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.


Ninth Circuit addresses TILA tender requirement and RESPA statute of limitations

By Stephen J. Shapiro

Under the Truth in Lending Act (TILA), a borrower may seek to rescind a loan under certain circumstances. The rescission process under TILA is as follows: (1) the borrower notifies his lender that he intends to rescind the loan; (2) the lender returns any security interest to the borrower; and (3) upon return of the security interest, the borrower tenders the loan proceeds to the lender.  The Ninth Circuit recently held that a borrower need not plead that he has tendered the loan proceeds or has the ability to do so in order to state a rescission claim under TILA.

In Merritt v. Countrywide Financial Corp., the plaintiffs obtained a mortgage and took out a home equity line of credit from the defendant lender in connection with a home they purchased.  The plaintiffs alleged that, despite repeated requests, their lender did not send them the loan documentation required by TILA for almost three years. When they finally received the documents, the plaintiffs concluded that they were the victims of “predatory lending” and notified the lender that they were invoking their right to rescind the loan under TILA. When the lender did not respond to the rescission request, plaintiffs sued the lender under TILA, requesting rescission of the loan. The district court dismissed the TILA claim because the plaintiffs had not pled that they tendered the loan proceeds to the lender or had the ability to do so at the time they sought rescission.

On appeal, the Ninth Circuit reversed. The Court acknowledged that, in a prior case, it held that the district courts may require a TILA plaintiff to produce evidence of his ability to tender the loan proceeds in response to a summary judgment motion brought by the lender.  However, the Court held that its prior holding does not extend to motions to dismiss. In other words, if warranted by the circumstances, a borrower may be required to present evidence that he is able to tender to defeat a motion for summary judgment on a TILA claim, but he is not required to plead that he has the ability to tender in order to state a claim under TILA.

The plaintiffs also alleged that the lender violated Section 8 of the Real Estate Settlement Procedures Act (RESPA).  The district court dismissed the claims as time barred because plaintiffs filed their claims after RESPA’s one-year statute of limitations had expired. On appeal, the Court, addressing an issue of first impression in the Ninth Circuit, held that under the appropriate circumstances RESPA’s statute of limitations may be equitably tolled. Because the district court did not address whether the plaintiffs were entitled to equitable tolling, the Court remanded for consideration of that issue.

The Court also remanded, for initial consideration by the district court, another issue of first impression in the Ninth Circuit. Plaintiffs alleged that the defendant violated Section 8(b) of RESPA, which prohibits the “giv[ing] . . . [of] any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service . . . other than for services actually performed.” Plaintiffs alleged that the defendant violated this provision by charging them more for services provided by third parties in connection with the mortgage transaction than defendant paid for those services. The Court noted the split among the Circuits as to whether such allegations – claims that a defendant “marked up” the cost of services provided by third parties – are actionable under Section 8(b) of RESPA. Specifically, the Second and Third Circuits have held that such allegations state a claim under Section 8(b), while the Fourth, Fifth, Seventh and Eighth Circuits have held that they do not.  Because the “complicated issues of statutory interpretation and administrative law” involved in these decisions were not addressed by the district court, the Court remanded the issue for further development.

Plaintiffs fail to establish equitable tolling in another putative RESPA kickback case

By Monica C. Platt

In Riddle v. Bank of America, a judge in the Eastern District of Pennsylvania just granted summary judgment against the plaintiffs in a case alleging that banks and mortgage insurers participated in a “scheme” to pay purported kickbacks in violation of the Real Estate Settlement Procedures Act (RESPA). We have discussed other similar cases in prior posts on this blog.

RESPA prohibits giving or receiving “any fee, kickback, or thing of value” in exchange for a referral of settlement-service business. 12 U.S.C. § 2607(a). In Riddle, the plaintiffs alleged that their mortgage lender purchased mortgage insurance coverage on their loans in exchange for mortgage insurers’ agreement to reinsure that coverage with a reinsurance company affiliated with the bank.  The plaintiffs said that this agreement was a “thing of value” for the lender because the reinsurer supposedly was insulated from paying any real losses.

Plaintiffs brought their claims years after the statute of limitations had already run, but argued that the doctrine of equitable tolling saved their claims.

The Riddle court allowed the plaintiffs a limited period of discovery to try to establish a basis for equitable tolling, but the discovery was fruitless.  The plaintiffs could not show that they investigated their claims between the time their loans closed and the time their lawyers contacted them.  The court found that it was clear that plaintiffs were not diligent, and only elected to pursue litigation after they were solicited by their lawyers.  As the court put it, the plaintiffs did not proffer any evidence that they “did anything other than appear at their [loan] closings.”

The plaintiffs tried to argue that documents they received at their closings misled them about the reinsurance relationship between the mortgage insurers and the lender’s reinsurance company, but the court rejected that argument.  The court found that the plaintiffs’ real contention what that these documents “failed to disclose that [the Defendants supposedly] were violating RESPA.”  Thus, the plaintiffs, at bottom, were “trying to turn Defendants’ failure to inform them that they [allegedly] were running a scheme in violation of RESPA into an affirmative act of concealment.”  The court found that this argument was “circular and would eviscerate the statute of limitations.”

More on the Filed Rate Doctrine and Force-Placed Insurance

By Stephen A. Fogdall and Monica C. Platt

Last week, we reported on a decision out of the Southern District of New York holding that the filed rate doctrine does not apply to force-placed insurance rates because they are “secondarily billed” to the borrower. We plan to monitor this issue closely to see if other courts reach the same conclusion.

Recently, a judge in the United States District Court for the Northern District of Mississippi did not reach this conclusion.  The case is Singleton v. Wells Fargo Bank.

In Singleton, the plaintiff sued her loan servicer and a force-placed insurer, asserting violations of RESPA and other claims.  The plaintiff alleged that the servicer had agreed to give all of its force-placed business to the insurer in exchange for kickbacks.  The plaintiff said that the exclusive relationship allowed the insurer to charge inflated rates for the insurance, and that the rates were further inflated because they supposedly included the kickbacks to the servicer.

In fact, the rates had been reviewed and approved by the Mississippi Department of Insurance.  The defendants argued that the plaintiff’s claims were therefore barred by the filed rate doctrine.

The plaintiff argued in response that she was not challenging the rates themselves, but rather the manner in which they were obtained, which she described as a “manipulation of the force-placed insurance process.”

The court said that this was “semantics.”  At bottom, the plaintiff was simply asserting that the rates were too high. Because the alleged kickbacks that the plaintiff claimed were inappropriately included were actually part of the rate approved by the insurance department, the court concluded that the filed rate doctrine barred her claims.

Plaintiffs Attempting to Plead Equitable Tolling Need to do More than Simple “Box Checking”

By Christopher Reese

On July 19, 2013, the United States District Court for the Western District of Pennsylvania rejected plaintiffs’ attempts to utilize equitable tolling to save their untimely claims from dismissal because their allegations of due diligence amounted to little more than “perfunctory box checking.”

The plaintiffs in Menichino v. Citibank, N.A. and Manners v. Fifth Third Bank filed class action lawsuits against mortgage lenders, reinsurance entities affiliated with the mortgage lenders, and private mortgage insurers, alleging that reinsurance transactions between the parties violated Section 8 of the Real Estate Settlement Procedures Act (RESPA).  Plaintiffs alleged that the reinsurance agreements violated RESPA because the premiums ceded by the private mortgage insurers to the lender subsidiary reinsurers allegedly were not commensurate with the amount of reinsurance received in return.

The court granted the motions to dismiss filed by all defendants, finding that RESPA’s one-year statute of limitations had expired and that the plaintiffs had not adequately pled a basis for equitable tolling or fraudulent concealment.  The court began by rejecting the argument that issues regarding equitable tolling of the statute of limitations cannot be resolved on a Rule 12(b)(6) motion to dismiss, finding that it is not sufficient for plaintiffs to “invoke the [equitable tolling] doctrine with conclusory allegations.”  They must instead plausibly plead the basis for equitable tolling in a manner consistent with Twombly and Iqbal.  Stated differently, the court held that “it is reasonable to require the Plaintiffs to plead with specificity what they knew, when and how they knew it, and what they did about it, especially because they were in possession of those facts when they filed their Complaint.”  “Where . . . the factual predicate for pleading equitable tolling resides entirely with the Plaintiffs, they are obligated to set forth a plausible factual basis for its invocation.”  The court noted that specific pleading “is the only way the Court can determine whether fact discovery will show that [Plaintiffs] were not on inquiry notice during the limitations period.”  Alleging “in only generalized and conclusory terms that [Plaintiffs] could not have discovered the possible existence of their claims during the limitations period” is not sufficient.  The court ultimately held that “[w]ithout sufficient facts to determine what led the Plaintiffs to discover their claims and when,” their “claimed entitlement to equitable tolling [is not] plausible on its face.”

The court also held that “[w]ithout knowing the factual circumstances that ultimately gave rise to the Plaintiffs’ discovery of their injuries, [it] is similarly unable to determine” whether the due diligence they say they exercised, which consisted of reviewing loan documents and participating in closing and then contacting their lenders and/or the mortgage insurers for information years later, “was reasonable under the circumstances.”  The court found that plaintiffs’ allegations of due diligence “give rise to doubts rather than confidence that discovery will show that equitable tolling should apply.”  Plaintiffs’ allegations of due diligence were insufficient to invoke equitable tolling because they amounted to nothing more than “perfunctory ‘box checking.’”

Finally, the court rejected plaintiffs’ argument that their claims were timely under the continuing violations doctrine, holding that “it would be inappropriate as a matter of law to apply the continuing violations theory to RESPA’s statute of limitations.”

As the decisions in Menichino and Manners make clear, defendants in these types of RESPA actions and other related cases may be well-served by bringing early challenges to the sufficiency of allegations purporting to invoke the equitable tolling and/or fraudulent concealment doctrines.

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