Sunday, January 16, 2011

7th Cir Rules Against Servicer on QWR Issues, RESPA Safe Harbor

The United States Court of Appeals for the Seventh Circuit recently held that borrower inquiries to a loan servicer that either request information, or that state a belief as to an error in servicing, are "Qualified Written Requests" under RESPA.  The Court further ruled that in order to invoke the "safe harbor" provisions under Section 6 of RESPA, a servicer must at least, upon discovery of a servicing error, notify the borrower of that error within 60 days, and before the borrower files suit. 

A copy of the decision is available online at:

Plaintiff borrowers' loan was assigned to GMAC after a lengthy period of mishandled servicing by a prior servicer.  Upon transfer, GMAC failed to provide borrowers with notification of the transfer of servicing and also sent account statements to the borrowers reflecting incorrect information that had been provided by the prior servicer.  Based on this incorrect information, GMAC also returned uncashed several payments, submitted negative information to several credit bureaus and initiated foreclosure proceedings.

Attempting to resolve these problems, the borrowers submitted a series of letters to GMAC outlining their concerns.  GMAC acknowledged receipt of these letters, but provided no further response to the borrowers' inquiries.  The borrowers filed suit, alleging violations of RESPA for GMAC's failure to notify of the transfer of servicing or to respond to their inquiries and also alleging negligence and breach of contract under state law.  The District Court granted summary judgment in favor GMAC as to all claims; the borrowers appealed.

The Appellate Court first examined the applicability of RESPA's "safe harbor" provisions under 12 U.S.C. § 2605(f)(4).  Although the Court declined to examine all of the requirements necessary for its protection, it did rule that one requirement is that upon discovering an error, a servicer must notify the borrower of that error within 60 days, and before the borrower files suit.  Because GMAC had failed to so notify the borrowers, the Court ruled, it could not claim RESPA's "safe harbor" protections.

The Court then considered GMAC's arguments that the borrowers' letters were not "Qualified Written Requests," and thus did not trigger obligations under Section 6 of RESPA, because they "merely dispute a debt or request information."  The Court noted that RESPA requires that a request (1) "must reasonably identify the borrower and account," and (2) must "include a statement of the reasons for the belief of the borrower, to the extent applicable, that the account is in error or provide sufficient detail to the servicer regarding other information sought by the borrower."  Thus, the Court explained, any "reasonably stated written request for account information can be a qualified written request."  Further, "[t]o the extent that a borrower is able to provide reasons for a belief that the account is in error, the borrower should provide them, but any request for information made with sufficient detail is enough under RESPA to be a Qualified Written Request…" 

The court then applied this analysis to the borrowers' letters.

The borrowers' first letter complained in "great detail" that previous payments had been submitted, that they had not been properly credited, and that additional fees had been improperly assessed.  The letter also requested "very specific information," including the reasons for failing to apply payments, an accounting of the funds previously applied and information related to the transfer of the servicing to GMAC.  The Court concluded that although some of the information requested might have been unavailable to GMAC, the letter itself "provide[d] sufficient detail...regarding other information sought by the borrower" to be considered a Qualified Written Request.

In the second letter, the borrowers explained their understanding of the amounts then due on the loan, and enclosed a check for that amount.  The borrowers also described a series of "expectations" as to how GMAC would handle their account moving forward, including that GMAC would provide any requested information, that GMAC would respond in writing, and that their payments would be applied in a timely manner.  However, they did not describe any disputes or errors with the servicing of the account.  Because the borrowers' statements of "expectations were not requests for information," the Court ruled, this letter was not a qualified written request.

In their third and fourth letters, the borrowers requested that GMAC apply the payments previously received, and also recounted their various frustrations with GMAC's failure to apply payments, but did not articulate any specific belief that GMAC's failure to apply the payments submitted was due to a servicing error.  Therefore, the Court ruled, although these letters clearly related to servicing, they did not either request information or state a belief as to an error in servicing, and thus were not Qualified Written Requests.

In their final letter, the borrowers disputed GMAC's "attempt to collect on [the account]" and further alleged that GMAC's failure to apply, and subsequent return of, the previously-submitted payments was a servicing error and further requested a specific explanation of the fees and costs applied to their account.  This, the Court ruled, was "unequivocally a Qualified Written Request under RESPA."

The Court next considered the borrowers' breach of contract claim and noted "is a basic tenant of contract law…that where time for performance is specified, the law implies a reasonable time."  Because the reasonableness of GMAC's admitted failure to apply immediately apply payments was a question of material fact, the Court ruled, the summary dismissal of these claims by the District Court was an error.

The Court also considered the District Court's dismissal of borrowers' negligence claims.  In affirming the lower decision, the Court observed that the economic loss doctrine bars tort recovery for purely economic losses based on failure to perform contractual obligations.  Although there are exceptions to this doctrine, these exceptions require "the existence of an extra-contractual duty between the parties," such as a fiduciary duty.  Because the borrowers failed to demonstrate a fiduciary or other such duty, the Court affirmed the dismissal of the negligence claims.

Finally, the Court examined the question of possible damages, either as a result of borrowers' denial of further credit or emotional distress.  Noting that RESPA allows for actual damages to the borrower as a result of compliance failure, the Court then examined the factual record and concluded that based on the record, a reasonable jury could conclude that GMAC's actions resulted in actual damages, either due to a denied business loan application, or due to emotional distress, and that these questions of fact would bar summary judgment.

Let me know if you have any questions.  Thanks.


Aaron Freeman

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 416-6170

Fax:  (866) 581-9302


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