Fifth Circuit Holds that a Request for Proof of Authority to Collect Does Not Constitute a “Qualified Written Request” Under RESPA

By:      Joshua A. Huber

On July 14, 2016, the Fifth Circuit Court of Appeals issued its opinion in In re Parker, holding that a qualified written request (“QWR”) pursuant to the Real Estate Settlement Procedures Act, 12 U.S.C. § 2605 (“RESPA”), does not encompass a borrower’s written request for proof of a lender’s status as the noteholder, or its authority to collect payments under a promissory note and deed of trust.[1]

The borrowers in In re Parker served their lender with correspondence titled “RESPA Qualified Written Request, Complaint, Dispute of Debt & Validation of Debt Letter,” which primarily questioned whether the lender was the owner of their promissory note with authority to collect payments.[2] The borrowers alleged in their subsequent lawsuit against the lender that this letter constituted a valid QWR and that the lender was liable under RESPA for its failure to respond and provide evidence of its authority.[3]

In rejecting the borrowers’ claim, the Fifth Circuit first noted that the borrowers were required to demonstrate, as a threshold matter, that the correspondence they sent to the lender was in fact a QWR within the meaning of RESPA.[4] The court observed that a valid QWR “must be related to the servicing of the loan,” which RESPA defines as “receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan . . . and making the payments of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the loan.”[5] Because the borrowers’ purported “QWR” requested only proof of the lender’s authority to collect payments under the promissory note and deed of trust, which does not relate to “servicing of the loan” under RESPA, the Fifth Circuit affirmed the dismissal of the borrowers’ claim.[6]

This is a significant development in RESPA jurisprudence, as it clarifies the limited scope and purpose of a QWR. The decision also provides lenders in the Fifth Circuit with a strong defense to RESPA violation claims premised on failure to respond to “show-me-the-note” correspondence from borrowers, as opposed to legitimate servicing-related inquiries.

[1] In re Parker, No. 15-41477, 2016 WL 3771837, at *4 & n.26 (5th Cir. Jul. 14, 2016).

[2] Id. at *1.

[3] Id. at *1 & n.4.

[4] Id. at *4.

[5] Id. (quoting 12 U.S.C. §§ 2605(e)(1)(A) & (i)(3))(emphasis added).

[6] Id. at *4 & n.6 (emphasis added).

Pa. Supreme Court Expands Act 6 Liability to Include Attorneys Representing Mortgage Lenders

By: Kevin McDonald

The Pennsylvania Supreme Court, in Glover v. Udren Law Offices, P.C., recently determined that a law firm, representing a residential mortgage lender in connection with foreclosure proceeding, can be liable to a borrower for three times the amount of attorneys’ fees charged by the mortgage lender if said fees are in violation of the Pennsylvania Loan Interest and Protection Law, commonly known as “Act 6”.  Section 406 of Act 6 limits the attorneys’ fees that a “residential mortgage lender” can contract for or receive from a borrower.  Section 502 of Act 6 provides for recovery of treble damages against a “person” who has collected such excess interest or charges.  “Person” is defined in Section 101 as “an individual, corporation, business trust, estate trust, partnership or association or any other legal entity, and shall include but not be limited to residential mortgage lenders.” Traditionally, law firms employed by residential mortgage lenders have been excluded from liability by the specific language of Section 406 as it applies only to “residential mortgage lenders.”  The Glover decision could expose such law firms to new claims by mortgage debtors because the Court has, for the first time, held that law firms are included for liability purposes under Section 502 if they have collected excessive attorneys’ fees in connection with the foreclosure in violation of Section 406. 

Mary E. Glover entered into a residential mortgage in 2002 with Washington Mutual Bank (later assigned to Wells Fargo Bank).  Following Glover’s unsuccessful attempts to obtain a loan modification due to financial difficulty, the bank initiated foreclosure proceedings by hiring Udren Law Offices, P.C. (“Udren”).  Udren took several actions on the bank’s behalf, including advising Glover of her unpaid debt and demanding missed payments and fees.  Eventually, the parties entered into a loan modification agreement that increased Glover’s principal balance, monthly payment and repayment period.  The increased principal included an amount of approximately $1,600 for escrow, attorney’s fees, and other charges.  Glover then filed a putative class action law suit against Udren in the Court of Common Pleas of Allegheny County, alleging that Udren had violated Act 6 by charging unearned and excessive attorney’s fees.  Because Udren was undisputedly not a residential mortgage lender under Act 6 (as the term is defined in Section 101), Udren filed preliminary objections asserting that Glover had failed to state an actionable claim and the Common Pleas Court agreed, finding that section 406 of Act 6 refers only to residential mortgage lenders and therefore, any violation of that provision did not give rise to a remedy against Udren under section 502. 

Glover’s appeal to the Superior Court argued that, because Act 6 permits a borrower to recover treble damages from a “person” who collects excess fees in connection with the mortgage foreclosure process, and defines “person” broadly to “include but not be limited to” residential mortgage lenders, the lower court had improperly narrowed the scope of the statute’s protections.  A divided panel of the Superior Court affirmed, holding that, because Section 406’s plain language regulates only the conduct of residential mortgage lenders, Section 502 does not authorize an action against a lender’s counsel for a Section 406 violation.  The majority rejected Glover’s contention that “person,” in Section 502, evidenced a legislative intent to make a broad set of actors liable for Section 406 violations, because the term was necessary to address, throughout Act 6’s various provisions, conduct by actors other than residential mortgage lenders.

The Supreme Court analyzed Act 6 with the objective purpose of ascertaining the Legislature’s intent in enacting the statute.  The Supreme Court read Sections 101, 406 and 502 together and determined that the plain and explicit terms permit a person who has paid charges prohibited or in excess of those allowed by Section 406 to recover treble damages in a suit at law against the person who has collected such excess charges.  The Supreme Court further reasoned that the Legislature expressly defined “person” to “include but not be limited to residential mortgage lenders” and under a straightforward application of the statute, Section 406 restricts the circumstances under which residential mortgage lenders may contract for or receive fees, while Section 502 provides a broad remedy against anyone who has collected such fees. 

The Supreme Court’s ruling focused solely on whether or not the term “person” as used in Section 502 of Act 6 provides for a remedy against any statutorily defined person collecting statutorily prohibited fees on behalf of residential mortgage lenders.  Having determined that it does, the Supreme Court remanded that matter for further proceedings without addressing the meaning of the term “collected” in Section 502.

This ruling is a significant development regarding Act 6 liability as the Supreme Court has issued a warning to mortgage foreclosure firms that they will be held liable to borrowers, with the potential of treble damages, if they are determined to be charging or collecting attorneys’ fees in excess of those allowed under Section 406.  Whether or not the remanded matter will address the law firm’s need to actually collect said fees before they can be found liable remains to be seen.

 

 

 

Spokeo: Not the Result Many Hoped (or Feared)

By Joe Patry

The United States Supreme Court’s decision in Spokeo v. Robbins re-emphasized the Constitutional requirement that a plaintiff must show a particularized and concrete injury to show standing to sue in federal court. In remanding a Fair Credit Reporting Act (“FCRA”), 15 U.S.C. § 1681 et seq. complaint to the Ninth Circuit, the Supreme Court found that the lower court failed to sufficiently analyze both requirements. This decision was widely anticipated to potentially cause a sea change in complaints based on violations of federal consumer statutes. Some had feared that this decision would potentially eliminate lawsuits based on statutory violations where the consumer suffers no actual damages. However, the decision merely requires the lower court to more fully analyze whether the consumer sufficiently alleged a concrete and actual injury.

In Spokeo, a six justice majority of the Supreme Court[1] examined whether a consumer had standing to bring a claim under the FCRA. Spokeo operates a “people search engine,” which allows visitors to the site to input a person’s name, phone number or email address, and then provides information about the subject of the search. See Spokeo at 1.[2] Mr. Thomas Robins learned that some of the information which Spokeo had on file for him was incorrect. Specifically, Spokeo states that he is married, has children, is in his 50s, has a job, is relatively affluent, and holds a graduate degree. Id. at 4. According to Mr. Robins, all of that information is incorrect. Id.

Mr. Robins filed sued in the United States District Court for the Central District of California and alleged that Spokeo had violated a provision of the FCRA which requires companies that provide consumer information to follow reasonable procedures to ensure that the information is accurate. Id. at 3. This particular provision of the FCRA allows actual damages or statutory damages of $1,000 per violation. Id. The trial court found that Mr. Robins did not have standing to bring his claim because he had not pled an injury in fact, which is required, as federal courts may decide only actual cases or controversies under Article III of the United States Constitution. Id. at 6. The Ninth Circuit reversed the dismissal, and found that the statutory violation was in and of itself sufficient to confer standing. Id. at 5. Spokeo appealed to the Supreme Court.

The Supreme Court began by briefly discussing the concept of standing, noting that the doctrine of standing developed to ensure that federal courts do not exceed their authority. Id. at 6. Further, the Supreme Court recited the three elements for plaintiff to have standing in federal court: (1) an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be addressed by a favorable judicial decision. Id. To survive a motion to dismiss, a complaint must allege facts to support each element. Id.

Focusing on the injury in fact requirement, the Supreme Court highlighted that plaintiff must have suffered “an invasion of a legally protected interest,” which is “concrete and particularized, and “actual or imminent, not conjectural or hypothetical.” Id. at 7 (internal citations omitted). To be particularized, an injury must affect the plaintiff in a personal way. Id. However, an injury must also be concrete. Id. at 8.

In remanding, the Supreme Court found that the Ninth Circuit had not sufficiently analyzed whether Mr. Robins’ injury caused by the alleged FCRA violation was concrete and actually existed. Id. Although Congress can create statutory violations for intangible harms, Article III still requires a concrete injury in the context of a statutory violation. Id. It is not enough for a plaintiff to allege solely that a statute has been violated. Id. at 10. For example, a provision of the FCRA requires the credit reporting agencies to inform consumers when it has provided information to third parties such as Spokeo. Id. at 10-11. There may be no statutory violation if the credit reporting agency fails to provide the notice to the consumer but the information provided to Spokeo or other third parties was accurate. Id. Or, there may be no harm from even incorrect information – i.e., if an incorrect zip code was provided, the Court found that a consumer could not possibly suffer any harm from this harmless incorrect information. Id.

Ultimately, depending on what happens on remand, this issue may be back before the Supreme Court. Depending on the Ninth Circuit’s decision on remand, the Supreme Court may again have the opportunity to issue an opinion that significantly impacts consumers’ ability to sue for statutory violations for which they have no actual damages. However, Spokeo was not the potential sea change that some had predicted.

[1] Justice Alito wrote the opinion, joined by Chief Justice Roberts, and Justices Kennedy, Thomas and Breyer. Justice Thomas concurred and Justices Ginsburg and Sotomayor dissented.

[2] All references to pages are to as the opinion is paginated in the version available on the Supreme Court’s website.

Fourth Circuit Holds that Defaulted Status of Debt Has No Bearing on Whether a Person Qualifies as a “Debt Collector” Under the FDCPA

By:      Joshua A. Huber

On March 23, 2016, the Fourth Circuit Court of Appeals issued its opinion in Henson v. Santander Consumer USA, Inc., holding that the default status of a debt has no bearing on whether an entity qualifies as a “debt collector” under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 (“FDCPA”).[i] The Fourth Circuit’s reading of the plain language of the FDCPA’s “debt collector” and “creditor” definitions, found in 15 U.S.C. § 1692(a)(6) and (a)(4), respectively, rejects the argument routinely advanced by borrowers, and commonly by courts throughout the country, that an entity who acquires a debt that is already in default is automatically a “debt collector.”

Henson involved a portfolio of defaulted auto loans purchased by Santander from CitiMortgage.[ii] When Santander sought to collect on the defaulted loans, the Henson plaintiffs filed suit under the FDCPA—which applies only to “debt collectors,” and not “creditors”—and maintained that the default status of debt determined whether a purchaser of debt, such as Santander, was a “debt collector” or a “creditor.”[iii]

The Henson plaintiffs’ argued, in part, because the FDCPA excludes from the definition of “creditor” any person that “receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another,” such person must be a “debt collector.[iv]    The Court rejected this argument and observed that the exclusion on which the Henson plaintiffs relied did not depend only on the default status of the debt. Rather, “the exclusion applies only to a person who receives defaulted debt ‘solely for the purpose of facilitating collection . . . for another.’ ”[v]

The Court further stated that even if an entity falls within the enumerated statutory exclusion from the definition of “creditor,” an FDCPA plaintiff must still demonstrate that the defendant meets the substantive definition of a “debt collector” as set forth in the FDCPA’s main text.[vi]  The Court summarized that definition to include: “(1) a person whose principal purpose is to collect debts; (2) a person who regularly collects debts owed to another; or (3) a person who collects its own debts, using a name other than its own as if it were a debt collector.”[vii]

Thus, the material distinction between a “debt collector” and a “creditor,” the Court noted, is whether a person’s regular collection activity is only for itself (a creditor) or for others (a debt collector), with the primary exception being an entity whose principal purpose is the collection of debts—not, as the Henson plaintiffs urged, whether the debt was in default when the person acquired it.

This is a significant development in FDCPA jurisprudence and, by moving the focus away from the status of the debt at the time of assignment, will provide lenders who seek to collect their own debts with a strong defense to future FDCPA liability.

[i] Henson v. Santander Consumer USA, Inc., —F.3d—, 2016 WL 1128419, at *3 (4th Cir. Mar. 23, 2016).

[ii] Id. at *1.

[iii] Id. at *1-2.

[iv] Id. at *2 (citing 15 U.S.C. § 1692a(4)) (emphasis in original).

[v] Id. at *3 (emphasis in original).

[vi] Id. at *4.

[vii] Id. at *3 (emphases in original).

Ohio Supreme Court Decides A Defectively Executed Recorded Mortgage Acts As Constructive Notice to the World (Including Bankruptcy Trustees)

By: Chrissy Dunn Dutton

The Ohio Supreme Court recently issued its decision in In re Messer, Slip Opinion No. 2016-Ohio-510, holding that a defectively executed recorded mortgage acts as constructive notice of that mortgage to the world.

In the opinion, the Court decided the following two questions of state law, which were certified from bankruptcy court: (1) whether R.C. 1301.401 applies to all recorded mortgages in Ohio; and (2) whether R.C. 1301.401 acts to provide constructive notice to the world of a recorded mortgage that was deficiently executed under R.C. 5301.01.

The court unanimously answered yes to both questions.

R.C. 1301.401(A) and 1301.401(C) provide that the recording of certain documents with the county recorder is constructive notice “to the whole world of the existence and contents of [the] document as a public record and of any transaction referred to in that public record…” and that “[a]ny person contesting the validity or effectiveness of any transaction referred to in a public record is considered to have discovered that public record and any transaction referred to in the record” as of the date and time of recording.

R.C. 5301.01, which sets forth the requirements for a mortgage in Ohio, provides, in relevant part, that a mortgage shall be signed by the mortgagor and the signing shall be acknowledged by the mortgagor in front of an appropriate state official who shall certify the acknowledgement and subscribe the official’s name to the certificate of the acknowledgment.

The notary acknowledgment on the mortgage at issue was left blank, providing no indication as to whether the borrowers executed the mortgage in front of a notary. When the borrowers filed a Chapter 13 bankruptcy and a companion adversary proceeding, seeking to avoid the mortgage as defectively executed under R.C. 5301.01, the bankruptcy court determined that its interpretation of R.C. 1301.401 would be dispositive. However, finding no interpretation of that statute by any Ohio court, the bankruptcy court certified the questions of state law to the Ohio Supreme Court. In its order for certification to the Supreme Court, the bankruptcy judge noted that the borrowers may have been able to avoid the mortgage before O.R.C. §1301.401 was enacted. However, the court questioned whether O.R.C. §1301.401 changed this result.

The full impact of the decision remains to be seen, as the bankruptcy court has not yet issued a decision on whether the mortgage can be avoided in the underlying adversary proceeding. However the Supreme Court decision is likely dispositive of that issue. The finding that a recorded but defectively executed mortgage puts subsequent parties (including bankruptcy Trustees) on constructive notice is therefore likely to defeat avoidance actions typically brought under Sec. 544 of the U.S. Bankruptcy Code.

 

 

NINTH CIRCUIT DENIES CLASS CERTIFICATION TO BORROWERS IN LOAN MODIFICATION CASE

By: Louise Bowes

In Hanna Bernard, et al. v. CitiMortgage Inc., the Ninth Circuit held that a purported class of borrowers was not eligible for class certification in an action against CitiMortgage Inc. (“Citi”) because the individual issues related to their loan modification reviews were too numerous to justify certification under Fed. R. Civ. P. 23(b)(3). No. 13-57158 (Ninth Cir. March 2, 2016). The Plaintiffs’ brought claims for breach of contract and breach of good faith and fair dealing, wherein they claimed that Citi failed to provide timely decisions regarding permanent loan modifications to borrowers who had completed three-month trial modifications under the Home Affordable Modification Program, and also failed to honor promises to provide permanent modifications after the trial plans were completed.

The Court affirmed the United States District Court for the Central District of California’s decision that the individual issues outweighed the common issues in the purported class’ cases. Specifically, determining whether Citi’s loan modification decisions were untimely would require an inquiry into the specific facts of each borrower’s situation, including changes in income or incomplete documentation. The district court also determined that the Plaintiffs failed to provide sufficient support for their claim that class certification was justified in this case as required by Fed. R. Civ. P. 23(b)(1) because the Plaintiffs failed to adequately explain why the cases they cited supported their position that the cases could not be adjudicated individually. The Plaintiffs attempted to characterize their action as seeking declaratory relief for the first time on appeal, but the Court held that the Plaintiffs waived this issue by failing to raise it before the district court.  The Court’s decision constitutes a significant setback for the Plaintiffs, as the costs of litigating their individual cases may outweigh the amounts they could potentially recover.

California Supreme Court issues narrow holding that, post-foreclosure, borrowers have standing to assert wrongful foreclosure based on allegations that an underlying assignment is void

By: Shawnda M. Grady

On February 18, 2016, the California Supreme Court resolved a split in the Courts of Appeal and unanimously held that a mortgage loan borrower has standing to sue for wrongful foreclosure based on an allegedly void assignment.  Tsvetana Yvanova v. New Century Mortgage Corp. et al., Case No. S218973 (Cal. Feb. 18, 2016).   The Court followed the reasoning in Glaski v. Bank of America, 218 Cal.App.4th 1079 (2013), which held that foreclosure itself is sufficient prejudice for standing purposes.  The Yvanova opinion did not extend to pre-foreclosure claims, did not address whether a borrower must allege tender to state a cause of action for wrongful foreclosure, did not address what facts render an assignment void, and explicitly limited its ruling to void – not voidable – mortgage assignments.  Three additional cases currently pending before the California Supreme Court, which have not yet been briefed, also address a homeowner’s standing to assert a claim for wrongful foreclosure and have the potential to expand the Yvanova ruling.

Background
Plaintiff-borrower Tsvetana Yvanova sued her mortgage lender, New Century Mortgage Corporation (“New Century”), and others for various foreclosure-related causes of action, with a single cause of action for quiet title remaining in her second amended complaint.  Yvanova alleged that in 2006, she obtained a $483,000 loan from New Century, for which she provided a deed of trust as security.  In 2007, New Century filed for bankruptcy and was liquidated in August 2008.  In December 2011, the servicer, on behalf of New Century, executed an assignment transferring the Deed of Trust to Deutsche Bank National Trust Company (“Deutsche Bank”) as trustee for a securitized trust.  The closing date for the securitized trust was in January 2007.  In August 2012, Western Progressive LLC recorded (1) a substitution of trustee, substituting itself for Deutsche Bank, and (2) a notice of trustee’s sale.  On September 14, 2012, the property was sold at public auction by Western Progressive LLC to a third party.

Yvanova alleged the December 2011 Assignment of the Deed of Trust from New Century to Deutsche Bank was void because:  (1) New Century lacked authority to transfer the Deed of Trust in 2011, because its assets were transferred to the bankruptcy trustee in 2008, and (2) the investment trust was closed in 2007, four years before the assignment.  The superior court sustained defendants’ demurrer without leave to amend.

The Court of Appeal affirmed the judgment, concluding that Yvanova could not state a claim for quiet title, because Yvanova had not alleged tender of the amount due.  The Court of Appeal also determined that Yvanova could not, on the facts alleged, amend her complaint to state a claim for wrongful foreclosure.  The Court of Appeal reasoned that, as a third party unrelated to the assignment at issue, Yvanova was not affected by any alleged deficiencies in the assignment and, therefore, lacked standing to enforce the terms of the agreements allegedly violated.  In so ruling, the Court of Appeal declined to follow the holding of Glaski.  Yvanova petitioned for review before the California Supreme Court, which granted review on August 27, 2014.  Yvanova v. New Century Mortg. Corp., 331 P.3d 1275 (Cal. 2014).

California Supreme Court Decision
In Yvanova,  California Supreme Court limited its review to the following:  “In an action for wrongful foreclosure on a deed of trust securing a home loan, does the borrower have standing to challenge an assignment of the note and deed of trust on the basis of defects allegedly rendering the assignment void?”  Yvanova, 331 P.3d at 1275.  The Court found in the affirmative, following the reasoning in Glaski, supra,  and rejecting the holding in Jenkins v. JPMorgan Chase Bank, N.A., 216 Cal.App.4th 497 (2013), to the extent that those cases addressed a borrower’s standing to assert a post-foreclosure claim of wrongful foreclosure based on a void assignment.  Specifically, the Court found that an entity foreclosing following a void assignment of the deed of trust, as opposed to a merely voidable assignment, acts without legal authority to do so.  Under such circumstances, a borrower has standing to state a claim for wrongful foreclosure, because he or she has suffered the loss of ownership of the property.

The Court explicitly noted that its holding was limited to the issue of standing in post-foreclosure cases.  The Court did not determine whether the defects alleged by Yvanova would render an assignment void, and declined to address what facts must be alleged to demonstrate a void assignment.  The Court further declined to extend its analysis of prejudice beyond the standing context.

Additional Cases Pending Review
Three additional cases remain pending before the California Supreme Court that also address a borrower’s standing to challenge foreclosure based on allegations of a void assignment:  Boyce v. TD. Service Company, 352 P.3d 390 (Cal. 2015) (post-foreclosure action); Keshtgar v. U.S. Bank, 334 P.3d 686 (Cal. 2014) (pre-foreclosure action); Mendoza v. JP Morgan Chase Bank, 337 P.3d 493 (Cal. 2014) (post-foreclosure action).  In each of these cases, the plaintiff asserted a wrongful foreclosure claim, alleging the assignment of the subject deed of trust was void because it was reportedly transferred into a securitized trust after the trust’s closing date; in Keshtgar and Medoza, the plaintiffs also challenged the authority of the individual who executed the assignment to do so.  In each of the three cases, the Court of Appeal declined to follow Glaski v. Bank of America, 218 Cal.App.4th 1079 (2013) and instead followed the reasoning in Jenkins, supra, holding that the borrowers had no standing.  The Supreme Court deferred briefing in each of these three cases pending the Court’s disposition of Yvanova, and no further orders have been issued.

Although borrowers may attempt to rely on Yvanova to assert wrongful foreclosure claims based on allegedly void assignments, the limitations of the Court’s holding in Yvanova still permit defendants to challenge the borrower’s failure to tender, whether the underlying facts regarding the assignment render it void and whether the borrower has sufficiently alleged prejudice as an element of wrongful foreclosure.  It is not yet clear whether the Court’s anticipated disposition of Boyce, Keshtgar, and Mendoza will extend to these issues or clarify the Yvanova holding.