4th Cir. Holds HPA Does Not Require LPMI Disclosures If LPMI Not Required at Closing

The U.S. Court of Appeals for the Fourth Circuit recently concluded that lender-paid mortgage insurance (“LPMI”) disclosures under the federal Homeowners Protection Act are only required if LPMI is a condition of the borrower obtaining the loan.

In affirming the trial court’s dismissal of the borrowers’ claims, the Fourth Circuit dissected the specific language of the provision in the HPA addressing disclosures related to mortgage insurance, 12 U.S.C. § 4905.  Specifically, the Fourth Circuit determined that the disclosures are only required if LPMI is a condition of the loan at the time of closing.

In this case, the lender did not condition the loans to the plaintiff borrowers on obtaining LPMI at the time of closing.  Instead, the lender began purchasing LPMI weeks to several months after the loans closed in order to make the loans more marketable on the secondary market.  Because LPMI was not, at the time of closing, a condition of the borrowers obtaining the loans, the Fourth Circuit affirmed that the notice requirements under the HPA were not triggered.

A copy of the opinion in Dwoskin v. Bank of America, NA is available at:  Link to Opinion.

The plaintiff borrowers were members of a putative class who had obtained 30-year, fixed-rate mortgage loans between June 2007 and December 2008.  The loans were all obtained through a “No Fee Mortgage Plus” program offered by the lender. The No Fee Mortgage Plus loans were advertised as charging no fees in connection with closing and requiring no private mortgage insurance.

Shortly after launching the program nationwide in 2007, the lender began obtaining LPMI on certain pools of closed and funded loans that had been offered through the program. According to the lender, this decision was made to increase liquidity during the financial crisis that began to affect the housing market that year. The lender believed purchasing LPMI gave it the option to sell the loans on the secondary market. LPMI was eventually purchased on each of the plaintiffs’ loans. For those loans which eventually received LPMI, the timeline for the purchase of LPMI ranged from one or two weeks after closing to several months after closing.

While looking to refinance their loan, the named plaintiffs discovered that the lender had purchased LPMI on their loan.  This putative class action ensued, in which the plaintiffs brought various state causes of action for fraud and consumer protection violations, and a claim under the HPA that the lender did not provide certain mortgage insurance disclosures required by the HPA.

The trial court granted summary judgment to the lender on the federal claims. The plaintiffs moved for reconsideration based on a declaration of a former employee of the lender. In response, the trial court affirmed its initial decision on the federal claims, and granted summary judgment to the lender on the state claims, and issued final judgment.

The plaintiffs appealed on the grounds that the trial court erred in its application of the HPA, abused its discretion in managing discovery, and wrongly granted summary judgment on the state law claims.

As you may recall, under the HPA, “not later than the date on which a loan commitment is made for [a] residential mortgage transaction, the prospective mortgagee shall provide to the prospective mortgagor a written notice.” See 12 U.S.C. § 4905(c). The required disclosures include “a generic analysis of the differing costs and benefits,” including the difference between LPMI and borrower paid mortgage insurance, the fact that LPMI may be tax-deductible, and the fact that LPMI “usually results in a residential mortgage having a higher interest rate than it would in the case of borrower paid mortgage insurance.” Id.

The disclosures, however, are not required with every mortgage. Under the HPA, the disclosures are only required “[i]n the case of lender paid mortgage insurance that is required in connection with a residential mortgage transaction.” Id. It was this provision on which the Fourth Circuit focused its attention, as the plaintiffs argued that this language makes the disclosures mandatory any time a lender purchases LPMI on a loan, even if LPMI is obtained after closing and is not a condition of closing.

The Fourth Circuit broke down the critical provision, phrase by phrase.  “The plain meaning of the key statutory phrase ‘required in connection with a residential mortgage transaction’ involves conditions at the time a mortgage loan is closed.”  The Court continued, “the ‘residential mortgage transaction’ is the loan’s closing, the phrase ‘in connection with’ conveys the close nexus between satisfaction of the requirement and the loan’s closing, and the word ‘required’ means just that—necessary for the transaction to move forward.”

The Court rejected the plaintiffs’ argument that the disclosures were required, regardless of when the LPMI was obtained.

The Fourth Circuit also looked at the congressional comments to the HPA, which provided the basic concepts of the HPA. “The HPA-mandated disclosures directly address these [borrowers’] concerns [with mortgage insurance] by highlighting how mortgage insurance might affect a borrower’s bottom line so that borrowers ‘can assess the benefits and drawbacks of this product.’”

The Court then emphasized that the key factor on whether the disclosures were required was whether the LPMI was a condition of the loan at closing.  “That Congress limited the mandatory disclosures to situations in which LPMI is ‘required in connection with a residential mortgage transaction’ makes clear that Congress did not intend the disclosures as a general education effort. Instead, the disclosures are designed to provide specific information to those most in need of it at precisely the time that it can be most useful.”

According to the Fourth Circuit, any other interpretation would subject lenders to potential violations of the HPA in situations where the lender obtained LPMI years after the loan closed.  The Court was not willing to read the HPA that broadly and put lenders in the position of providing the disclosures for every loan.

The Court summarized its conclusion: “the language and design of 12 U.S.C. § 4905(c) reveal a single plausible meaning: banks must provide LPMI disclosures only when LPMI is a condition of a loan at closing.”

The Fourth Circuit also rejected the plaintiffs’ argument that the lender’s post-closing purchase of LPMI affected the interest rate on the plaintiffs’ loans.  According to the Court, the evidence demonstrated that purchasing of LPMI after the closing did not adversely affect the plaintiffs’ loans or any other loans.

Because LPMI was not a condition to the plaintiffs’ loans at the time of closing, the Court affirmed the district court’s ruling.  The Court also dismissed the plaintiffs’ state law claims, as they were preempted by the HPA, which explicitly preempts state laws “relating to . . . any disclosure of information addressed by” the HPA.  12 U.S.C. § 4908(a)(1)

Finally, the Fourth Circuit summarily rejected the plaintiffs’ argument that additional discovery could have uncovered evidence that the lender always intended to purchase LPMI on the loans and then passed the cost into the plaintiffs’ interest rates.  According to the Court, the parties had over 14 months to conduct discovery, and the lender produced over 88,000 documents.  “Plaintiffs are not entitled to endless discovery to search for evidence for their claims.”

Accordingly, the Fourth Circuit affirmed the trial court’s dismissal of the plaintiffs’ claims against the lender.

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Mickey Lee practices in Maurice Wutscher’s Commercial Litigation, Consumer Credit Litigation and Employment Litigation groups. He has substantial experience representing clients in class action litigation, Fair Credit Reporting Act litigation, labor and employment law, and various types of commercial litigation. He has co-chaired several bench and jury trials in state and federal court and has authored numerous appellate briefs and argued numerous cases before the Indiana Court of Appeals and the United States Court of Appeals for the Seventh Circuit. He is Vice President of the Indianapolis Chapter of the Federal Bar Association, and a Board member of the Johnson County Indiana University Alumni Association. Mickey and his wife, Melissa, are active members of the Riley Society with the Riley Children’s Foundation and the Mended Little Hearts of Indianapolis. Mickey received his Juris Doctor from the Indiana University Robert H. McKinney School of Law, and obtained his Bachelor of Science degree from Indiana University – Bloomington.