On April 2, 2014, the Minnesota Supreme Court in Gretsch v. Vantium Capital, Inc. recognized a new private right of action against residential mortgage loan servicers who breach their servicer participation agreements with Fannie Mae. The decision represents a dramatic departure from prior court decisions in Minnesota state and federal courts, which had held that borrowers do not have standing to enforce the terms of servicer participation agreements to which they are not parties.

Background

Gretsch filed a lawsuit against her residential mortgage loan servicer, Vantium Capital, Inc., asserting claims arising from the servicer’s alleged violation of its Servicer Participation Agreement (SPA) with Fannie Mae. Specifically, Gretsch alleged that the servicer failed to follow guidelines applicable under the Home Affordable Modification Program (HAMP) by failing to properly review her request for mortgage assistance and commencing foreclosure proceedings without first determining her eligibility for a loan modification.

The district court dismissed Gretsch’s claims, holding that HAMP does not create a private right of action and concluding that SPAs do not give rise to third-party beneficiary claims. The court reasoned that because there was no breach of contract between Gretsch and the servicer, and because Gretsch was not a party to the SPA allegedly breached, Gretsch lacked standing to enforce HAMP's directives. The Minnesota Court of Appeals affirmed the district court’s dismissal.

Minnesota Supreme Court's Decision

The Minnesota Supreme Court reversed, holding that: 

1. Minn. Stat. § 58.18, subd. 1 provides a borrower who is injured by a violation of the standards set forth in Minn. Stat. §§ 58.13, 58.136, 58.137, 58.16, and 58.161 a private right of action for damages; 
2. HAMP does not preempt the state statute, and the lack of a federal cause of action to enforce HAMP's directives does not prohibit a state from providing a cause of action to enforce those directives; and
3. The state statute does not violate the Contracts Clause of either the U.S. Constitution or the Minnesota Constitution.

The Minnesota Supreme Court rejected three arguments made by the servicer, namely:

1. Interpreting the statute to provide Gretsch with a cause of action would lead to an absurd result (“unlimited and disruptive litigation by parties with no relationship to the myriad agreements that servicers have with other entities”);
2. The subsequent enactment of Minn. Stat. § 582.043 (which includes a private right of action for a borrower to enjoin or set aside a foreclosure sale based on a violation of mitigation requirements) suggests that the statute does not provide a private right of action for HAMP violations; and
3. HAMP preempts Gretsch’s state cause of action because the statute poses an obstacle to the federal objective of increasing servicer participation and lowering foreclosure rates.

Takeaways

• Borrowers now have standing to assert a claim for damages based on the failure of a residential mortgage loan servicer to comply with contractual obligations arising from SPAs or other agreements with “investors, other licensees or exempt persons.” 
• The Gretsch decision may lead to claims from borrowers seeking damages arising from residential mortgage loan servicers' failure to comply with mitigation obligations under HAMP. 
• Residential mortgage loans originated by certain types of banks are exempt from liability under the statute, including federal or state chartered banks, savings banks, credit unions, and their subsidiaries. 
• Although the Minnesota Supreme Court held that claims under the statute are not preempted by HAMP, claims under the statute made against national banks acting as residential mortgage loan servicers may be preempted by the National Bank Act.