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.
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.
Ralph T. Wutscher
Kahrl Wutscher LLP
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