Does a mortgage loan servicer's failure to adhere to investor guidelines implicate Washington’s consumer protection laws?

Based on notices received, homeowners often believe their mortgage loans are constantly being sold. But if you read the fine print, it is actually the loan servicer, not owner, that frequently changes. 

Most residential mortgages are owned by Freddie Mac and Fannie Mae and administered by various servicers who transfer servicing rights between themselves.  The Washington Supreme Court case of Brown v. Dep't of Commerce, 184 Wn.2d 509, 520 (2015) discusses the relationship between Freddie and Fannie and their loan servicers. Loan sale notices to homeowners are usually notices that the servicer, not the owner, is changing.

The servicer typically administers the mortgage pursuant to written investor guidelines. Brown discusses a “voluminous, detailed handbook” that Freddie issues to its servicers.  Changing investor guidelines and changing state and federal rules and regulations, coupled with the high-volume nature of the servicing business, creates ample room for servicing errors.

What happens when a servicer fails to materially comply with investor guidelines, or commits what is coined “servicing error” in the industry?  As between the servicer and investor, the contractual consequence is usually that the servicer has to “buy-back” the loan from the investor.  But what about the Washington homeowner / consumer that is adversely affected by the servicer's failure to comply with investor guidelines?  A claim for breach of contract by the homeowner against the servicer is unlikely given the homeowner is not a party to the investor contract. But can the homeowner seek relief under Washington’s Consumer Protection Act (“CPA”)?  Possibly.

As has been explained in prior posts, the CPA’s prohibition against unfair or deceptive acts or practices is broadly applied.  See Klem v. Washington Mut. Bank, 176 Wn.2d 771, 295 P.3d 1179 (2013).  A servicer’s failure to follow guidelines set forth by the investor which deprives Washington homeowners of a right granted by the investor, or imposes upon homeowners additional obligations not required by the investor, can certainly be both unfair and deceptive under Washington’s CPA.  This is especially true if the “least sophisticated” Washington consumer would not be aware the servicer was failing to adhere to investor guidelines.  See Panag v. Farmers Ins. Co. of Washington, 166 Wn.2d 27, 50, 204 P.3d 885, 889 (2009) (in evaluating the tendency for deception, courts look to the least sophisticated consumer).

As has also been explained in prior posts, the private CPA claimant must show the public interest is implicated.  The public interest is likely to be implicated where a high-volume servicer has repeatedly failed to follow investor guidelines, or where the failure to follow guidelines is likely to be repeated in the future.  A unique or one-off error by the servicer is less likely to satisfy the CPA's public interest element. 

It goes without saying that the servicer can protect itself from CPA liability (and loan “buy-backs”) by strictly adhering to investor guidelines.  There is some Washington authority for the proposition that a servicer’s adherence to guidelines, whether propounded by the investor or internally, can provide general insulation from CPA claims.  See Patrick v. Wells Fargo Bank, N.A., 196 Wn. App. 398, 409, 385 P.3d 165, 171 (2016) (no CPA violation where the servicer’s conduct complied with its own internal guidelines).  But internal guidelines can create separate problems under the CPA if they dictate an unfair or deceptive practice.