Mortgage servicing transfers are supposed to transfer the servicing of a mortgage. They are not supposed to erase a loan modification, resurrect amounts that were already capitalized or waived, or require a homeowner to repeatedly litigate what everyone had supposedly already agreed to.

But that, at least according to the evidence presented by the homeowner in Johnson v. SN Servicing Corp., is essentially what happened.

Chief Judge Catherine C. Eagles of the Middle District of North Carolina denied summary judgment to SN Servicing Corporation and U.S. Bank Trust National Association, finding genuine disputes of material fact on the homeowner’s claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair and deceptive trade practices.

The opinion is worth reading not merely as another mortgage-servicing dispute, but as an illustration of why structured, court-supervised Loan Modification Management programs are so valuable—and why the Eastern District of North Carolina’s decision to discontinue its LMM program was so unfortunate and, in my view, unjustified.

The Modification, the Servicing Transfers, and the Beginning of the Problem

Thomas Johnson purchased his home in 2016. After falling behind on the mortgage, his then-servicer, Community Loan Servicing, offered him a loan modification in 2022. Under that modification, approximately $14,269 in unpaid installments, interest, late charges, fees, costs, and applicable tax and insurance advances were added to the principal balance.

That should have provided a reasonably clear new starting point.

Instead, the loan was transferred among servicers. As Judge Eagles rather diplomatically described it:

“These changes led to what can be characterized at best as confusion and misunderstanding and then to a lawsuit.”

The mortgage holder repeatedly changed servicers, eventually landing with SN Servicing. Despite the 2022 modification, subsequent servicers allegedly pursued collection according to the original loan terms rather than the modification.

Johnson sued in September 2023.

That lawsuit quickly settled. SN agreed to honor the 2022 modification and to waive “all costs and fees, including attorneys’ fees, associated with Foreclosure” as well as “all costs and late fees associated with the Note” from May 1, 2022 through December 2023.

That might reasonably have been expected to end the dispute.

It did not.

A $16,000 Escrow Shortage Appears

Shortly after settling the first lawsuit, SN informed Johnson that he still owed almost $16,000 in escrow payments and demanded approximately $1,300 per month in additional payments, on top of his regular mortgage payment, to cure the alleged shortage.

Johnson's attorney disputed the accounting, contending that SN was attempting to collect amounts that had already been capitalized under the modification or waived in the settlement.

SN responded that it was servicing the mortgage according to a 2021 modification and that the records it had received from the previous servicer showed a negative escrow balance.

There is an important lesson buried in that response: a mortgage servicer cannot necessarily defend its own accounting simply by saying, “That is what the prior servicer told us.”

Judge Eagles was considerably more succinct:

“SN asserts that it took the balance passed on from the previous servicer at face value, but that attempt to pass the buck is unavailing.”

The court held that the 2022 modification unambiguously capitalized applicable pre-modification tax and insurance advances into the new principal balance. Because SN had subsequently promised to honor that modification, attempting to collect those advances again could constitute a breach.

SN had its own contractual obligations. It could not necessarily satisfy them merely by blindly importing numbers from a predecessor's servicing system.

For consumer attorneys who regularly deal with transferred mortgages, that may be the most useful sentence in the opinion.

And Then SN Charged Johnson Its Attorneys’ Fees for Suing SN

The dispute became even more remarkable after Johnson filed his second lawsuit.

SN began assessing against Johnson's mortgage account the legal fees SN incurred defending itself against Johnson's lawsuit. Those charges eventually exceeded $15,000.

SN characterized those assessments as a mistake.

But Judge Eagles noted that this particular “mistake” occurred repeatedly over several months. SN had also assessed legal fees against Johnson during the first lawsuit, only to waive them as part of that settlement.

That evidence, the court held, could allow a jury to conclude that SN was using unjustified legal-fee assessments to discourage Johnson from challenging its servicing practices.

That matters particularly because Johnson was not merely pursuing a garden-variety contract claim. He also asserted an unfair and deceptive trade practices claim under N.C. Gen. Stat. § 75-1.1.

A simple breach of contract ordinarily does not establish a Chapter 75 violation. There must generally be aggravating circumstances.

Judge Eagles found enough evidence for a jury to decide whether those aggravating circumstances existed here.

“We Got Those Numbers From the Previous Servicer” Wasn’t Much of an Investigation

Perhaps the most troubling portion of the opinion concerns what SN allegedly did—or did not do—after Johnson specifically identified the problem.

Johnson's attorney wrote SN's general counsel explaining in detail why the escrow accounting was inconsistent with the modification and settlement.

According to the evidence viewed in Johnson's favor, SN nevertheless relied upon the unverified account history received from the previous servicer and undertook no meaningful investigation into whether those amounts had actually been properly assessed.

Judge Eagles found evidence from which a jury could conclude that SN falsely represented the character, extent, or amount of Johnson's debt. The court further observed that such conduct can constitute a per se unfair and deceptive trade practice under North Carolina law.

There is also an important parallel between Johnson and the mortgage-servicing double-bookkeeping or “dual booking” problem recognized by North Carolina bankruptcy courts in In re Peach in the Western District of North Carolina and In re Rogers in the Middle District of North Carolina.

The precise problems are not identical. Peach and Rogers arose in the Chapter 13 and Rule 3002.1 context, where mortgage servicers' internal accounting could diverge from what had been disclosed and permitted in the bankruptcy case. Johnson involves a loan modification, settlement agreement, servicing transfers, and allegedly erroneous escrow accounting.

But the underlying problem is strikingly similar: the mortgage somehow exists in two different accounting realities.

One set of records reflects what the borrower legally owes after a bankruptcy, modification, settlement, waiver, or other adjustment. Another portion of the servicer's accounting system continues marching along as though that event never happened.

Eventually those two realities collide.

And when they do, the servicer too often seems to place the burden on the homeowner to prove that the servicer's own books are wrong.

That is precisely what Judge Eagles refused to allow SN to brush aside here. SN's position was essentially that it inherited the escrow balance from the previous servicer and relied upon it. But the court rejected that effort to “pass the buck,” emphasizing that SN had its own contractual duties to perform.

Nor is this merely a matter of good servicing practices.

Federal mortgage-servicing regulations specifically recognize the dangers created when servicing is transferred while a borrower is pursuing loss mitigation. Regulation X imposes obligations on transferee servicers concerning pending loss-mitigation applications following a servicing transfer. See 12 C.F.R. § 1024.41(k).

The CFPB's mortgage-servicing rules and guidance are aimed at preventing a servicing transfer from causing a borrower to fall through the cracks merely because the mortgage moved from one company's computer system to another. That is particularly important for modifications that are already “in flight” at the time of transfer. The transferor and transferee are supposed to accomplish a sufficiently seamless hand-off that the borrower's loss-mitigation rights and progress are preserved.

And while Johnson involved an already-completed modification rather than merely a pending application, the principle should be even more obvious there.

A completed mortgage modification should travel with the mortgage.

The borrower's legally modified payment obligations should not disappear somewhere between the transferor's computer and the transferee's computer. Nor should a homeowner who successfully obtained a modification be required to start over—or file another lawsuit—because the new servicer received inaccurate data, failed to reconcile that data against the actual modification documents, and then treated the inherited numbers as presumptively correct.

Seen alongside Peach and Rogers, Johnson suggests that mortgage-servicing double bookkeeping is not simply a bankruptcy accounting problem. It is a broader servicing problem that becomes especially dangerous when loans move from one servicer to another.

A servicer should have one accurate set of books reflecting what the homeowner actually owes. And a servicing transfer should be a seamless hand-off of that reality, not an opportunity to create a new one.

The consequences for Johnson were not merely theoretical.

The disputed account allegedly interfered with his attempt to refinance, and he ultimately had to sell his home. The court found evidence from which a jury could determine that SN continued to misrepresent the amount owed without justification even during those efforts.

This Is Exactly Why Bankruptcy LMM Programs Exist

Johnson does not appear from this opinion to have filed a Chapter 13 bankruptcy case. His disputes instead played out through two rounds of federal litigation.

But the problems described in Johnson are almost a textbook explanation for why bankruptcy courts developed Loan Modification Management programs.

A homeowner and servicer reach a modification.

The mortgage gets transferred.

The successor servicer's records do not accurately reflect the modification.

Escrow figures become incomprehensible.

The homeowner says the numbers are wrong.

The servicer relies on information inherited from its predecessor.

Fees accumulate.

Months pass.

And eventually lawyers, judges, discovery, summary judgment motions, and potentially a jury are needed to determine what the mortgage payment was supposed to have been in the first place.

An effective LMM program creates a structured, transparent, court-supervised process intended to prevent precisely this sort of breakdown. Documents are exchanged through a standardized process. Communications are centralized. Proposed modifications are documented. The debtor's attorney, mortgage creditor, servicer, Chapter 13 Trustee, and bankruptcy court all have visibility into what is happening.

Most importantly, when a permanent modification is reached, there is a bankruptcy court record establishing what was agreed upon.

That does not guarantee that a subsequent servicing transfer will be flawless. Nothing seems capable of guaranteeing that.

But it creates accountability and a readily accessible record before confusion metastasizes into years of litigation.

The EDNC's Abandonment of LMM Looks Even Worse in Light of Cases Like This

That is why the Eastern District of North Carolina's discontinuation of its Loan Modification Management program remains so disappointing.

The program was not merely an administrative convenience for bankruptcy lawyers. It was consumer-protection infrastructure.

Mortgage servicing is extraordinarily complicated, particularly when loans are transferred between servicers. Bankruptcy adds another layer of complexity because the debtor may simultaneously be curing arrears through a Chapter 13 plan while maintaining ongoing mortgage payments and attempting to obtain a permanent modification.

Removing the structured LMM process does not make any of those problems disappear.

It merely sends debtors, attorneys, servicers, trustees, and ultimately courts back toward less structured methods of dealing with them.

And Johnson illustrates what can happen when there is no effective mechanism for forcing everyone to get on the same page.

Here, according to the homeowner's evidence, one modification was followed by multiple servicing transfers, disputed accounting, a lawsuit, a settlement expressly requiring the servicer to honor the modification, another disputed accounting, another lawsuit, more than $15,000 in litigation fees assessed against the homeowner's mortgage account, and now potentially a jury trial.

That hardly looks cheaper or more efficient than having a bankruptcy court supervise the modification process correctly in the first place.

A Broader Lesson for Chapter 13 Attorneys

Consumer bankruptcy attorneys should pay particular attention to Judge Eagles' rejection of SN's effort to “pass the buck” to a previous servicer.

Servicing transfers are common during Chapter 13 cases, and inaccurate transferred balances are hardly unknown. When a successor servicer's numbers suddenly do not match the confirmed plan, an approved modification, prior Rule 3002.1 notices, payment histories, or the debtor's records, the response cannot simply be that those were the numbers received from the prior servicer.

Peach and Rogers already warn against maintaining one version of the mortgage account for purposes of the bankruptcy case and another internally.

Johnson adds another variation: the successor servicer cannot simply inherit questionable numbers and thereby inherit an excuse for them.

And Regulation X's treatment of servicing transfers reinforces the broader principle that loss-mitigation rights and obligations are supposed to survive the hand-off from one servicer to another.

The new servicer acquired more than a stream of monthly payments. It acquired servicing obligations.

Johnson is therefore both a useful North Carolina mortgage-servicing decision and a cautionary tale.

Loan modifications do little good if nobody can later determine what they modified.

And when a homeowner must file two lawsuits simply to make a servicer comply with a modification and then with a settlement agreement requiring compliance with that same modification, the problem is not excessive judicial supervision.

It is too little supervision, too late.

For Chapter 13 debtors trying to save their homes, that is precisely the problem that Loan Modification Management programs were designed to prevent—and precisely why North Carolina's bankruptcy courts should preserve, strengthen, and, in the Eastern District, restore them.

To read a copy of the transcript, please see: