Consumer Compliance Outlook
On the Docket: Recent Federal Court Opinions
REGULATION Z — TRUTH IN LENDING ACT (TILA)
The Third Circuit addresses how a borrower exercises the right to rescind a loan subject to TILA. Sherzer v. Homestar Mortgage Services, 707 F.3d 255 (3d Cir. 2013). The Third Circuit has held that “an obligor exercises his right of rescission by sending the creditor a valid written notice of rescission, and need not also file suit within the three-year period.” The federal appeals courts are divided over the timeliness of lawsuits seeking rescission that are filed more than three years after loan consummation. (Borrowers have three business days after consummation to rescind certain types of transactions, but TILA extends the rescission period to three years if the creditor fails to provide the notice of the right to cancel or the material disclosures.) In several cases, borrowers sent rescission notices to creditors within three years, but the creditors rejected the requests or did not respond, and the borrowers filed lawsuits more than three years after loan consummation. The issue is whether such lawsuits are timely because the borrower had already sent the rescission notice within the three-year period. The Third Circuit in Sherzer joined the Fourth Circuit in holding that a consumer’s lawsuit filed after the three-year period is timely if the consumer previously sent a rescission notice during the three-year period. See Gilbert v. Residential Funding LLC, 678 F.3d 271 (4th Cir. 2012). But the Ninth and Tenth Circuits have held that a borrower must also file the rescission lawsuit within the three-year period. See Rosenfield v. HSBC Bank, USA, 681 F.3d 1172 (10th Cir. 2012) and McOmie-Gray v. Bank of America Home Loans, 667 F.3d 1325 (9th Cir. 2012).
The Third Circuit in Sherzer noted neither TILA nor Regulation Z requires a borrower to file a lawsuit to exercise the right of rescission and instead refers to a borrower’s written notice to the creditor as the means by which a borrower exercises the right of rescission. One concern addressed in the decision is whether a borrower could strategically send a rescission notice within the three-year period and then wait several years before filing a lawsuit. The Third Circuit said courts in that circumstance would borrow the most closely analogous state or federal statute of limitations to determine if such a lawsuit were untimely.
Federal district court in Florida holds loan assignee can be vicariously liable for servicer’s post-assignment violation of TILA’s servicing requirements. St. Breux v. U.S. Bank, N.A., 2013 WL 331592 (S.D. Fla. 2013). U.S. Bank, N.A., obtained the plaintiff’s mortgage loan by assignment and retained Litton Loan Servicing, L.P., to service it. The plaintiff made a request for information to Litton under Section 1641(f)(2) of TILA, which requires the servicer to identify the name, address, and telephone number of the owner or master servicer of the loan. In response, Litton identified U.S. Bank as the owner and Litton as the servicer but failed to provide all of the required information. In considering whether to dismiss the case, the court had to decide whether the assignee that owns the loan can be vicariously liable for a TILA violation committed by the servicer it retained as its agent. The court held that an owner of a loan could be held liable for the violations of its agent servicer and denied the motion to dismiss the lawsuit.
REGULATION X — REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)
Tenth Circuit affirms dismissal of lawsuit because borrower failed to send a Qualified Written Request (QWR) to the address designated by the servicer. Berneike v. CitiMortgage, Inc., 708 F.3d 1141 (10th Cir. 2013). The plaintiff faxed more than 80 letters to her loan servicer to dispute the billing for her mortgage loan using the subject line “Qualified Written Request (RESPA).” Some of the letters listed an Illinois address, and others listed a Nevada address, but none listed the address in Baltimore that the servicer had designated for QWRs. After the servicer responded that the billing was accurate, the plaintiff filed a lawsuit alleging the servicer violated RESPA’s QWR requirements, 12 C.F.R. §1024.21(e). This section of Regulation X requires servicers to acknowledge and respond within certain time frames to written requests from borrowers relating to the servicing of a federally related mortgage loan. The regulation permits the servicer to designate an address to which QWRs must be sent. The lower court dismissed the lawsuit. On appeal, the Tenth Circuit affirmed, noting that while the statute is silent on this issue, Regulation X permits the practice. The Tenth Circuit also did not find persuasive the plaintiff’s argument that the servicer waived the address issue because it had responded to some of the letters. The court held that if a servicer designates a mailing address for QWRs, then the servicer’s RESPA duties are only triggered if the borrower uses the designated address.
REGULATION B — EQUAL CREDIT OPPORTUNITY ACT (ECOA); FAIR HOUSING ACT (FHA)
Sixth Circuit holds that claims of disparate impact based on pricing discretion could not be certified in a class-action lawsuit. In re Countrywide Financial Corp. Mortgage Lending Practices Litigation, 708 F.3d 704 (6th Cir. 2013). Eleven plaintiffs filed a class-action lawsuit against Countrywide Bank, N.A., under the ECOA, the FHA, and the Civil Rights Act, alleging disparities in loan pricing on the basis of race. Plaintiffs alleged that the disparities occurred because Countrywide’s loan originators were permitted to use their discretion in setting prices. Under the bank’s loan-pricing policy, the annual percentage rate for a mortgage loan had two components — an objective component based on objective factors about the borrower and the loan and a subjective component applied at the loan originator’s discretion to increase or decrease a borrower’s rate. The lower court denied class certification based on the Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011). On appeal, the Sixth Circuit affirmed, finding that the claims against Countrywide were similar to those raised in the Dukes case. In Dukes, the Supreme Court held that a lawsuit alleging employment discrimination against women because of broad discretion afforded to local store managers did not satisfy the commonality requirement for certifying a class because the plaintiffs did not establish “a common mode of exercising discretion that pervades the entire company.” The Sixth Circuit found this reasoning applicable to the Countrywide lawsuit, noting that the plaintiffs failed to submit evidence of a uniform policy or practice instructing originators to exercise their pricing discretion in a way that caused the disparate impact.
Since the Dukes decision was issued in June 2011, several other courts have also rejected class-action lawsuits alleging disparate impact claims under the ECOA and the FHA when lenders had pricing discretion. See Barrett v. Option One Mort. Corp., 2012 WL 4076465 (D. Mass. Sept. 18, 2012); Rodriguez v. National City Bank, 2011 WL 4018028 (E.D. Pa. Sept. 8, 2011); and In re Wells Fargo Residential Mortgage Lending Discrimination Litigation, 2011 WL 3903117 (N.D. Cal. Sept. 6, 2011)