FYI: 7th Cir Holds Property Inspection Fees Did Not Violate UDAP or Breach Mortgage Contract

The U.S. Court of Appeals for the Seventh Circuit recently affirmed the dismissal of a borrower's complaint alleging that a fee charged by the servicer for a home inspection was a violation of the Illinois UDAP statute and a breach of the mortgage contract.

 

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

 

The appeal arises out of a claim brought by a borrower ("Borrower") against her mortgage servicer ("Servicer").  After Borrower defaulted on her mortgage, Servicer informed her she was in default and conducted a visual drive-by inspection of the property.  Servicer charged Borrower a $20.00 fee for the inspection which was disclosed in her monthly mortgage statement.

 

Borrower sued Servicer alleging claims for breach of the mortgage contract and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/2 (ICFA), on behalf of putative nationwide and Illinois classes.

 

Specifically, Borrower alleged that Servicer breached the mortgage agreement by charging the $20.00 fee when Servicer supposedly knew or should have known that she occupied the property in alleged violation of HUD regulations (24 C.F.R. § 203.377), which Borrower claimed limited the fees Servicer could charge under the contract and was incorporated into the contract.  Borrower further alleged that charging the fee was an unfair trade practice under the ICFA.

 

The trial court granted Servicer's motion to dismiss, disagreeing with Borrower's interpretation of her mortgage contract and finding that the fees Borrower could charge were not limited by the HUD regulation.  The trial court also found that Servicer did not violate the ICFA as charging the fee did not offend public policy and was not oppressive. Borrower appealed.

 

The Seventh Circuit held that the mortgage contract did not evince an intent to incorporate § 203.377 or to prohibit inspection fees.

 

The Appellate Court relied on Illinois law, which holds that "a document is incorporated by reference into the parties' contract only if the parties intended its incorporation." 188 LLC v. Trinity Indus., Inc., 300 F.3d 730, 736 (7th Cir. 2002) (citing Wilson v. Wilson, 577 N.E.2d 1323, 1329 (Ill App. Ct. 1991). The Seventh Circuit further stated that the mere reference of the HUD regulations in the mortgage contract was insufficient to demonstrate that the parties intended to incorporate them, in their entirety. Hayes v. M & T Mortg. Corp., 906 N.E.2d 638, 641 (Ill. App. Ct. 2009).

 

The Seventh Circuit further held that the plain language of the contract did not prohibit Servicer from charging inspection fees..  On the contrary, the Court noted, the mortgage contract expressly allowed the Servicer to charge the inspection fee as a "necessary" expenditure   to   protect   the   value   of   the   property after default. 

 

Additionally, the Appellate Court ruled that the provision allowing Servicer to collect fees and charges authorized by the Secretary of HUD did not bar Servicer from collecting unauthorized fees.  Instead, the Seventh Circuit held this provision merely conveyed that Servicer could, but did not have to, collect additional fees that were permitted by the Secretary.

 

Thus, the Seventh Circuit held that the trial court properly concluded that § 203.377 is not incorporated in the mortgage agreement and that the contract expressly permitted the inspection fee at issue, and thus ruled that Borrower had failed to state a claim for breach of contract.

 

Borrower next argued that charging the inspection fee was an unfair practice, in violation of the ICFA.

 

To determine whether a practice is unfair, the Court considers "(1) whether the practice offends public policy; (2) whether it is immoral, unethical, oppressive, or unscrupulous;  [and] (3)  whether  it  causes  substantial injury to consumers." Robinson v. Toyota Motor Credit Corp., 775 N.E.2d 951, 961 (Ill. 2002).  "All three criteria do not need to be satisfied to support a finding of unfairness. A practice may be unfair because of the degree to which it meets one of the criteria or because to a lesser extent it meets all three." Id. (quoting Cheshire Mortg. Serv., Inc. v. Montes, 612 A.2d 1130, 1143–44 (Conn. 1992)).

 

Borrower contended the fee offended public policy because it violated § 203.337. A practice offends public policy "if it is within at least the penumbra of some common-law, statutory or other established concept of unfairness." Elder v. Coronet Ins. Co., 558 N.E.2d 1312, 1316 (Ill. App. Ct. 1990) (quoting FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244–45 n.5 (1972)). 

 

Borrower also contended that because HUD Mortgage Letter 81-26 states that no further property inspections are required by HUD and reimbursement would not be allowed once a property is found to be occupied, Servicer could not be reimbursed for the property inspection.

 

The Seventh Circuit disagreed, ruling that Borrower took this statement out of context, and finding that the purpose of the Letter was to establish that Servicers could be reimbursed by HUD but was silent as to whether a Servicer could demand reimbursement from a Borrower for performing inspections.

 

The Borrower next referenced Chapter 9 of HUD's Administration of Insured Home Mortgages Handbook (4330.1), section 9-9(A)(2)(d) which provides, "If there is evidence that the Servicer knew the Borrower was still in occupancy ... charges [of inspection fees] are inappropriate and must not be charged to the Borrower or included on a claim for insurance benefits."

 

However, the Seventh Circuit held that this section had been superseded, prior to the inspection conducted by Borrower, by a provision which only addressed mandatory inspections and did not mention whether inspection fees were prohibited when the borrower occupied the property.

 

Finally, Borrower cited to HUD Mortgage Letter 10-18 which outlines "inspection requirements and types of inspections" as set forth in § 203.377 and HUD Handbook 4330.1, but did not purport to limit fees for inspections.

 

The Seventh Circuit also noted that the purpose of the regulation was to protect the FHA's interest in property's once the borrower has defaulted. The Court continued that the policy underlying § 203.377 was to impose obligations on Servicers to protect the value of the property in the case of default, not to protect a Borrower from unnecessary fees. Thus, the Court concluded that the fees did not offend public policy.

 

Borrower next argued that the fee violated ICFA because it was oppressive in that she was forced to pay the fee in order to bring her mortgage current and avoid default. However, because the inspection fee arose as a result of Borrower already being in default and was allowed by the mortgage contract which Borrower did not claim she was forced to enter into, the Court rejected this argument.

 

Finally, the Seventh Circuit found that Borrower failed to demonstrate the fee caused her substantial injury.

 

Under the inquiry the Borrower needed to show the injury was substantial, was not outweighed by any countervailing benefits to consumers or competition that the practice produced and was an injury that consumers themselves could not reasonably have avoided. See Siegel v. Shell Oil Co., 612 F.3d 932, 935 (7th Cir. 2010).

 

Borrower argued that Servicer's practice of charging an inspection fee "in the aggregate, causes substantial losses to the public as a whole." The Court found that even a large loss could not support a claim for unfairness on its own, (Robinson v. Toyota Motor Credit Corp., 775 N.E.2d 951, 961 (Ill. 2002)), and even if Borrower had been stuck paying the fee, the fee was not oppressive. Batson v. Live Nation Ent., Inc., 746 F.3d 827, 834 (7th Cir. 2014).

 

Thus, the Seventh Circuit concluded that Borrower failed to state a claim under the IFCA.

 

As the Appellate Court found the trial court correct in its rulings, the Seventh Circuit affirmed the entirety of trial court's decision.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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

 

 

 

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FYI: 9th Cir Reverses Dismissal of EFTA Claim for Unauthorized Charges, Hold Privacy Notice Created No Substantive Rights

The U.S. Court of Appeals for the Ninth Circuit recently reversed the dismissal of a consumer's claims that a bank violated the federal Electronic Fund Transfer Act, 15 U.S.C. § 1693, et seq. ("EFTA") by failing to fully reimburse her for losses suffered as result of fraudulent transfers from her account. 

 

In so ruling, the Ninth Circuit concluded that although the consumer failed to report unauthorized withdrawals within 60 days after her bank sent monthly statements reflecting the withdrawal, as required, the trial court erred by overlooking the additional requirement holding the consumer liable for any such transfers only if the bank establishes that those transfers "would not have occurred but for the failure of the consumer" to timely report the earlier unauthorized transfer reflected on her bank statement.   

 

However, the Ninth Circuit affirmed the dismissal of the consumers' state law breach of contract and breach of the implied covenant of good faith and fair dealing. Here, the Ninth Circuit rejected the consumer's claim that the bank breached the Privacy Notice appended to the Deposit Account Agreement, finding that the Privacy Notice did not impose any substantive duties on the bank, but merely explained its policies and a consumer's ability to limit the sharing of personal information.

 

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

 

A foreign consumer who primarily resided outside the United States but maintained a residence in California ("Consumer") held several bank accounts at a bank in the United States ("Bank").

 

Purportedly unidentified individuals gained access to the Consumer's checking account in October 2017 and began making unauthorized withdrawals without her knowledge — first in a nominal amount of less than $2 to another bank, followed by a transfer of $29,000 to the same bank two days later. Suspecting fraudulent activity, the bank receiving the transfers contacted the Consumer's Bank's fraud department.  The two banks jointly determined that the transaction was fraudulent, and refunded the money to the Consumer's account. 

 

The Consumer's Bank did not inform the Consumer of this fraudulent activity and took no subsequent action to protect her account from further unauthorized withdrawals.  Thereafter, the same individuals purportedly made more than 100 unauthorized withdrawals from the Consumer's checking account between November 2017 and March 2019, at which time the Consumer reported the fraudulent activity to her Bank upon review of her account statements when she returned to California.

 

The Consumer was reimbursed by her Bank for some of the unauthorized withdrawals through its internal dispute resolution process, but the Bank refused to reimburse her for $300,000 of the losses she suffered, citing her failure to report the initial unauthorized withdrawals within 60 days of their appearance on her bank statements, as required under the EFTA. See 15 U.S.C. §§ 1693f(a), 1693g(a); 12 C.F.R. § 1005.6(b)(3).

 

The Consumer filed suit against the Bank, asserting claims for purported (1) violation of the EFTA or, alternatively, California's EFTA counterpart, Cal. Comm. Code § 11101 et seq.; (2) breach of contract; (3) breach of the implied covenant of good faith and fair dealing; and (4) negligence.  

 

The Bank moved to dismiss Consumer's complaint for failure to state a claim.  The trial court granted the Bank's motion to dismiss, finding that the EFTA barred the Consumer's claims as a result of her failure to timely report the withdrawals at issue, and dismissed the Consumer's EFTA and state law claims with prejudice.  The Consumer timely appealed.

 

On appeal, the Ninth Circuit was tasked with interpreting section § 1693g of the EFTA which limits a consumer's liability for unauthorized electronic fund transfers to $50 in most instances, subject to two exceptions. 

 

The first exception raises the cap to $500 when the unauthorized transfers occur due to the loss or theft of an access device (such as an ATM card) and the consumer fails to notify her bank within two business days of learning that the device has been lost or stolen. 15 U.S.C. § 1693g(a); see 12 C.F.R. § 1005.6(b)(2).

 

The second exception, which is relevant to the case at bar, provides that the cap on liability will be lifted if: (1) an unauthorized transfer appears on the monthly statement that banks must send to consumers under 15 U.S.C. § 1693d(c); (2) the consumer fails to report the unauthorized transfer to her bank within 60 days after the statement is sent to her; and (3) the bank can establish that unauthorized transfers made after the 60-day period would not have occurred but for the consumer's failure to provide timely notice of the earlier unauthorized transfer. 15 U.S.C. § 1693g(a).

 

In the latter scenario, the consumer's liability for unauthorized transfers that occur within the 60-day period cannot exceed $50 or $500 (depending on the circumstances), but the consumer faces unlimited liability for unauthorized transfers occurring outside the 60-day period. See 12 C.F.R. § 1005.6(b)(3); 12 C.F.R. pt. 1005, Supp. I, 6(b)(3) ¶ 1.  The bank bears the burden of proving that the conditions of liability set forth in the aforementioned subsections creating the exceptions apply.  15 U.S.C. § 1693g(b).

 

Here, the Consumer did not dispute that she failed to report the unauthorized withdrawals within the 60-day period set by the EFTA, but argued that she was excused from the 60-day reporting requirement because: (1) her limited access to banking records and extended international travel constituted "extenuating circumstances" under 1693g(a), and (2) she was not required to report the unauthorized withdrawals because the Bank was already aware of the initial fraudulent transfers by virtue of its communications from the bank which received. 

 

The Ninth Circuit agreed that the trial court properly rejected these arguments, noting that Section 1693g(a) plainly requires "the consumer" — and not a third party — to timely report an unauthorized withdrawal to avoid facing potentially unlimited liability for subsequent withdrawals occurring after that period.

 

However, the Ninth Circuit noted that although the EFTA requires a consumer to notify her bank of unauthorized transfers within the prescribed 60-day reporting period, a consumer who fails to do so is not automatically liable for all subsequent losses — liability is placed upon the consumer for unauthorized transfers occurring after the 60-day period only if the bank establishes that those transfers "would not have occurred but for the failure of the consumer" to timely report the earlier unauthorized transfer reflected on her bank statement. 15 U.S.C. § 1693g(a). 

 

The trial court's analysis overlooked this requirement, and the Ninth Circuit determined that its error was not harmless.

 

Here, the Ninth Circuit noted that the Consumer's allegations that her Bank took no further action to protect her account after it became aware of the initial fraudulent transfers gave the Bank a strong financial incentive to take immediate corrective action, regardless of the source of its notice of fraudulent activity, and giving rise to a reasonable inference that the Bank would not have taken action to prevent subsequent losses even if she had reported the initial unauthorized withdrawals within the 60-day period. 

 

As such, the Appellate Court concluded that the Consumer met her pleading burden to survive a motion to dismiss by plausibly suggesting that even if she had reported an unauthorized transfer within the 60-day period, the subsequent unauthorized transfers for which she seeks reimbursement would still have occurred. See Nayab v. Capital One Bank (USA), N.A., 942 F.3d 480, 495–97 (9th Cir. 2019) (holding in a similar context that the plaintiff must allege facts giving rise to a reasonable inference that a statutorily available affirmative defense does not apply).  

 

As to the Consumer's remaining state claims for purported breach of contract and breach of implied covenant of good faith and fair dealing raised on appeal, which the trial court held were foreclosed due to the Consumer's failure to provide notice within the EFTA's 60-day reporting period, the Appellate Court affirmed dismissal but for different reasons.

 

The Ninth Circuit rejected the Consumer's claim that the Bank breached the Privacy Notice appended to the Deposit Account Agreement (DAA), finding that it did not impose any substantive duties on the Bank, but merely explained its policies and a consumer's ability to limit the sharing of personal information.  The Ninth Circuit further held that the Consumer's claim for breach of the implied covenant of good faith and fair dealing failed because the DAA expressly permitted the Bank to close the Consumer's accounts.

 

In sum, because the Ninth Circuit concluded that the trial court erred in dismissing the Consumer's EFTA claims, but properly dismissed the state court claims, the dismissal was reversed in part, and affirmed in part, and remanded to the lower court for further proceedings.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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

 

 

 

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