In this week’s edition of the Mortgage Litigation Update, we summarize (i) a decision from the Northern District of California finding that a loan servicer’s solicitation and review of a borrower’s loan modification does not give rise to a duty of care, and (ii) a decision from the Middle District of Pennsylvania finding that a loan servicer’s status as holder of a mortgage note does not itself, absent other factors, exclude it from the definition of “debt collector” under the FDCPA when it acquired the debt after default.
Forster v. Wells Fargo Bank, N.A., No. 17-cv-05120-BLF, 2018 WL 509967 (N.D. Cal. Jan. 23, 2018)
- Plaintiff borrowers sued their loan servicer for negligence and under several California consumer statutes after they fell behind on mortgage payments and the lender denied their application for a loan modification. Plaintiffs alleged the servicer’s wrongful denial of their loan modification resulted in increased indebtedness, lost equity in their property, damage to their credit, and other unspecified consequential damages.
- The servicer moved to dismiss. With respect to the negligence claim, the servicer argued no duty of care exists between a financial institution and a borrower absent special circumstances. Plaintiff argued that the servicer owes a duty of care in the processing and review of a loan modification application, as it solicited the modification, which goes beyond a typical conventional arms-length lending relationship.
- Noting a circuit split on the issue and the sometimes fact intensive nature of the inquiry, the District Court agreed with the lender that a duty of care does not arise in the typical loan modification because “[w]here modification is necessary because the borrower cannot repay the loan, the borrower’s harm is not closely connected with the lender’s conduct, and the lender is not morally culpable.”
Beard v. Ocwen Loan Servicing, LLC, Civil No. 1:14-cv-1162, 2018 WL 638455 (M.D. Pa. Jan. 31, 2018)
- Plaintiff borrower filed a complaint alleging that its loan servicer assessed unearned fees and costs in a reinstatement quote in violation of the Fair Debt Collection Practices Act (“FDCPA”).
- The Defendant had previously moved for summary judgment, asserting that it was not a “debt collector” under the FDCPA. The District Court rejected this argument and denied the motion for summary judgment, finding that a mortgage servicer is a debt collector if it acquired the obligation by assignment after the debt was already in default.
- The loan servicer moved for reconsideration, citing the United States Supreme Court’s recent decision in Henson v. Santander Consumer USA Inc., 137 S. Ct. 1718 (2017), holding that an entity collecting a debt on its own behalf is not a “debt collector” merely because it acquired the loan after default. According to the loan servicer, its role as the holder of the note placed it within the purview of Henson.
- The District Court disagreed, reasoning that a holder is legally distinct from an owner. Although a note’s holder is in possession of the note and qualified to enforce it through foreclosure on the underlying deed of trust, it is not necessarily entitled to the economic benefits from payments received. Because the servicer did not establish it was the owner of the note, it failed to show that it was collecting the debt on its own behalf within the meaning of Henson.
In this edition of our Mortgage Litigation Update, we summarize (i) an Eleventh Circuit decision interpreting Regulation X under RESPA where there are duplicative applications; and (ii) a case from the District Court for the District of Massachusetts evaluating borrowers’ claim of entitlement to a free house.
Navia v. Nationstar Mortgage LLC, Case No. 17-11320, —Fed. App’x—-, 2018 WL 327233 (11th Cir. January 9, 2018)
- The Court affirmed the dismissal of the Appellant’s complaint for failure to state a claim under the Real Estate Settlement Procedures Act (“RESPA”).
- The Court determined that RESPA’s Regulation X places certain obligations on mortgage servicers when a borrower submits an initial loss mitigation application; however, those obligations do not apply to duplicative applications.
- The Court stated, “a servicer need not comply with § 1024.41 requirements [regarding evaluation of all loss mitigation alternatives] on subsequent applications if that servicer previously complied with §1024.41’s requirements with regard to a borrower’s loss mitigation application.”
Paulding v. New Penn Financial, LLC, Case No. 17-11340-FDS, 2018 WL 379019 (D. Mass. January 11, 2018)
- The District Court for the District of Massachusetts granted in part and denied in part the defendants’ motion to dismiss the plaintiff’s complaint seeking to prevent a mortgage foreclosure.
- In particular, the Court evaluated the plaintiffs’ contention that the mortgage was void on the grounds that the original lender was (1) never incorporated; (2) never registered with the Commonwealth; and (3) never authorized to conduct business in the Commonwealth.
- The Court rejected the plaintiffs’ argument that they were essentially entitled to a free house noting that, “[t]he money borrowed by plaintiffs was surely not fictitious; they used it to buy the property. And it is entirely unclear how any failure on [the original lender] to obtain a license, if true, caused plaintiffs any injury at all, much less damages in the amount of the entire value of their mortgage.”
In this edition of our Mortgage Litigation Update, we summarize (i) a decision from the Northern District of California striking class allegations as fail-safe in a case implicating discrimination in mortgage lending, (ii) an Eastern District of Virginia order rejecting a borrower’s attempt to tie an interpretive rule regarding modification review to a clause in his Deed of Trust requiring compliance with “applicable law,” and (iii) a Second Circuit decision illuminating certain difficulties in establishing standing to foreclose when the original lender has declared bankruptcy.
Perez, et al. v. Wells Fargo Bank, N.A., Case No. 17-cv-00454-MMC, (N.D. Cal. Jan. 30, 2017)
- Plaintiffs brought a discrimination in lending class action alleging that they were denied credit from Defendant across multiple lines of business, including student lending, small business loans, credit cards, mortgages, and auto financing, based on their immigration status as non-U.S. citizens, including as participants in the Deferred Action for Childhood Arrivals, or DACA, Program.
- Defendant moved to strike the class allegations, as Plaintiffs’ proposed class definition was fail-safe in that it was defined in a way that required an individual determination of liability in order to decide who would be a member of the class.
- The court struck the class allegations, finding that the proposed class definition was impermissibly fail-safe. The court permitted Plaintiffs an opportunity to amend.
- Defendant is represented by McGuireWoods.
Menacho v. U.S. Bank N.A. et al., Case No. 3:17-CV-00428-JAG, 2017 WL 6462356 (E.D. Va. Dec. 19, 2017)
- Plaintiff alleged that the foreclosing trustee violated the Deed of Trust provision stating that the right to foreclosure was “subject to any requirements and limitations of Applicable Law” because the trustee had failed to respond to his loan modification application.
- Plaintiff argued this violated the Secretary of the Treasury’s Supplemental Directive No. 09-01, which prohibits loan servicers from proceeding with foreclosure for loans eligible for HAMP modifications until the applicant has been deemed ineligible, and thus the foreclosure did not comply with “Applicable Law.”
- The Court held that Supplemental Directive No. 09-01 did not trigger the “Applicable Law” provision of the deed of trust. The Court reasoned that because Supplemental Directive No. 09-01 was not subject to the notice and comment procedures of the Administrative Procedures Act, it was only an “interpretive rule” that did not have the effect of law.
Gustavia Home, LLC, v. Rutty, Case No. 17-345(L), 2017 WL 6539178 (2nd Cir. Dec. 21, 2017)
- The Second Circuit upheld a borrower’s appeal of the lower court’s foreclosure judgment that found the foreclosing plaintiff had not sufficiently demonstrated its standing to foreclose following the original lender’s bankruptcy, which would have made the original lender’s interest in the note property of the bankruptcy estate.
- Although the foreclosing plaintiff had submitted a series of undated allonges that satisfied the lower court that it had standing to foreclose, the Second Circuit agreed with the borrower that the plaintiff had failed to present evidence of when it came in possession of the note or whether the original lender transferred the note either before the bankruptcy or with the permission of the bankruptcy court to do so.
- The court vacated the judgment and remanded for further proceedings regarding the foreclosing entity’s standing.