Mortgages vs. Promissory Notes: Not the Same thing

MIAMI – In the recently-decided matter of Fis v Newrez, LLC, LEXIS 233104 (SD Fla. Dec. 28, 2022, No. 22-81364), the United States District Court for the Southern District of Florida (the Court) issued an interesting opinion highlighting the differing rights and obligations imposed by mortgages and their accompanying promissory notes, using the dichotomy between the instruments to dismiss a Real Estate Settlement Procedures Act (RESPA) claim on the basis of a lack of standing.

The background facts of the action were simple: In May 2008, Rafael Fis, Maria Fis, Diana Fis, and Omar Fis jointly purchased a home at 8921 Starhaven Cove in Boynton Beach, Florida (the Property). As part of the sale, Diana and Omar executed a mortgage and promissory note with Bank of America – however, neither of these instruments named Raphael or Maria. Subsequent to the purchase, the mortgage was amended to add Raphael and Maria – thereby including all four parties – while the note remained unchanged and included just two parties as obligors, Diana and Omar.

Fourteen years later, in June 2022, Raphael and Maria (plaintiffs) submitted a loan mitigation application (LMA) to defendant Newrez, LLC, which was the note servicer. The defendant failed to respond to both the June 2022 LMA request and an additional follow-up request sent in August 2022. Plaintiffs thereafter brought suit against the defendant seeking damages for RESPA violations, with the defendant moving to dismiss on the basis that the plaintiffs lacked sufficient Article III Constitutional standing to maintain their action.

In ruling on the motion, the court first noted that RESPA requires loan servicers to take specific actions in response to borrower requests, specifically mandating that servicers:

1. provide written acknowledgment of their receipt of an LMA request within five business days of reception
2. furnish a substantive written response to the LMA request within thirty business days of reception

 While it was undisputed that the defendant never responded to either of the plaintiffs’ LMA requests, the defendant alleged it nevertheless owed no liability because the plaintiffs had “not suffered a constitutionally-sufficient injury-in-fact [as] they were not borrowers or otherwise obligated on the note,” observing that the mortgage and note were “separate agreements setting forth different rights and obligations.”

The Court agreed, explaining that, “[p]ut simply, [while] a loan obligates you to pay the lender back, a mortgage gives the lender the ability to take your house if you fail to meet that obligation.”

To illustrate this concept the court summarized the holding issued by the Sixth Circuit in the analogous matter of Keen v Helson, 930 F3d 799 (6th Cir. 2019), wherein a husband and wife jointly purchased a home, with both parties signing the mortgage but the husband alone signing the note. The Keen parties later divorced, with the husband conveying full title to the wife and subsequently passing away, following which the wife continued to make payments despite not being an obligor on the note.

The wife eventually fell behind on payments, requested relief from the lender via LMA, was ignored, and sued for a RESPA violation, with her suit dismissed on the basis that only the obligors on the note itself have sufficient standing to bring a RESPA action as being a mortgage signatory alone does not create any repayment obligation.

The Court held that the plaintiffs’ standing argument was identical to the standing observed in Keen, as while Raphael and Maria were parties to the mortgage-which operated to grant the defendant, as lender, a security interest in the property – they were not parties to the note.

By virtue of their absence from the note they had no standing to request relief under RESPA, as they owed no obligation to issue payments, and without the existence of such obligation there could be no RESPA violation on the defendant’s part. Plaintiffs’ action was therefore dismissed for a lack of Article III standing.

Takeaways

This opinion highlights the differing rights and obligations imposed by mortgages and promissory notes, instruments which individuals often mistakenly conflate as imposing a singular global repayment obligation. As mortgages grant a security interest in a property and promissory notes impose the repayment obligation, this opinion underscores the importance of proper closing procedures and ensuring all parties’ names are properly listed on all documents.

It also demonstrates the scope of RESPA and that causes of action under the statute flow from promissory notes themselves and not mortgage agreements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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