8th Circuit Finds that Mortgage Loan Purchaser Complied with Repurchase Agreement Regarding Allegedly Defective Loans

The U.S. Court of Appeals for the Eighth Circuit recently ruled in favor of a purchaser and reseller of mortgage loans, which sued a mortgage originator for allegedly breaching a contract by failing to repurchase several allegedly defective loans.  The court held that the purchaser adequately and substantially complied with the contract to repurchase defective loans, which neither specified a form of notice nor indicated that the prescription of a time for cure had to be contained within the notice.

In the case at issue, the purchaser bought approximately 750 loans from the originator.  The purchaser filed a lawsuit regarding seven of those loans, which were allegedly defective.  The purchaser resold these seven loans to Fannie Mae but was forced by Fannie Mae to repurchase the loans due to the originator’s alleged failures to comply with underwriting standards.

The underlying repurchase agreement granted the purchaser broad discretion to determine if a loan under the agreement was defective.  This discretion included the right to determine if the originator had breached the standards applicable for underwriting the loans and to determine if the purchaser itself was required to repurchase a loan it had resold to a third party (such as Fannie Mae).  The agreement provided that the originator was to be afforded an opportunity to correct or cure an alleged defect and that, absent correction or cure to the purchaser’s “complete satisfaction,” the originator could be required to repurchase the loan.  Moreover, if the purchaser itself was required to repurchase a loan after sale to a third party, the purchaser could assert the fact of that third party’s demand for repurchase as grounds to demand the originator, in turn, repurchase that same loan.  After Fannie Mae informed the purchaser that there were defects in the mortgages, the purchaser sent three letters to the originator for each of the seven loans, describing the breach and stating that repurchase was required.  The purchaser then filed suit against the originator, alleging that the originator breached the contract by failing to repurchase the seven allegedly defective loans after the purchaser demanded repurchase by sending multiple notices to the originator for each loan.

The district court ruled in favor of the originator, holding that the purchaser failed to satisfy a condition precedent in the agreement by failing to prescribe a time within which the originator could correct or cure the alleged defects.  The court reversed this judgment, holding that the purchaser adequately and substantially complied with the contract, which did not specify a form of notice nor indicated that the prescription of a time for cure had to be contained within the notice.  The court held that it did need not decide the issue of whether a contested provision in the case imposes a condition precedent.  Indeed, the court found that even if the prescription of a time for cure were a condition precedent, the purchaser’s three letters concerning each individual loan sufficed to satisfy the purchaser’s notice obligations because each set of three letters collectively identified a defect, invited written responses with supporting documentation, and identified a deadline. 

Accordingly, the court reversed the district court’s judgment and remanded for further proceedings.