Saturday, March 5, 2011

FYI: Maine Fed Ct Dismisses Common Law "Robosigner/Fraudulent Foreclosure" Allegations

The United States District Court for the District of Maine recently dismissed a group of borrowers' state law claims against a mortgage servicer for abuse of process and fraud on the court, and denied the borrowers' motion to remand all of the state law claims.  A copy of the opinion is attached.

A group of Maine borrowers ("Borrowers") threatened with foreclosure or eviction brought suit against GMAC Mortgage, LLC ("GMAC") seeking damages and injunctive relief, alleging abuse of process, fraud on the court and violations of the Maine UTPA.  GMAC removed the case to federal court on the basis of diversity of citizenship and the Class Action Fairness Act, and the Borrowers moved to remand the case back to state court.

At the outset, the Court denied the Borrowers' motion to remand, reasoning that "there is indisputably subject matter jurisdiction based upon diversity of citizenship" as to the three state common law damages claims.  In addition, only once has the Court "resolved all claims over which there is federal subject matter jurisdiction" may the Court "remand the claims over which there is no federal subject matter jurisdiction."  See 28 U.S.C. § 1447(c).   

The Court next dismissed the Borrowers' abuse of process claim.  The alleged basis of the abuse of process was the supposed "filing of false certifications and affidavits in support of GMAC's motions for summary judgment in various Maine foreclosure proceedings." 

However, a claim for abuse of process under Maine law requires, among other things, "the use of process in a manner improper in the regular conduct of the proceeding."  The Court reasoned that the use of the challenged affidavits and certifications "does not satisfy the 'improper' use requirement."  See Advanced Construction Corp. v. Pilecki, 901 A.2d 189 (Me. 2006). 

Rather, the certifications and affidavits "were used to win the foreclosure lawsuits, and that is a proper use of such documents."  The Court further noted that if the documents were false, "then the remedy is to seek to vacate the judgment that was obtained, not to start a new lawsuit alleging abuse of process."

The Court also dismissed the Borrowers' claim for fraud on the court, reasoning that "no Maine case law recognizes such a basis for a private damage recovery."  In addition, fraud on the court may be a ground for, among other things, vacating a judgment or for sanctions under state civil procedure rules, "but it is not a ground for the recovery of damages by a party in a later lawsuit."

Finally, the Court denied the Borrowers' motion to remand the remaining claim under the Maine UTPA based upon both the Rooker-Feldman doctrine and Younger abstention doctrine.

As you may recall, the Rooker-Feldman doctrine essentially holds that "a federal court below the United States Supreme Court does not have jurisdiction over a claim that seeks in essence to overturn a state court judgment," and "[i]nstead, the proper avenue for such a challenge is to the state's highest court and from there to the United States Supreme Court."

The district court held that "Rooker-Feldman does not destroy subject matter jurisdiction over" the UTPA claim "because the borrowers' claim is that GMAC's conduct produced the state court judgments they attack, not that the Maine courts committed legal error."

As you may also recall, the Younger abstention doctrine "counsels federal courts not to interfere by injunction with ongoing state judicial proceedings."  However, when damages are requested, that doctrine commonly "calls upon the federal court merely to stay the damages claim until the state lawsuit is resolved, not dismiss or remand the claim for damages altogether." 

In this case, the district court noted that "the foreclosure actions, including those pending at the time GMAC removed this action to federal court, have since been resolved," and the Court determined therefore to "proceed on the merits of the damages claim."   As explained above, the Court "cannot remand part of the case (the claim for equitable relief) while the rest (the claim for damages) proceeds actively in federal court." 

Accordingly, the borrowers' Maine UTPA allegations remain for resolution before the federal district court.

Having denied the Borrower's motion for partial remand, the Court concluded by denying the Borrower's Motion for Order of Notice to Putative Class as moot. 

Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois  60602
Direct:  (312) 551-9320 
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Thursday, March 3, 2011

FYI: 5th Cir Says Collecting on Time-Barred Debts "May" Violate FDCPA, But Not In This Case

In a case involving collection activities on an allegedly time-barred cell
phone debt, the U.S. Court of Appeals for the Fifth Circuit recently held
that: (1) the Federal Communications Act statute of limitations of two
years did not apply in this case, as there was no indication of federal
preemption of state statutes of limitation on collecting on cell phone
bills; and (2) the relevant state statute of limitations of four years
applied, and the defendant's were therefore not "threatening to sue on
time-barred debts."

A copy of the opinion is available online at:

The consumer brought suit against two debt collectors concerning letters
he perceived as threatening suit on an approximately three (3) year old
cellular phone bill. The consumer alleged that these collecting on these
cell phones bills was time-barred under the Federal Communications Act

The relevant language of the FCA, 47 U.S.C. §415(a), states: "All actions
at law by carriers for recovery of their lawful charges . . . shall be
begun, within two years from the time the cause of action accrues, and not

The district court certified as a class all persons with Texas addresses
who had received similar letters to Castro's during a specified time
period on debts that had gone delinquent more than two years before the
letters were sent. However, the district court then granted the
defendants' motion to dismiss, and denied the consumer's motion for
partial summary judgment. The consumer appealed.

One appeal, the Fifth Circuit noted that "threatening to sue on
time-barred debt may well constitute a violation of the FDCPA." Thus, the
Court determined that "in order to proceed "the plaintiffs needed to
demonstrate that their debts were "time-barred."

The Court then contrasted the 4-year statute of limitations in §
16.004(a)(30) of the Texas Civil Practice & Remedies Code with the 2-year
limitations period under the FCA, 47 U.S.C. §415(a).

The Fifth Circuit framed the choice between these two statutes of
limitations as "a question of preemption." Due to the fact that Congress
had amended the FCA to allow states to control "many aspects of regulating
commercial mobile services" including the traditional state regulation of
contracts and consumer protection, the Court held that "Congress did not
intend to preempt "the historic police powers of the states," absent a
showing that this was "the clear and manifest purpose of Congress."

Because the plaintiffs did not contend that express or field preemption
was applicable in this matter, the Court focused on the possibility of
conflict preemption.

The Court noted that when the FCA was enacted in 1934 carriers were
required "to file their rates, also called 'tariffs' with the FCC."
Although many telecommunications carriers have since been released from
the requirement to file tariffs, the Court noted that "Congress did not
change the language of §415(a)."

The plaintiffs urged the Court to accept their definition of "lawful
charges" as applying to non-tariffed as well as tariffed charges.
However, Court held that given the history of the regulation it was "at
least equally reasonable to read 'lawful charges' in §415(a) as a term of
art meaning only tariffed charges." Due to this ambiguity in the meaning
of "lawful charges," the Court would not "interpret the term in such a way
that conflict preemption would apply."

Because conflict preemption did not apply to displace the 4-year state
statute of limitations period, the cell phone debts at issue were not
time-barred, and the consumer had no claim. Thus, the Fifth Circuit
affirmed the lower court's judgment.

Ralph T. Wutscher
Kahrl 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

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Wednesday, March 2, 2011

FYI: FRB/FTC Issue Proposed Rule on Dodd-Frank Act Changes to Risk-Based Pricing, Adverse Action Notices

The Federal Reserve Board and Federal Trade Commission propose to:  (1) revise and add to the content requirements for risk-based pricing notices; and  (2) revise and add related risk-based pricing and adverse action notice model forms to reflect the new Dodd-Frank Act credit score disclosure requirements . 

The full text of the proposed risk-based pricing rule is available at:

The full text of the proposed adverse action notice rule is available at:

In January of last year, the FRB and the FTC published final rules to implement the risk-based pricing provisions in section 311 of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act), which amends the Fair Credit Reporting Act (FCRA).

These existing final rules generally require a creditor to provide a risk-based pricing notice to a consumer when the creditor uses a consumer report to grant or extend credit to the consumer on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that creditor. The mandatory compliance date for these existing risk-based pricing rules was January 1, 2011.

As you may recall, the Dodd-Frank Act requires creditors to also and additionally disclose credit scores and related information to consumers in risk-based pricing and adverse action notices under the Fair Credit Reporting Act, if a credit score was used in setting the credit terms or taking adverse action.   The effective date of these amendments is July 21, 2011.

Section 1100F of the Dodd-Frank Act requires that a risk-based pricing notice include:  (1) a numerical credit score used in making the credit decision;  (2) the range of possible scores under the model used;  (3) the key factors that adversely affected the credit score of the consumer in the model used;  (4) the date on which the credit score was created; and  (5) the name of the person or entity that provided the credit score.

Accordingly, in order to prepare for the effective date of the Dodd-Frank Act amendments, the FRB and FTC propose to amend their respective risk-based pricing rules to require disclosure of credit scores and information relating to credit scores in risk-based pricing notices, if a credit score of the consumer is used in setting the material terms of credit.

In addition, the Federal Reserve Board proposes to amend the adverse action model notices under Regulation B (Equal Credit Opportunity Act), which combine the adverse action notice requirements for both Regulation B and the FCRA. The proposed amendments would revise the model notices to incorporate the new credit score disclosure requirements. 

The Board proposes to amend these model notices in Regulation B to include the disclosure of credit scores and information relating to credit scores if a credit score is used in taking adverse action. These proposed amendments reflect the new content requirements in section 615(a) of the FCRA that were added by section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Public comments on the proposed rules are due 30 days after publication in the Federal Register, which is expected shortly.


Ralph T. Wutscher
Kahrl 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

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Sunday, February 27, 2011

FYI: Cal App Allows Breach of Fid Duty Claim Against Lender, When Loan Officer Told Borrower He Would "Shop for the Best Loan"

The California Court of Appeal, Second District, recently held that a mortgage lender that brokered loans to other lenders, and that had represented to a prospective borrower that it would "shop the best loan" for her, acted as a mortgage broker and thus had a fiduciary duty to the borrower.

A copy of the opinion is available online at:

Defendant Home Loan Funding ("HLF") primarily originated and occasionally brokered loans to residential borrowers.  The plaintiff consumer contacted HLF to apply for a HELOC, but HLF's loan officer was unable to qualify the plaintiff, despite making multiple inquiries with other lenders.  The loan officer then suggested refinancing with a new first deed of trust and assured the plaintiff that he would "shop the best loan" for her, and would obtain a loan without a pre-payment penalty.  HLF then directly extended an adjustable rate loan to plaintiff that included a pre-payment penalty, and an interest rate margin higher than the lowest for which the plaintiff likely could have qualified.

The borrower sued, and the trial court concluded that HLF and its loan officer acted as mortgage loan brokers, breached their fiduciary duty to plaintiff, and misrepresented the terms and advisability of the loan.  The trial court awarded damages for the pre-payment penalty, the difference between the actual interest rate margin and that of a loan for which the borrower could have qualified, and attorney fees.  HLF appealed.

The appellate court examined Section 10131 of the California Business and Professions Code, noting that a "broker" is defined as a person who "[s]olicits borrowers or lenders for or negotiates loans or collects payments or performs services for borrowers or lenders or note owners in connection with loans secured directly or collaterally by liens on real property…."  The Court also noted that the "mortgage broker acts as the borrower's agent."

The appellate court also examined Section 50003(m) of the California Financial Code, which defines a mortgage "lender" as "a person [who] . . . directly makes residential mortgage loans, and . . . makes the credit decision in the loan transactions."  Unlike the broker relationship, "[t]he relationship between a lending institution and a borrower is not fiduciary in nature."

The Court then analyzed the trial record, and concluded that HLF's loan officer had "shopped" plaintiff's HELOC application among multiple lenders, and that he had represented to the plaintiff that he was a mortgage broker and would "shop the best loan" for the refinance.  The appellate court held that the record also established that HLF had previously placed loans with other lenders.  According to the appellate court, these facts provided "more than ample evidence to support the trial court's finding that HLF and [its loan officer] acted as a mortgage broker and owed [plaintiff] fiduciary duties," the Court noted.  The Court was not persuaded by HFL's argument that the loan documents identified HLF only as a lender, noting that it was HLF that "ultimately persuaded [the borrower] to accept one of its loans."

The Court then evaluated the calculation of damages, in light of HLF's argument that the borrower would likely not pay the loan for its full 30 year term, by examining two conflicting California appellate decisions.  In Hutton v. Glicksberg (1982) 128 Cal.App.3d 240, 251-252, a damages calculation "based on the difference in interest calculated over the entire 30-year term of the loan" was upheld.  However, the appellate court in Stratton v. Tejani (1982) 139 Cal.App.3d 204, 214, reached a different conclusion, ruling that "calculating the interest differential over the entire 30-year term lacks a factual basis," particularly given that "residential real property typically is held for only seven to ten years."

Considering these precedents, the Court concluded that "Stratton is not applicable here," as "[t]he actual term of the mortgage provides a more solid foundation for the calculation of damages than speculation based on what the typical homeowner may or may not do, particularly in today's uncertain housing market."  Further, the Court noted, "[t]he evidence is that [plaintiff] does not qualify to refinance" and that "she is more likely than anyone to be saddled with a 30-year mortgage."

However, the Court agreed with HLF in that "it is inconsistent for the trial court to award damages based on both the 30-year term of the mortgage and the prepayment penalty" and therefore ordered the prepayment penalty damages stricken.

The Court also considered the award of attorney fees, observing that the borrower's note specifically provided for an award of fees and that Section 1717(a) of the California Civil Code provides that a prevailing party may receive fees "[w]here a contract provides for attorney's fees."

The Court disagreed with HLF's argument that, although the borrower was a prevailing party, she prevailed on an "action[] based on tort," rather than an "action on a contract," as is required by Section 1717.  The Court noted that, "[i]n addition to breach of fiduciary duty and misrepresentation… HLF breached the implied covenant of good faith and fair dealing."  Because "the implied covenant is contract-based," and because the appellate court believed that the trial court appropriately considered "the oral brokerage agreement and the loan documents as a single agreement," the appellate court ruled that the "award of attorney fees was proper."

Ralph T. Wutscher
Kahrl 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

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FYI: 9th Cir Confirms RESPA Does Not Apply to Loans Used to Purchase Rental Property

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
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

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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