NY AG Fails to Compel Enforcement of National Mortgage Settlement Against Wells Fargo

By: Louise Bowes Marencik

Last Monday, the United States District Court for the District of Columbia ruled that evidence of Wells Fargo’s noncompliance with the National Mortgage Settlement presented by the New York Attorney General’s Office was insufficient to support its claims to compel enforcement of the settlement. United States v. Bank of Am. Corp., 2015 U.S. Dist. LEXIS 11617 (D.D.C. Feb. 2, 2015). In October 2013, the New York AG’s Office filed a motion to compel enforcement of the National Mortgage Settlement against Wells Fargo, alleging that the bank does not sufficiently adhere to the loan modification review timelines agreed to by the bank in the National Mortgage Settlement. Wells Fargo defended against the claims on the basis that the evidence set forth by the AG’s office related to less than 0.025 percent of its loans.

In February 2012, Wells Fargo and four other mortgage servicers entered into multiple consent judgments, collectively known as the National Mortgage Settlement, with the United States Department of Justice, 49 state attorneys general, and the Department of Housing and Urban Development. The Settlement, which was valued at $25 billion, required the servicers to comply with certain “Servicing Standards,” including the implementation of certain practices related to loan modification reviews. For example, under the National Mortgage Settlement, the servicer must acknowledge receipt of a borrower’s application for a loan modification within 3 business days, and notify the borrower of any missing information necessary to conduct the review within 5 business days.

In its Motion to Enforce the Consent Judgment, the NY AG claimed that Wells Fargo failed to comply with these and other similar requirements in connection with 97 out of the roughly 450,000 loans serviced by Wells Fargo in New York. The Consent Judgment provides that the Servicing Standards required to be implemented by the servicers are to be monitored by a Monitoring Committee, including representatives from the state attorneys general, financial regulators, the Department of Justice, and the Department of Housing and Urban Development. Designated Monitors are responsible for implementing certain “Metric” testing to determine whether the servicers are in compliance with the various requirements of the Consent Judgment. If a certain error rate is exceeded, the Monitor notifies the servicer of a “Potential Violation,” and a remedial procedure is triggered; however, not all of the Servicing Standards can be evaluated using the Metric process.

The issue in this case was whether the NY AG had the authority to bring the Motion to Enforce the Consent Judgment given that the Judgment specifically provides for enforcement by the Monitoring Committee. Wells Fargo argued that state attorneys general can only file such a motion related to uncured Potential Violations; however, the Court opined that Wells Fargo’s argument went “too far.” The Court found 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.” Id. at *31.

Although the Court found that the NY AG could seek enforcement of the Consent Judgment under these circumstances, because two of the Servicing Standards in question are not monitored by the Metric system, the Court ultimately found that the NY AG failed to allege a breach of the Consent Judgment in its motion because the AG relied on such a small sample of the loans serviced by Wells Fargo in New York to support its claims. The Court noted that the “Consent Judgment does not require absolute perfection in loan servicing” and “the Parties understood this.” Id. at *35.

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