A former goliath of the non-prime lending market, Aurora Loan Services, LLC (“ALS”), recently resolved a class-action lawsuit alleging that it fraudulently induced distressed California borrowers to enter into purported “workout” agreements to extract unearned payments. ALS was one of many servicing affiliates of big banks that created, and profited off of, various reduced documentation programs, which correspondent lenders originating and funding residential home loans sold to Aurora Bank FSB were required to follow. A subsidiary of Aurora Bank FSB, and affiliate of Lehman Brothers Holdings, Inc., ALS left the mortgage servicing business in the aftermath of the financial crisis of 2007-2008, selling the majority of its remaining servicing rights to Nationstar Mortgage LLC in 2012.

The class-action lawsuit against ALS was pending before Judge Saundra Brown Armstrong of the United States District Court for the Northern District of California. The Amended Complaint contains accusations that ALS took advantage of homeowners who fell behind on their mortgage payments, drawing them into deceptive contracts that required borrowers to make monthly payments in exchange for delaying impending foreclosures. The agreements promised an opportunity for borrowers to obtain mortgage modifications, but ALS allegedly failed to follow through. The lawsuit was consolidated with two other cases and survived various dispositive motions brought by ALS.

The settlement fund containing $5.3 million is expected to be split among 15,000 mortgagors in California who were allegedly duped into entering illusory agreements with ALS that induced them to continue making payments with the false hope of curing their deficiencies. Borrowers claimed they were under the impression that their foreclosures were on hold while they were considered for a loan modification. In actuality, any such modification allegedly would have violated ALS’ policies and procedures. The plaintiffs contend that the workout agreement program was an improper attempt to generate additional funds from non-performing loans, allowing ALS to continue to reap servicing fees.

Defeating Demands for Repurchase

Following the collapse of the housing market, it has become all too common for correspondent lenders to be inundated with repurchase demands and indemnification requests made by big banks and their servicing affiliates, such as Aurora and ALS.

When litigating or settling repurchase demands, loan originators should consider whether residential servicers improperly serviced any defaulted loans. To the extent that residential servicers used deceptive or fraudulent practices, the affirmative defense of unclean hands (among others) may prove to be successful. Likewise, if residential servicers entered into modification agreements with distressed borrowers, loan originators may be able to take the position that a loan modified without the originator’s involvement is not the same loan that was sold, and therefore is no longer subject to repurchase claims.