Monday, July 16, 2012

FYI: 9th Cir Holds TILA's Loan Ownership Disclosure Provisions (15 USC 1641(f)) Apply Only to Servicer-Assignees

The U.S. Court of Appeals for the Ninth Circuit recently held that a loan servicer was not liable under the federal Truth in Lending Act for the servicer's alleged failure to respond to a borrower's request for the identification and contact information for the current loan owner, because 15 U.S.C. 1641(f) applies only to servicers that are also assignees of mortgage loans and the servicer in this case was not such an assignee.
A copy of the opinion is available at:
Plaintiff ("Borrower") defaulted on a home mortgage refinancing loan that was secured by a deed of trust on Borrower's property.  The trust deed designated Mortgage Electronic Registration System, Inc. ("MERS") as the beneficiary under the trust deed and as lender's nominee.  The original lender was also the servicer ("Defendant Servicer") of the loan and continued to service the loan even after the loan had been sold on the secondary mortgage market and securitized
Following his default, Borrower contacted Defendant Servicer in writing, inquiring about a possible loan modification and requesting the name and address of the owner and holder of his loan.  Lender-Servicer allegedly never responded.
MERS later assigned its beneficial interest under the deed of trust to the trustee of the asset-backed securities trust, and non-judicial foreclosure proceedings ensued.    A foreclosure sale of the property was also scheduled.
In an effort to stop the foreclosure, Borrower filed suit in federal court against Defendant Servicer, MERS, and the owner of the loan, among others.  The complaint alleged in part that Defendant Servicer violated section 1641(f)(2) of the federal Truth in Lending Act, ("TILA") by failing to provide Borrower with the requested name of the holder of the loan.  Borrower also alleged various violations of Nevada law, including breach of contract, wrongful foreclosure, and breach of the covenant of good faith and fair dealing.  
Granting the defendants' motion to dismiss, the district court dismissed without leave to amend.  Borrower appealed.  The Ninth Circuit affirmed in part, vacated in part, and remanded.
As you may recall, Subsection 1641(f) of TILA provides:   "(1) . . . A servicer of a consumer obligation arising from a consumer credit transaction shall not be treated as an assignee of such obligation for purposes of this section unless the servicer is or was the owner of the obligation.  (2) A servicer . . . shall not be treated as the owner of the obligation for purposes of this section on the basis of an assignment of the obligation from the creditor or another assignee to the servicer solely for the administrative convenience of the servicer in servicing the obligation. Upon written request by the obligor, the servicer shall provide the obligor, to the best knowledge of the servicer, with the name, address, and telephone number of the owner of the obligation or the master servicer of the obligation."  15 U.S.C. §1641(f).
Examining section 1641 as a whole and subsection (f)(2) in detail, the Ninth Circuit noted that section 1641 addresses only entities that are purchasers or assignees of mortgages.  See 15 U.S.C. § 1641(a)(a "civil action for a violation . . . may be maintained against any assignee . . . only if the violation . . . is apparent on the face of the disclosure statement, except where the assignment was involuntary. . . ."); 15 U.S.C § 1641(b)(relating to compliance by a "subsequent assignee of the original creditor"); 15 U.S.C §1641(c)("Any consumer who has the right to rescind a transaction . . . may rescind the transaction as against any assignee of the obligation"); and 15 U.S.C §1641(d)("[a]ny person who purchases or is otherwise assigned a mortgage . . . shall be subject to all claims and defenses with respect to that mortgage").  
In so doing, the Court stressed that although subsection 1641(f)(1) "sets out a general rule that a servicer must be the assignee-owner of the obligation to incur assignee liability," subsection 1641(f)(2) provides that servicers that are assigned ownership of a loan "solely for 'administrative convenience'" would not be liable as assignees for failure to respond to consumer inquiries.
Thus, the Ninth Circuit held that the Borrower was unable to assert a claim under section 1641(f)(2) against Defendant Servicer for failure to provide the requested information, because Defendant Servicer was not a servicer-assignee.  On the other hand, the Court noted that, had Defendant Servicer been assigned the loan from another company, Defendant Servicer would have been liable under section 1641(f) for failure to provide Borrower with the information he sought.
In addition, the Court concluded that because Borrower's claim accrued before implementation of the mandate requiring all servicers  to respond to requests for information, Defendant Servicer could not be held liable under subsection (f)(2) for failure to respond to the Borrower's requests. 
As for Borrower's various state law allegations, the Court noted that a claim for breach of the covenant of good faith and fair dealing required a showing that Defendant Servicer acted in an "arbitrary or unfair" way "to the disadvantage of" Borrower.  The Ninth Circuit thus ruled that, absent an express contractual provision to the contrary, Defendant Servicer's alleged failure to respond did not qualify as "arbitrary or unfair," and accordingly affirmed the district court's dismissal of that claim.  
The Court remanded Borrower's wrongful foreclosure and other claims for further consideration in light of the additional legal authority Borrower presented to support his arguments.  

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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