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On January 11, the U.S. District Court for the Northern District of Mississippi granted a mortgage servicer’s motion to dismiss a lawsuit with prejudice brought by a homeowner’s widow alleging violations of, among other claims, TILA, RESPA, and FDCPA, for failing to include a credit-life-insurance provision in the loan note. According to the opinion, the plaintiff sued the mortgage servicer and mortgage originator after her husband passed and the servicer initiated foreclosure proceedings. The plaintiff argued that her husband, who was the sole borrower, and the mortgage originator had an oral agreement to include a credit-life-provision in the mortgage loan note but the originator failed to include it. The mortgage servicer moved to dismiss the action arguing, among other things, that the plaintiff lacked standing to bring the action. Upon review, the court agreed with the mortgage servicer, determining that the plaintiff lacks standing under TILA, RESPA, and the FDCPA because she was neither an “obligor” nor “borrower” on the loan even though she was identified as a “borrower” on the Deed of Trust. Moreover, the court rejected the plaintiff’s alternative claim that she is a third-party beneficiary with standing to sue under the laws, finding that no valid contract existed as to the credit-life-insurance policy and therefore, the plaintiff could not claim to be a beneficiary of a non-existent contract. The court also dismissed the plaintiff’s other state law and fraud claims, finding she failed to provide sufficient facts to make the claims plausible.
On January 10, the CFPB released the assessment reports required by Section 1022(d) of the Dodd-Frank Act for two of its 2013 mortgage rules: the TILA Ability-to-Repay and Qualified Mortgage (ATR/QM) Rule and the RESPA Mortgage Servicing Rule. The assessment reports were conducted using the Bureau’s own research and external sources. The reports do not include a benefit-cost analysis of either rule, nor do they propose amendments to the rules or contain any other policy recommendations. However, the Bureau expects the reports to be used to “inform the Bureau’s future policy decisions.”
The ATR/QM Rule became effective in January 2014 and generally requires that lenders make a reasonable and good faith determination, based on documented information, that the borrower has the reasonable ability to repay the mortgage loan. Highlights of the report’s findings include:
- While it is difficult to distinguish the effects of the ATR/QM Rule and the marketwide tightening of underwriting standards following the housing crisis, the rule may have restricted the reintroduction of certain types of loans that were associated with high delinquency or foreclosure rates, such as loans based on limited or no documentation of income or assets, loans with low initial monthly payments that reset after a period of time, and loans with high debt-to-income ratios.
- The ATR/QM Rule was not generally associated with an improvement in loan performance, as measured by the percentage of loans becoming 60 or more days delinquent within two years of origination.
- The ATR/QM Rule did not impact access to credit for self-employed borrowers who were eligible for a GSE loan. For other self-employed borrowers, the Bureau acknowledged lenders may find it difficult to comply with the Appendix Q documentation and calculation requirements but found that approval rates for this population decreased only slightly.
- While the costs of originating a mortgage loan have increased substantially over time, the ATR/QM Rule does not appear to have materially increased the lenders’ costs or the prices the lenders charged to consumers, at an aggregate market level. However, based on data from nine lenders, the Bureau estimated the foregone profits from not originating certain types of non-QM loans at $20-$26 million per year.
- Contrary to the Bureau’s expectations when it issued the ATR/QM Rule, the GSEs have maintained a persistently high share of the market, and the market for non-QM loans remains relatively small.
The Mortgage Servicing Rule became effective in January 2014 and, among other things, imposes procedural requirements on servicers with respect to loss mitigation and foreclosure for delinquent borrowers. Highlights of the report’s findings include:
- Loans that became delinquent were less likely to proceed to a foreclosure during the months after the Mortgage Servicing Rule’s effective date compared to months prior to the effective date and were more likely to return to current status. For borrowers who became delinquent the year the rule took effect, the Bureau estimated that, absent the rule, at least 26,000 additional borrowers would have experienced foreclosure within three years, and at least 127,000 fewer borrowers would have recovered from delinquency within three years.
- The cost of servicing mortgage loans has increased substantially; the main increase in costs occurred before the Mortgage Servicing Rule took effect and is not attributable to the rule. However, some servicers reported significant ongoing costs of complying with the rule, which can be attributable with the need for “robust control functions” and higher personnel costs to support increased communication with delinquent borrowers.
- The time from borrower initiation of a loss mitigation application to short-sale offer increased in 2015 compared to 2012.
- A larger share of borrowers who completed loss mitigation applications in 2015 were able to avoid foreclosure than borrowers who completed loss mitigation applications in 2012.
- The rate of written error assertions per account fell by about one-half after the Mortgage Servicing Rule’s effective date compared to the prior three years.
- There was a moderate decrease in the share of borrowers receiving force-placed insurance and the Rule’s effective date, which can be attributable to the Rule but also to the changes in the insurance market.
5th Circuit: Loan originators cannot be liable for loan servicers’ violations of RESPA loss mitigation requirements
On December 21, the U.S. Court of Appeals for the 5th Circuit held that a mortgage loan originator cannot be held vicariously liable for a loan servicer’s failure to comply with the loss mitigation requirements of RESPA (and its implementing Regulation X). According to the opinion, in response to a foreclosure action, a consumer filed a third-party complaint against her loan servicers and loan originator alleging, among other things, that the loan servicers had violated Regulation X’s requirement that a servicer evaluate a completed loss mitigation application submitted more than 37 days before a foreclosure sale. In subsequent filings, the consumer clarified that the claims against the loan originator were for breach of contract and vicarious liability for one of the loan servicer’s alleged RESPA violations. The district court dismissed both claims against the loan originator and the consumer appealed the dismissal of the RESPA claim.
On appeal, the 5th Circuit affirmed the dismissal for two independent reasons. First, the 5th Circuit noted it is well established that vicarious liability requires an agency relationship and determined the consumer failed to assert facts that suggested such a relationship existed. Second, in an issue of first impression at the circuit court stage, the court ruled that, as a matter of law, the loan originator could not be vicariously liable for its servicer’s alleged violations of RESPA, as the applicable statutory and regulatory provisions only impose loss mitigation requirements on “servicers,” and therefore only servicers could fail to comply with those obligations. The appellate court reasoned that Congress explicitly imposed RESPA duties more broadly in other sections (using the example of RESPA’s prohibition on kickbacks and unearned fees that applies to any “person”), but chose “a narrower set of potential defendants for the violations [the consumer] alleges.” The court concluded, “the text of this statute plainly and unambiguously shields [the loan originator] from any liability created by the alleged RESPA violations of its loan servicer.”
On December 19, the Illinois governor signed HB 5542, which amends the state’s Residential Mortgage License Act of 1987 (the Act) to make various changes to state licensing requirements. Among other things, the amended Act (i) clarifies the definition of a “bona fide nonprofit organization”; (ii) provides a list of prohibited acts and practices; (iii) stipulates that a licensee filing a Mortgage Call Report is not required to file an annual report with the Secretary of Financial and Professional Regulation (Secretary) disclosing applicable annual activities; (iv) repeals a provision requiring the Secretary to obtain loan delinquency data from HUD as part of an examination of each licensee; (v) clarifies that the notice of change in loan terms disclosure requirements do not apply to any licensee providing notices of changes in loan terms pursuant to the CFPB’s Know Before You Owe mortgage disclosure procedure under TILA and RESPA, while removing the provision that previously excluded licensees limited to soliciting residential mortgage loan applications as approved by the Secretary from the requirements to provide disclosure of changes in loan terms; (vi) removes certain criteria concerning the operability date for submitting licensing information to the Nationwide Multistate Licensing System; and (vii) makes other technical and conforming changes. The amendments are effective immediately.
On December 10, the U.S. District Court for the District of Minnesota ruled on a motion for summary judgment concerning whether the Minnesota Mortgage Originator and Servicer Licensing Act’s (MOSLA) provision prohibiting “a mortgage servicer from violating ‘federal law regulating residential mortgage loans’” provides a cause of action under state law when a loan servicer violates RESPA but where the consumer ultimately has no federal cause of action because the consumer “sustained no actual damages and thus has no actionable claim under RESPA.”
As previously covered by InfoBytes, the U.S. Court of Appeals for the 8th Circuit reviewed the district court’s earlier decision to grant summary judgement in favor of a consumer who claimed the mortgage loan servicer failed to adequately respond to his qualified written requests concerning erroneous delinquency allegations. The 8th Circuit overturned that ruling, opining that while the loan servicer failed to (i) conduct an adequate investigation following the plaintiff’s request as to why there was a delinquency for his account, and (ii) failed to provide a complete loan payment history when requested, its failure did not cause actual damages.
Now, revisiting the issue on remand, the district court stated that any MOSLA violation or injury is predicated on the RESPA violation or injury. Reasoning that since there were “no actual damages under RESPA, then there are no actual damages under MOSLA,” the court concluded that the consumer did not have a viable cause of action under MOSLA and dismissed the action with prejudice.
On December 7, the U.S. District Court for the District of Maryland granted a motion for summary judgment filed by a real estate team and title company (defendants), finding that an alleged kickback scheme involving the defendants did not constitute a violation of RESPA, and that the plaintiffs failed to demonstrate that they suffered from any concrete harm. According to the court, the plaintiffs filed a suit on behalf of a putative class more than four and a half years after they purchased their home, claiming the defendants violated RESPA by allegedly “using a ‘sham’ marketing agreement . . . to disguise an illegal kickback scheme,” which provided the real estate team with “unearned fees” through settlement referrals to the title company. The plaintiffs further argued that they were entitled to equitable tolling because the kickback scheme was allegedly concealed in an undisclosed marketing and services agreement, and that even if the agreement had been disclosed, it would have seemingly appeared to be valid. However, the court found “no genuine issue of material fact that the [p]laintiffs failed to exercise reasonable diligence to discover their claim” because at the time of closing, “they knew that they could choose their own settlement and title company” but elected not to. In addition, the court disagreed with the plaintiffs’ argument that they had Article III standing because they were “deprived of impartial and fair competition between settlement services,” finding that the plaintiffs were not overcharged for services due to the alleged kickback scheme and failed to show that the costs of settlement services were unnecessarily increased.
Moreover, the court found that the plaintiffs (i) did not inquire about a potential relationship between the defendants; (ii) did not claim dissatisfaction with the title company services provided; and (iii) did not claim that the fees paid to the title company were “unreasonable or undeserved.” Furthermore, the court found that the claim was barred by RESPA’s one-year statute of limitations and that equitable tolling did not apply.
On November 7, the U.S. Court of Appeals for the 7th Circuit affirmed a grant of summary judgment in favor of a mortgage servicer. The court, noting the District Court had concluded there was insufficient evidence to support a claim the servicer had violated RESPA, affirmed the lower court decision that even if such a violation had occurred, the homeowner plaintiff failed to demonstrate any actual harm from the servicer’s alleged failure to fully respond to his qualified written request (QWR). According to the opinion, in November 2012, a state court entered a judgment of foreclosure against a homeowner who struggled to make payments on his mortgage loan; and after numerous reschedulings due to bankruptcy filings, a sheriff sale was set to be conducted in October 2016. In August 2016, the homeowner sent a letter to his mortgage servicer with “twenty-two wide-ranging questions about his account.” The mortgage servicer treated the letter as a QWR under RESPA, acknowledged receipt of the letter and stated it would provide a substantive response by September 30, the deadline under the statute. Two days prior to the statutory deadline, the homeowner and his wife filed a lawsuit against the mortgage servicer, alleging violations of RESPA and Wisconsin law for failing to respond to the QWR, which they argued, would have provided information to assist in their fight against forthcoming sheriff’s sale. The mortgage servicer mailed a response on September 30, consisting of a three-page letter and 58 pages of attachments, which addressed “most of [the homeowner]’s questions to some degree, but not all of them,” and also invited further information from the homeowner to consider further responses. The district court granted the mortgage servicer’s motion for summary judgment, concluding that the homeowner failed to provide evidence the mortgage servicer violated RESPA or state law and failed to show how any alleged failure, even had it occurred, caused harm.
On appeal, the 7th Circuit determined the homeowner had standing to sue the mortgage servicer but his wife did not, as she had no legal interest in the property. As for the alleged RESPA violation, assuming such a violation occurred, the court concluded that the homeowner failed to establish an actual harm that resulted from the mortgage servicer’s alleged violation. Specifically, the appeals court disagreed with the homeowner that the fees paid to an attorney to review the mortgage servicer’s response “could be a cost incurred as a result of an alleged violation” of RESPA. The appeals court also rejected claims of damages for physical and emotional distress because the homeowner’s “stress had essentially nothing to do with any arguable RESPA violations.”
Court approves $17 million class action settlement with mortgage company and real estate service companies for alleged RESPA violations
On August 27, the U.S. District Court for the Central District of California approved a class action settlement agreement resolving allegations against a national mortgage company and a real estate services family of companies (defendants) for allegedly arranging kickbacks for unlawful referrals of title services in violation of RESPA. As previously covered by InfoBytes, the 2015 complaint accused the defendants of violating RESPA by allegedly facilitating the exchange of unlawful referral fees and kickbacks through an affiliated business arrangement, while also directing various banks to refer title insurance and other settlement services to a subsidiary in the family of real estate services companies without informing customers of the relationship between the entities. In a stipulation of settlement filed in 2017 alongside a motion for preliminary approval, defendants indicated that they continued “to deny each and all of the claims and contentions alleged in the [a]ction . . . [but] have concluded that the further conduct of the [a]ction against them would be protracted and expensive.” The stipulation further noted that “substantial amounts of time, energy and resources have been and, unless this [s]ettlement is made, will continue to be devoted to the defense of the claims asserted in the [a]ction.”
The approved settlement class encompasses more than 32,000 transactions related to borrowers who closed on mortgage loans originated by the mortgage company between approximately November 2014 through November 2015, and who paid any title, escrow or closing related charges to the real estate services companies. The defendants will pay $17 million into a settlement fund, which covers payment to class members as well as attorney’s fees and costs.
1st Circuit holds homeowners who defaulted on an allegedly unlicensed mortgage loan cannot escape time bars for their claims
On August 23, the U.S. Court of Appeals for the 1st Circuit held that homeowners who defaulted on a refinance loan on their Massachusetts property could not void the transaction or enjoin their property’s foreclosure sale. The appellate court determined that the homeowners’ claims that the lender violated the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act, the Truth in Lending Act, and the Massachusetts consumer protection statute were all time-barred. The homeowners argued that the statute of limitations never began to run because the lender was not licensed to lend money in the state, making the original note and mortgage “akin to forgeries and thus ‘void ab initio,’” but the court held that there was “no authority for this unusual proposition.” The court also refused to toll the limitations period under the doctrine of fraudulent concealment, which requires the plaintiff “to make a threshold showing of due diligence,” because the homeowners filed their claims more than five years after they retained counsel and ten years after they granted the mortgage at issue.
On August 14, the U.S. District Court for the Northern District of Illinois held that RESPA (and its implementing Regulation X) does not require a plaintiff to wait until a property is foreclosed upon to bring an action for a violation of Regulation X’s loss mitigation requirements. The plaintiff filed a complaint against her mortgage servicer for (among other claims) allegedly violating RESPA when the company initiated a foreclosure action while she had a pending loss mitigation application, even though the company did not ultimately foreclose on the property. The company moved to dismiss the RESPA claim as unripe and the court disagreed, finding there is no language in the statute or implementing regulation that states a plaintiff must wait. Conversely, the implementing regulation “expressly states that the prohibited action is a servicer making ‘the first notice or filing required by applicable law…’” and, therefore, the plaintiff’s claim did not fail for lack of ripeness. The court ultimately dismissed the plaintiff’s action against the company, however, finding the plaintiff did not adequately plead actual damages, and granted the plaintiff leave to file an amended complaint.
- Michelle L. Rogers to discuss "Preparing for servicing exams in the current regulatory environment" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jon David D. Langlois to discuss "Regulatory risks of convenience fees" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- APPROVED Webcast: NMLS Annual Conference & Ombudsman Meeting: Review and recap
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Melissa Klimkiewicz to discuss "Servicing super session" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jessica L. Pollet to discuss "Law & compliance speedsmarts" at the American Financial Services Association Law & Compliance Symposium
- Daniel P. Stipano to discuss "Lessons learned from recent high profile enforcement actions" at the Florida International Bankers Association AML Compliance Conference
- Moorari K. Shah to provide "Regulatory update – California and beyond" at the National Equipment Finance Association Summit
- Sasha Leonhardt and John B. Williams to discuss "Privacy" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Aaron C. Mahler to discuss "Regulation B/fair lending" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Heidi M. Bauer to discuss "'So you want to form a joint venture' — Licensing strategies for successful JVs" at RESPRO26
- Jonice Gray Tucker to discuss "Small business & regulation: How fair lending has evolved & where are we heading?" at CBA Live
- Jonice Gray Tucker to to discuss "DC policy: Everything but the kitchen sink" at CBA Live
- Daniel P. Stipano to discuss "Lessons learned from ABLV and other major cases involving inadequate compliance oversight" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "A year in the life of the CDD final rule: A first anniversary assessment" at the ACAMS International AML & Financial Crime Conference
- Moorari K. Shah to discuss "State regulatory and disclosures" at the Equipment Leasing and Finance Association Legal Forum
- Hank Asbill to discuss "Creative character evidence in criminal and civil trials" at the Litigation Counsel of America Spring Conference & Celebration of Fellows
- Hank Asbill to discuss "Pay no attention to the man behind the curtain: Addressing prosecutions driven by hidden actors" at the National Association of Criminal Defense Lawyers West Coast White Collar Conference
- Daniel P. Stipano to discuss "Keep off the grass: Mitigating the risks of banking marijuana-related businesses" at the ACAMS AML Risk Management Conference
- Daniel P. Stipano to discuss "Mid-year policy update" at the ACAMS AML Risk Management Conference
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program