FYI: 7th Cir Rejects Alleged RESPA "Pattern and Practice" Due to No Evidence of "Coordination"

The U.S. Court of Appeals for the Seventh Circuit recently held that a mortgage servicer's response to a borrower's written request for information complied with requirements of the federal Real Estate Settlement Procedures Act ("RESPA") and, to the extent any information was missing, the borrower suffered no actual damages as the result.

 

In so ruling, the Seventh Circuit rejected the borrowers' pattern or practice argument under RESPA, based on two district court cases in 2012 and 2014 holding the servicer liable for RESPA violations, because "[t]wo examples of similar behavior — in different states, separated by a handful of years, and with no evidence of coordination — isn't enough to support recover statutory damages."

 

A copy of the opinion is available at:  Link to Opinion

 

The borrower's switched insurance carriers, but failed to inform the mortgage servicer. This resulted in the servicer paying the wrong homeowner's insurer using money from the loan's escrow account.

 

Upon learning of the error, the servicer paid the correct insurer and told the borrowers that they would receive a refund check from their former insurer, and that they needed to send the refund check back to the servicer to replenish the escrow account.

 

Instead of doing as instructed, the borrowers kept the refund from the insurer and did not replenish their escrow account.  This resulted in the servicer adjusting their monthly payment upward to make up for the shortfall.

 

The borrowers refused to pay the increased amount, even though the difference was only $66.86 per month, and the loan went into default.

 

The borrowers sent the servicer two letters requesting information under RESPA and demanding that the servicer replenish the escrow account because it erroneously paid the wrong insurance carrier. The servicer responded by providing a complete account history, which included a detailed escrow statement.

 

The borrowers then sued the servicer for allegedly violating RESPA because the servicer's response to their request for information was supposedly inadequate and for supposedly breaching the common law implied covenant of good faith and fair dealing. The borrowers sought more than $300,000 damages and blamed the collapse of their marriage on the servicer

 

The district court entered summary judgment in the servicer's favor, holding that there was no evidence that the servicer violated either its statutory obligations under RESPA or the common-law covenant of good faith and fair dealing. The borrowers appealed.

 

On appeal, the Seventh Circuit first addressed the common law claim, explaining that "Indiana does not recognize an implied covenant of good faith and fair dealing in every contractual setting; instead, the state courts have recognized an implied covenant of good faith in the context of employment contracts, insurance contracts, and certain other limited circumstances—for example, when on counterparty stands in a fiduciary, superior, or special relationship to the other."

 

Because the district court assumed without deciding that the duty of good faith applied in the context of mortgage servicing, the Appellate Court adopted the same assumption.  The Seventh Circuit explained that "[a] party violates the implied duty of good faith and fair dealing when, though not breaching the express terms of the contract, he nonetheless behaves unreasonably or unfairly."

 

The borrowers argued that the servicer breached this duty by holding a partial payment they made in December 2010 "in suspense."  The Seventh Circuit rejected their argument because the servicer never agreed to accept the partial payment "in full satisfaction" of the December payment that was due, and moreover, the mortgage contained standard language allowing the servicer to accept partial payments without waiving its right to enforce the loan's terms.

 

The Seventh Circuit also rejected the borrowers' argument that the servicer had a duty to apply a 2010 escrow refund toward their December 2010 payment, reasoning that by the time the escrow refund was calculated, the account was already past due, "so even if [the bank] had applied those funds to the account, the late fees would already have accrued." In addition, the Court noted that the borrowers could have used the escrow refund to pay the balance owed on the December payment, but chose not to so.  The Court concluded that the servicer had no duty to do this for them.

 

Turning to the RESPA claim, the Seventh Circuit recited that "RESPA requires mortgage servicers to correct account errors and disclose account information when a borrower sends a written request for information."   As you may recall, RESPA provides borrowers with a cause of action if a servicer fails to comply for actual damages resulting from the failure to comply, plus statutory damages of up to $2,000 if the borrower proves that the servicer engaged in a "pattern or practice of noncompliance. A prevailing borrower is also entitled to recover costs and attorney's fees.

 

The Seventh Circuit also explained that a servicer does not have a duty to respond to all inquiries or complaints from borrowers. Instead, RESPA "covers only written requests alleging an account error or seeking information relating to loan servicing." The statute defines "servicing" as "receiving any periodic payments from a borrower pursuant to the terms of any loan, including amounts for escrow accounts …, and making the payments with respect to the amounts received from the borrower as may be required" by the loan documents.

 

The Court continued that RESPA requires that a servicer that receives a qualified written request take one of three actions: (a) correct the account error; (b) after investigating, provide the borrower with a written explanation or clarification why the account is correct; or (c) provide the information requested to the borrower or explain why its unavailable.

 

Here, the Seventh Circuit found that the servicer's response "almost perfectly" complied with the requirements of RESPA subsection 2605(e)(2) because it provided a complete account history showing all monthly payments, how those payments were applied to principal, interest, and escrow, escrow payments and "a complete escrow accounting."

 

The only things missing, the Court noted, were the name of the insurance company that received the $1,422 escrow payment and an explanation of why the December 2010 payment was correctly held in suspense.

 

The Seventh Circuit held, however, that this missing information was had already been provided in earlier correspondence and, accordingly, even if the response "fell slightly short of full compliance as a technical matter," the borrowers could not show "that they suffered any actual damages 'as a result of' any failure to comply with RESPA response duties."

 

The Court also addressed the borrower's allegation that the servicer's' failure to respond properly caused their marriage to dissolve, finding that while "[e]motional distress damages are recoverable under RESPA, … the breakdown of a marriage is not the type of harm that faithful performance of RESPA duties avoids. This kind of harm is far too attenuated from the alleged violation to cross the proximate-cause threshold."

 

The Seventh Circuit held that even though the servicer's response was technically incomplete, "no reasonable fact finder could conclude that [the borrowers] suffered any actual damages as a result of that shortcoming."

 

The Court also found that because the borrowers failed to produce any evidence showing a pattern or practice of noncompliance with RESPA, their claim for statutory damages failed.

 

The Seventh Circuit rejected the borrowers' pattern or practice argument, based on two district court cases in 2012 and 2014 holding the servicer liable for RESPA violations, because "[t]wo examples of similar behavior — in different states, separated by a handful of years, and with no evidence of coordination — isn't enough to support recover statutory damages."

 

Accordingly, the district court's summary judgment was affirmed.

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Massachusetts   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

FYI: Fla App Ct (3rd DCA) Holds Mortgagee Failed to Prove Repairs to Property Not "Economically Feasible"

The Court of Appeal of the State of Florida, Third District, recently reversed summary judgment in favor of a mortgagee-loss payee under a homeowner's insurance policy, holding that the mortgagee failed to provide evidence of the value of the property after repairs, and therefore failed to show that repairing the property was not economically feasible.

 

A copy of the opinion is available at: Link to Opinion

 

A consumer took out a purchase money loan for $120,000 secured by a mortgage on the residential property.  The original lender assigned the mortgage to two fractional assignees, one of whom assigned again it to a limited liability company.

 

The property securing the loan was damaged by fire and the owner filed a claim with her homeowner's insurance carrier. The insurer issued two checks totaling $94,162.52 jointly payable to the homeowner, the law firm representing her, and the mortgagees.

 

One of the mortgagees withheld the insurance proceeds, invoking a section of the mortgage that gave it the right to apply the insurance proceeds to the loan if it was not economically feasible to repair the property. An initial exterior appraisal of the home valued it at $90,000, but a contractor's repair estimate was for $98,717. The homeowner later provided a lower revised repair estimate of $53,117.

 

The homeowner sued the mortgagee, alleging that she was unable to repair the property because the mortgagee refused to release the insurance proceeds. The mortgagee moved to dismiss and the homeowner filed an amended complaint raising claims for breach of contract, breach of implied covenant of good faith and fair dealing, declaratory judgment and unjust enrichment.

 

The mortgagee moved for summary judgment on all claims and the homeowner filed a response in opposition supported by two affidavits. The trial court granted summary judgment in favor of the mortgagee, finding that "it was not economically feasible to repair the property because the cost to repair was greater than the value of the property."  The homeowner moved for reconsideration and rehearing, but the trial court denied the motion. The homeowner appealed.

 

On appeal, reviewing the summary judgment under a de novo standard, the Appellate Court pointed out that the homeowner's affidavit in opposition to summary judgment indicated that it was economically feasible to repair the property "because the value of the property with repairs will be significantly greater than the outstanding balance on the mortgage."

 

In addition, the Court noted, the mortgage did not define the term "economically feasible,' a term subject to more than one interpretation. Because the mortgagee "did not provide an estimate of the value of the property after repairs, [it] therefore did not meet its burden of proof that no genuine issue of material fact exists."

 

The Court further found that summary judgment was improper because a genuine issue of material fact existed as to the cost of repairing the property. The mortgagee relied on the initial estimate that the homeowner used to obtain the insurance pay-out, while the homeowner relied on a revised estimate that was much less than the insurance proceeds.

 

Such conflicting evidence precluded summary judgment because "the trial court must not weigh material conflicting evidence or pass upon the credibility of the witness." … Only a trier of fact may weigh evidence and determine credibility—the court was without authority to with the evidentiary value of the conflicting estimates."

 

Accordingly, the Appellate Court reversed the summary judgment order and remanded the case for further proceedings.

 

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

FYI: NJ Fed Ct Holds FDCPA Plaintiff Lacked Standing Under Spokeo

The U.S. District Court for the District of New Jersey recently granted a debt collector's motion for summary judgment for lack of standing under Spokeo v. Robbins in an FDCPA putative class action arising from online payment processing fees where the collection account at issue did not belong to the debtor.

 

A copy of the opinion is available at:  Link to Opinion

 

The plaintiff received a dunning letter from a collector allowing him to make payments by phone or online subject to a $4.95 processing fee.  Similar payments made by mail would not be subject to the processing fee.  Although the account at issue did not belong to him, the plaintiff filed suit on behalf of himself and a putative class for violations of the federal Fair Debt Collection Practices Act.  Specifically the plaintiff alleged violations of 1692e and 1692f of the FDCPA claiming that the processing fee was not authorized by the contract.

 

The plaintiff argued that "[t]he only question to be resolved in this action is whether the Defendant's actions, in attempting to charge a $4.95 processing fee to consumers paying their debts via credit card, violates the FDCPA," and that the processing fee violated the FDCPA because it was not "expressly permitted by the contract creating the debt."

 

The defendant countered that its reference to a processing fee did not violate the FDCPA because the plaintiff "could have paid by mail without incurring a processing fee," and the relevant state law "permits charging consumers processing fees so long as the consumers have another option to pay without incurring a fee."

 

The Court noted, however, that the parties did not dispute that the plaintiff never signed any agreement with the creditor.  Before addressing whether the processing fee violated the FDCPA, the District Court addressed whether the plaintiff had standing under Article III of the U.S. Constitution, which limits the jurisdiction of federal courts to cases or controversies. 

 

Relying on the recent Supreme Court case Spokeo v. Robbins, the Court held that the plaintiff must demonstrate he suffered (1) an injury in fact; (2) that is fairly traceable to the challenged conduct of the defendant; and (3) is likely to be redressed by a favorable judicial decision.

 

Focusing on the injury in fact requirement, the District Court found that the purported violation was no more than a bare procedural violation divorced of any concrete harm.  The plaintiff testified that the account at issue was not his account and that he thought the collection letter was a scam.  Thus, the Court found that it was undisputed that there was no risk that the plaintiff would pay the $4.95 processing fee because he never had an account with the creditor. 

 

Accordingly, the Court held that the plaintiff admitted that he did not suffer any actual harm and thus lacked standing.

 

Although it did not address the issue regarding the $4.95 processing fee, the District Court did add a footnote that suggests that it would similarly have granted summary judgment on the processing fee if it were to go that far in light of a recent, non-precedential opinion from the Third Circuit in Szczurek v. Professional Mgmt., Inc.

 

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments 

 

FYI: 1st Cir Holds IRS 1099-A Forms Did Not Violate Discharge Injunction

The U.S. Court of Appeals for the First Circuit recently affirmed a bankruptcy court's ruling that a mortgagee did not violate the discharge injunction in 11 U.S.C. § 524(a) by sending IRS 1099-A Forms to borrowers after their discharge, agreeing that the IRS forms were not objectively coercive attempts to collect a debt.

 

A copy of the opinion is available at:  Link to Opinion

 

The borrowers obtained a mortgage loan secured by their home. They filed bankruptcy under Chapter 7 in 2008 and received a discharge of their personal liability for the loan in 2009.

 

The borrowers entered into a loan modification agreement post-discharge, which did not reaffirm their personal liability but allowed them to remain in the home as long as they made payments. The borrowers defaulted under the modification agreement, the mortgagee foreclosed and the borrowers moved out in October 2011.

 

In January 2012, each borrower received an IRS Form 1099-A by mail. One of the boxes on the forms was checked, stating that "the borrower was personally liable for the repayment of the debt."  The borrowers' attorney sent a letter to the mortgagee demanding the revocation of the 1099-A Forms due to the bankruptcy discharge, which the mortgagee refused to do.

 

In May of 2013, the borrowers filed a motion to reopen their bankruptcy case, then sued the mortgagee for trying to collect on the discharged mortgage debt in violation of the discharge injunction provisions under 11 U.S.C. § 524(a).

 

In June of 2013, the borrowers received a pre-recorded phone call from the mortgagee requesting proof of insurance on their former home.

 

Both sides moved for summary judgment, and the bankruptcy court granted the borrowers' motion, finding that the phone call violated the discharge injunction, but also finding the borrower failed to prove any damages.

 

The bankruptcy court granted summary judgment in the mortgagee's favor on the remaining claims, including the borrowers' claim that the 1099-A Forms violated the discharge injunction, reasoning that they provided "no objective basis" for borrowers to believe that the mortgagee was trying to the collect the mortgage debt.

 

The borrowers appealed the bankruptcy court's rulings on damages and the 1099-A Forms, but the district court affirmed both. The borrowers then appealed to the First Circuit.

 

On appeal, the Appellate Court began by explaining that under the federal Tax Code, discharged debt can count as taxable income. 26 U.S.C. § 61(a)(12). However, debt discharged in bankruptcy on a qualified principal residence is not considered taxable income. 26 U.S.C. § 108(a)(1)(A).

 

Section 524(a) of the Bankruptcy Code prohibits "acts to collect, recover, or offset debts discharged in bankruptcy proceedings. … To prove a discharge injunction violation, a debtor must establish that the creditor '(1) has notice of the debtor's discharge …; (2) intends the actions which constituted the violation; and (3) acts in a way that improperly coerces or harasses the debtor.'"

 

The First Circuit noted that the parties only disputed the third element, i.e., whether the IRS Forms "were an improperly coercive or harassing attempt to collect on the discharged debt."

 

The Court explained that whether conduct is coercive or harassing is determined using an objective standard. "[T]he debtor's subjective feeling of coercion or harassment is not enough." Under the objective standard a court considers "the facts and circumstances of each case, including factors such as the 'immediateness of any threatened action and the context in which a statement is made.'" However, "bad acts that do not have a coercive effect on the debtor do not violate the discharge."

 

The First Circuit agreed with the bankruptcy court that the IRS 1099-A Forms were not an improper coercive attempt to collect the discharged debt, reasoning that (a) the forms provided "tax information" but did not demand payment or threaten any legal action; (b) provided the outstanding principal balance as of the foreclosure, but did not state that the borrowers owed any money to anyone; and (c) incorrectly checking the box stating that "the borrower was personally liable for repayment of the debt" did not matter because it did not change the informational nature of the form or demand payment.

 

The Court rejected as inapposite the borrowers' argument, citing In re Lumb, 401 B.R. 1 (B.A.P. 1st Cir. 2009), that the IRS forms put them "between a rock and a hard place" because they either "had to pay the discharged debt or seek tax advice."

 

In Lumb, unlike the case at bar, the "creditor threatened to sue the debtor's wife to collect if the debtor did not pay up." Post-discharge, the creditor sued, causing the debtors to incur legal fees defending "the meritless lawsuit."  Thus, the debtor in Lumb "was in a jam: pay the discharged debt, or pay the legal fees and risk losing the lawsuit." The First Circuit here noted "[s]o unlike in In re Lumb, where the consequence of paying to defend a bogus lawsuit was brought on by the creditor's misdeeds, here the consequence of potentially needing tax advice was triggered by the foreclosure itself. That some consequent may have followed from the [borrowers'] receipt of the 1099-A Forms does not make that consequence coercion."

 

Finally, the First Circuit rejected the borrowers' argument that the bankruptcy court should have considered the mortgagee's failure to correct the 1099-A Forms and the May 2013 pre-recorded phone message in determining whether coercion existed, reasoning that even if the 1099-A form contained an error, "filing the 1099-A Forms did not create tax liability for the [borrowers] or any other consequences beyond those that come with foreclosure."

 

However, the Court held that because "there were no consequences and no attempt to collect a debt, [the mortgagee's] failure to retract the 1099-A Forms does not give rise to an inference of coercion."

 

As to the pre-recorded call, the First Circuit reasoned that it saw no reason to find that the call made the IRS Forms objectively coercive because the call was made "around a year and a half after [the borrowers] received their 1099-A Forms."  As there was no other evidence in the record of communications between the mortgagee and borrowers after the foreclosure, and the borrowers did not explain why the one phone call rendered the1099-A Forms objectively coercive, the Court refused to do so.

 

The First Circuit concluded by affirming the bankruptcy court's ruling that the mortgagee did not violate the discharge injunction, explaining that while it had "no doubt that the 1099-A Forms caused the [borrowers] stress and concern," their "subjective feeling of coercion is not enough to prove a violation of the discharge injunction, and the [borrowers] have not presented evidence that the Forms were objectively coercive."

 

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments