COLLATERAL SOURCE RULE APPLIED TO SERVICER PAYMENTS OF OBLIGATIONS OWED TO INVESTOR/CREDITOR

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There have been a number of questions lately about the collateral source rule and whether it has any effect on the payments made by the servicer of principal and interest even after the borrower stops paying. First let us note that the servicer is required to make payments to the creditor and that finding out who the servicer is paying will start you on the path to discovering the actual creditor although it is likely not to be a direct route.

The collateral source rule was basically adopted around 1854 on the premise that just because an injured plaintiff is going to receive some money for his injuries in some kind of accident, it should not offset the damage award against the defendant who created the damages. So if somebody got hit by a wagon and they sued the driver, the fact that they got some money from the maker of the wagon might not offset the damages the plaintiff could receive. It is specified in most decisions that this relates to torts and not contracts although there are some decisions around that the rule might apply also to contracts for non-economic damages.

The idea is that a tort-feaser should not be rewarded by the fact that the plaintiff is getting some relief from a collateral source. The reason cited is that the damage awards usually don’t cover all the ways the plaintiff was hurt, so if they are able to mitigate the effect of the injury in other ways, they should be able to keep the money and not have it subject to offset one way or the other. Homeowners are not tort-feasers and nobody is claiming they are.

In order to apply the rule, you would have to assume that the homeowner had done something wrong. While we could have an ideological discussion about personal responsibility, the issue is not whether there is a moral obligation to pay a debt. In a straightforward mortgage foreclosure, the bank would offset any money it got to offset its actual economic damages from the breach of contract by the borrower in not paying making the payments due on the obligation. Whether some collateral source rule would or could be applied against Banks is debatable in the traditional mortgage situation.

Where loans are claimed and treated as though they were securitized (even if they were not successfully securitized) I can’t think of a theory under which the collateral source rule would apply. The contract is not between the creditor/investor and the borrower. The obligation and the right to receive payment is between the investor and homeowner but it is obscured by multiple sources of third party payments that may or may not relate to a claim of “default.” Since the question posed is not relating to insurance payments and credit default swaps or credit enhancement or hedge products and proceeds, I will limit myself to the the issue of the payments made by servicers who continue to pay the creditor despite the cessation of payments from the alleged borrower.

The collateral source rule does not apply. And the reason it doesn’t apply is that the four corners of the contract include all the documents that were created and executed and all the agreements that were created and executed or intended to be executed and not just the ones that the borrower signed. The investor advanced money based upon several premises only one of which was the promise that any payments received by the borrower would be paid to the investor. The creditor was to receive payments from multiple sources and the obligation to pay the creditor would end when the creditor was paid in full.

The investors has no non-economic damages and has no damages at all if he has been paid in full. If he has not been paid in full then the amount is determined by taking the obligation as it was agreed with the investor when the investor advanced the funds and reducing it by ALL the payments received in accordance with THAT set of promises included in multiple documents incorporated into the securitization scheme. It is true that neither the investor nor the borrower would have any right, under contract law, to any more credit or payment than the amount of the obligation assumed by the borrower and the amount of the money expected by the investor pursuant to contracts.

So if there was extra money made by the intermediaries as a result of the various instruments exotic or otherwise that were used to trade in the securities markets, neither the investor nor the borrower would have a claim under contract. But they both might have a claim under common law and the borrower might have claims for undisclosed compensation under TILA and RESPA. Thus you might assume that the collateral source rule was in operation here once the contract was fulfilled as to both the borrower and the investor. In that limited sense, the rule could be applied although the legal reasoning would be convoluted.

Thus my conclusion is that the collateral source rule should not be used to make a borrower pay money on a debt that has been paid down by collateral sources, because the debt is no longer due to the creditor and the debt has not be assigned nor have the payors been subrogated to the rights of the creditor. And the act of continuing to make those payments precludes the claim of default against the borrower by the creditor — but might give rise to a claim by the servicer against the borrower for equitable restitution. That claim would obviously be unsecured by any encumbrance and not be subject to foreclosure.

In actuality this issue is being raised by “lenders” who are not lenders in order to justify their non-existent standing. Under their theory an investor who has been completely repaid and is satisfied would nonetheless serve as a straw-man to collect money from the borrower to be paid to an entity that never loaned him any money and who did not purchase the obligation. The pretender lender theory is that the borrower owes the money anyway. Thus the pretenders arrange themselves into a collective “creditor”, all of whom are covered by the mortgage even though the parties to the mortgage and the note never included them. The obligation however, did in fact include them and they had both the obligation to pay the investor and the opportunity to profit in excess of the amount due to the investor.

The reality of the transaction is that they took more money from the investor than was actually used to fund loans keeping the balance as their fees and profits. This was an undisclosed profit the knowledge of which would have prevented the transaction from ever happening. Now they want to institutionalize their theft and  make it legal with the collateral source rule. My guess is that no court will apply it.

Tags: bankruptcy, borrower, COLLATERAL SOURCE RULE, countrywide, disclosure, foreclosure, foreclosure defense, foreclosure offense, foreclosures, fraud, LOAN MODIFICATION, modification, quiet title, rescission, RESPA, securitization, TILA audit, trustee, WEISBAND
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