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Sirmons Motion in Opposition to Plaintiff's Motion for Summary Judgement

February 17, 2016

This educational material was prepared in response to Plaintiff’s Motion for Protective Order MPO). The information contained herein should be used in Defendants’ Motion in Opposition as the same issues are argued.

Plaintiff alleges in Paragraph C of their MPO “Defendants Lack Standing to Challenge Plaintiff’s Compliance With its Pooling & Servicing Agreement.”

Plaintiff’s claim that the issue of whether a borrower has standing to challenge a securitized trust’s authority to enforce a loan and mortgage based on violation of the underlying pooling and servicing agreement has not been decided by an Indiana Court. Plaintiff cites cases from other jurisdictions to argue that a borrower lacks standing to challenge acts or omissions under the Pooling & Servicing Agreement. This Court can however, answer the issue based on the handbook published by the Comptroller of the Currency Administrator of National Banks on Asset Securitization and Indiana’s own case law.

In November 1997 the Comptroller of the Currency Administrator of National Banks published the “Asset Securitization Comptroller’s Handbook”. The Comptroller of the Currency is an independent bureau within the United States Department of the Treasury, established by the National Currency Act of 1863. The Comptroller of the Currency serves to charter, regulate and supervise all national banks and thrift institutions. In its Handbook, the Comptroller discusses Asset-Backed Securities, how they are structured, the parties to the Asset-Backed Securities and the benefits conferred upon said parties.

Plaintiff’s argument that Borrower is not party to the Asset-Backed Securities securitization process is flat out wrong. The Comptroller clearly recognizes the Borrower as a party to the securitization process. In its Handbook, the Comptroller discusses the “Parties to the Transaction” (1) and identifies each party and the respective roles in the securitization process. The Comptroller asserts:

Borrower. The borrower is responsible for payment on the underlying loans and therefore the ultimate performance of the asset-backed security.

The Comptroller also recognizes the other indispensable parties to the asset-backed securitization process as the Originator, the Servicer and the Trustee, among others.

Originator. Originators create and often service the assets that are sold or used as collateral for asset-backed securities. (3)

Servicer. The originator/lender of a pool of securitized assets usually continues to service the securitized portfolio. (The only assets with an active secondary market for servicing contracts are mortgages.) Servicing includes customer service and payment processing for the borrowers in the securitized pool and collection actions in accordance with the pooling and servicing agreement. (4)

Trustee. The trustee is a third party retained for a fee to administer the trust that holds the underlying assets supporting an asset-backed security. (5)

Contrary to Plaintiff’s unsupported assertion that a borrower is not a party to the securitization process, the Comptroller of the Currency, the sub-agency of the Department of Treasury and the agency responsible for chartering and regulating all national banks and thrift institutions clearly and unequivocally recognize the Borrower as an indispensable party to the securitization process.

In addition to the mandate of the Comptroller of Currency, Indiana case law also supports the fact that the Borrower is a party to the securitization process as a third-party beneficiary and thus has standing to sue. Generally, only those who are parties to a contract, or those in privity with a party, have the right to recover under the contract. Gonzales v. Kil Nam Chun, 465 N.E. 2d 727, 729 (Ind. Ct.App. 1984). However, those not a party to the contract may enforce the provisions of the contract by demonstrating that they are third-party beneficiaries to the contract. Centennial Mortg., Inc. v. Blumenfeld, 745 N.E. 2d 268, 275 (Ind. Ct.App. 2001), citing Garco Indus. Equip. Co. v. Mallory, 485 N.E. 2d 652, 654 (Ind.Ct.App. 1985).

Reading Kil Nam Chun in conjunction with the Comptroller Handbook, it is clear that the borrower does have standing to challenge the securitization process as the Comptroller Handbook recognizes the borrower as a party to the process, and Kil Nam Chun stands for the right of a party to sue. Even if this Court were to disregard the Comptroller’s recognition of the borrower as a party to the securitization process, this Court must recognize the borrower as a third-party beneficiary pursuant to Blumenfeld and Mallory.

The Comptroller recognizes the benefits conferred onto the borrower engaged in the securitization process.

For Borrowers

Borrowers benefit from the increasing availability of credit on terms that lenders may not have provided had they kept the loans on their balance sheets. For example, because a market exists for mortgage-backed securities, lenders can now extend fixed rate debt, which many consumers prefer over variable rate debt, without overexposing themselves to interest rate risk.

The Comptroller clearly and unwaveringly recognizes that the borrower receives a direct benefit from the securitization process in the form of increased availability of financing and at a fixed or lower rate, which would have been unavailable but for the securitization process.

In order to enforce a contract by virtue of being a third-party beneficiary, the third-party beneficiary must show:

1. A clear intent by the actual parties to the contract to benefit the third party;

2. A duty imposed on one of the contracting parties in favor of the third party; and

3. Performance of the contract terms is necessary to render the third party a direct benefit intended by the parties to the contract.

Centennial Mortg., Inc. v. Blumenfeld, 745 N.E. 2d 268, 276, (Ind.Ct.App. 2001), citing NN Investors Life Insurance Co. Inc., v. Crossley, 580 N.E. 2d 307, 309 (Ind.Ct.App. 1991). Aside from the conclusion by the Comptroller that the borrower is a beneficiary to the securitization process, the Borrower in this cause of action is a third-party beneficiary under Blumenfeld.

1. A clear intent by the actual parties to the contract to benefit the third party.

The parties to the securitization process securitize mortgages to increase the availability of financing to borrowers. By expanding the group of borrowers who can be financed through the securitization process, the parties to the securitization process receive substantial fees.

2. A duty imposed on one of the contracting parties in favor of the third party.
The Originator, a direct party to the securitization process has a duty to create the assets that are sold or used as collateral for asset-backed securities. This obligation is a direct benefit to the borrower as it is only through the Originator’s creation of an asset to securitize, does the borrower receive the benefits of more financing opportunities at a fixed or lower interest rate.

3. Performance of the contract terms is necessary to render the third party a direct benefit intended by the parties to the contract.
Performance of the underlying obligations by the parties to the securitization process is required for the securitization process to work. Should either part to the securitization process fail to uphold their obligations, the borrower would not have the intended benefit of increased financing opportunities at lower or fixed interest rates.

Plaintiff’s claim that the borrower is not a party to the securitization process nor is the borrower a third-party beneficiary flies in the face of the Comptroller of Currency’s own assessment of the borrower’s role in the securitization process.

D. Defendants Lack Standing to Challenge the Validity of the Assignment of the Note and Mortgage to Plaintiff

Plaintiff’s argument that the borrower does not have standing to challenge the assignment of the Note and Mortgage is a red herring. Borrower not only has a right to challenge the assignment, but also a contractual duty to do so.

BORROWER COVENANTS that Borrower is lawfully seised of the estate hereby conveyed and has the right to mortgage, grant and convey the Property and that the Property is unencumbered, except for the encumbrances of record. Borrower warrants and will defend generally the title to the Property against all claims and demands, subject to any encumbrances of record.
Mortgage pg. 3, paragraph 4, (Emphasis supplied)

The Assignment of Mortgage effects the title to the property and borrower, according to the Mortgage, is obligated to defend against said claim to title.

Conclusion

Plaintiff’s claims that Defendants are not a party to, nor the beneficiary of the Asset-Securitization process is in direct contravention to the findings of the Comptroller of the Currency Administrator of National Banks, the sub-agency of the Department of the Treasury and with whom we entrust the management of your financial system.

The Comptroller in its “Asset Securitization Comptroller Handbook” unequivocally deems the borrower a direct party in the securitization process and even goes so far as to state that the borrower is ultimately responsible for the performance of the asset-backed security. The Handbook also recognizes the direct benefit to the borrower of the securitization process, finding that through the securitization process, borrowers are afforded financing opportunities they may normally not have, and at rates that are fixed or lower than what could be obtained without the spreading of risk the securitization process delivers.

As Plaintiff recognizes, the issue of whether the borrower has standing to challenge the securitization process is unresolved in the State of Indiana. This Court has the opportunity to correctly find that the borrowers do have standing to challenge the securitization process and this Court can turn to the Comptroller of the Currency to support its decision, as the Comptroller literally “wrote the book” on Asset Securitization.

Footnotes

1. Asset Securitization Comptroller’s Handbook, pg. 7, Subparagraph “Parties to the Transaction”, Comptroller of the Currency Administrator of National Banks, November 1997
2. Id. at 8
3. Id. at 9
4. Id. at 10
5. Id.
6. Asset Securitization Comptroller’s Handbook, pg. 4, 5, Comptroller of the Currency Administrator of National Banks, November 1997

 

 

 

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