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.

 

Eighth Circuit Opens Circuit Split on the Scope of the Equal Credit Opportunity Act

By Aaron J. Fickes

The Equal Credit Opportunity Act (ECOA) makes it unlawful for any creditor “to discriminate against any applicant, with respect to any aspect of a credit transaction . . . on the basis of . . . marital status.” The statute was designed to prevent, in part, creditors from refusing to grant a wife’s credit application without a guaranty from her husband. However, one must be an “applicant” for the statute’s protections to apply. While Congress defined “applicant,” the Federal Reserve Bank expanded the definition by regulation to include guarantors. Is that regulation entitled to deference under the familiar Chevron two-step framework? The question is important because it determines the scope of the ECOA.

The two courts of appeals that have squarely addressed this issue have reached opposite conclusions. Earlier this year, the Sixth Circuit in RL BB Acquisition, LLC v. Bridgemill Commons Development Group enforced the regulation, effectively expanding the scope of the ECOA. According to the Sixth Circuit, because the ECOA does not specify whether a guarantor qualifies as an applicant, and because the Federal Reserve’s interpretation — that a guarantor is a credit applicant — is reasonable in light of the statute, the Federal Reserve’s definition is entitled to deference and therefore enforceable.

Recently, the Eighth Circuit in Hawkins v. Community Bank of Raymore expressly disagreed with the Sixth Circuit. In that case, the plaintiffs, two wives, alleged that Community Bank required them to execute guaranties securing loans to a company that their husbands owned solely because they are married to their respective husbands. The plaintiffs claimed that this requirement constituted discrimination against them on the basis of their marital status, in violation of the ECOA, so their guaranties were void and unenforceable. Community Bank moved for summary judgment. The trial court granted the motion, holding that the plaintiffs, as guarantors, were not “applicants” within the meaning of the ECOA. As such, Community Bank could not violate the ECOA by requiring the plaintiffs to execute guaranties.

The Eighth Circuit affirmed. At Chevron step one the court held that the plain language of the ECOA provides that a person is an applicant only if she requests credit. A guarantor does not request credit, but rather assumes a secondary, contingent liability on behalf of the person requesting credit. So, a guarantor cannot be an applicant under the ECOA. As a result, a guarantor is not protected from marital-status discrimination by the ECOA.

The Supreme Court may intervene to resolve this circuit split. Until then, it may be prudent for creditors outside of the Eighth Circuit to assume that the Sixth Circuit rule applies to avoid potential liability under the ECOA.

UPDATE: 

The Supreme Court agreed to review Hawkins and on March 22, 2016, issued a 4-4 per curiam order.  Because the Court was evenly divided, the order has the effect of affirming the Eighth Circuit’s ruling, but it has no precedential value for future cases.  As a result, the circuit split remains.

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