Tuesday, July 19, 2011

FYI: 7th Cir Rules in Favor of Mortgage Servicer in "Pyramiding of Late Fees" Putative Class Action

The U.S. Court of Appeals for the Seventh Circuit recently upheld the
grant of summary judgment in favor of a loan servicer in a putative class
action involving alleged breach of contract and alleged pyramiding of late
fees under Indiana's Home Loan Practices Act (IHLPA), Ind. Code §
24-9-1-1, et seq., as the named-plaintiff borrower failed to present any
evidence of a breach of contract, and could not show any intentional
violation of the IHLPA. A copy of the opinion is attached.

In August 2004, the plaintiff borrower secured financing from WMC Mortgage
Company to purchase a home in Indiana. WMC subsequently assigned the
servicing obligations to defendant America's Servicing Company ("ASC").
Under the terms of the loan, mortgage payments were due on the first of
each month, with a 15-day grace period after which ASC assessed a late
fee. If plaintiff skipped a month, his next payment was applied to the
principal and interest for the missed month.

In the fall of 2006, the borrower missed his September and October
payments. In November, he contacted ASC and entered into his first
forbearance agreement. The agreement provided he would not have to make
his November payment; rather, it would be pro rated and added to his
regular monthly payments over the next eight months—from December 2006
through July 2007.

The borrower also had until the 15th of each month to make his payments,
but there was no grace period before ASC would assess a late fee, and the
agreement also stated that credit reporting would continue until the loan
was current.

The borrower made payments under the forbearance agreement around the 15th
of each month from December through March. In April, he received a second
forbearance agreement from ASC under which ASC agreed not to accelerate
the total loan amount if he made payments by the 27th of the month from
April through July. This plan also included no grace period for late fees,
and clearly stated that credit reporting would continue "until the loan is

The borrower attempted to refinance his loan in August of 2007, and found
that ASC had, contrary to his purported understanding of the forbearance
agreements, been reporting his late payments to the credit bureaus during
the forbearance agreement periods, and had assessed him late fees between
November and July. He subsequently brought suit when ASC refused to
remove the late fees and retract and negative credit reporting, alleging
among other things breach of contract, and pyramiding of late fees under
the IHLPA.

The borrower argued that ASC breached the contracts by assessing late fees
and reporting late payments even though he paid on time and in full as the
forbearance agreements required. ASC contended that it did not breach the
terms of the contracts because when plaintiff entered into the first
forbearance agreement he had already missed two payments— September and
October 2006—and the forbearance agreement did not change the fact that
those two previous payments were still outstanding.

The appellate court found this fact "devastating" to the borrower's claim,
as the original mortgage agreement made clear that if the borrower missed
a payment, his next payment would be applied to the "Periodic Payment in
the order in which it became due," and the forbearance agreement "clearly
stated that this provision remained in effect." Even if the borrower had
continued to pay according to the forbearance agreement, the Court noted
that he would still be late as he was more than a month behind when
entering into the agreement, and therefore ASC was justified in assessing
the late fees.

The appellate court also noted that even if plaintiff was correct in
stating that he believed according to his phone conversation with an ASC
representative that there would be no late fees or negative credit
reporting during the forbearance plan, this was immaterial. Under the
Indiana Lenders Liability Act, the borrower could not assert a breach of
contract claim based on alleged oral modifications to loan agreements.
IND. CODE § 26-2-9-4(b). The appellate court stated it had "already
found, the language of the contracts is clear—ASC had the right at all
times, under the original contract and both forbearance agreements, to
charge Collins late fees and report his late payments."

Finally, the appellate court addressed plaintiff's claims that ASC
violated IHLPA by not considering the forbearance agreements when
assessing late fees, and that he had "every expectation" that he would not
be assessed these fees if he made the payments under these agreements.

The appellate court found that the borrower had not shown, as required by
the IHLPA, that ASC (1) knowingly or intentionally, (2) made a material
misrepresentation, or (3) concealed material information regarding the
terms or conditions of the transactions.

Because the "plain language" of the forbearance agreements specifically
provided that all terms of the original mortgage remained in full force
and effect, including the provision that payments would be applied in the
order they became due, and there was no grace period in either agreement,
the borrower could not prove that ASC had "knowingly or intentionally"
made a material misrepresentation or concealed material information
concerning these agreements.

Accordingly, the appellate court affirmed the decision of the district
court granting ASC's summary judgment motion with regard to both the
plaintiff's breach of contract and IHLPA claims.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com

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