Servicer Violated RESPA but Caused no Damages: Eighth Circuit

By Stephen A. Fogdall

The U.S. Court of Appeals for the Eighth Circuit concluded earlier this month in Wirtz v. Specialized Loan Servicing, LLC, that a mortgage loan servicer violated Section 6 of the Real Estate Settlement Procedures Act (RESPA) by failing to obtain a borrower’s complete payment history from a previous servicer and to provide a copy of the history to the borrower in response to his qualified written requests.  However, the court concluded that the borrower nevertheless failed to state a claim under RESPA because there was no evidence that he suffered any actual damages as a result of the violation.

The main RESPA compliance lesson from Wirtz is that if the information a servicer needs to respond to a borrower’s qualified written request is in the possession of a prior servicer, the servicer itself should take reasonable steps to obtain that information from the prior servicer rather than tell the borrower to obtain it.

The servicer in Wirtz received a partial payment history (beginning in mid-2011) from the prior servicer when it acquired the servicing rights to the loan.  The first entry in the history appeared to show that the borrower was delinquent by one month.  Later entries suggested the borrower had missed other payments in 2012 and 2013.  The borrower believed all of these entries were in error and sent qualified written requests to the servicer in order to challenge them.  Among other things, the borrower requested that the servicer provide a complete payment history for the loan from origination to the present.

The servicer responded that if the borrower wanted to contest the missed payments, he himself would need to obtain the documents necessary to do so.  Thereafter, the borrower obtained the complete payment history to address the initial alleged missing payment, and obtained other bank records (for which he paid $80) to address the alleged missing payments in 2012 and 2013.  He then renewed his qualified written requests.  Unsatisfied with the servicer’s responses to these renewed requests, he brought suit under Section 6 of RESPA.

Section 6 of RESPA requires a servicer receiving a qualified written request to conduct “an investigation” and then to “provide the borrower with a written explanation or clarification that includes” the “information requested by the borrower or an explanation of why the information requested is unavailable or cannot be obtained by the servicer.”  Section 6 further provides that the borrower may recover from the servicer “any actual damages” the borrower suffered “as a result of” a violation of these obligations, as well as “any additional damages, as the court may allow, in the case of a pattern or practice of noncompliance,” not to exceed $2,000.00, plus costs and attorneys fees.

The district court found that the servicer did not violate Section 6 with respect to its handling of the borrower’s requests relating to the alleged missing payments in 2012 and 2013.  However, the district court concluded that the servicer “made minimal effort to investigate the error” relating to the initial alleged missing payment, and failed to provide the borrower with the payment history he requested.  The district court awarded as actual damages the $80 the borrower had spent to obtain the bank records relating to the alleged missing payments in 2012 and 2013 (for which the district court had found no violation), then awarded a further $2,000.00 in statutory damages, along with attorneys fees of over $45,000.00.

On appeal, the Eighth Circuit affirmed the district court’s conclusion that the servicer violated Section 6 by failing to obtain the borrower’s complete payment history.  The Eighth Circuit explained that Section 6 “imposes a substantive obligation on mortgage loan servicers to conduct a reasonably thorough examination before responding to a borrower’s qualified written request.”  In addition, the court held that the servicer could not claim that the borrower’s payment history was “unavailable” simply because the servicer itself did not possess it, when that history “could be obtained” by the servicer from the prior servicer “through reasonable investigation.”

Nevertheless, the Eighth Circuit reversed the district court’s finding of damages.  The court held that the only violation found by the district court related to the initial alleged missing payment, whereas the $80 the borrower spent to obtain bank records related to the alleged missing payments in 2012 and 2013.  The $80 expense was therefore not the “result of” the violation the district court found.  The court further held that the borrower could not recover statutory damages because such damages are characterized in the statute as “additional damages,” implying that they can only be awarded if the borrower can first establish actual damages.  Lastly, because damages are an “essential element” of a Section 6 claim, the court held that the borrower had failed to establish any claim for relief under Section 6 and directed entry of judgment in favor of the servicer on that claim.

Although the servicer in Wirtz ultimately escaped liability under RESPA, servicers should still carefully consider the court’s guidance that Section 6 imposes a substantive obligation to conduct a reasonably thorough investigation before responding to a qualified written request, as well as take heed that information cannot be considered “unavailable” merely because it is in the hands of a prior servicer.  Servicers should proceed on the assumption that courts will expect them to take reasonable steps to obtain needed information from a prior servicer rather than put the onus on borrowers to do so.

 

Pennsylvania Supreme Court Extends Reach of Unfair Trade Practices and Consumer Protection Law to Transactions Occurring Outside Pennsylvania and to Non-Pennsylvanians

By Edward J. Sholinsky

The Supreme Court greatly expanded the territorial reach of the Unfair Trade Practices and Consumer Protection Law recently, holding that the Law reaches the alleged acts of Pennsylvania-based companies outside the Commonwealth.

Answering a certified question from the United States Court of Appeals for the Third Circuit, the Court in Danganan v. Guardian Protection Services held that the UTPCPL could reach the extraterritorial acts of companies headquartered in Pennsylvania, no matter how tenuous Pennsylvania’s link to the alleged act.  In doing so, the Court rejected years of federal district court decisions concluding that the UTPCPL only may be invoked: (1) by Pennsylvania plaintiffs; and (2) where the alleged wrongful acts have a sufficient nexus to Pennsylvania.

The plaintiff in Danganan alleged that he purchased home alarm services for his Washington, D.C. residence from Guardian, a company headquartered in Pennsylvania.  He signed a three-year agreement, which he allegedly attempted to cancel when he sold his D.C. home and moved to California.  Danganan alleged, however, that Guardian continued billing him for the services.  Danganan filed a putative class action in the Court of Common Pleas of Philadelphia County alleging, among other things, that the defendant violated the provision of the UTPCPL stating that:  “[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce . . . are . . . unlawful.”  The UTPCPL defines “commerce,” in relevant part as “any trade or commerce directly or indirectly affecting the people” of Pennsylvania.  The defendant removed to federal court, with the case ultimately ending up in the United States District Court for the Western District of Pennsylvania.  The District Court granted Guardian’s motion to dismiss, holding that plaintiff had not established a “sufficient nexus” between the alleged acts and Pennsylvania and that the UTPCPL generally applied only to Pennsylvania residents.  Danganan appealed to the Third Circuit, which certified two questions to the Pennsylvania Supreme Court, including whether a non-Pennsylvania resident could bring suit against a Pennsylvania company for a transaction occurring outside of Pennsylvania.

The Court adopted a broad reading of the UTPCPL, heavily relying on a 2015 Washington Supreme Court decision, Thornell v. Seattle Service Bureau, Inc., 363 P.3d 587, which interpreted a similar Washington State law.  In particular, the Court adopted Thornell’s broad definitions of the words “person” and “commerce” and the phrase “indirectly affecting the people of Washington.”

As a result, the Court found that there are no territorial limitations in the terms “person,” “trade” and “commerce” in the UTPCPL and no explicit requirement that a plaintiff reside in Pennsylvania.  The Court also put great weight on the broad remedial purpose of the UTPCPL.  Thus, the Court found “that the Law’s prescription against deceptive practices employed by Pennsylvania-based businesses may encompass misconduct that has occurred in other jurisdictions.”

In so holding, the Court rejected the “sufficient nexus” test relied on by the District Court.  The Court held that “there is no textual basis in the UTPCPL for its imposition, and the Court may not supply additional terms to, or alter, the language that the Legislature has chosen.”

In apparent recognition of the potentially broad application of its opinion, the Court stated that the rule it announced could be limited through jurisdictional and choice-of-law principles.

Nevertheless, the rule announced by the Court in Danganan represents a major expansion of the reach of the UTPCPL.  It potentially expands the remedies available to foreign plaintiffs in their dealings with Pennsylvania-based companies—no matter how remote the connection to Pennsylvania is to any specific act—and may encourage these plaintiffs to bring suit in Pennsylvania rather than their home states or in the state where the acts occurred in the hopes that courts will apply the UTPCPL.  While that may seem like a hassle, the broad remedies of the UTPCPL, including treble damages and attorneys’ fees, could make it a worthwhile effort for plaintiffs and their counsel.

PHH Mortgage Settles Lawsuit with States for $45 Million

By Emily P. Daly

PHH Mortgage Corporation, the ninth largest residential mortgage servicing company in the country, agreed Wednesday to pay over $45 million to settle claims brought against it by the Attorneys General of 49 states and the District of Columbia. Consent Judgment ¶ 4.

The coalition of Attorneys General filed a complaint against PHH Mortgage in the United States District Court for the District of Columbia on January 3, 2018, alleging that PHH Mortgage violated the Unfair and Deceptive Acts and Practices laws of the respective states and the Consumer Financial Protection Act of 2010 for conduct occurring between January 1, 2009 and December 31, 2012.  Compl. ¶¶ 17, 19, 22, 25, 27.

According to the complaint, PHH Mortgage, as a servicer of residential mortgage loans, “regularly reviews mortgage loans for potential loss mitigation or loan modification options, and conducts or manages foreclosures.”  Compl. ¶ 16.  The Complaint alleges that PHH charged unauthorized fees, used incomplete information in the foreclosure process, and failed to apply payments made by borrowers. Compl. ¶ 17

The $45 million monetary settlement will be distributed among borrowers, the Attorneys General, and the states as an administrative penalty. Consent Judgment ¶ 5.  Over $31 million of the settlement amount will go to “(a) borrowers whose loans were serviced by PHH at the time the foreclosure was completed and whose homes were sold or taken in foreclosure between and including January 1, 2009, and December 31, 2012, or (b) all other borrowers whose loans were serviced by PHH and referred to foreclosure during that same time period and not accounted for in (a) above.”  Consent Judgment ¶ 6.

In addition to the monetary settlement, PHH Mortgage is required to adopt new servicing standards, which are attached as Exhibit A to the Consent Judgment.  Consent Judgment ¶ 9.  PHH issued a press release in response to the settlement and stated that the new servicing standards are “largely PHH’s servicing standards today.”

Treasury Issues Report Proposing Changes to FSOC Designation Process

By Gordon S. Woodward

On April 21, 2017, President Trump issued a Presidential Memorandum directing the U.S. Department of the Treasury to evaluate and make recommendations on the Financial Stability Oversight Council’s (FSOC) designation process.  The FSOC is a panel consisting of the heads of U.S. financial regulatory agencies, including the Treasury, the SEC and the CFPB, which was created by the Dodd-Frank-Act of 2010 to monitor the financial system. The panel may designate nonbank firms as “systemically important financial institutions” (SIFIs), which subjects them to enhanced supervision by the Federal Reserve. The intent was to identify and monitor firms, other than big banks, whose failure could imperil the economy (large banks such as JPMorgan Chase and Goldman Sachs were automatically designated as SIFIs under Dodd-Frank).

On November 17, 2017, the U.S. Department of the Treasury responded to the April 21st Presidential Memorandum with a report proposing changes to FSOC’s designation process. Proposed changes include enhancing communication between FSOC and the companies under review. In addition, FSOC should assess the likelihood of a firm’s financial distress and conduct a cost-benefit analysis, designating a firm only if the “expected benefits to financial stability outweigh the costs of designation.” The report also calls for an “off-ramp” that companies may follow to avoid the SIFI designation.

The Treasury proposal differs significantly from the approach proposed in the Financial CHOICE Act, which the U.S. House of Representatives passed in June. That act would strip the FSOC of most of its regulatory authority, including the ability to designate nonbank financial firms as SIFIs.

As a result, the administration has signaled a middle ground approach to SIFI regulation.  The FSOC will, for the time being, survive Congress’s deregulatory push but with limitations designed to address Wall Street’s most significant concerns.

SCOTUS Clarifies Who is a Debt Collector Under FDCPA

By Stephen A. Fogdall

The Fair Debt Collection Practices Act (FDCPA) prohibits a “debt collector” from using any “false, deceptive, or misleading representation or means in connection with the collection of any debt,” as well as any “unfair or unconscionable means to collect or attempt to collect any debt.”  15 U.S.C. §§ 1692e, 1692f.  The critical predicate for liability under these provisions is that the party allegedly engaged in the improper conduct is, in fact, a “debt collector.”  It is well-settled that a party seeking to collect for its own account a debt it itself originated is not a “debt collector,” while an independent party in the business of collecting debts owned by others is a “debt collector.”   However, over the past ten years a circuit split arose regarding whether a party that buys debts originated by someone else, after those debts have gone into default, and then seeks to collect those debts for its own account is a “debt collector.”  The Third and Seventh Circuits concluded that such parties are debt collectors under the FDCPA, while the Fourth and Eleventh Circuits concluded that they are not.  The U.S. Supreme Court recently weighed in in Henson v. Santander Consumer USA Inc..  In a unanimous decision authored by Associate Justice Gorsuch (his first), the Court concluded that at least one part of the FDCPA’s definition of a “debt collector” excludes such parties.

The FDCPA broadly defines a “debt collector” as “any person” who (1) “uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts” (sometimes referred to as the FDCPA’s “first definition” of a “debt collector”)  or (2) “who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another” (sometimes referred to as the “second definition” of a “debt collector”).  15 U.S.C. § 1692(a)(6).  The statute then lists six exclusions, one of which is relevant to the Henson decision.  Specifically, this exclusion provides that the term “debt collector” “does not include” “any person collecting or attempting to collect any debt owed or due . . . another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained by such person.”  15 U.S.C. § 1692a(6)(F)(iii).  This exclusion is discussed further below.

The Court in Henson addressed the second definition, the portion that applies to those who “regularly collect . . . debts owed or due . . . another.”  The Court specifically declined to address the first definition, the portion that applies to persons “in any business the principal purpose of which is to the collection of any debts,” stating that “the parties haven’t much litigated” this portion and it was outside the scope of the grant of certiorari.

Addressing the second definition, the Court fairly easily concluded that it excludes those who, like the respondent in Henson, purchase debts (even, importantly, after the debts have already gone into default) and seek to collect those debts for their own account.  Because the second definition by its terms refers to the collection of debts owed to “another,” it follows, the Court held, that the definition does not include those who collect debts for themselves.

The petitioners’ primary argument against this conclusion was that the second definition uses the word “owed” in the past tense.  Thus, according to the petitioners, a subsequent purchaser of a debt that was at one time “owed” to “another,” namely, the originating lender, would qualify as a “debt collector.”  The Court rejected this argument, noting that the word “owed” could easily be understood in the present tense, and, in any event, construing it in the past tense would be difficult to square with the nearby word “due” (“owed or due . . . another”), which indisputably is used in the present tense.

The Court then addressed the exclusion, alluded to above, removing from the definition “any person collecting or attempting to collect any debt owed or due . . . another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained by such person.”  15 U.S.C. § 1692a(6)(F)(iii).  The Court rejected the petitioners’ suggestion that by excluding a person collecting a debt that “was not in default at the time it was obtained by such person,” the definition of “debt collector” impliedly included a person collecting a debt that was in default “at the time it was obtained by such person” (which allegedly was the case with the debts at issue here).

The Court concluded, first, that the term “obtained” in this exclusion does not mean “purchased,” but rather having taken “possession” of a debt “for servicing and collection.”  Second, the Court concluded that since the exclusion removes persons from the scope of the term “debt collector” who would otherwise fall within it, the exclusion does even not apply unless the person at issue does indeed satisfy the initial definition.  In other words, a person must, as a threshold, “attempt to collect debts owed another” in order for the logically secondary question to arise as to whether that person is within the terms of the exclusion.  The Court observed that the “petitioners’ argument simply does not fully confront this plain and implacable textual prerequisite.”

Although it is now clear that a party seeking to collect a debt for its own account (even when it acquired the debt after it had already gone into default) cannot be a “debt collector” under the second of the two definitions in the FDCPA, by declining to address the first definition, the Court in Henson left open the possibility that a party collecting  for its own account might still qualify as a debt collector if it is “in any business the principal purpose of which is the collection of any debts.”  15 U.S.C. § 1692a(6).  Indeed, the Eleventh Circuit, after concluding, like the Supreme Court in Henson, that the second definition excludes parties collecting debts for their own accounts, expressly acknowledged that such a party might nevertheless be a debt collector under the first definition if its “‘principal purpose’ is the collection of ‘any debts.’”  Davidson v. Capital One Bank (USA), N.A., 797 F.3d 1309, 1316 n.8 (11th Cir. 2015).

There are comparatively few decisions analyzing the first definition, but that presumably will change in the wake of Henson, as plaintiffs, and their lawyers, seek to make use of this still potentially open path to attempt to establish that a debt owner is a “debt collector.”  Parties that purchase and collect debts for their own accounts should pay close attention as this issue evolves.  This blog will track and report on significant developments.

The CFPB Takes Aim at Arbitration Clauses in Contracts for Consumer Financial Products

Schnader Alert by Monica Clarke Platt:

The Consumer Financial Protection Bureau (CFPB) last week issued two proposals aimed at weakening and discouraging arbitration clauses in contracts for consumer financial products. First, the CFPB proposes prohibiting the application of arbitration clauses to class actions proceeding in court. Specifically, the Bureau is considering a requirement that arbitration clauses in covered consumer financial contracts provide that the arbitration agreement is inapplicable to putative class actions filed in court unless and until class certification is denied or the class claims are dismissed. This proposal could significantly increase putative class claims in the consumer finance sector (indeed, increasing access to class litigation appears to be the Bureau’s goal). Second, the Bureau seeks to require entities that use arbitration agreements in their contracts to submit to the Bureau notice of claims filed in arbitration proceedings and arbitration awards, potentially for publication.

Please click here to read the full Alert.

The U.S. Supreme Court Unanimously Rules Against the Creditor in Jesinoski

By Stephen A. Fogdall

We predicted here that at least five U.S. Supreme Court Justices would reject the creditor’s argument in Jesinoski v. Countrywide Home Loans, Inc. that a borrower must file a lawsuit within three years of the consummation of the loan in order to preserve the statutory right to rescind under the Truth in Lending Act. As it turned out, the Court rejected that argument unanimously, holding instead that mere written notice to the creditor within the three-year period is sufficient. “[The statute] explains in unequivocal terms how the right to rescind is to be exercised,” the Court stated. “It provides that a borrower ‘shall have the right to rescind . . . by notifying the creditor . . . of his intention to do so’ (emphasis added). The language leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind. It follows that, so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely. The statute does not also require him to sue within three years.”

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