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This project was made possible by a grant from the Office of the
Attorney General of California, from the National Mortgage Fraud
Settlement, to assist California consumers.
January 2014 Newsletter
New RESPA Rules Change Qualified Written Request
Procedure1
RESPA provides mortgage borrowers with the right to dispute
servicer errors and to obtain account information by sending a
“qualified written request.”2 The Consumer Financial Protection
Bureau (CFPB) has substantially revised the prior qualified written
request procedure. New regulations that take effect on January 10,
2014 create two separate processes: one for resolving errors on a
borrower’s account and the other for requesting information regarding
the account. The final 2013 RESPA Servicing Rule expands the scope
1 This article is the first in a two-part series authored by John Rao for the National
Consumer Law Center’s eReports service. Printed here with permission of the author
and NCLC. Copyright © 2014 National Consumer Law Center, Inc. All rights
reserved. 2 12 U.S.C. § 2605(e)(1)(B). A borrower inquiry made under section 2605(e) is referred
to as a “qualified written request,” which “includes a statement of the reasons for the
belief of the borrower, to the extent applicable, that the account is in error or
provides sufficient detail to the servicer regarding other information sought by the
borrower.”
In this issue—
RESPA’s “Qualified Written Request”
gets a makeover: new “notices of error”
and “requests for information”
Recent case summaries and regulatory
updates
Announcements—
We have updated our Litigating under
HBOR Practice Guide! The new edition,
current through 2013, is available on our
website, http://calhbor.org/resources/.
Sign up now for two webinars breaking
down the new CFPB servicing rules, and
our live HBOR training in Fresno. See
information at the end of the newsletter.
2
of these borrower inquiries, effectively overruling several court
decisions that had limited the application of qualified written requests.
Is It a QWR, NOE or RFI (or All Three)?
The Regulation X provisions that implement RESPA section 2605(e)
no longer refer to a qualified written request.3 Rather, the Regulation
X amendments establish separate qualifications and procedures
depending upon whether a written inquiry is a “notice of error” sent
under Regulation X § 1024.35 or a “request for information” sent under
Regulation X § 1024.36. As under the prior regulation, the same
written inquiry from the borrower can both dispute a servicer action
and seek information, and therefore a request for information and a
notice of error can be combined in the same writing or sent as separate
writings.4
Despite the new changes and in recognition that RESPA itself still
refers to a qualified written request, the CFPB has indicated that a
qualified written request that properly asserts an error under §
1024.35 or seeks information under § 1024.36 is a notice of error or
request for information for purposes of these respective regulations.
However, the CFPB’s Official Interpretations to Regulation X makes
clear that a qualified written request is “just one form that a written
notice of error or information request may take.”5
Thus, the requirements for compliance with a notice of error or
request for information apply irrespective of whether a servicer
receives a qualified written request. In other words, a written inquiry
can be a notice of error or request for information even if it is not a
qualified written request. What is less clear under the CFPB regime is
whether a written correspondence can be a qualified written request
3 Reg. X, 12 C.F.R. §§ 1024.35(a) and 36(a) (effective Jan. 10, 2014). 4 See Amini v. Bank of Am. Corp., 2012 WL 398636 (W.D. Wash. Feb. 7, 2012); Luciw
v. Bank of Am., 2010 WL 3958715 (N.D. Cal. Oct. 7, 2010) (statute is drafted in the
disjunctive so that request for account information alone, without statement that
account is in error, is a valid qualified written request); Goldman v. Aurora Loan
Servs., L.L.C., 2010 WL 3842308 (N.D. Ga. Sept. 24, 2010) (same); Rodeback v. Utah
Fin., 2010 WL 2757243 (D. Utah July 13, 2010) (same). 5 Official Interpretation, Supplement 1 to Part 1024, ¶ 30(b)-(Qualified written
request)-1, effective Jan. 10, 2014).
3
requiring compliance under RESPA section 2605(e) if it does not
satisfy the requirements for being either a notice of error under section
1024.35 or a request for information under section 1024.36.
Requirements for Notice of Error
A servicer is required to respond to any written notice it receives
from a borrower that asserts an error covered by section 1024.35.6 A
covered error must fall within one of the following categories:
Failing to accept a payment that conforms to the servicer’s
written requirements for making payments;
Failing to apply an accepted payment under the terms of
the mortgage loan and applicable law;
Failing to credit a borrower’s payment as of the date of
receipt in violation of 12 C.F.R. § 1026.36(c)(1);7
Failing to pay taxes, insurance, and other escrow items in
a timely manner as required by 12 C.F.R. § 1024.34(a),8 or
to refund an escrow account balance upon loan payoff as
required by 12 C.F.R. § 1024.34(b);9
Imposing a fee or charge that the servicer lacks a
reasonable basis to impose upon the borrower;
Failing to provide an accurate payoff balance amount upon
a borrower’s request in violation of 12 C.F.R. §
1026.36(c)(3);10
Failing to provide accurate information to a borrower
regarding loss mitigation options and foreclosure, as
required by 12 C.F.R. § 1024.39;11
Failing to transfer accurately and timely information
relating to the servicing of a borrower’s mortgage loan
account to a transferee servicer;
Making the first notice or filing required by applicable law
for any judicial or non-judicial foreclosure process in
violation of 12 C.F.R. § 1024.41(f) or (j);12
6 Reg. X, 12 C.F.R. § 1024.35(b) (effective Jan. 10, 2014). 7 See NCLC Foreclosures, § 9.6.3 (4th ed. and 2013 Supp.). 8 Id. at § 9.2.4. 9 Id. at § 9.2.4.2. 10 Id. at § 9.6.5. 11 Id. at § 9.2.6. 12 Id. at § 9.2.8.7.
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Moving for foreclosure judgment or order of sale, or
conducting a foreclosure sale in violation of 12 C.F.R. §
1024.41(g) or (j);13 or
Any other error relating to the servicing of a borrower’s
mortgage loan.14
Many of the covered errors relate to duties imposed on servicers by
other RESPA or Regulation X provisions. Thus, a determination of
whether a notice of error is appropriate or whether a servicer has
adequately responded to a notice will be guided by these other
provisions.
One error category that is not addressed directly by other
regulations is a servicer’s imposition of unreasonable fees on the
borrower. The CFPB’s Official Interpretations for this rule provides
some examples of unreasonable fees. A servicer lacks a reasonable
basis to impose fees that are not bona fide, such as (1) a late fee for a
payment that was not late; (2) a charge imposed by a service provider
for a service that was not actually rendered; (3) a default property
management fee for borrowers that are not in a delinquency status
that would justify the charge; or (4) a charge for force-placed insurance
in a circumstance not permitted by Regulation X section 1024.37.15
In the analysis provided when issuing the final rule, the CFPB
discussed the borrowers’ right to assert a notice of error based on a
servicer’s failure to provide accurate information about available loss
mitigation options. The CFPB stated that “it is critical for borrowers to
have information regarding available loss mitigation options,” and that
that this access should include “accurate information about the loss
mitigation options available to the borrower, the requirements for
receiving an evaluation for any such loss mitigation option, and the
applicable timelines relating to both the evaluation of the borrower for
the loss mitigation options and any potential foreclosure process.”16
The CFPB also noted that servicers are typically required to provide
13 Id. 14 Reg. X, 12 C.F.R. § 1024.35(b) (effective Jan. 10, 2014). 15 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(b)-2 (effective Jan.
10, 2014). 16 See Section-by-Section Analysis, § 1024.35(b)(7), 78 Fed. Reg. 10742 (Feb. 14,
2013).
5
borrowers with information about loss mitigation options and
foreclosure under the National Mortgage Settlement and servicer
participation agreements with the Department of the Treasury, HUD,
Fannie Mae, and Freddie Mac, and that “providing such information to
borrowers is a standard servicer duty.”17
Importantly, the new notice of error rule permits the borrower to
dispute errors related to the transfer of servicing. The final 2013
RESPA Servicing Rule imposes a general obligation on transferor and
transferee servicers to have the capacity to accurately transfer
information and download data for transferred mortgage loans from
and onto their servicing platforms.18 The CFPB describes the accurate
and timely transfer of information on a borrower’s mortgage account as
a “standard servicer duty.”19 This general requirement is found in
Regulation X § 1024.38, which is one of the few new regulations that is
not privately enforceable. However, it is enforceable under the error
resolution procedure. If the borrower believes that information has not
been accurately transferred, a servicer’s failure to correct the error can
lead to liability under RESPA. The CFPB’s analysis of this provision
notes that “by defining an error in this way, a borrower will have a
remedy to ensure that a transferor servicer provides information to a
transferee servicer that accurately reflects the borrower’s account
consistent with the obligations applicable to a servicer’s general
servicing policies and procedures.”20
Non-Covered Errors
The CFPB’s Official Bureau Interpretation provides examples of
“noncovered errors” that are consistent with matters generally not
considered to be related to the servicing of a mortgage loan. A servicer
is not compelled to respond to a written notice sent by the borrower
that asserts an error relating to the origination, underwriting, and
17 Id. 18 Reg. X, 12 C.F.R. § 1024.38(b)(4) (effective Jan. 10, 2014); § 9.4, infra. 19 See Section-by-Section Analysis, § 1024.35(b)(8), 78 Fed. Reg. 10,743 (Feb. 14,
2013). 20 Id.
6
subsequent sale or securitization of a mortgage loan.21 Additionally, an
asserted error relating to the determination to sell, assign, or transfer
the servicing of a mortgage loan is not a covered error. In contrast, the
failure to transfer accurately and timely information relating to the
servicing of a borrower’s mortgage loan account to a transferee servicer
as discussed above is a covered error.22
General “Catchall” for Errors Relating to Servicing of Loan
When the CFPB initially proposed the error resolution rule, it
contained an exclusive list of nine covered errors.23 The list of specific
covered errors did not include a general category for errors related to
the servicing of the borrower’s loan. NCLC and other consumer
organizations submitted comments noting that RESPA section 2605(e)
is drafted broadly and does not contain a finite list of potential errors,
and that the Dodd-Frank Act amendment adding subsection
2605(k)(1)(C) requires servicers to correct errors relating to “standard
servicer duties.” It was also pointed out that the proposed rule would
fail to address future servicing problems as standard servicer’s duties
change over time.
In response to these comments, the CFPB added to the final rule a
catch-all category for “any other error relating to the servicing of a
borrower’s mortgage loan.”24 The CFPB agreed with “consumer
advocacy commenters that the mortgage market is fluid and constantly
changing and that it is impossible to anticipate with certainty the
precise nature of the issues that borrowers will encounter.”25
Servicers will likely argue that a notice of error asserting an error
under the catch-all provision is ineffective unless it pertains to a
servicing duty set out in the definition of “servicing” provided in
21 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(b)-1 (effective Jan.
10, 2014). 22 Id. 23 See Section-by-Section Analysis, § 1024.35(b)(11), 78 Fed. Reg. 10,743/-/44 (Feb. 14,
2013). 24 Reg. X, 12 C.F.R. § 1024.35(b)(11) (effective Jan. 10, 2014). 25 See Section-by-Section Analysis, § 1024.35(b)(11), 78 Fed. Reg. 10,744 (Feb. 14,
2013).
7
RESPA section 2605(i)(3),26 relying on court opinions from cases
concerning qualified written requests decided before the 2013
amendments to Regulation X became effective.27 These pre-January
10, 2014 court opinions no longer have precedential value based on the
substantial changes made to Regulation X by the 2013 amendments.
Although the CFPB retained the statutory definition of servicing in
Regulation X section 1024.2, amendments to regulations under both
Regulation X and Regulation Z recognize that standard servicer duties
have greatly expanded since the 1990 Servicer Act amendments to
RESPA. For example, Subpart C of Regulation X now includes
regulations dealing with servicing operations not contemplated by the
definition of “servicing” in RESPA section 2605(i)(3), such as force-
placed insurance, disclosure of mortgage owners, foreclosure
avoidance, and loss mitigation. Regulation X also now includes a
separate section that describes general servicing policies, procedures,
and requirements, based on the CFPB’s analysis of servicing industry
practices.28 These significant regulatory changes and developing
industry practices must be considered when determining whether an
error asserted under the catch-all provision in section 1024.35(b)(11) is
related to the servicing of a borrower’s mortgage loan.
Notice of Error for Failure to Correctly Evaluate Loss
Mitigation Options
This leads to the question of whether a borrower can assert as an
error under the catch-all provision in section 1024.35(b)(11) a servicer’s
failure to correctly evaluate a borrower for a loss mitigation option?
26 The term “servicing” is defined in section 2605(i)(3) to mean “receiving any
scheduled periodic payments from a borrower pursuant to the terms of any loan,
including amounts for escrow accounts . . . and making the payments of principal and
interest and such other payments with respect to the amounts received from the
borrower as may be required pursuant to the terms of the loan.” 27 See, e.g., Bilek v. Bank of Am., 2011 WL 830948 (N.D. Ill. Mar. 3, 2011) (letter sent
when borrower was in foreclosure is not a qualified written request because servicer
is no longer “receiving any scheduled periodic payments)”); Moore v. Fed. Deposit
Ins. Corp., 2009 WL 4405538 (N.D. Ill. Nov. 30, 2009) (borrower inquiry seeking
information about amounts claimed as due on a mortgage account is not related to
servicing). See also NCLC Foreclosures, § 9.2.2.2.3.1 (4th ed. and 2013 Supp.). 28 Reg. X, 12 C.F.R. § 1024.38 (effective Jan. 10, 2014).
8
Although the final 2013 RESPA Servicing Rule focuses only on a
servicer’s duty to follow standard loss mitigation procedures and does
not compel a servicer to offer loan modifications or any particular loss
mitigation option, it does establish loss mitigation activities as a
standard servicer duty.29 In addition, Congress has specifically stated
that the loan modification analysis required by the HAMP program is
the standard of the residential mortgage servicing industry under both
federal and state law.30 As the CFPB correctly noted, “any error
related to the servicing of a borrower’s mortgage loan also relates to
standard servicer duties.”31 It would thus seem appropriate for a notice
of error to be used by a borrower to seek correction of a servicer’s
improper denial of a loan modification application by asserting, for
example, that the servicer failed to follow HAMP or GSE guidelines, or
erroneously applied the net present value test.
In discussing its reasoning for not including a servicer’s failure to
correctly evaluate a borrower for a loss mitigation option as a specific
covered error in section 1024.35(b), the CFPB stated that the “appeals
process set forth in § 1024.41(h) provides an effective procedural
means for borrowers to address issues relating to a servicer’s
evaluation of a borrower for a loan modification program.”32
Significantly, though, the CFPB went on to state in this same
discussion that it was adding the catch-all provision to the error
resolution procedure under section 1024.35(b) so as “to encompass the
myriad and diverse types of errors that borrowers may encounter with
respect to their mortgage loans.”33 In doing so, the CFPB did not
foreclose arguments that a notice of error for a servicer’s failure to
29 See Reg. X, 12 C.F.R. § 1024.41 (effective Jan. 10, 2014) (loss mitigation
procedures); NCLC Foreclosures, § 9.2.8 (4th ed. and 2013 Supp.). See also
CWCapital Asset Mgmt., L.L.C. v. Chicago Properties, L.L.C., 610 F.3d 497, 500 (7th
Cir. 2010) (describing common duties of a servicer of loans in a securitized trust,
including “modifying the mortgage to make its terms less onerous to the borrower”). 30 See Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-22, 123 Stat.
1632 (2009) (“The qualified loss mitigation plan guidelines issued by the Secretary of
the Treasury under the Emergency Economic Stabilization Act of 2008 shall
constitute standard industry practice for purposes of all Federal and State laws”). 31 See Section-by-Section Analysis, § 1024.35(b)(11), 78 Fed. Reg. 10,744 (Feb. 14,
2013). 32 See Section-by-Section Analysis, § 1024.35(b)(11), 78 Fed. Reg. 10,744 (Feb. 14,
2013). 33 Id.
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correctly evaluate a borrower for a loss mitigation option may be
proper. Such a notice of error may be particularly appropriate when
the “procedural means” for seeking redress under the appeal process
are ineffective or inapplicable.
It is also significant that while the CFPB did not include loss
mitigation evaluation as a covered error, it also did not exclude it or
indicate that it was a “noncovered error.” Although section 1024.35
includes express exclusions and limitations on the use of error notices
as discussed above, nothing in section 1024.35 or its commentary
prohibits a borrower from asserting an error under the catch-all
provision in section 1024.35(b)(11) based on a servicer’s failure to
correctly evaluate a loss mitigation application. In fact, RESPA itself
requires servicers, through amendments made by the Dodd-Frank Act,
to take timely action to correct errors relating to “avoiding foreclosure,”
suggesting that borrowers should be able to assert under RESPA
errors related to loss mitigation.34
Duplicative and Overbroad Notice of Error
The pre-January 10, 2014 version of Regulation X did not include
an exclusion from compliance for a dispute notice sent as a qualified
written request that was duplicative or overbroad. The 2013
amendments to Regulation X change this by permitting a servicer to
reject certain error notices. A servicer is not required to comply with
the response requirements if the servicer reasonably determines that
the asserted error is substantially the same as an error previously
asserted by the borrower for which the servicer has previously
complied, unless the borrower provides new and material information
to support the asserted error.35 New and material information means
information the servicer did not previously review in connection with
investigating a prior notice and is reasonably likely to change the
servicer’s prior determination about the error. A dispute over whether
information was previously reviewed by a servicer or whether a
servicer properly determined that information reviewed was not
34 12 U.S.C. § 2605(k)(1)(C). 35 Reg. X, 12 C.F.R. § 1024.35(g)(1)(i) (effective Jan. 10, 2014).
10
material to its prior determination does not itself constitute new and
material information.36
A servicer may also refuse to comply with an overbroad notice of
error. A notice of error is overbroad if the servicer cannot reasonably
determine from the notice the specific error that the borrower asserts
has occurred on the account.37 A servicer is nevertheless required to
comply with an otherwise overbroad notice of error to the extent that
the servicer reasonably identifies some valid assertion of an error
within the notice.38 The Official Interpretations provide the following
examples of an overbroad notice of error:
Assertions of errors regarding substantially all aspects of a
mortgage loan, including errors relating to all aspects of
mortgage origination, mortgage servicing, and foreclosure,
as well as errors relating to the crediting of substantially
every borrower payment and escrow account transaction;
Assertions of errors in the form of a judicial action
complaint, subpoena, or discovery request that purports to
require servicers to respond to each numbered paragraph;
and
Assertions of errors in a form that is not reasonably
understandable or is included with voluminous tangential
discussion or requests for information, such that a servicer
cannot reasonably identify from the notice of error any
error for which § 1024.35 requires a response.39
The exclusion for duplicative or overbroad error notices appears
intended by the CFPB as a response to servicer complaints about
boilerplate qualified written requests available on the internet that
have been used by pro se homeowners and some attorneys in
foreclosure litigation.40 These forms often contain numbered
36 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(g)(1)(i)-1 (effective
Jan. 10, 2014). 37 Reg. X, 12 C.F.R. § 1024.35(g)(1)(ii) (effective Jan. 10, 2014). 38 Id. 39 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(g)(1)(ii)-1 (effective
Jan. 10, 2014). 40 See Section-by-Section Analysis, § 1024.36(f)(1)(iv), 78 Fed. Reg. 10,760 (Feb. 14,
2013) (“During the Small Business Review Panel outreach, small entity
11
paragraphs that resemble discovery requests and have numerous
assertions that may not be relevant to the homeowner’s dispute. To
avoid any potential servicer defense in litigation over violations of
RESPA section 2605(e) and Regulation X section 1024.35, an attorney
who drafts a notice of error should ensure that it is concise and tailored
to the facts of the particular case.
If the servicer determines that a notice of error is duplicative or
overbroad, the servicer must notify the borrower in writing within five
business days after making its determination.41 The notice must set
forth the basis for the servicer’s determination. The failure to provide
such notice to the borrower should preclude a servicer from having a
defense to liability for noncompliance in subsequent litigation based on
an argument that the requirements were not applicable.
Compliance with Notices of Error
The final 2013 RESPA Servicing Rule makes the dispute rights
under RESPA more effective by shortening the response periods. The
servicer must acknowledge receipt of a notice of error within five days
(excluding holidays, Saturdays, and Sundays) after receiving the
notice, rather than the twenty business day period under the former
law.42 Alternatively, the servicer need not provide this
acknowledgment or otherwise satisfy the compliance requirements if it
corrects the error or errors asserted by the borrower, and notifies the
borrower in writing of the correction, within the five business day
period.43
Except for certain notices of error that have different response
periods as discussed below, a servicer must respond to a notice of error
from the borrower within thirty days (excluding holidays, Saturdays,
and Sundays) after receiving the notice.44 This is significantly shorter
representatives expressed that typically qualified written requests received from
borrowers were vague forms found online or forms used by advocates as a form of
pre-litigation discovery.”). 41 Reg. X, 12 C.F.R. § 1024.35(g)(2) (effective Jan. 10, 2014). 42 Reg. X, 12 C.F.R. §§ 1024.35(d) (effective Jan. 10, 2014). 43 Reg. X, 12 C.F.R. §§ 1024.35(f) (effective Jan. 10, 2014). 44 Reg. X, 12 C.F.R. §§ 1024.35(e)(3) (effective Jan. 10, 2014).
12
than the prior sixty business day response period. A servicer
adequately responds by taking action to either:
Correct the error or errors asserted by the borrower and
provide the borrower with a written notification of the
correction, the effective date of the correction, and contact
information, including a telephone number, for further
assistance; or
Conduct a reasonable investigation and provide the
borrower with a written notification that includes a
statement that the servicer has determined that no error
occurred, a statement of the reason or reasons for this
determination, a statement of the borrower’s right to
request documents relied upon by the servicer in reaching
its determination, information regarding how the
borrower can request such documents, and contact
information, including a telephone number, for further
assistance.45
Additionally, if during a reasonable investigation of a notice of
error, a servicer determines that there were errors other than or in
addition to the error asserted by the borrower, the servicer must
correct these additional errors and provide the borrower with a written
notification that describes the errors, the action taken to correct the
errors, the effective date of the correction, and contact information,
including a telephone number, for further assistance.46 A servicer may
provide the response for different or additional errors it identifies in
the same notice that responds to errors asserted by the borrower or in
a separate response that addresses these different or additional
errors.47
Shorter Time Deadlines for Certain Notices of Error
Different time limitations apply to certain notices of error. If the
borrower sends a notice of error under section 1024.35(b)(6) asserting
45 Reg. X, 12 C.F.R. §§ 1024.35(e)(1) (effective Jan. 10, 2014). 46 Reg. X, 12 C.F.R. § 1024.36(e)(1)(ii) (effective Jan. 10, 2014). 47 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(e)(1)(ii)-1 (effective
Jan. 10, 2014).
13
that the servicer has failed to provide an accurate loan payoff balance
following a request made under Regulation Z section 1026.36(c)(3),48
the servicer must respond within seven days (excluding holidays,
Saturdays, and Sundays) after receiving the notice.49
For a notice of error asserting certain violations of the Regulation X
loss mitigation procedures, either under section 1024.35(b)(9) that the
servicer initiated a foreclosure before the 120th day of delinquency in
violation of section 1024.41 (f) or (j), or under section 1024.35 (b)(10)
that the servicer moved for foreclosure judgment or conducted a
foreclosure sale in violation of section 1024.41(g) or (j),50 the servicer
must respond prior to the date of a foreclosure sale or within thirty
days (excluding holidays, Saturdays, and Sundays), whichever is
earlier, after the servicer receives the notice of error.51 However, a
servicer is not required to comply with such an error notice if the
servicer receives it seven or less days before a scheduled foreclosure
sale.52 In this situation a servicer shall make a good faith attempt to
respond to the borrower, orally or in writing, and either correct the
error or state the reason it believes no error has occurred.53
Extension of Response Period
A servicer may extend the thirty-day time period for responding to
an notice of error by an additional fifteen days (excluding legal public
holidays, Saturdays, and Sundays) if, before the end of the thirty-day
period, the servicer notifies the borrower in writing of the extension
and the reasons for the extension.54 Although the borrower notification
must state the reasons for the extension, RESPA and Regulation X do
not require that the servicer have a valid or justifiable reason for
extending the time period.
48 See NCLC Foreclosures, § 9.6.5 (4th ed. and 2013 Supp.) and NCLC eReports, Nov.
2013, No. 4. 49 Reg. X, 12 C.F.R. §§ 1024.35(e)(3)(i)(A) (effective Jan. 10, 2014). 50 See NCLC Foreclosures, § 9.2.8.7 (4th ed. and 2013 Supp.) . The loss mitigation
rule will be covered in a future eReports article. 51 Reg. X, 12 C.F.R. § 1024.35(e)(3)(i)(B) (effective Jan. 10, 2014). 52 Reg. X, 12 C.F.R. § 1024.35(f)(2) (effective Jan. 10, 2014). 53 Id. 54 12 U.S.C. 12 C.F.R. § 2605(e)(4); Reg. X, § 1024.35(e)(3)(ii) (effective Jan. 10, 2014).
14
However, a servicer’s right to a fifteen-day extension does not apply
to all notices of error. A servicer may not extend the seven-day time
period for responding to a notice of error under section 1024.35(b)(6)
asserting that the servicer failed to provide an accurate loan payoff
balance.55 Similarly, no extension of time for compliance is permitted
for a notice of error under either section 1024.35(b)(9) or (b)(10)
asserting violations of the applicable loss mitigation procedures.56 If a
servicer cannot comply by the earlier of the foreclosure sale or thirty
days after receipt of the notice of error, it may cancel or postpone a
foreclosure sale.57 A servicer in this situation would comply with the
time limit by responding before the earlier of the date of the
rescheduled foreclosure sale or thirty business days after receipt of the
notice of error.
If the borrower sends a notice of error that asserts multiple errors,
the CFPB’s Official Bureau Interpretation advises that the servicer
may respond through either a single response or separate responses
that address each error.58 It may also treat such a notice of error as
separate notices of error and may extend the time period for
responding to each asserted error for which an extension is
permissible.59
Borrower Right to Request Documentation Supporting
Response
Regulation X imposes several additional requirements upon
servicers in responding to a notice of error. If the borrower requests
copies of documents and information relied upon by the servicer in
making a determination that no error occurred, a servicer shall provide
to the borrower, at no charge, the documents and information within
fifteen business days of receiving the borrower’s request for such
55 Id. 56 Id. 57 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(e)(3)(i)(B)-1 (effective
Jan. 10, 2014). 58 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(e)(1)(i)-1 (effective
Jan. 10, 2014). 59 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(e)(3)(ii)-1 (effective
Jan. 10, 2014).
15
documents.60 Only those documents actually relied upon by the
servicer in finding that no error occurred are required to be produced.
This may include documents reflecting information entered in a
servicer’s collection system, such as a copy of a screen shot of the
servicer’s system showing amounts credited to the borrower’s loan if
the asserted error involves payment allocation.61
A servicer is not required to provide documents relied upon that it
determines contain confidential, proprietary, or privileged information.
If a servicer withholds documents on this basis, the servicer must
notify the borrower of its determination in writing within fifteen
business days of receipt of the borrower’s request for such documents.62
Regulation X permits a servicer to request that the borrower
provide supporting documentation in connection with the investigation
of an asserted error. However, a servicer may not (1) require a
borrower to provide such information as a condition of investigating an
error; or (2) determine that no error occurred because the borrower
failed to provide any requested information without conducting a
reasonable investigation.63
Ban on Charging Response Fees
The Dodd-Frank Act clarifies that a servicer shall not charge a fee
for responding to a “valid qualified written request.”64 This provision is
implemented by Regulation X section 1024.35(h) for notices of error
and section 1024.36(g) for requests for information.65 A servicer is
prohibited from charging a fee as a condition of responding to a notice
of error or request for information.
The final 2013 RESPA Servicing Rule also clarifies that a servicer
shall not require a borrower to make any payment that may be owed
on a borrower’s account as a condition of responding to a notice of
60 Reg. X, 12 C.F.R. § 1024.36(e)(4) (effective Jan. 10, 2014). 61 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(e)(4)-1 (effective Jan.
10, 2014). 62 Id. 63 Reg. X, 12 C.F.R. § 1024.36(e)(2) (effective Jan. 10, 2014). 64 Pub. L. No. 111-203, 124 Stat. 1376, tit. XIV, § 1463(a) (July 21, 2010). 65 Reg. X, 12 C.F.R. § 1024.35(h) and § 1024.36(g) (effective Jan. 10, 2014).
16
error.66 The Official Interpretations instruct that this borrower
protection does not alter the borrower’s obligation to make payments
owed under the terms of the mortgage loan.67 For example, if a
borrower sends a notice of error asserting that the servicer failed to
accept the borrower’s monthly payment made in February, the
borrower is still obligated to make the March monthly payment.
However, the servicer may not require that a borrower make the
March payment as a condition for complying with its obligations under
section 1024.35 with respect to the notice of error on the February
payment.
66 Reg. X, 12 C.F.R. § 1024.35(h) (effective Jan. 10, 2014). 67 See Official Interpretations, Supplement 1 to Part 1024, ¶ 35(h)-1 (effective Jan.
10, 2014).
17
Summaries of Recent Cases
Unpublished & Trial Court Decisions68
Promissory Estoppel
Haroutunian v. GMAC Mortg., LLC., 2013 WL 6687158 (Cal. Ct.
App. Dec. 19, 2013): Promissory estoppel claims must include: 1) a
promise, 2) reasonably made with the expectation of inducing reliance
by the other party; 3) detrimental reliance; and 4) injustice if the
promise is not enforced. Here, servicer promised to cancel a foreclosure
sale if borrower paid an initial $10,000, followed by five monthly
payments that would bring her mortgage current. Borrower made the
initial and two monthly payments, but the home was foreclosed. The
trial court refused borrower’s motion to amend her complaint to assert
a promissory estoppel claim against her servicer. The Court of Appeal
remanded the case, considering this an abuse of discretion, and
instructed the trial court to allow borrower to add a promissory
estoppel cause of action because her facts stated a valid PE claim.
First, there was a clear and unambiguous promise to cancel the sale in
exchange for money, “paid in accordance with a written payment
schedule to be provided by [servicer].” This was not an “agreement to
agree,” and borrower did not breach the agreement by waiting to make
her first monthly payment until she received the schedule from
servicer (which was after the servicer had scheduled the first
payment). Further, borrower had taken out personal loans to pay the
entire reinstatement amount in a lump sum, but servicer only offered
to cancel the sale if borrower reinstated with installment payments.
Borrower detrimentally relied on servicer’s promise by choosing not to
reinstate in a lump sum, and in making three installment payments.
Servicer should have reasonably expected borrower to rely on its
promise not to foreclose, demonstrated by borrower’s continued
installment payments up to the foreclosure. The statute of frauds
68 Cases without Westlaw citations can found at the end of the newsletter. Please
refer to Cal. Rule of Ct. 8.1115 before citing unpublished decisions.
18
defense argued by servicer is inapplicable to a promissory estoppel
cause of action. Lastly, borrower’s pleadings, if true, show that
injustice can only be avoided if the promise is enforced.
Federal Cases
First Circuit Upholds Dismissal of HAMP-Related Implied
Covenant of Good Faith & Fair Dealing and Negligence Claims
MacKenzie v. Flagstar Bank, FSB, __ F.3d __, 2013 WL 6840611
(1st Cir. Dec. 30, 2013): Breach of implied covenant of good faith and
fair dealing claims require borrowers to show their servicer unfairly
interfered with the borrower’s right to see a contract fully performed.
Here, servicer offered borrowers a HAMP modification but rescinded
that offer (after what appears to be borrowers’ rejection) just six days
later. Two contracts gave rise to possible (but ultimately unsuccessful)
fair dealing claims. First, borrowers argued that as a third party
beneficiary to the Servicer Participation Agreement (SPA) between
their servicer and the Treasury Department (part of the HAMP
program) they could assert a valid fair dealing claim. The First Circuit,
however, reaffirmed the widely held reasoning that private borrowers
are not third party beneficiaries to SPA agreements. They are rather
“incidental” beneficiaries of the HAMP program, and cannot bring
contract-related causes of action using those agreements. Second,
borrowers staked their fair dealing claim on their mortgage agreement,
arguing that their servicer must act “in good faith” and “use reasonable
diligence to protect the interests of the mortgagor.” But because
nothing in the mortgage contract required the servicer to modify the
loan, or even to consider a modification, servicer’s failure to extend a
modification did not breach the implied covenant. The court upheld the
dismissal of borrower’s breach claim pertaining to both contracts.
As in California, Massachusetts borrowers must allege they were owed
a duty of care by their servicer to bring a claim for negligence, and a
normal borrower-lender relationship does not give rise to a duty. No
duty was owed under the SPA agreement –to which borrowers are not
19
third party beneficiaries— or under HAMP itself. Nor can statutory
causes of action provide the basis for a negligence claim absent an
independent duty of care. Further, HAMP violations do not provide
grounds for negligence per se. Borrowers were unable to establish a
duty of care and the court upheld the dismissal of their negligence
claim.
Tender Not Required When Sale Would be Void
Aniel v. Aurora Loan Servs., LLC, __ F. App’x __, 2013 WL 6671549
(9th Cir. Dec. 19, 2013): California law requires borrowers bringing
wrongful foreclosure claims to tender the amount due on their loan.
There are several exceptions to this rule, including where the
allegations, if true, would render the foreclosure sale void. Alleging
mere irregularities in the foreclosure sale is not enough to escape
tender. Here, borrowers brought a wrongful foreclosure claim based on
an allegedly fraudulent (forged) substitution of trustee. If true, this
allegation would render the sale void and extinguish the tender
requirement. The district court erred, then, in dismissing borrower’s
claim with prejudice based on borrower’s inability to tender.
Ninth Circuit Definition of “Debt Collector” under the FDCPA
& Who Bears the Burden of Proof
In re Brown, 2013 WL 6511979 (B.A.P. 9th Cir. Dec. 12, 2013): The
FDCPA defines “debt collector” two ways: 1) “any person who uses any
instrumentality of interstate commerce or the mails in any business
the principal purpose of which is the collection of any debts;” 2) or any
person “who regularly collects or attempts to collect, directly or
indirectly, debts owed . . . or due another.” The Ninth Circuit recently
determined that, to be liable under the first definition, a “debt
collector” must have debt collection as the principal purpose of its
business, not merely a principal purpose. Schlegel v. Wells Fargo Bank,
N.A. (In re Schlegel), 720 F.3d 1204 (9th Cir. 2013) (summarized in our
August 2013 newsletter). Plaintiff-debtors bear the burden of proving
this element. Here, the trial bankruptcy court (which decided the case
20
before Schlegel was published) impermissibly shifted the burden of
proof to defendant-servicers, requiring them to show that debt
collection was not the principal purpose of their businesses. The
bankruptcy court granted servicers their summary judgment motion
on other grounds, so this error was “harmless,” but the Ninth Circuit
BAP, in affirming the bankruptcy court’s decision, clarified that
servicers do not have to show they are not “debt collectors” as defined
in Schlegel. Rather, plaintiff-borrowers must affirmatively show that
debt collection is the principal purpose of their servicer’s business (or
at least that servicer’s status as a “debt collector” is a genuine issue of
material fact).
HUD Policy Statement on RESPA’s “Affiliated Business
Arrangement” Exception is Not Binding
Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722 (6th Cir. 2013):
RESPA prohibits settlement-service providers, like real estate agencies
and title insurers, from accepting fees or kickbacks for business
referrals. This prohibition, however, does not apply to “affiliated
business arrangements” (ABAs), as defined by three prerequisites in
the statute. HUD issued a policy statement in 1996, identifying ten
factors the agency should consider in ferreting out sham ABAs. Here,
borrowers alleged their real estate agency impermissibly created a
sham ABA with a title service company that referred business to a
separate title insurance provider. This title insurance provider
performed the bulk of the title work, leaving the sham ABA to conceal
the kickbacks. Borrowers conceded that the ABA met the three
prerequisites outlined in RESPA, but argued it nevertheless violated
RESPA because it did not satisfy the ten HUD-specified factors and
was, therefore, a sham ABA. The Sixth Circuit disagreed, holding that
as long as the business arrangement met the three requirements listed
in RESPA, it qualified as an ABA and escaped RESPA liability. This
ruling effectively held that HUD’s long-standing policy statement was
irrelevant, not entitled to Chevron or Skidmore deference, and not
binding on the court.
21
FDCPA vs. Rosenthal: Differing Definitions of “Debt Collector”
& “Debt Collection”
Webb v. Bank of Am., N.A., 2013 WL 6839501 (E.D. Cal. Dec. 23,
2013): The FDCPA defines “debt collector” as: 1) “any person who uses
any instrumentality of interstate commerce or the mails in any
business the principal purpose of which is the collection of any debts;”
2) or any person “who regularly collects or attempts to collect, directly
or indirectly, debts owed . . . or due another.” The Ninth Circuit has
not explicitly determined whether mortgage servicers (or their
transferees) are “debt collectors” under the FDCPA, but this court has
previously discounted that notion because servicers are collecting debt
owed to themselves, not to others. (If a servicer bought the loan while it
was in default, that is an exception to the general rule that servicers
are not “debt collectors.”) This borrower brought an FDCPA claim
against her new servicer, which purchased servicing rights to
borrower’s loan after borrower was granted a permanent modification
and had already begun making modified payments. The new servicer
refused to accept borrower’s modified mortgage payments and
attempted to collect her un-modified amount. The court found the
servicer did not qualify as a “debt collector” under the FDCPA and
dismissed this claim.
The Rosenthal Act’s definition of “debt collector” is much broader: “any
person who, in the ordinary course of business, regularly, on behalf of
himself or herself or others, engages in debt collection.” But to even
reach that inquiry, borrower had to assert that her servicer was
engaged in “debt collection,” which this court had previously
determined did not include foreclosure. The court cited Corvello v.
Wells Fargo Bank, 728 F.3d 878 (9th Cir. 2013) for the proposition that
engaging in a modification agreement (in Corvello, a TPP) and
collecting modified payments can qualify as “debt collection.” This
ruling, and borrower’s allegations that servicer repeatedly demanded
un-modified mortgage payments and did not merely engage in
foreclosure activity, convinced the court that servicer should not
“categorically [be] excluded as a ‘debt collector’ under the Rosenthal
Act.” Under its broad definition, which includes entities collecting their
22
own debts, servicer qualified as a “debt collector” and the court denied
its motion to dismiss borrower’s Rosenthal claim. Borrower’s unlawful
prong UCL claim, based on her Rosenthal claim, also survived.
Fraudulent Substitution of Trustee: Basis for Wrongful
Foreclosure Claim, Tender Excused
Engler v. ReconTrust Co., 2013 WL 6815013 (C.D. Cal. Dec. 20,
2013): California law requires any substitution of a trustee be
recorded, executed and acknowledged by “all of the beneficiaries under
the trust deed or their successors in interest.” CC § 2934(a)(1). Invalid
substitutions render any resulting foreclosure sale void. In this case,
MERS was listed as the beneficiary on borrower’s original note.
Accordingly, MERS –or its authorized agent—should have signed the
substitution of trustee that was recorded the day after the NOD was
recorded. The only signature appearing on the substitution of trustee,
however, belonged to an employee of borrower’s servicer, not an
employee of MERS. The court found these allegations sufficient to
state a valid wrongful foreclosure claim based on noncompliance with
CC 2934(a). No tender was required because these allegations, if true,
would render the foreclosure void.
“Mislabeling” a Cause of Action; Valid Constructive Fraud and
UCL “Unfair” Prong Claims Based on Reverse Mortgage
Origination
Welte v. Wells Fargo Bank, N.A., 2013 WL 6728889 (C.D. Cal. Dec.
18, 2013): Under the federal rules, a complaint should not be dismissed
just because the facts alleged do not match up exactly with the
“particular legal theory” advanced by plaintiff. A court should, if it can,
look at the facts alleged in the complaint and determine if they support
any valid legal theory. Here, borrower brought a negligent
misrepresentation claim against the parties who arranged a reverse
mortgage for her and her (now deceased) husband. In her opposition to
defendants’ motion to dismiss, she stated that this claim was
“mislabeled” and should instead be characterized as a fraud claim. The
23
court agreed that plaintiff was not impermissibly asserting additional
facts in her opposition, but that her complaint alleged sufficient facts
to support a fraud cause of action. The court denied the motion to
dismiss plaintiff’s negligent misrepresentation claim, but instructed
her to change the title of the claim to reflect its true nature: fraud.
To allege constructive fraud, a plaintiff must show: “1) any breach of
duty which, without an actual fraudulent intent, 2) gains an advantage
to the person in fault . . . by misleading another to his prejudice.” Duty
and breach were established at an earlier stage in this litigation, and
the court now found that defendants had gained an advantage by
breaching that duty. In failing to disclose that plaintiff should have
been included as a “borrower” and “owner” in the reverse mortgage
arrangement, and that under the HUD regulation foreclosure was
solely dependent upon the death of her husband, defendants failed to
disclose material facts. Plaintiff’s fraud claim survived.
To state a UCL claim under its “unfair” prong, a plaintiff must show
that defendant’s actions or practices “offends an established public
policy or . . . is immoral, unethical, oppressive, unscrupulous or
substantially injurious to consumers.” Reverse mortgages are insured
by HUD and intended to protect elderly homeowners as they age and
“prevent displacement.” Plaintiff’s “unfair” UCL claim then, survives
the motion to dismiss because failing to treat the homeowner’s spouse
as a homeowner, protected under the reverse mortgage regulation, is
an unfair business practice.69
Glaski-like Claim Rejected; Prejudice Required for Wrongful
Foreclosure and Robo-Signing Claims
Rivac v. NDeX West LLC, 2013 WL 6662762 (N.D. Cal. Dec. 17,
2013): The borrowers in Glaski v. Bank of America (see HBOR
Collaborative’s August and September newsletters) successfully
69 In accordance with Bennett v. Donovan, __ F. Supp. 2d __, 2013 WL 5424708
(D.D.C. Sept. 30, 2013), HUD will likely revise the regulation to conform with
statutory language that prohibits foreclosure until the death of the borrower and the
borrower’s spouse.
24
alleged a wrongful foreclosure claim based on a void assignment of the
deed of trust. Specifically, the owner of the loan attempted to assign it
to a trust after the trust had already closed according to the trust’s own
pooling and servicing agreement (PSA). In this case, borrowers
attempted a slightly different argument: that the owner of their loan
failed to record the loan’s assignment to a trust within the 90 days
specified in that trust’s PSA. Instead, the assignment was recorded
four years later. The court did not address this argument specifically,
but instead recited the oft-repeated reasoning that securitization does
nothing to effect the authority to foreclose. Addressing Glaski, this
court sided with the majority of California courts in rejecting the
notion that borrowers have standing to challenge a PSA to which they
are not a party or a third-party beneficiary.
To bring a wrongful foreclosure claim, many California courts require
borrowers to show prejudice resulting from the fraudulent
foreclosure—not from borrower’s default. So too with robo-signing
claims: “where a [borrower] alleges that a document is void due to
robo-signing, yet does not contest the validity of the underlying debt,
and is not a party to the assignment, the [borrower] does not have
standing to contest the alleged fraudulent transfer.” Here, borrowers’
wrongful foreclosure and robo-signing claims were dismissed, in part,
because they could not allege prejudice unrelated to their own default.
Basically, the court determined that even if there were irregularities in
the foreclosure sale, or in assignments leading up to the sale, the
foreclosure would still have occurred because of borrowers’ default.
Borrowers must show defendants’ wrongful acts—securitization
irregularities, foreclosure notice irregularities, or robo-signing—
directly caused harm to the borrower.
Statutory Immunities from Slander of Title Claims
Patel v. Mortg. Elec. Reg. Sys. Inc., 2013 WL 6512848 (N.D. Cal.
Dec. 12, 2013): To establish a claim for slander of title, a borrower
must show: 1) a publication, 2) without privilege or justification, 3)
that is false, 4) and directly causes immediate pecuniary loss.
25
Defendants may assert several statutory immunities to defend against
slander of title claims, including the specific privilege afforded NODs
and NTSs (CC § 2924(d)), that publications were made without malice,
from an interested party, to an interested party (CC § 47(c)), and that
any trustee error was made “in good faith,” relying upon default
related information supplied by the beneficiary (CC § 2924(b)). Here,
borrower alleged trustee’s NOD and NTS were false, unprivileged,
malicious, and reckless publications. The court disagreed: all
assignments and substitutions were allowed by the DOT and properly
recorded, defeating borrower’s claim of recklessness. Further, the NOD
and NTS were recorded because of borrower’s default—which borrower
admitted. Lastly, borrower was unable to show that any error in the
NOD or NTS (not specified) was not the result of good faith reliance on
the undisputed fact that borrower was in default. The court
determined that defendant trustee was therefore immune from slander
of title in multiple ways. The NOD and NTS were privileged
publications and borrower’s slander of title claim was dismissed.
In Rem Relief from Automatic Stay: Application through
Several Bankruptcies and Immunity from Collateral Attack
Miller v. Deutsche Bank Nat’l Tr. Co., 2013 WL 6502498 (N.D. Cal.
Dec. 11, 2013): Filing a bankruptcy petition stays all debt-related
activity against the debtor, including foreclosure activity, until the
case is dismissed or discharged. Creditors may petition the court for
relief from the stay which enables them to continue debt-collection
activities, like foreclosure. Usually, relief from an automatic stay
applies only to a particular bankruptcy case. Bankruptcy courts can,
however, authorize special in rem relief if a creditor can prove that a
debtor filed multiple bankruptcies in a “scheme” to delay or thwart
legitimate efforts to foreclose on real property. 11 U.S.C. § 362(d)(4).
This relief is binding (as applied to the particular real property in
question) on any other bankruptcy within two years after relief is
granted. In other words, the in rem relief from the automatic stay
sticks to the property, and applies to any bankruptcy involving that
property, regardless of petitioner. Here, borrower brought an action
26
against her servicer for wrongful foreclosure and eviction in violation
of the automatic stay pertaining to her bankruptcy case. A bankruptcy
court had issued in rem relief applied to the property in an earlier
bankruptcy case, however, filed by a different debtor. Borrower
claimed that the debtor in the prior bankruptcy case giving rise to the
§ 362(d)(4) order had no true interest in the property, effectively
challenging the bankruptcy court’s factual findings that gave rise to its
in rem order. The district court determined that borrower should have
objected to the in rem order during that first bankruptcy case (though
she was not the debtor in that case) and cannot now collaterally attack
a final order of a bankruptcy court. Further, that in rem order is
“effective as to anyone holding any interest in the property, whether or
not they are in privity with the debtor.” The court granted servicer’s
motion to dismiss.
Delayed Discovery Doctrine Does Not Apply to RESPA Claims
Cheung v. Wells Fargo Bank, N.A., 2013 WL 6443116 (N.D. Cal.
Dec. 9, 2013): RESPA claims under 12 U.S.C. § 2605 (dealing with
mortgage servicing and escrow accounts) must be brought within three
years from the alleged violation. Under California’s delayed discovery
doctrine, SOL clocks can toll until the plaintiff discovered (or had
reasonable opportunity to discover) the misconduct. Here, borrowers
attempted to toll the three-year RESPA SOL by pleading they could
not determine when their servicer's wrongful acts occurred, or exactly
what those acts were, without the benefit of the discovery stage of
litigation. The court disagreed on two grounds: 1) the delayed discovery
doctrine pertains only to borrower’s personal discovery of the wrongful
conduct and is unrelated to borrower’s opportunity to conduct
discovery; and 2) the doctrine does not apply to RESPA claims, at least
in the Ninth Circuit. Broadly, the doctrine does not apply “to claims
made pursuant to a statute that defines when the claim accrues rather
than defining a limitations period from the date of accrual” (emphasis
original). Because REPSA states that a § 2605 claim may be brought
within three years “from the date of the occurrence of the violation,”
this type of claim is impervious to the delayed discovery doctrine.
27
Diversity Jurisdiction Analysis: Wells Fargo is a “Citizen” of
South Dakota; HOLA Preempts HBOR, Not Common Law
Claims; When Servicers Owe Borrowers a Duty of Care
Meyer v. Wells Fargo Bank, N.A., 2013 WL 6407516 (N.D. Cal. Dec.
6, 2013): A defendant may remove a state action to federal court if the
federal court exercises subject matter jurisdiction (SMJ) over the
matter. Federal courts can exercise SMJ in two ways: 1) over a federal
claim; or 2) over a state claim arising between citizens of diverse
(different) states. If it appears, at any time before final judgment, that
the federal court lacks SMJ, that court must remand the case to state
court. This California borrower argued that the case, consisting
entirely of state claims, should be remanded because Wells Fargo’s
California citizenship destroyed diversity jurisdiction. Unlike the court
in Vargas (below), this court found Wells Fargo to be solely a citizen of
South Dakota, its state of incorporation and the state listed as housing
the company’s “main office” in its articles of association. That Wells
Fargo’s “principal place of business” is in California does not render
Wells Fargo a “citizen” of California. The court denied borrower’s
motion to remand.
State laws regulating or affecting the “processing, origination,
servicing, sale or purchase of . . . mortgages” are preempted by the
Home Owner’s Loan Act (HOLA), as applied to federal savings
associations. Without independent analysis, this court accepted the
reasoning of the majority of California federal courts that Wells Fargo,
a national bank, can invoke HOLA preemption to defend its conduct as
a national bank because the loan in question originated with a federal
savings association. The court then found borrower’s HBOR claims
(pre-NOD outreach, dual tracking and SPOC) preempted because these
laws relate to the processing and servicing of mortgages. Borrower’s
fraud, promissory estoppel, negligence, negligent misrepresentation,
and UCL claims were not preempted. These common laws “[hold
banks] responsible for the statements they make to their borrowers”
and impose a “general duty not to misrepresent material facts when
doing business with borrowers.” Borrowers’ common law claims were
based on the allegation that her servicer falsely promised to halt
28
foreclosure while her modification application was pending, and were
accordingly not preempted.
To state a claim for negligence, a borrower must show that her servicer
owed her a duty of care. This court allowed that a duty can arise when
“a financial institution . . . offers borrowers a loan modification and a
trial period plan.” Here, however, there was never a trial or permanent
modification. The “mere engaging in the loan modification process is a
traditional money lending activity” (emphasis original) and does not
give rise to a duty. Borrower’s negligence claim was dismissed.
Diversity Jurisdiction Analysis: Wells Fargo is a “Citizen” of
California
Vargas v. Wells Fargo Bank, N.A., __ F. Supp. 2d __, 2013 WL
6235575 (N.D. Cal. Dec. 2, 2013): A defendant may remove a state
action to federal court if the federal court exercises subject matter
jurisdiction (SMJ) over the matter. Federal courts can exercise SMJ in
two ways: 1) over a federal claim; or 2) over a state claim arising
between citizens of diverse (different) states. If it appears, at any time
before final judgment, that the federal court lacks SMJ, that court
must remand the case to state court. Here, two California borrowers
sued Wells Fargo in state court, asserting only state claims. Wells
removed the action on the basis of diversity jurisdiction, claiming
exclusive South Dakota citizenship based on its incorporation in that
state. The federal district court rejected this argument, emphasizing
the congressional goal of achieving jurisdictional parity between
national and state banks. Accordingly, the court determined that
national banks are citizens of both their state of incorporation and the
state where the bank maintains its principal place of business.
Because Wells Fargo maintains its principal place of business in
California, it was considered a “citizen” of California, destroying
diversity with the California borrowers. The case was remanded.
29
Proposed Class Action Survives MTD on “Unfair” &
“Fraudulent” UCL Prongs
Bias v. Wells Fargo Bank, N.A., 942 F. Supp. 2d 915 (N.D. Cal.
2013): To have UCL standing, borrowers must allege economic injury
directly caused by the unfair business practice. Broadly, this proposed
class accuses Wells Fargo of using subsidiaries to impose marked-up
fees (“Broker’s Price Opinions” (BPOs) and appraisals) on defaulting
borrowers and unfairly profiting from that arrangement. Using
California’s UCL statute, borrowers alleged Wells concealed this
arrangement, did not provide borrowers with true itemizations of the
fees or “services,” and allowed borrowers to believe they needed to pay
Wells for these services, even though their mortgage agreements said
nothing about these costs. Wells argued that because the fees were
within market rate, borrowers cannot show economic injury. The court
disagreed: even if the BPOs were within the market rate, borrowers
allege they still paid Wells Fargo more than they would have if Wells
had only passed on actual costs, not the marked-up costs incurred by
contracting the work to Wells Fargo subsidiaries. Borrowers
successfully alleged UCL standing because their economic injury was
directly caused by Wells Fargo’s actions.
After establishing that prospective plaintiffs have standing, the court
then considered two UCL prongs. “Unfair” practices can include
activity that controverts a public policy, is “immoral, unethical,
oppressive, unscrupulous, or substantially injurious to consumers,” or
that results in substantial consumer injury, not outweighed by
consumer benefits and not reasonably avoided. This court found
borrower’s allegations to fulfill the second category: these fees are
sufficiently characterized as immoral, unethical and oppressive. Also,
under the third definition, it is not certain (at this stage) that the
benefits of BPOs and appraisals outweigh the harm to borrowers in
racking up fees that plunged them further and further into default.
Borrowers’ “unfair” UCL claim survived the MTD.
Finally, the court considered borrowers’ “fraudulent” UCL claim. This
requires a showing that members of the public are likely to be deceived
30
by defendant’s actions. Here, borrowers’ claim is one of fraud by
omission, which must be pled with particularity. Borrowers
successfully alleged “numerous instances where the omitted
information could have been revealed – namely, in the mortgage
agreements themselves, in the mortgage statements . . . or during
communications with Wells Fargo where it told [borrowers] that the
fees were in accordance with their mortgage agreements.” These
allegations were particular enough for borrowers’ fraudulent prong
UCL claim to survive. (Borrowers’ fraud claim also survived based on
similar reasoning.)
A National Bank Cannot Invoke HOLA Preemption to Defend
its Own Conduct
Winterbower v. Wells Fargo Bank, N.A., No. SA CV 13-0360-DOC-
DFMx (C.D. Cal. Dec. 9, 2013):70 State laws may be preempted by
federal banking laws such as the Home Owner’s Loan Act (HOLA) and
the National Banking Act (NBA). HOLA regulates federal savings
associations and the NBA, national banks. Here, Wells Fargo argued
HBOR’s dual tracking statute (CC § 2923.6) is preempted by HOLA.
Normally, Wells Fargo would be prevented from invoking HOLA
because it is a national bank. Wells Fargo argued, however, that
because the loan in question originated with World Savings, a federal
savings association, HOLA preemption survived Wells Fargo’s
ultimate purchase of the loan through merger. The HBOR
Collaborative submitted an amicus brief and reply in this case, arguing
on behalf of borrowers that Wells Fargo cannot use HOLA to defend its
own conduct as a national bank. Reversing his previous position and
rulings on this issue, Judge Carter agreed with the Collaborative that
preemption cannot be purchased or assigned. Rather, courts should
“look to see whether the alleged violations took place when the banking
entity was covered by HOLA.” If Wells Fargo had to defend World
Savings’ origination conduct, for example, HOLA preemption would be
70 This summary is based on the court’s unadopted tentative ruling on a motion to
dismiss. Plaintiffs moved to voluntarily dismiss their action before the court could
officially rule on this issue. The tentative is attached to the end of this newsletter.
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appropriate because World Savings was regulated by HOLA when the
conduct being litigated occurred. Here, however, Wells Fargo was
defending its own dual tracking conduct, which occurred long after
Wells Fargo obtained the loan. The court accordingly prevented Wells
Fargo from invoking HOLA to defend its own conduct. The court also
acknowledged that precedent that has allowed national banks to use
HOLA preemption has been incorrectly decided.
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Recent Regulatory Updates
IRS Letter to Barbara Boxer RE: Cancellation of Debt Income
(CODI) and CCP 580e Short Sales (Sept. 19, 2013)71
Cal. Code Civ. Proc. § 580e prevents lenders from collecting a
deficiency from a borrower who short sells his home in a lender-
approved sale for less than what he owes on his mortgage. Previously,
the IRS had followed Rev. Rul. 90-16, stating that these borrowers
needed to report the deficiency as CODI. With this letter, the IRS has
now determined that California borrowers protected by § 580e’s anti-
deficiency provisions essentially have “nonrecourse loans,” for tax
purposes, and need not report a deficiency resulting from a short sale
as CODI. They should report the short sale, however, “as an amount
realized on the sale of the property.”
SB 426: Additional Deficiency Protections for California
Borrowers
Senate Bill 426 amended CCP §§ 580b & 580d. Previously, these
statutes prohibited creditors from collecting post-foreclosure deficiency
judgments against borrowers. Many creditors, though, would continue
post-foreclosure collection efforts because the existing laws only
prohibited deficiency judgments. SB 426 amended the law to prevent
both deficiency judgments and collection efforts and clarified that a
deficiency is not owed after foreclosure. It also prohibits creditors from
reporting post-foreclosure deficiencies as debts to credit reporting
agencies.
71 Letter is attached.
33
Fannie Mae Servicing Guide Announcement SVC-2013-27,
Force-Placed Insurance Requirements (Dec. 18, 2013) (effective
June 1, 2014)
Fannie Mae has revised its servicing requirements for force-placed
insurance. The change applies to all new or renewed force-placed
insurance policies on properties secured by Fannie Mae mortgages.
Effective June 1, 2014, force-placed premiums may not include any
insurance commissions or payments to the servicer, its employees, or
affiliates. Servicers are also prohibited from obtaining force-placed
insurance from entities affiliated with the servicer, specifically captive
insurance and reinsurance arrangements. Servicers will be required to
sign a “lender-placed insurance servicer certification,” asserting
compliance with these new requirements.
Fannie Mae Servicing Guide Announcement SVC-2013-28,
Standard Modification and Streamlined Modification (Dec. 19,
2013) (effective April 1, 2014)
Loans available for Fannie Mae modification programs (standard and
streamlined) now include loans “with a pre-modified mark-to-market
loan-to-value (MTMLTV) ratio less than 80%.” This calculation
consists of the gross unpaid principal balance divided by the current
property value. This expands the number of loans available for Fannie
Mae modification programs. This same expansion applies to Freddie
Mac loans (see explanation below).
Fannie Mae Servicing Guide Announcement SVC-2013-29,
Servicing Transfers (Dec. 19, 2013) (effective Mar. 1, 2014)
Servicing transfers have always required Fannie Mae’s approval. This
announcement makes clear that, effective March 1, 2014, Fannie Mae’s
prior written consent must be obtained for all subservicing transfers,
whether from the master servicer to a subservicer, between
subservicers, or from the subservicer back to the master servicer.
Fannie Mae’s transfer of servicing form, Form 629, now requires
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identification of any subservicers involved in a transfer. Fannie Mae
will review the capacity and performance of any designated
subservicer.
Freddie Mac Bulletin 2013-27, Deficiencies, Modifications, Non-
Mod Foreclosure Alternatives & Force-Placed Insurance (Dec.
18, 2013) (varying effective dates)
Default Judgments & Deficiencies
To expedite default judgments, servicers may obtain judgments
against borrowers for less than the amount owed on the loan. Servicers
are now prevented, however, from agreeing to default judgments for
less than the market value of the property. Also, effective immediately,
servicers must cooperate with Freddie Mac to collect deficiencies.
Loan modifications
Servicers may not include any waivers in modification agreements,
requiring borrowers to waive any of their legal rights as a condition of
the agreement. This language is framed as a clarification of existing
guidance and may be helpful in attacking waiver provisions inserted
into mortgage modifications.
Effective April 1, 2014, borrowers with equity in their homes may now
be eligible for modifications. Borrowers whose current loan-to-value
ratio (using the actual current market value of the property) is less
than 80%, must be offered Trial Plans based on a 480-month
amortization schedule, where that payment is less than or equal to the
current principal and interest payment; and based on a 360-month
amortization schedule, where that results in a reduction in the current
principal and interest payment of at least 20%. Borrowers who ask for
a shorter amortization period may be offered one, provided certain
conditions are met.
Servicers granting modifications to borrowers with homes damaged or
destroyed by an “Eligible Disaster” (defined on a case-by-case basis)
must, effective February 1, 2014, convert any adjustable rate mortgage
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it modifies to a fixed interest rate mortgage (unless objected to by the
borrower).
Non-Mod Foreclosure Alternatives
Servicers are granted increased discretion in offering special
forbearances to borrowers with homes damaged or destroyed in an
Eligible Disaster (defined on a case-by-case basis).
Effective February 1, 2014, a borrower’s contribution toward a short
sale or a deed-in-lieu can take the form of cash or a promissory note.
Servicers must evaluate borrowers more than 31 days delinquent in
two ways, to assess borrower’s ability to repay: 1) what are the
borrower’s cash reserves? and 2) what is the borrower’s ability to make
payments based on a promissory note?
Force-placed insurance
The changes to force-placed insurance are promulgated under a
directive from the Federal Housing Finance Agency (FHFA) and track
Fannie Mae’s changes (above). Effective June 1, 2014, servicers, their
employees, agents, brokers, or anyone else affiliated with the servicer,
cannot receive any compensation from an insurer in connection with
force-placed insurance. Further, servicers cannot use an affiliate to
place or reinsure force-placed insurance.
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The HBOR Collaborative presents:
New Two-Part Webinar Series on CFPB Mortgage
Servicing Rules
Thursday, January 16
12:00 PM - 1:30 PM PST
New CFPB Mortgage Servicing
Rules Part 1: Error Resolution;
Force Placed Insurance; Periodic
Statements, Other Servicer
Duties
(1.5 hours of MCLE credit)
Space is limited.
Reserve your Webinar seat now for Part 1
at:
https://www1.gotomeeting.com/register/649
193728
Part 1 of the webinar will cover the privately
enforceable mortgage servicing regulations
under RESPA and TILA that go into effect
on January 10, 2014.
Learn how the qualified written request
procedure under RESPA has been completely
changed. Part 1 will also cover new regulations
on force-placed insurance, requests for identity
of mortgage owner, mortgage payment
application, payoff statements, payment change
notices, and periodic mortgage statements.
Thursday, January 23
12:00 PM - 1:30 PM PST
New CFPB Mortgage Servicing
Rules Part 2: Loss Mitigation
Procedures
(1.5 hours of MCLE credit)
Space is limited.
Reserve your Webinar seat now for Part 2
at:
https://www1.gotomeeting.com/register/637
117752
Part 2 of the webinar will cover the privately
enforceable mortgage servicing regulations
under RESPA that go into effect on January 10,
2014.
This session will focus on the Regulation X
provisions dealing with early intervention,
continuity of contact, and loss mitigation
procedures (including dual tracking).
After registering you will receive a confirmation email containing information about joining
the Webinar.
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Presenter: John Rao, staff attorney, National Consumer Law Center
San Francisco-based housing advocacy center, the National Housing Law Project (NHLP), and its
project partners, Western Center on Law & Poverty, the National Consumer Law Center, and
Tenants Together (the HBOR Collaborative) announce they are offering free assistance to
California attorneys in implementing the state’s new Homeowner Bill of Rights (HBOR). The HBOR
Collaborative’s free services for consumer attorneys statewide include education, advocacy,
technical assistance, litigation support, a listserv for attorneys, and extensive web-based attorney
resources. The Collaborative is also providing internet webinars and live trainings in areas
throughout California. To learn more about California HBOR and to register for this and all
upcoming trainings, consumer attorneys should go to http://calhbor.org/. Consumer attorneys with
specific questions can contact HBOR collaborative staff through our website,
http://calhbor.org/.
Each webinar will qualify for 1.5 hours of MCLE through National Housing Law Project.
For more information email Jessica Hiemenz at Jhiemenz@nclc.org
System Requirements
PC-based attendees
Required: Windows® 8, 7, Vista, XP or 2003 Server
The HBOR Collaborative and its services, including this free webinar training for
attorneys, are funded by a grant from the Office of the Attorney General of California
from the National Mortgage Settlement to assist California consumers.
38
SAVE THE DATE! TUESDAY FEBRUARY 25, 2014
The HBOR Collaborative presents:
REPRESENTING HOMEOWNERS & TENANTS UNDER THE HOMEOWNER BILL OF RIGHTS
This free training will be held at:
THE UNITARIAN UNIVERSALIST CHURCH OF FRESNO 2672 E. Alluvial Avenue, Fresno, CA
The HBOR Collaborative presents a free all-day training on the nuts and bolts of representing tenants and homeowners under California’s Homeowner Bill of Rights (HBOR). The training will cover HBOR basics and provide practical tips for representing clients. HBOR became effective on January 1, 2013 and codifies the broad intentions of the National Mortgage Settlement’s pre-foreclosure protections. It also provides tenants in foreclosed properties with a host of substantive and procedural protections. The training will cover the interplay of HBOR with NMS, CFPB servicing rules, and the Protecting Tenants at Foreclosure Act. We will also discuss HBOR’s attorney fee provisions. Registration information will be available soon.
Watch your inbox for a save the date for our next training in the Inland Empire—coming soon.
The HBOR Collaborative, a partnership of four organizations, National Housing Law Project, National Consumer Law Center, Tenants Together and Western Center on Law and Poverty, offers free training, technical assistance, litigation support, and legal resources to California’s consumer attorneys and the judiciary on all aspects of the new California Homeowner Bill of Rights, including its tenant protections. The goal of the Collaborative is to ensure that California’s
5 Hours of MCLE Credit
Lunch will be provided.
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homeowners and tenants receive the intended benefits secured for them under the Homeowner Bill of Rights by providing legal representation with a broad array of support services and practice resources.
To contact the HBOR Collaborative team or for more information on our services for attorneys, please visit http://calhbor.org/
The HBOR Collaborative and its services, including this free training for attorneys, are funded by a grant from the Office of the Attorney General of California from the National Mortgage Settlement to assist California consumers. This training would not be possible without the invaluable support of our partners the California State Bar and Housing Opportunities Collaborative.
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