NY AG Eric Schneiderman’s suit to bring meaning to the servicing standards of the National Mortgage Enforcement Fraud rises and falls on how the D.C. Circuit interprets two provisions of the Consent Judgment.
In my last post, I explained that one provision–the one sentence section II–seems to require that the banks comply to the letter of the servicing standards in Exhibit A, notwithstanding the elaborate metrics/monitoring process that institutionalizes banks’ right to violate the standards so long as they don’t do it too often. If it doesn’t Schneiderman has no suit.
But even if it does require perfect compliance, the AG has one more argument he has to win. I didn’t explain that properly last post. Here’s the key part:
“3. Enforcement Action. In the event of an action to enforce the obligations of Servicer and to seek remedies for an uncured Potential Violation for which Servicer’s time to cure has expired, the sole relief available in such an action will be:
(a) Equitable Relief….
(b) Civil Penalties….”
NY AG Schneiderman’s right to sue hinges on how the bolded language is read. If “enforce the obligations of Servicer” means the same thing as “seek remedies for an uncured Potential Violation”, then there’s no right to sue until the metrics process really plays out. Bank of America would then be right. (See the end of its letter to A.G. Schneiderman.)
So here is the best case I can make for both sides, written as dialogue:
NY AG: Bank of America, Section II couldn’t be more plain English: you have to comply with the servicing standards according to their terms. You aren’t.
BofA: Look, AG, Section II is not enforceable regardless of what it says. You took a deal–I remember popping champagne when I heard you were going to sign–you took a deal that provides only one way to enforce it: the metrics and related process in E. At best Section II’s a right without a remedy, and you know what those are worth.
NY AG: No no no. You’re reading the enforcement provision wrong. I can sue you to enforce your obligations, and I can sue you to seek remedies for your failures under the metrics/monitoring process.
BofA: You’re being redundant. As the deal is structured, the only way to enforce it is via the metrics/monitoring process. See section IV, which is as plain English as that section II you like so much. Unless we’ve screwed up two straight quarters–hard to do given the generous threshold error rates–you’re out of luck. “[E]nforce the obligations of Servicer” means the same thing as “seek remedies for an uncured Potential Violation.”
NY AG: If it means the same thing we wouldn’t have said it that way. Lawyers are wordy, sure, but the basic idea in reading contracts and statutes are that words are there for a reason, that we’re not just repeating ourselves constantly. If both sides of the “and” were the same thing, we would have put it this way:
“3. Enforcement Action. In the event of an action to enforce the obligations of Servicer, the sole relief available in such an action will be:
We wouldn’t need that bit about uncured ‘Potential’ Violations. The reason we have both is there are two different kinds of remedies available, equitable relief and monetary penalties. Only the monetary penalties are tied to the uncured ‘Potential’ Violations. We can sue for the equitable relief of specific performance of the servicing standards without regard to the metrics process. The right created by Section II has a remedy; just not a monetary penalty one. For that matter, we could sue for equitable relief for uncured Potential Violations too, but why bother with the metrics when we don’t have to?
BofA: You’re superficially convincing, but your problem is the word “enforce”. The Consent Judgment couldn’t be clearer that the only enforcement is via the metrics process, so when it says
“3. Enforcement Action. In the event of an action to enforce the obligations of Servicer,
it can only mean a suit related to failure under the metrics.
AG ES: You think I and the other Democratic AGs who were pushing for a good deal would have signed off on this one if we couldn’t enforce Section II? Our justification for the deal was the servicing standards in Exhibit A. If your read is right, those standards only as good as the metrics, that is, virtually meaningless. That’s not the deal we took. Of course I can sue you for specific performance to the servicing standards in A. Section II requires total compliance, Exhibit E at J.3. gives me the right to sue for it.
BofA: Do you think we and our Bailed Out Banker brethren are idiots? Why would we take a deal that exposed us to suits by 49 AGs, the feds and other regulators for any level of noncompliance with the servicing standards as spelled out in A? Why would we give all of you a way to bypass the metrics? Sure, you can’t get money penalties with your suit, but so what, the money penalties from the metrics process are chump change. The real action is whether we have to thoroughly overhaul our operations to comply with the servicing standards as written in A. We don’t intend to do that overhaul. That’s the point of the Metrics.
AG ES: Section II says you have to overhaul, and the language in J.3 means I can force you to comply.
BofA: Section IV says you can only make me meet the metrics, and the language in J.3 means that too. “Enforce” means “enforce”.
AG ES/BofA: See you in Court!
BofA: (aside, to the audience): glad it’s the D.C. Circuit!