FYI: 3rd Cir Upholds Ruling Rejecting Lender Liability for Broker Misconduct

The U.S. Court of Appeals for the Third Circuit recently affirmed a district court's ruling that plaintiffs failed to state a claim against mortgage lenders in relation to an alleged ponzi scheme perpetrated by a mortgage broker.  A copy of the opinion is attached. 

Defendant lenders provided refinance mortgage loans to plaintiffs.  The refinance transactions were proposed by a mortgage broker who offered an "Equity Slide Down Mortgage,"  which allegedly turned out to be a "bogus" ponzi scheme.  Such transactions consisted of legitimate mortgages and notes with defendants, but also required plaintiffs to execute a second set of purported "mortgages" and "notes," pursuant to which the interest rates and monthly payments on the mortgages were lowered, but required prepayment of a large portion of the principal balance and monthly payments to be paid directly to a company owned by the mortgage broker. 

 

Defendant lenders were not parties to the second set of transactions and eventually demanded monthly payments from plaintiffs on their legitimate mortgage loans, as the mortgage broker's company was not remitting the plaintiffs payments to defendants.  Plaintiffs then filed a putative class action against defendants, alleging negligence and RESPA violations, on the theory that the mortgage broker's company was the defendants' loan servicer.  The district court granted the defendants' motion to dismiss for failure to state a claim and denied plaintiffs' request for leave to amend.  This appeal followed.

The appellate court upheld the district court's dismissal of the plaintiff's complaint.  For their negligence claim, plaintiffs alleged that the defendants had a continuing duty to take reasonable steps to supervise the mortgage broker's company.  The Third Circuit held that the district court properly dismissed this claim under Pennsylvania's "gist of the action" doctrine, which precludes plaintiffs from recasting breach of contract claims into tort claims.  In this case, the Court held that any duty to properly credit payments arose from the contracts between plaintiffs and defendants and plaintiffs and the mortgage broker's company, such that plaintiffs were precluded from recasting this contractual claim as a tort claim.

For their RESPA claim, plaintiffs claimed that the defendant lenders failed to properly credit the payments the plaintiffs made to the mortgage broker's company, and in so doing violated RESPA's notice and reporting requirements for loan servicers.  The Third Circuit agreed with the district court's holding that the mortgage broker's company was not a servicer as defined by RESPA.  The Court looked to RESPA's definition of servicing as "receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan" (emphasis added).  The payments made by plaintiffs to the mortgage broker's company were not made pursuant to the terms of the legitimate loans.  Further, the Court agreed that the mortgage broker's company was not a servicer because they were not responsible for making payments of principal and interest received from the plaintiff to the defendant lenders under the terms of the loan.

 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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FYI: 9th Cir Says FCRA Allows Recovery of Non-Taxable Litigation Expenses

The U.S. Court of Appeals for the Ninth Circuit recently held that district courts have the discretion to include non-taxable costs as part of "reasonable attorney's fees" in awards to prevailing parties under the FCRA.  A copy of the opinion is attached.

 

Plaintiff brought a complaint in federal court against Wells Fargo after Wells Fargo refused to correct information it provided to credit reporting agencies stating that Plaintiff was delinquent on an automobile loan.  Under the settlement reached by the parties, Wells Fargo agreed to pay the Plaintiff $20,000 plus "recoverable attorney's fees."  The district court determined that Plaintiff was the prevailing party and was entitled to recover attorney's fees and costs.  The district court reduced the attorney's fees requested by the Plaintiff and, on procedural grounds, denied the Plaintiff's request for taxable costs, which are costs listed as "taxable" under 28 U.S.C. § 1920.  In addition, the district court concluded that it "lacked discretion to award non-taxable costs."

Absent a specific statutory provision, taxable costs under 28  U.S.C. § 1920 are the only costs of litigation recoverable by a prevailing party.  The expense shifting provision of the FCRA provides that a prevailing party can recover, "the costs of the action together with reasonable attorney's fees."  At issue on appeal was whether the fee shifting provision of the FCRA allows the prevailing party to recover non-taxable costs, in addition to taxable costs and attorney's fees.  

 

In this case, the Ninth Circuit held that FCRA's fee shifting provision allowed for recovery of non-taxable costs.  Relying on precedent from both its prior rulings and from the Supreme Court, the Court held that the phrase "reasonable attorney's fees" should be interpreted as "reasonable out-of-pocket litigation expenses that would normally be charged to a fee paying client."   Therefore, the Court went on to hold that, "because the FCRA provides for 'reasonable attorney's fees'… district courts have discretion to award non-taxable costs to prevailing parties[.]"  According to the Ninth Circuit, included in non-taxable costs are costs that it is the "prevailing practice in the given community" for lawyers to bill as separate from their hourly rates.  The Ninth Circuit thus reversed the district court's decision and remanded the case.

 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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FYI: 7th Cir Enters Unusual Ruling Upholding Class Cert in State UDAP Case

The U.S. Court of Appeals for the Seventh Circuit recently affirmed a district court's decision to certify two classes in a state UDAP "consumer fraud" case, clarifying that elements of state UDAP or "consumer fraud" cases often present difficulties for class treatment of such claims, but that such claims may at times be amenable to class treatment.  A copy of the opinion is attached.

Plaintiffs brought this class action against a defendant window manufacturer and seller, alleging consumer fraud claims for defects in windows manufactured and sold by the defendant over an 18 year period and for defendant's failure to publicly declare the role that the design defect played in allowing rot.  The district court certified two classes of plaintiffs, a nationwide class under Fed. R.Civ. P. 23(b)(2) who owned structures with the windows but whose windows had not yet manifested the defect or whose windows had not yet been replaced and a smaller, more narrowly defined, class of plaintiffs consisting of only those who had a manifest defect and whose windows had already been replaced.  The appellate court granted defendant's Fed. R. Civ. P. 23(f) appeal of the certifications.

On appeal, defendant argued that consumer fraud cases are not amenable to class treatment.  The appellate court, however, noted that "[w]hile consumer fraud class actions present problems that courts must carefully consider before granting certification, there is not and should not be a rule that they never can be certified." 

 

The Court rejected the defendants' argument that it had ever opined that class certification was never appropriate in consumer fraud cases, pointing out instead that there are times when class certification is a sensible and legally permissible alternative in the consumer fraud context.  As related to this particular case, the Court held that the district court "properly weighed the facts before it and exercised its discretion to conclude that the common predominant issue of whether the windows suffer from a single, inherent design defect leading to wood rot is the essence of the dispute and is better resolved by class treatment." 

The Court explained that issues present in certifying a class in other consumer fraud actions were not present here, including: (1) the risk of error in cases with complex issues; (2) proximate causation; and (3) whether the claim requests final injunctive relief or primarily monetary damages.

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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FYI: 9th Cir Says Authorized User Not Entitled to FCBA Dispute Rights

The U.S. Court of Appeals for the Ninth Circuit recently held that a credit card issuer is required to resolve disputes about purchases only with the person who obtained the credit card, and not with an authorized user who used the card to buy goods.  A copy of the opinion is attached.

Defendant Wells Fargo issued a credit card to two consumers, who agreed to be equally responsible for the repayment of charges on the card. One of the consumers subsequently added plaintiff as an authorized user on the credit card account.  The authorized user had numerous disputed charges on the account, each time resolving the disputes with Wells Fargo, who believed the authorized user to be the attorney of the two consumers.  When Wells Fargo discovered that the authorized user was writing on his own behalf, and not as the attorney of the two consumers, it ceased discussions with him regarding billing disputes.  The authorized user then sued Wells Fargo for damages under, among other things, the Fair Credit Billing Act for seven billing disputes that Wells Fargo did not resolve with him.  The district court found in favor of Wells Fargo and this appeal followed.

In upholding the district court's ruling in favor of Wells Fargo, the Ninth Circuit noted that, under TILA, a credit card issuer owes an obligation to respond to, investigate and resolve disputes regarding purchases and this appeal required them to determine to whom that obligation is owed.  The billing dispute duties under TILA run to the "obligor," but neither TILA nor the regulations promulgated thereunder define the term "obligor."  Accordingly, the Court looked to the standard legal definition, which defines obligor as "one who is obligated to pay a debt."  The Court noted that at no time was the authorized user obligated to pay the debt, and therefore under TILA the authorized user was not entitled to the procedures owed to the obligors. 

The Court noted, however, that TILA's implementing regulations were not as straightforward, as they make the duty to resolve billing disputes run to a "consumer," rather than to the "obligor."  Under the relevant regulations, a consumer is defined as a "cardholder or natural person to whom consumer credit is offered or extended."  In interpreting the regulations as they apply to billing disputes, the Court found that "[w]hether Regulation Z and the Official Staff Commentary impose on Wells Fargo a duty to communicate with the consumer, or even if [the authorized user] is the consumer for this purpose, is not ascertainable with certainty," but, "without much confidence," concluded that even if the authorized user was a "consumer" in the ordinary sense of the word, "he is not a 'consumer' in the bizarre usage of Regulation Z."

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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FYI: FTC Issues Final Rule for Deposits at Non-Insured Institutions

The Federal Trade Commission issued the attached final rules requiring depository institutions that lack federal deposit insurance to disclose that information to consumers.

 

Among other things, FTC’s rules require institutions without federal deposit insurance to disclose that they are not federally insured and that the federal government does not guarantee consumers will get their money back if the institution fails.  These disclosures must be made on account statements, in advertising, and inside branches at deposit windows. 

 

The requirement was a part of the Federal Deposit Insurance Corporation Improvement Act of 1991, which directed FTC to write disclosure regulations, as amended by the Financial Services Regulatory Relief Act of 2006. 

 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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FYI: FHFA/GSEs Announce New Loan and Other Data Standards/Processes

The Federal Housing Finance Agency, working with industry participants, announced a major new initiative by Freddie Mac and Fannie Mae to improve the consistency and quality of data for appraisals and other loan information.  The press release and related fact sheet are attached.

 

The Uniform Mortgage Data Program is a long-term, joint effort to create improved and uniform data standards and data collection processes in submissions to the GSEs.  The standard program will be adopted by the GSEs in phases through a common platform, and will provide opportunities for continued stakeholder input.

 

Under the program, data submitted to Fannie Mae and Freddie Mac on loans sold to or guaranteed by them will include more complete and consistent data on:  (a) loan characteristics;  (b) borrower information;  (c) the property securing the loans; and  (d) the identity of the parties creating the transaction.

 

The new data standards for all single-family appraisal forms on all loan applications will be required beginning Jan. 1, 2011.  The standards must be used for loans delivered to the GSEs by Sept. 1, 2011.  The attached fact sheet contains a more specific and detailed timeline.

 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

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