Alert October 02, 2012

Federal Court Holds Loan Servicer Exempt Under TILA “Administrative Convenience” Safe Harbor When Conducting Foreclosure

The United States District Court for the Southern District of Alabama dismissed a case challenging a loan servicer’s exemption from TILA’s requirement that borrowers be informed within 30 days of the change in ownership of their loans.  The Court held that the assignment of a mortgage to a loan servicer for purposes of foreclosure falls within TILA’s “administrative convenience” exemption from the 30-day notice requirement. Plaintiff alleged that defendant, the servicer of his loan, violated TILA by failing to provide notice within 30 days of the assignment of his mortgage to another servicer. (Plaintiff had defaulted on his loan and defendant took the assignment in anticipation of foreclosure on the plaintiff’s property.) Defendant countered that, as a loan servicer, it was exempted from the notice requirement by the “administrative convenience” safe harbor provided under TILA, which provides that a loan servicer shall not be treated as a new owner of a consumer obligation where it takes assignment of the obligation “solely for the administrative convenience of the servicer in servicing the obligation.”

Holding defendant to be exempt under this provision, the Court rejected plaintiff’s definition of matters “solely for administrative convenience” as overly narrow, noting instead that a plain reading of the term “administrative convenience” encompassed any transfer of ownership done “to make it less difficult for the defendant to perform a servicing duty.” The Court also noted that the Code of Federal Regulations does not define the term, leaving courts to determine the scope of the application based on the language of the TILA statute itself. The ruling is significant because it offers a concrete and specific application of the “administrative convenience” exemption in the context of a transfer in advance of foreclosure.