More Tempests About Servicer Advances by Neil Garfield

Amongst some lay readers there seems to be antipathy to the views I have expressed and continue to express concerning the advances by servicers to the creditors (if the recipients of the payments are deemed creditors). There is of course the question of whether the mortgage was a perfected lien or encumbrance upon the land if the "lender" in the paperwork did not advance any money as per the contract. But now some thing that advances by servicers are entitled to claim a secured lien for the money they gave to the creditor. And the argument seems to be between people who are neither accountants nor lawyers. Needless to say any reader here should check with qualified licensed legal counsel before following the paths suggested here or anywhere else.

For purposes of clarity I am quoting from an email I sent to one such person who thought that what I was saying was that the advance extinguished the debt. That is not what I meant to convey. But of course that is exactly what the bank's attorney will assert that I am saying. The conclusion is that the debt started as a debt to the investors which probably was not secured by the recorded mortgage.

Remember that the debt was converted from a note that the borrower signed to a bond that the REMIC trust signed and the borrower knew nothing about. If the REMIC trust was properly formed and funded, and if the PSA was followed, and if the REMIC paid for the funding or purchase of the loan, then the closing documents should have reflected that, the disclosures required it under Federal Law. Assuming we accept the premise that the REMIC trust was properly secured at closing then the actions of the servicer are pursuant to the PSA. If not then the servicer is a volunteer with apparent authority ratified by conduct of the parties, to collect and disburse the borrower's payments.

The debt, whether it was truly owed directly to the investors or owed to the investors' Trust, can only be extinguished by payment. What if the payment comes from a third party? Well then the original debt is still extinguished and a new one arises owed to the volunteer who paid the borrower's debt. So the uproar is over nothing. The net result though is important because extinguishing the original debt or paying the account current eliminates either the security instrument or the claim of default.  It is offered here because it eliminates the declaration of default, acceleration, foreclosure and sale of the property. If the creditors' account showed no shortage then the existence of the default is either true or false. If current, the creditor cannot claim default nor pursue remedies for default. If not current then the reverse is true.

For the laymen naysayers I said the following:

You are mistaken although it would be expected that the banks would argue as you have set forth. You would be right if the borrower had signed up for a securitized loan and the closing documents included the PSA. The very fact that the PSA states that advances shall be repaid by the borrower underscores the legal conclusion that the debt has shifted from the original creditor to a new creditor who has no paperwork and no lien rights. In order to understand how this plays out in legal analysis you must dig deeper.

How does an agreement between investor and investment banker create a new obligation from the borrower? If it does create a new obligation then the old obligation must be extinguished. If it doesn't create a new obligation that would require the advance to be repaid by the investor to the servicer --- something that I have never seen. If the borrower is said to be untouched by the PSA or any other document to which he was not a party nor that was disclosed, then it would seem logical that the investor's account receivable would be the basis for determining a default or shortage.

Digging even deeper, the real question comes back to who was the lender in the transaction with the borrower --- was it the party named on the documents signed by the borrower? Presumptively yes but in the final analysis it doesn't work that way if there is no underlying transaction in which money exchanged hands. The law is concerned with reality and substance far beyond form and forms. If the reality is that the investors' money was what landed on the closing table then by operation of law it is presumed that the borrower must account for it, if it was applied to the benefit of the borrower. The borrower cannot be held to account to two different parties in the same amount on the same debt.

Thus the conclusion is that the borrower is held to account to the investors or the investors' entity if it is validly formed and funded. If the investors chose to insert an intermediary bookkeeping service to intercept the payments, then the payments from the borrower to the bookkeeper obviously would be applied against the amount due. Whether the bookkeeper sends the money to the creditor is irrelevant if all parties have agreed by conduct to process payments in this manner.

If the borrower fails to make a payment but the bookkeeper advances the payment as though the borrower had made a payment then two conclusions are inevitable: the creditor's account is satisfied and the bookkeeper has a claim for unjust enrichment or contribution. You are right that the debt is not extinguished. But you are jumping to the wrong conclusion as it effects the foreclosure. The effect is that the creditor is current at the time the loan is declared in default. The notice of default should have been a demand letter from the servicer for contribution, with full knowledge that such a claim has no security or collateral. The only way you could see it otherwise is to say that upon foreclosure, the servicer gets the money it advanced first, which might or might not be the case, but is a matter of proof. But this argument begs the question of how you can initiate a foreclosure in the absence of a default in the account receivable of the creditor?

These are questions that are difficult to understand without having been educated in accounting, auditing and bookkeeping. And the legal effect leads to questions that are above the pay grade of the pro se litigants who are trying to make sense out of all this without the help of an attorney.

The end result, now that I am again lead counsel on a number of cases in Florida, will end the debate. I have predicted many judges in the trial courts will reject the above analysis in favor of a more simple explanation of "the borrower didn't pay his debt." But on appeal, it seems to me that the conclusions I reached will be unavoidable if we have created the proper record on appeal and preserved our issues for appeal.