The United States Court of Appeals for the Ninth Circuit recently confirmed that a borrower is not a "consumer," and therefore RESPA does not apply, where a borrower takes out a loan to purchase real estate that is used as rental property.
A copy of the opinion is available at:
The borrower was a real estate professional who purchased 200 to 300 properties across the country. The properties were refurbished, then rented out or sold. Wells Fargo Home Mortgage, Inc. ("Wells Fargo") was the servicer on two of the borrower's loans, referred to as "loan 55" and "loan 56," on two properties located in Oregon.
The borrower's wife sent in two payments on the loan 56, but inadvertently noted on the checks that they were to pay off loan 55. As a result, Wells Fargo applied to checks to loan 55. Because of the error, loan 56 became delinquent, which led to Wells Fargo commencing foreclosure proceedings and reporting the delinquency to the credit reporting agencies. This caused the borrower's credit to dry up, which in turn led to the failure of various business ventures.
The borrower then filed a lawsuit asserting claims under RESPA, FCRA, FDCPA and under the theory of negligence. Wells Fargo moved for summary judgment, which the District Court granted with respect to all claims except the FCRA claim. The court explained that the negligence claim was preempted by FCRA, and RESPA did not apply because the loans were "business purpose loans." The court further found that FDCPA did not apply because the borrower's debt was "business in nature, not consumer in nature," and also Wells Fargo was not a "debt collector" within the meaning of the statute. The borrower eventually appealed the rulings with respect to the RESPA and negligence claims.
After several more months of discovery, Wells Fargo again filed a motion for summary judgment with respect to the remaining FCRA claim. Summary judgment was denied and the parties stipulated to binding arbitration before the matter was to go to trial. The arbitrator found that Wells Fargo violated the FCRA and awarded damages to the borrower. Wells Fargo filed a motion to vacate or modify the award in the District Court. However, the District Court stated that its understanding was that the arbitration agreement provided that if the parties were unhappy with the arbitration decision, they would appeal directly to the appellate court. The District Court therefore did not review the arbitration. The parties appealed.
The issues on appeal were the District Court's granting of summary judgment on the RESPA and negligence claims, and the arbitrator's ruling on the FCRA claims. The Ninth Circuit first addressed the arbitrator's award. The appellate court held that it could not be the first court to review the arbitrator's award, as no act of Congress supplies federal appellate courts with jurisdiction to review an arbitrator's award directly. Therefore, because the District Court did not review the arbitrator's award, the Ninth Circuit remanded the award back to the District Court.
The Ninth Circuit then addressed the District Court's grant of summary judgment to Wells Fargo on the RESPA and common law negligence claims. In upholding the District Court's ruling with respect to the RESPA claim, the Ninth Circuit noted that RESPA does not "apply to credit transactions involving extensions of credit. . . primarily for business, commercial, or agricultural purposes. . ." The court then looked to Regulation X to determine what it meant for a loan to be primarily for a business purpose.
As the court explained, Regulation X provides in relevant part that RESPA does not apply to "business purpose loans," which are defined as "[a]n extension of credit primarily for a business, commercial, or agricultural purpose, as defined by Regulation Z." The court then looked to Regulation Z for further guidance.
The court noted that Regulation Z does not define "a business . . . purpose" loan, rather it "just recites the same terms also contained in Regulation X." The court therefore looked to the Official Staff Commentary on Regulation Z. The court found that one particular comment was directly on point. It provides as follows:
"Non-owner-occupied rental property. Credit extended to acquire, improve, or maintain rental property (regardless of the number of housing units) that is not owner-occupied is deemed to be for business purposes. . . ." 12 C.F.R. Pt. 226, Supp. I, Cmt. 3(a)(4).
The borrower did not dispute that the properties were non-owner-occupied rental properties. The court therefore found that "Loans 55 and 56, the mortgages on those properties, thus fall within Regulation Z's definition of a business-purpose loan, and, so, RESPA does not apply to them."
Still, the borrower contended that such a finding did not end the matter. Instead, he argued that the court should not look to the Official Staff Commentary on Regulation Z when interpreting Regulation X, because Regulation Z is not part of Regulation X, and the Federal Reserve Board did not intend to interpret RESPA, only the Truth in Lending Act. The Ninth Circuit disagreed, holding that by "directing those seeking a definition of the term 'primarily for a business . . . purpose' in Regulation X to Regulation Z, Regulation X necessarily includes a direction to the staff interpretations of Regulation Z."
Further, the appellate court held that "Congress explicitly required that agency regulations ensure that RESPA's exemption for 'credit transactions involving extensions of credit primarily for business . . . purposes' 'be the same as the exemption . . . under [the Truth in Lending Act].'" Thus, "[b]ecause Regulation Z implements the Truth in Lending Act. . . it does not matter whether the Federal Reserve Board 'intended' to interpret RESPA in issuing Regulation Z."
The borrower also claimed that a variation between RESPA's general use of "federally related mortgage loan" and § 2606(a)'s use of the phrase "credit transactions" was of significance and cause for overturning the District Court's ruling. The court rejected the borrower's argument, finding that in the circumstances of the case the difference in language was of no significance.
The borrower also argued that use of the comments in Regulation Z to interpret Regulation X automatically amended RESPA by redefining federally related mortgage loans. Specifically, the borrower referred to comment 3(a)(5), which related to owner-occupied rental property. The appellate court again disagreed, holding that because the properties at issue were not owner-occupied, the borrower's argument was without merit.
The borrower's final argument was that Wells Fargo was required to comply with RESPA as a matter of contract, because the deeds of trust for loans 55 and 56 both provide that lenders and servicers would abide by many of the requirements of RESPA. However, the appellate court held that the borrower did not plead a claim for breach of contract, and his motion for leave to amend his complaint to add a breach of contract claim was denied by the District Court. Because the borrower did not challenge the District Court's denial of his motion for leave to amend, the appellate court ruled that the issue was not properly raised on appeal.
With respect to the common law negligence claims, the court noted that the District Court held that Oregon tort law's economic loss doctrine barred the borrower's negligence claim, in part, and that FCRA preempted the remainder. The Ninth Circuit upheld the first part of the ruling but reversed the latter.
In reversing the District Court on the preemption ruling, the court noted that "[t]he District Court thought [the borrower's] negligence claim was premised on violations of the provisions of FCRA." However, the Ninth Circuit held that the borrower made no such allegations, and instead relied on provisions of the FDCPA. The issue was therefore remanded to the District Court.
Finally, the court upheld the District Court's grant of sanctions against the borrower for willfully reformatting his hard drives, and thus destroying evidence. The District Court found that the jury should be instructed that the destruction of evidence would "creat[e] a presumption in favor of [Wells Fargo] that the spoliated evidence was unfavorable" to the borrower. The Ninth Circuit found that such a sanction was appropriate.
Ralph T. Wutscher
Kahrl Wutscher LLP
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