case of a consent decree, a court must be careful not to interpret the decree
by reference to the purpose of one of its parties because:
[T]he decree itself cannot be said to have a purpose; rather the
parties have purposes generally opposed to each other, and the
resultant decree embodies as much of those opposing purposes as
the respective parties have the bargaining power and skill to
achieve. . . . [T]he instrument must be construed as it is written,
7
and not as it might have been written had the plaintiff established
his factual claims and legal theories in litigation.
ITT Cont’l Baking Co., 420 U.S. at 236-37 (citing United States v. Armour & Co., 402 U.S. 673,
681-82 (1971)). Further, a court should construe a contract as a whole, to give meaning to all of
its express terms. Mergentime, 626 F.2d at 961. It is a cardinal principle of contract
construction that “a document should be read to give effect to all its provisions and to render
them consistent with each another.” Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S.
52, 63 (1995).
III. ANALYSIS
The Consent Judgment provides that the Servicer (here, Wells Fargo) “shall
comply with the Servicing Standards,” Consent J. ¶ 2, and the Consent Judgment “shall be
enforced” in accord with the procedures set forth in Exhibit E, titled “Enforcement Terms.” Id.
¶ 6. Generally, the Enforcement Terms establish:
• a timeline for implementing Servicing Standards, Consent J., Ex. E § A;
• the creation of a Monitoring Committee, 6 id. § B;
• the appointment of Joseph A. Smith, Jr., as Monitor to assess the Servicer’s compliance
with the Consent Judgment and to report findings to the Monitoring Committee and the
Court, id. § C(1), (5), D;
• the creation of a Work Plan incorporating specific Metrics for compliance evaluation,
covering a substantial portion of the Servicing Standards and providing for Metric testing
methods and procedures, id. § C(6), (11)-(15);
6
The Monitoring Committee is composed of representatives of the State attorneys general and
financial regulators as well as the Department of Justice and the Department of Housing and
Urban Development. Consent J., Ex. E § B. The State members of the Monitoring Committee
are: Attorneys General of Iowa, Texas, Florida, Connecticut, California, Colorado, Nevada,
North Caroline, Washington, Ohio, Michigan, Arizona, Oregon, and Illinois, as well as the
Maryland Commissioner of Financial Regulation.
8
• the creation of an Internal Review Group 7 within the Servicer responsible for reviewing
compliance, id. § C(7);
• the Servicer’s obligation to cure “Potential Violations” of the Metrics and remediate
material harm to borrowers, id. § E;
• a dispute resolution procedure, id. § G; and
• the authorization to bring an enforcement action, id. § J.
A. Compliance Testing by the Monitor
More specifically, the Consent Judgment designates a Monitor, Ex. E § C(1), who
is required to determine whether the Servicer is in compliance with defined Servicing Standards,
see id. § C(5). The Consent Judgment sets forth 304 Servicing Standards, see Ex. A, and the
Monitor is responsible for implementing and performing “Metric” testing to determine
compliance with such Standards, see id. § C(6), (11). That is, the Monitor reviews the Servicer’s
performance on each Metric to ensure no greater rate of error than that permitted by the Metric.
To assess compliance, the Monitor reviews internal national data and testing with respect to
Metrics defined in Exhibit E-1 to the Consent Judgment, as reported to him each quarter by the
Servicer’s Internal Review Group that is charged with this task. See id. § C(6), (11), (15), D(1).
The Monitor uses sampling methods to determine for each Metric whether the Servicer’s errors
in performance are higher than the negotiated threshold error rate assigned to each Metric. See
id. § C(11), (15). If the error rate is exceeded, the Monitor notifies the Servicer of a “Potential
Violation” and a corrective procedure is triggered. See id. § E(1)-6). A corrective action plan is
put into place. See id. § E(3). The Servicer has a right to cure a Potential Violation within a set
cure period. Id. § E(2). The Monitor thereafter confirms that the threshold error rate for the
7
The Internal Review Group is “an internal quality control group independent from the line of
business whose performance is measured . . . to perform compliance reviews each calendar
quarter . . . .” Ex. E § C(7).
9
relevant Metric was not exceeded during the cure period, which is usually the first quarter after
the completion of the corrective action plan. See id. § E(3). If this notice/cure procedure brings
the Servicer into compliance with Metric, no Party to the Consent Judgment can sue on the
Potential Violation. 8 See id. § E(6) (“[i]n the event a Potential Violation is cured . . . , then no
Party shall have any remedy under this Consent Judgment . . . with respect to such Potential
Violation.”)
When the Monitor identifies a Potential Violation, the Servicer also is required to
remediate any material harm to borrowers that have been identified. Id. § E(5). If the Potential
Violation is widespread, the Servicer is required to identify other borrowers who suffered harm
and remediate as to them as well. Id.
There are 33 Metrics, many of which relate to more than one Servicing Standard. 9
See Ex. E; Ex. E-1 (Servicing Standards Quarterly Compliance Metrics). While the Metrics do
not test all 304 Servicing Standards, they do test those that would cause the greatest harm to
borrowers if violated. See, e.g., Ex. E1 at 1-3 (establishing testing Metrics for erroneous
foreclosure, incorrect denials of loan modification requests, and the accuracy of proofs of claim
filed in bankruptcy). Although there are Metrics for the majority of the Servicing Standards,
there is not a Metric for every Servicing Standard. As a result, there are over 100 Servicing
Standards that are not covered by Metric testing and are not covered by the Potential
Violation/cure procedure. States’ Brief [Dkt. 176] at 4-5.
8
“Party” means any party to the Consent Judgment––the Federal Government, the States, the
District of Columbia, and the Servicer.
9
Under Exhibit E § C(12), the Monitor can add up to three additional Metrics that relate to
material terms of the Servicing Standards. The total of 33 Metrics includes three added by the
Monitor on October 2, 2013. See Notice of Additional Metrics [Dkt. 84].
10
The enforcement process appears to have been working. On November 14, 2012,
the Wells Fargo Internal Review Group (IRG) filed its First Quarterly Report indicating that
Wells Fargo had not exceeded the threshold error rate for any of the tested Metrics. Monitor
Report (6/18/13) [Dkt. 74] at 16. On February 14, 2013, the IRG filed the Second Quarterly
Report stating that Wells Fargo had not exceeded the threshold error rate for any of the tested
Metrics except for Metric 19. Id. at 17. Metric 19 tests whether Wells Fargo complied with
Servicing Standards §§ IV(F)(2) & (3) regarding timely and accurate 5-day notices to borrowers
whose loan modification applications are missing information, see Ex. A §IV(F)(2) (5-day
Deficiency Notice), and whether Wells Fargo afforded borrowers 30 days to submit
supplemental information, see Ex. A § IV(F)(3) (30-day Notice of Missing Information). See
also Monitor Report (6/18/13) [Dkt. 74] at 31-32.
Metric 19 is assigned a threshold error rate of 5%, and Wells Fargo’s national
error rate was 7.84%, an error rate 2.84% over the threshold. For this analysis, the Monitor
determined that the noncompliance was not widespread. Id. at 33. Wells Fargo proposed a
corrective action plan, and the Monitor approved it in June 2013. Id. at 33-34. Subsequently, the
Monitor determined that Wells Fargo satisfactorily implemented the corrective action plan. See
Monitor Report (12/4/13) [Dkt. 123] at 24. Wells Fargo has since been in compliance with
Metric 19. See Monitor Report (5/14/114) [Dkt. 163] at 20. In fact, Wells Fargo has not failed
any other Metric. See Monitor Report (6/18/13) [Dkt. 74] at 16-17; Monitor Report (12/4/13)
[Dkt. 123] at 9-12; Monitor Report (5/14/114) [Dkt. 163] at 7-10; Monitor Report (12/16/14)
[Dkt. 195] at 7-10.
11
B. Enforcement Actions
Critical to the Court’s decision here, Exhibit E § J(2) of the Consent Judgment,
provides that any Party or the Monitoring Committee can bring an enforcement action:
2. Enforcing Authorities. Servicer’s obligations under this
Consent Judgment shall be enforceable solely in the U.S. District
Court for the District of Columbia. An enforcement action under
this Consent Judgment may be brought by any Party to this
Consent Judgment or the Monitoring Committee.
Ex. E § J(2). 10 This language is clear and unambiguous––even more so when construed in
context.
Exhibit E foresees two types of enforcement actions: (1) actions alleging that the
Servicer violated an “obligation” under the Consent Judgment; and (2) actions alleging that the
Servicer failed to cure a “Potential Violation” of the Metrics as revealed by testing. Ex. E § J(3)
(describing relief that is available “[i]n the event of an action to enforce the obligations of
Servicer and to seek remedies for an uncured Potential Violation”). Section J(3) provides:
10
Section J(2) further provides that notice must be given to the Monitoring Committee before
commencing an enforcement action:
[U]nless immediate action is necessary in order to prevent
irreparable and immediate harm, prior to commencing any
enforcement action, a Party must provide notice to the Monitoring
Committee of its intent to bring an action to enforce this Consent
Judgment. The members of the Monitoring Committee shall have
no more than 21 days to determine whether to bring an
enforcement action. If the members of the Monitoring Committee
decline to bring an enforcement action, the Party must wait 21
additional days after such a determination by the members of the
Monitoring Committee before commencing an enforcement action.
Ex. E § J(2). NYAG provided the requisite notice to the Monitoring Committee, and the
Monitoring Committee declined to bring an enforcement action. Ex. 12 [Dkt. 86-14] (6/27/13
Committee Letter). NYAG filed its Motion To Enforce Consent Judgment on October 2, 2013,
more than 21 days after the Monitoring Committee declined to bring an enforcement action.
12
3. Enforcement Action. In the event of an action to enforce the
obligations of Servicer and to seek remedies for an uncured
Potential Violation for which Servicer’s time to cure has expired,
the sole relief available in such an action will be:
(a) Equitable Relief. An order directing non-monetary equitable
relief, including injunctive relief, directing specific performance
under the terms of this Consent Judgment, or other non-monetary
corrective action.
(b) Civil Penalties. The Court may award as civil penalties an
amount not more than $1 million per uncured Potential Violation
. . . Nothing in this Section shall limit the availability of remedial
compensation to harmed borrowers as provided in Section E.5.
(c) Any penalty or payment owed by Servicer pursuant to the
Consent Judgment shall be paid to the clerk of the Court or as
otherwise agreed by the Monitor and the Servicer and distributed
by the Monitor . . . .
The Consent Judgment does not define the word “obligation.” Exhibit E uses
“obligation” broadly to refer to any promise, duty, or responsibility––i.e., to refer to servicing
standards, see Ex. E §§ C(25), K; consumer relief requirements, see id. §§ C(7), (11); payment
obligations, see id. §§ D(1), (6); and the responsibility to cure Potential Violations, see id. § E(5).
See also Ex. F (Federal Release) & Ex. G (State Release) (both using the term “obligation”
without any limitation). In contrast, the Consent Judgment expressly defines “Potential
Violation.” As explained above, a Potential Violation occurs when the Servicer exceeds the
threshold error rate on a Servicing Standard that is tested by a Metric. Ex. E § E(1).
The remedies that a Party or the Monitoring Committee may seek in enforcing
an “obligation” versus a “Potential Violation” are different, as provided in § J(3) (quoted in
pertinent part above). When the parties to the Consent Judgment or the Monitoring Committee
sue to enforce an “obligation,” they may seek only non-monetary equitable relief, see Ex. E
§ J(3)(a). When they sue the Servicer for failure to cure a Potential Violation in a timely manner,
13
they can seek a civil penalty. 11 See id. § J(3)(b). There is no provision for a civil penalty for a
suit to enforce an obligation.
The broad right of a Party or the Monitoring Committee to file an enforcement
action as provided by § J(2) is limited by § E(6), which provides that “[i]n the event a Potential
Violation is cured . . . , then no Party shall have any remedy under this Consent Judgment . . .
with respect to such Potential Violation.” Thus, a suit on a cured Potential Violation is
prohibited. Section E(6) supplies a safe harbor that precludes an enforcement action when the
Monitor cites the Servicer for a Potential Violation and the Servicer successfully and timely
cures the Potential Violation. Section E(6) allows an enforcement action when the Monitor
notifies the Servicer of a Potential Violation and the Servicer fails to cure it. Obviously, the cure
process for a Potential Violation must run its course before suit on an uncured Potential
Violation can be filed. The Servicer has a right to cure under § E(2). To be clear, because
§ E(6) only allows suit on uncured Potential Violations, in the first instance only the Monitor can
enforce Servicing Standards that are covered by a Metric.
Section E(6) is narrow. It does not restrict enforcement actions to uncured
Potential Violations. It does not restrict enforcement actions to Servicing Standards tested by
Metrics. Therefore, suits to enforce Servicing Standards not measured by a Metric and suits to
enforce other “obligations” under the Consent Judgment are allowed.
The Servicing Standards for which there are Metrics are enforceable through
monitoring and notice of Potential Violation by the Monitor; only if not timely cured can a Party
sue. See Ex. E § E(6) (“[i]n the event a Potential Violation is cured . . . , then no Party shall have
11
NYAG does not base its Motion to Enforce Consent Judgment on an uncured Potential
Violation. Instead, it moves to enforce Servicing Standards and seeks only non-monetary
equitable relief. NYAG Reply [Dkt. 116] at 3-4.
14
any remedy under this Consent Judgment . . . with respect to such Potential Violation.”). This
framework bars NYAG’s Motion to Enforce Consent Judgment to the extent it is premised on
Wells Fargo’s failure to comply with Servicing Standards §§ IV(F)(2) and (3), i.e. Wells Fargo’s
alleged failure to timely and accurately send 5-day notices to borrowers regarding missing
information required by Ex. A § IV(F)(2) (5-day Deficiency Notice) and Wells Fargo’s alleged
failure to afford borrowers 30 days to submit supplemental information as required by Ex. A
§ IV(F)(3) (30-day Notice of Missing Information). The Monitor cited Wells Fargo for a
Potential Violation of Metric 19, due to violations of Servicing Standards §§ IV(F)(2) and (3).
Wells Fargo timely cured the Potential Violation, and under § E(6), no Party can sue Wells Fargo
on past performance of Servicing Standards §§ IV(F)(2) and (3).
Section E(6) also bars NYAG’s Motion To Enforce Consent Judgment to the
extent that NYAG seeks to enforce Servicing Standard § IV F(4) (30-day Notice of Disposition)
because this Servicing Standard is tested via Metric 20. Despite repeated testing since the
quarter ending September 2012, the Monitor has never cited Wells Fargo for a Potential
Violation of Metric 20. See Monitor Report (6/18/13) [Dkt. 74] at 16-17; Monitor Report
(12/4/13) [Dkt. 123] at 9-12; Monitor Report (5/14/114) [Dkt. 163] at 7-10; Monitor Report
(12/16/14) [Dkt. 195] at 7-10. Only the Monitor has the authority to enforce Servicing Standards
measured by a Metric (such as the § IV F(4) 30-day Notice of Disposition) in the first instance.
That leaves NYAG with a Motion To Enforce Consent Judgment premised only
upon Wells Fargo’s alleged failure to comply with Servicing Standards § IV(F)(1) (3-day
Acknowledgment) and § IV(A)(4) (Prompt Delivery of Final Modification Agreement), which
do not have an associated Metric. Wells Fargo contends that NYAG cannot premise an
enforcement action on failure to comply with these Servicing Standards. Wells Fargo argues that
15
NYAG can only file an enforcement action for uncured Potential Violations, pursuant to the
language of § J(3). This argument goes too far.
Section J(3) does not state that it is the exclusive remedy for enforcing all
Servicing Standards. Equally important, it does not state that there is no remedy for the violation
of a Service Standard that is not covered by a tested Metric. Section J(3) does not delineate
when or what type of an enforcement action may be filed. It presupposes that an action has been
filed by stating “[i]n the event of an action to enforce the obligations of Servicer and to seek
remedies for an uncured Potential Violation for which Servicer’s time to cure has expired . . .”,
and then § J(3) proceeds to limit the type of relief available. Wells Fargo reads limitations into
§ J that simply do not exist. If enforcement of the Consent Judgment were limited to uncured
Potential Violations, the more than 100 Servicing Standards that are not tested by a Metric could
not be enforced. As noted above, the key operative language is found in § J(2), which provides:
Servicer’s obligations under this Consent Judgment shall be
enforceable solely in the U.S. District Court for the District of
Columbia. An enforcement action under this Consent Judgment
may be brought by any Party to this Consent Judgment or the
Monitoring Committee.
And while § E(6) prohibits suits on cured Potential Violations, § E(6) does not restrict
enforcement actions outside the scope of Metric testing. Because the Court is required to give
effect to all of the terms of the Consent Judgment, see Mastrobuono, 514 U.S. at 63, the Court
finds that (1) only the Monitor can enforce Servicing Standards covered by a Metric unless there
has been a failure to cure and (2) the parties and the Monitoring Committee can sue to enforce
(a) uncured Potential Violations of Servicing Standards covered by a Metric and (b) Servicing
Standards that are outside the Metric testing/Potential Violation process.
Wells Fargo also argues that when a Servicing Standard is not tested by a Metric,
the only way that a Plaintiff can enforce compliance is to petition the Monitor to add a Metric
16
under § C(12) or under § C(23)-(25). Section C(12) permits the Monitor to add up to three
Metrics that are similar to the Metrics already established and that relate to a material term of the
Servicing Standards. As noted above, the Monitor added the maximum number of Metrics it
could add under § C(12). See Notice of Additional Metrics [Dkt. 84]. Sections C(23)-(25)
provide a process whereby the Monitor can expand his oversight and add Metrics if it finds that
the Servicer has “engaged in a pattern of noncompliance with a material term of the Servicing
Standards that is reasonably likely to cause harm to borrowers.” See Ex. E § C(23). These terms
do not limit a Party’s right to enforce the Consent Judgment.
Wells Fargo also reads § C as limiting enforcement of the Consent Judgment
because § C(5) provides that it is the responsibility of the Monitor to determine, via the Metric
testing process, whether the Servicer is complying with the Servicing Standards. Wells Fargo
misapprehends § C. Section C is titled “Monitor” and it includes the following subsections:
Retention and Qualifications and Standard of Conduct, § C(1)-(4); Monitor’s Responsibilities
§ C(5)-(6); Internal Review Group § C(7)-(10); Work Plan, § C(11)-(15); Monitor’s Access to
Information, § C(16)-(21); and Monitor’s Powers, § C(22)-(25). Section C sets forth the
responsibilities of the Monitor, describes how compliance with Servicing Standards and
consumer relief standards will be tested, and specifies how Metrics can be added. It does not
address or limit enforcement actions. It does not limit the ability of the parties or the Monitoring
Committee to bring an enforcement action. Moreover, enforcement is covered by § J, tellingly
titled “Enforcement.” To reiterate, § J(2) broadly provides that an enforcement action may be
brought by any Party or the Monitoring Committee.
17
Nonetheless, NYAG’s Motion to Enforce Consent Judgment will be denied for
failure to allege a breach of the Consent Judgment. 12 NYAG alleges that Wells Fargo failed to
comply with the Servicing Standards regarding 97 out of the approximately 450,000 loans that
Wells Fargo services in the State of New York. This amounts to less than .022% of the New
York loans serviced by Wells Fargo; it represents an even smaller percentage if compared to the
total number of mortgage loans serviced by Wells Fargo nationwide.
In reaching the national settlement, the parties agreed to limits on enforcement
suits in return for the large monetary payments by the banks, totaling $25 billion. As explained
above, such limits on enforcement bar NYAG from bringing an action based on Servicing
Standards §§ IV(F)(2)-(4). Many of NYAG’s complaints of noncompliance regarding the 97
loans relate to such barred claims. As for the remaining two types of claim, i.e. that Wells Fargo
failed to comply with Servicing Standards § IV(F)(1) (3-day Acknowledgment) and § IV(A)(4)
(Prompt Delivery of Final Modification Agreement), NYAG asserts 41 violations of Servicing
Standard § IV(F)(1) and only 11 violations of Servicing Standard § IV(A)(4). These 52 alleged
violations represent a mere .012% of New York loans serviced by Wells Fargo.
The Consent Judgment does not require absolute perfection in loan servicing.
The Parties understood this, and thus they negotiated threshold error rates for each Metric,
ranging from 1% to 10%. See, e.g., Monitor Report (12/16/14) [Dkt. 195] at 7-8. Errors
amounting to .012% of New York loans are just too few to constitute a breach of the Consent
Judgment. As Wells Fargo points out, “[t]he Court is ill-suited to regulate the mortgage industry
12
Because NYAG’s motion in essence brings a complaint for breach of contract, it must state a
claim under Federal Rule of Civil Procedure 12(b)(6). Like a complaint, the Motion to Enforce
Consent Judgment must contain sufficient factual matter, accepted as true, to state a claim for
relief that is “plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).
18
in such detail on an ongoing basis,” see Opp’n [Dkt. 114] at 20, and it was the Parties’ intent in
drafting the Consent Judgment to avoid such a result.
To permit NYAG to enforce failures to comply with the Servicing Standards that
are so insubstantial would open the floodgates to lawsuits, running afoul of the core purpose of
the Consent Judgment––to resolve problems in the mortgage industry with monitoring and
compliance and without litigation. No Party, and certainly not this Court, envisioned penny-ante
enforcement actions regarding compliance with the Consent Judgment. 13 For this reason, and to
protect the Court’s ability to manage its docket efficiently, NYAG’s Motion to Enforce Consent
Judgment will be denied for failure to allege a breach of contact.
IV. CONCLUSION
For the reasons set forth above, NYAG’s Motion to Enforce Consent Judgment
[Dkt. 86] will be denied. A memorializing Order accompanies this Opinion.
Date: February 2, 2015 /s/
ROSEMARY M. COLLYER
United States District Judge
13
While the Court stayed discovery and briefing on the factual issues presented in NYAG’s
Motion to Enforce Consent Judgment in order to consider the threshold legal issue regarding
whether NYAG has the right to bring an enforcement action, the Court now finds that further
briefing on the factual allegations is not necessary.
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