Defending Your Company Against Individual Borrower Actions

Fraud - RESPA - FHA/ECOA FDCPA Claims

Christy A. Ames Stites & Harbison, PLLC 400 West Market Street Louisville, Kentucky 40202 cames@stites.com

Fraud

Fraud
A. Sample Claims
1. Broker or lender misrepresent loan terms (Ex. loan product, prepayment penalty, whether escrow exists). 2. Broker or lender fail to disclose important information to borrower (constructive fraud). 3. Broker or lender state that the borrower is/will be approved for financing, but the borrower is declined. 4. Broker or lender gives the borrower loan cannot afford.

B. Damages
Compensatory, punitive (Note: If the plaintiff proves fraud in the inducement, plaintiff is not entitled to void the loan, only rescission.)

C. Statute of Limitations
Varies by state.

Fraud
D. Key Issues to Defeat Claim
1. Has plaintiff sufficiently stated a claim for fraud under Fed. R. Civ. P. 9(b)? Complaint must state time, place, and specific content of false misrepresentations as well as parties to misrepresentations. Brewer v. Indymac Bank, 609 F. Supp.2d 1104 (E.D.Cal. 2009) 2. Has plaintiff committed fraud against the lender or participated in the alleged fraud? (Ex. Did the borrower sign the loan application with false information?) a) Defenses - Unclean hands and estoppel. b) Counterclaim against plaintiff.

Fraud
D. Key Issues (cont.)
3. Can plaintiff plead required elements? (Same common elements in most states). a) A false representation about a past or present material fact (or failure to disclose if there is a duty to disclose). Past or present fact - Statements of opinion or intention or statements relating to future performance or prediction of future events usually are not actionable. b) Knowingly made (or failed to disclose). c) Intent to induce borrowers action (or inaction). d) Borrowers justifiable reliance. e) Damages that are proximately caused by the misrepresentation.

Fraud
E. Reliance Difficult Hurdle for Plaintiffs.
Actual reliance? (Ex. Brown v. Interbay Funding LLC, 417

F.Supp.2d 573 (D.Del. 2006) - borrower did not rely on appraisal.)

Reasonable or Justified reliance?

No reliance if contradicts loan documents. (Davis v. G.N. Mortgage Corp., 396 F.3d 869 (7th Cir. 2005) - borrowers could not rely on oral promise regarding prepayment penalty when loan documents were contrary.) Borrower is expected to read the loan documents. Courts examine the extent of the confidence. No reliance if borrower was in a position to know of false representations. (Ex. False information on 1003).

RESPA
Real Estate Settlement Procedures Act 12 U.S.C. 2601-2617

RESPA
Nearly every residential mortgage loan has TILA and/or RESPA violations which can be used as leverage to negotiate a loan modification or a short sale payoff. Additionally the violations can be litigated, which may result in substantial damages due to the borrowers.

How to Prevent Foreclosure Using the Truth in Lending Act (TILA), Creative Foreclosure Prevention Methods, http://knol.google.com/k/anonymous/how-to-prevent-foreclosure-usingthe/2t60k2hgg3973/2#

RESPA
Improper Disclosures
Claim
Failure to provide or improper disclosure on Good Faith Estimate (GFE) and HUD-1 (Ex. YSP improperly disclosed).

Response
Motion to Dismiss - No private right of action. Johnson v. Equity Title & Escrow Co., 476 F.Supp. 2d 873 (W.D. Tenn. 2002).

Beware
In some states, even with no private right of action under RESPA, borrowers have been able to incorporate their otherwise barred RESPA claims through state consumer protection laws. Pierce v. NovaStar Mortgage, Inc., 2007 U.S. Dist. LEXIS 18336 (W.D. Wash. March 15, 2007) (settlement of $3.3 million to consumers; $1.8 million in attorneys fees).

RESPA
Section 6 Claims - Qualified Written Request
A. Claims
Failure to respond to qualified written request. 12 U.S.C. 2605(e).

B. Potential Damages
1. Actual Damages

time and convenience emotional distress (courts split)

2. An amount not to exceed $1,000 if pattern and practice of noncompliance. 3. Reasonable costs, including attorney fees.

C. Statute of Limitations
3 years (courts split on whether tolling may apply).

RESPA
Section 6 Claims - Qualified Written Request
Key Issues to Defeat Claim
Did the borrower make a proper QWR? Did the servicer receive the QWR? Within 20 days, did the servicer act on or send a timely response acknowledging

receipt of the correspondence?

Within 60 days (if no action taken within 20 days), did the servicer:

1. take appropriate action? 2. properly notify borrower?

During the 60 days, did the servicer refrain from providing to a consumer

reporting agency information regarding any overdue payment owed by borrower?

Did borrower wait 60 days after the QWR to file suit? Did the borrower properly plead that he or she suffered damages? (Can the

borrower prove that he or she was damaged as a result of the servicers failure to comply with RESPA?)

RESPA
Section 8 Claims
A. Overview of Section 8 Claims
1. Section 8(a) - No person can give or receive a thing of value for a referral. 2. Section 8(b) - Deals with fee splitting, mark-ups and overcharges. 3. Section 8(c) - Exceptions from Section 8 violations.

B. Potential Damages
1. Actual damages (could include emotional distress). 2. Amount equal to three times the amount of the charge paid for the service.

C. Statute of Limitations
One year (equitable tolling could apply).

RESPA
Section 8(a) Claims
A. Sample Claim
Yield spread premium was improper referral fee.

B. Key Issues to Defeat Claim

1. Did the yield spread premium violate RESPA? See Statement of Policy 2001-1, 60 Fed. Reg. 53052 (Oct. 2001) and Statement of Policy 1991-1 64 FR 10080 (March 1, 1999). a) Were services actually performed? b) Was the total broker compensation reasonable? 2. These cases may be expensive to litigate due to the factual issues created by the reasonableness prong. 3. Plaintiff has burden to prove that yield spread premium was unreasonable and will need an expert to do so.

RESPA
Section 8(b) Claims
A. Claim fee split, overcharge or mark up of a fee. B. Key Issues to Defeat Claim - strength of case varies
with type of violation being alleged.
1. Fee split. a) When two or more parties split a fee, which for any portion of services is unearned. b) Violation of Section 8(b). 2. Markups a) When one settlement provider marks-up the cost of the services performed or goods provided by another settlement services providers without providing additional, actual, necessary, and distinct settlement services, goods, or facilities to justify the additional charge. b) Ex. If a broker charges more for credit reports ($65) then it paid a third party vendor ($15). c) Courts are split as to whether violation of RESPA.

RESPA
Section 8(b) Claims
B. Key Issues (cont.) - strength of case varies with type of
violation being alleged.
3. Overcharge a) With work performed. 1) One settlement provider charges the consumer a fee where the fee is in excess of the reasonable value of goods or facilities provided or the services actually performed. (Ex. Charging $250 for a processing fee only worth $50). 2) Courts have not found a violation of Section 8 not fee splitting statute. b) Overcharge with no work performed. 1) One service provider charges a borrower a fee for no services or for which nominal or duplicative work is performed. 2) Most courts hold a violation of Section 8.

FHA & ECOA

Fair Lending

FHA
Fair Housing Act

FHA
Fair Housing Act (FHA)
42 U.S.C. , et seq. prohibits discrimination in residential credit transactions based on race, color, national origin, religion, sex, familial status or disability.

A. Types of Claims
1. Intentional discrimination. 2. Unintentional conduct that has the effect of discrimination (disparate impact).

B. Damages - FHA 813(c)

1. Injunctive relief. 2. Actual damages (impairment of reputation, personal humiliation, mental anguish, and suffering). 3. Punitive damages.

C. Statute of Limitations
2 years from the time of occurrence or termination of the alleged discriminatory housing practice.

ECOA
Equal Credit Opportunity Act

ECOA
Equal Credit Opportunity Act (ECOA)
15 U.S.C. 1691-1691f Prohibits creditors from discriminating against credit applicants on the basis of race, religion, national origin, sex, marital status, age, receipt of public assistance, or exercise of rights under the Consumer Credit Protection Act.

A. Claims
1. Intentional discrimination. 2. No intent to discriminate (disparate impact). 3. Violation of notice requirements.

B. Damages
1. Actual damages - compensation for embarrassment, humiliation, mental distress resulting from denial of credit and reputational damage. 2. Punitive damages - limited to $10,000 for individual borrower actions.

C. Statute of Limitations
2 years from date of occurrence of violation (although can be extended).

ECOA
ECOA - Violation of Notice of Requirements
A. Claims
Creditor violated the procedural notification requirements of ECOA by not providing an accurate and timely notification of adverse action.
1) Separate and distinct requirements from the discrimination sections of ECOA. 2) Borrower does not need to be a member of a protected class to bring claim.

ECOA
ECOA - Violation of Notice of Requirements
B. Key Issues to Defeat Claim Look for NOAT in File.
1. Is the defendant a creditor? 2. Was the application completed v. inquiry? Very fact specific test - did the creditor receive information that it regularly receives to make a credit decision? High v. McLean Financial Corp., 659 F.Supp. 1561 (D.D.C. 1987) - no right to notification because application was incomplete. 3. Was the creditors decision favorable or adverse? Was it a counteroffer? The offer to grant credit in a different amount or on other terms is a counteroffer and no adverse action is deemed taken if the applicant thereafter accepts the counteroffer either expressly or by using the credit. Diaz v. Virginia Housing Development Authority, 117 F.Supp.2d 500, 504505 (E.D. Va. 2000). Soslau v. PHH Mortgage Corp., No. 06-1422 (E.D. Pa. July 18, 2008) - granting motion to dismiss ECOA claim because counteroffer was made within thirty days is not and adverse action.

ECOA
ECOA - Violations of Notice of Requirements
B. Key Issues (cont).
4. Does the creditor have records indicating notice sent in the mail? 5. Is the notice of action taken in the proper form? (Reg. B provides a form notice).

FDCPA
Fair Debt Collection Practices Act 15 U.S.C. 1692

FDCPA
A. Claims
1. Actions taken by a debt collector that are prohibited under the FDCPA. 2. Foreclosure on property even though consumer sent written notification that debt was disputed. 15 U.S.C. 1692(e).

B. Damages
Actual, punitive (up to $1,000 in an individual action), and costs such as reasonable attorneys fees.

C. Statute of Limitations
One year from the date the violation occurred.

FDCPA
D. Key Issues to Defeat Claims
1. Is defendant a debt collector?
Any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another. 15 U.S.C.

1692a(6)
Not a Debt Collector a) Lender
Foreclosing on real property. - Collecting its debts using its own name. (Ex. Mortgage company is not a debt collector as its primary purpose was to make and service consumer loans, and further, because it did not collect debts for any entity other than itself. Oldroyd v. Assoc. Cons. Disc. Co., 863 F. Supp. 237 (E.D. Pa. 1994)).

FDCPA
D. Key Issues (cont.)
b) Servicer
- An entity collecting debts it originates, sells and continues to service (like mortgages). 15 U.S.C. 1692a(6)(F)(iii). - An entity collecting debts not in default when the collecting entity acquired. 15 U.S.C. 1692a(6)(F)(iii). - A special servicer likely would qualify as a debt collector.

2. Is the action a collection of a debt? Does not apply to commercial debts.

any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment. 15 U.S.C.A 1692a(5).

FDCPA
D. Key Issues (cont.)
3. Bona Fide Error Defense under 1692(k)(c)?
Only available for technical and clerical mistakes.

4. Good Faith Defense under 1692(k)?

Debt collector may not be held liable for any act done or omitted in good faith in conformity with an advisory opinion of the Commission, notwithstanding that after such act or omission has occurred, such opinion is amended, rescinded, or determined by judicial or other authority to be invalid for any reason.