Tenth Circuit Reverses District Court Ruling, Allows Credit Union To Pursue Lawsuit Against Mortgage Lender For Misappropriating Loan Funds

Mortgage Origination Federal Issues

Recently, the United States Court of Appeals for the Tenth Circuit reversed a district ruling allowing a Texas-based credit union to sue against a mortgage lender. In 2003, the credit union’s predecessor in interest entered into a funding service agreement with the mortgage lender which originated 26 mortgage loans to individual borrowers. The credit union alleged that the mortgage lender and its closing agents wrongfully induced the predecessor to fund loans to “straw borrowers” as a vehicle to misappropriate $14 million in loan proceeds. In 2007, the credit union and its predecessor in interest entered into a purchase and assumption agreement (PAA). According to the Court, when two parties to a contract agree to its terms, as pursuant to the PAA, a third party cannot object. Further, the Court noted that, because of the PAA, the credit union had all rights to pursue claims on behalf of the predecessor in interest. A district court had previously ruled that the credit union was not a proper plaintiff and dismissed the case. The dismissal was reversed. Security Service FCU v. First American Mortgage Funding, LLC, No. 13-1133 (10^th Cir. Nov. 4, 2014).