Where Servicer and Originator Were the Same, Originator’s Failure to Cure Defective Loans Constituted Servicer Failure to Perform Event of Default

On September 21, 2023, Judge Engelmayer of the S.D.N.Y, issued a decision in Ambac Assurance Corporation v. U.S. Bank, 17 Civ. 2614 (PAE) (KHP), holding that where the servicer and originator were the same, the originator’s failure to cure defective loans was a servicer failure to perform event of default.

The court framed the question as

whether the term “Seller” in Subsection 14.0l(ii) of the Master Mortgage Loan Purchasing & Servicing Agreement (“MMLPSA”), as amended and reconstituted, is ambiguous. The meaning of “Seller” bears on whether the failure of CHL to fulfill its obligations under the MMLPSA constitutes an event of default (“EOD”) that in tum triggers the post-EOD obligations of U.S. Bank to act as a prudent person. Ambac contends that “Seller” does in fact include CHL in its capacity as the loan originator and that, therefore, CHL’ s material failure to perform its obligation to deliver complete mortgage loan documents constituted an EOD triggering U.S. Bank’s prudent-person obligations. U.S. Bank argues that, after CHL transferred its servicing rights to Countrywide Home Loans Servicing LP (“CHL Servicing”), the parties modified Subsection 14.0l(ii) such that only CHL Servicing’s material failures could trigger EODs. . . .

I will not repeat the court’s detailed analysis here, but it concluded:

Read together, the contract documents indicate that the original MMLPSA envisioned that EODs under Subsection 14.0l(ii) could flow from breaches by CHL as either originator or servicer, and that this broad definition of Seller, which included CHL as originator, survived updates made to the MMLPSA . . . .

The question then becomes whether the RSA modified Subsection 14.0l(ii) so as to exclude liability for CHL’s failures as originator. The text of the RSA and amended MMLPSA plainly indicate that no such modification was made. That is because the RSA preserved the broad definition of “Seller” so as to encompass CHL, except in provisions exclusively related to servicing, and Subsection 14.01(ii) is not such a servicing-focused provision.

. . .

Accordingly, the Court finds that the term “Seller” in Subsection 14.0l(ii), by the provision’s plain language, unambiguously includes CHL in its capacity as originator.

(Internal quotations omitted).

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