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United States ex rel. Schneider v. J.P. Morgan Chase Bank, N.A.

United States District Court, District of Columbia

December 22, 2016

United States of America, et al., ex rel. LAURENCE SCHNEIDER, Plaintiffs,
v.
J.P. MORGAN CHASE BANK, N.A., Defendant.

          OPINION

          ROSEMARY M. COLLYER, United States District Judge

         Pursuant to the Federal False Claims Act and similar State laws, Relator Laurence Schneider asserts that J.P. Morgan Chase Bank, N.A. (Chase) submitted false claims relating to the National Mortgage Settlement and false claims relating to the Home Affordable Modification Program (HAMP) to decrease its liability to the Federal Government. However, the National Mortgage Settlement claims are barred because Mr. Schneider failed to engage in the alternative dispute resolution process mandated by the Settlement on which the claims are based. Mr. Schneider also fails to state a claim that Defendant falsely certified HAMP compliance because he does not allege, with factual allegations in support, that the certifications were materially false. The Complaint will be dismissed.

         I. FACTS

         A. Background

         Following the burst of the housing bubble in 2008, the Federal Government began to institute measures designed to stabilize the housing and credit markets. Those measures included the Troubled Asset Relief Program (TARP) and the Making Home Affordable Program, both programs in the Department of the Treasury. See U.S. Department of the Treasury, TARP Programs (Nov. 15, 2016), https://www.treasury.gov/initiatives/financial-stability/TARP-Programs/Pages/default.aspx; U.S. Department of the Treasury, Making Home Affordable (July 22, 2012), https://www.treasury.gov/initiatives/financial-stability/TARP-Programs/housing/ mha/Pages/hamp.aspx. The Making Home Affordable Program included the Home Affordable Modification Program (HAMP), which used funds from TARP as incentives for banks to modify first-lien mortgages so that homeowners could lower their mortgage payments. HAMP continues to this day; its goal is to encourage modification of loans that are at risk of default and make them more affordable.

         In March 2012, the Federal Government, 49 States, and the District of Columbia filed complaint in the United States District Court for the District of Columbia against “numerous banks and loan servicing companies, including Chase, for misconduct related to their origination and servicing of single family residential mortgages.”[1] Second Am. Compl. [Dkt. 102] (SAC) ¶ 56. Other defendant banks included Bank of America Corporation; Countrywide Bank, FSB; Citibank, N.A.; and Wells Fargo Bank, N.A. Prior to filing the National Mortgage Complaint, its parties had negotiated a national settlement of its allegations, i.e., the National Mortgage Settlement. On April 4, 2012, this Court entered consent judgments approving the National Mortgage Settlement. See e.g., Consent Judgments, United States v. Bank of America Corp., No. 12-361 (RMC) [Dkts. 10, 11, 12, 13, 14].

         The National Mortgage Settlement was intended “to provide immediate relief to enable struggling homeowners to avoid foreclosure; to bring badly needed reform to the mortgage servicing industry; to ensure that foreclosures are lawfully conducted; and to penalize the banks for robo-signing misconduct.” SAC ¶ 63. The Court appointed Joseph A. Smith to serve as Monitor of the Settlement and thereby to oversee implementation of the reforms of mortgage loan servicing and evaluate compliance by the signatory banks. Exhibit A to the National Mortgage Settlement was a list of Servicing Standards, which included the following kinds of standards:

1. Standards for documents used in foreclosure and bankruptcy proceedings;
2. Standards for qualifications, training and supervision of employees;
3. Requirements for accuracy and verification of borrower's account information;
4. Standards to ensure documentation of note, holder status and chain of assignment;
5. Loss mitigation requirements;
6. Requirements for an easily accessible and reliable single point of contact for potentially-eligible first lien mortgage borrowers; and 7. Restrictions on servicing fees.

See Consent Judgment, Ex. A, United States v. Bank of America Corp., et al., No. 12-361 (RMC) [Dkt. 10-1]; see also SAC ¶ 74. The Servicing Standards were implemented through a work plan for each signatory bank. Compliance was ascertained by the Monitor using “29 Metrics to test the application and performance of the required Servicing Standards.” SAC ¶ 88. “[T]he Monitor, through the chain of process, relied on the IRG's [Internal Review Group's] testing of the metrics pursuant to the terms of the Consent Judgment to determine the Defendant's compliance with the Consent Judgment.” Id. ¶ 96. At the end of each quarter, Monitor Smith submitted a report to the Court indicating “(i) the Metrics for that Quarter; (ii) Servicer's progress toward meeting its payment obligations under th[e] Consent Judgment; [and] (iii) general statistical data on Servicer's overall servicing performance.” Consent Judgment, Ex. E, United States v. Bank of America Corp., et al, No. 12-361 (RMC) [Dkt. 10-1] at E-9.[2]

         In addition to the Servicing Standards, the National Mortgage Settlement required each Defendant to provide a specific dollar amount in consumer relief, which totaled about $25 billion overall. Chase was required “to provide over $4 billion in consumer relief in the form of loan forgiveness and refinancing.” SAC ¶ 97. Specifically, Chase was required to provide “$3, 675, 400, 000 of relief to consumers who me[t] the eligibility requirements in paragraphs 1-8 of Exhibit D” to the National Mortgage Settlement and “$537, 000, 000 of refinancing relief to consumers who me[t] the requirements of paragraph 9 of Exhibit D.” Id. ¶ 101. Chase received credits toward its consumer relief amount when it:

. Allowed borrowers to make First Lien and Second Lien Modifications;
. Allowed borrowers to make Second Lien Portfolio Modifications;
. Provided borrowers Enhanced Transitional Funds;
. Facilitated Short Sales for borrowers;
. Provided borrowers Deficiency Waivers;
. Provided Forbearance for Unemployed Borrowers; and
. Assisted in Anti-Blight efforts.

See Consent Judgment, Ex. D, United States v. Bank of America Corp., et al., No. 12-361 (RMC) [Dkt. 10-1] at D1-D7.

         B. Relevant Terms of the National Mortgage Settlement

         The National Mortgage Settlement also provided a process for notice and cure in the event a bank failed to satisfy a Servicing Standard. If Monitor Smith determined that a bank had exceeded the “negotiated threshold error rate assigned to [any] Metric, ” he would notify that bank and trigger a corrective procedure. United States v. Bank of America, 78 F.Supp.3d 520, 528 (D.D.C. 2015); see also Consent Judgment, Ex. E at E-11-E-12. “The [bank] ha[d] a right to cure a Potential Violation within a set cure period.” Id. If the bank cured the errors then “no Party to the Consent Judgment can sue on the Potential Violation.” Id.

         Parties and the Monitoring Committee were only permitted to “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 532. Prior to commencing any enforcement action arising out of the Consent Judgment a party was required to “provide notice to the Monitoring Committee of its intent to bring an action” and allow the Monitoring Committee 21 days to consider bringing the action itself. Consent Judgment, Ex. E at E-15. If the Monitoring Committee declined to bring an enforcement action, the party was obligated to wait an additional 21 days before filing suit. See id.

         C. Home Affordable Modification Program (HAMP)

         HAMP is a federally-funded foreclosure relief program operated by the Department of the Treasury, which provides incentive payments to mortgage servicers[3] in exchange for modifying eligible mortgage loans. Eligibility for modification is determined through an application process, subject to some exceptions. Mortgage servicers participate in HAMP through a Servicer Participation Agreement with the Federal National Mortgage Association (Fannie Mae), Treasury's designated financial agent for HAMP. Treasury also provided guidance regarding HAMP through the Making Home Affordable Handbook (MHA Handbook), which requires Servicers to solicit eligible borrowers for HAMP loan modification. See MHA Handbook at 75-76 (version 5.1 May 26, 2016), available at https://www.hmpadmin.com/portal/programs/docs/hampservicer/mhahandbook 51.pdf. The MHA Handbook provides exceptions to the solicitation requirement, including when “the servicer has released the borrower from liability for the debt and provided a copy of such release to the borrower, ” id. at 69, or in active bankruptcy cases. See id. at 73.

         Freddie Mac monitors compliance with HAMP through annual compliance certificates from the Servicers. In the compliance certificates, each Servicer must report any instances of noncompliance that had “a material effect on its ability to comply with . . . program requirements.” Id. at 39.

         D. Chase Bank's Performance under the National Mortgage Settlement and HAMP

         Chase generally maintains records of the mortgage loans it services through an electronic “System of Records.” However, loans considered uncollectable (usually because the value of the property was much less than the outstanding loan) are put in the “Recovery One population” (RCV1) and those records are maintained outside the primary System of Records. RCV1 loans are those that Chase deems “valueless based on General Acceptable Accounting Principles (GAAP) and other internal methods of bookkeeping.” SAC ¶ 174. When Chase determines that a loan is valueless, it “charges off” the loan, i.e., enters it as a loss on the bank's books, and then transfers the loan from its System of Records to RCV1. Chase does not foreclose on RCV1 loans because it would make no financial sense to foreclose on a valueless loan; the cost to Chase of attempting foreclosure could never be regained since, by definition, the residence is worth less than the loan. Both first and second lien mortgages may be transferred to RCV1, as well as “mortgages that are subject to bankruptcies and post-foreclosure deficiencies.” Id. ¶ 172. Once a loan is transferred to RCV1, its documentation often becomes “corrupted, ignored or allowed to fall into disarray, ” because it has no business value to Chase. Id.

         Monitoring for compliance with the National Mortgage Settlement continued for three years for the initial signatories. At that point, Monitor Smith determined that Chase had provided $4.463 billion in consumer relief, thereby “satisf[ying] the minimum requirements and obligations . . . imposed upon it under . . . the [National Mortgage Settlement] to provide Consumer Relief.” Monitor's Final Consumer Relief Report Regarding Defendant J.P. Morgan Chase Bank, N.A., United States v. Bank of America Corp., et al., No. 12-361 (RMC) (March 18, 2014) [Dkt. 143] at 20-22, 25.

         E. Relator's Interest

         Relator's allegations arise from certain non-performing mortgage loans that were serviced by Chase. Over 3, 000 loans from Chase's RCV1 files were sold to companies owned by or affiliated with the Relator, including S&A Capital Partners, Inc., 1st Fidelity Loan Servicing, LLC, and Mortgage Resolution Servicing, LLC. Chase later “charged off” or canceled the amount owed on numerous loans owned by Relator's entities. In return, Chase received credit against the National Mortgage Settlement consumer relief amount it was required to provide because it had released the borrower from liability for the debt.

         II. ...


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