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5th Cir. Holds Providing Reason for Loss Mit Denial Once Is Enough Under RESPA

The U.S. Court of Appeals for the Fifth Circuit recently held that a mortgage servicer only had to comply with the federal Real Estate Settlement Procedure Act (RESPA) requirements regarding loss mitigation applications once when the servicer had already provided the same reasons for the denial of a loan modification in response to a prior loss mitigation application.

A copy of the opinion in Germain v. US Bank National Association is available at:  Link to Opinion.

In 2005, a borrower executed a deed of trust in favor of a lender to refinance his home. In 2012, the servicer began servicing the loan. In 2014, the mortgagee became the holder of the note secured by the deed of trust.  The borrower went in and out of default several times since 2009 and last made a loan payment in 2014.

In 2012, the servicer initiated a foreclosure, and the borrower submitted the first of four loss mitigation applications.  The servicer denied the loan modification request because the loan owner did not allow the modification.  The servicer subsequently denied the other three modification applications over several years.

In 2015, the servicer accelerated the loan and set the property for foreclosure.  In response, the borrower filed suit in state court against the mortgagee and the servicer to stop the foreclosure.  The defendants removed the case to federal court.

Relevant to this appeal, the borrower alleged that the mortgagee and servicer defendants violated RESPA and the Texas Debt Collection Act (TDCA).  Specifically, the borrower alleged the defendants violated section 1024.41(c) and (d) of RESPA’s implementing regulation because, even though the loan owner did not change and the servicer had previously identified the loan owner, subsequent loss mitigation denials did not “repeat the name of the owner of the mortgage note.”

As you may recall, 12 U.S.C. § 1024.41(c) provides that after receiving a completed loss mitigation application more than 37 days before a foreclosure sale, the loan servicer shall (1) “[e]valuate the borrower for all loss mitigation options available to the borrower” and (2) “[p]rovide the borrower with a notice in writing stating the servicer’s determination of which loss mitigation options, if any, it will offer to the borrower on behalf of the owner or assignee of the mortgage.”

Further, section 1024.41(d) states that: “[i]f a borrower’s complete loss mitigation application is denied for any trial or permanent loan modification option available to the borrower pursuant to paragraph (c) of this section, a servicer shall state in the notice sent to the borrower pursuant to paragraph (c)(1)(ii) of this section the specific reason or reasons for the servicer’s determination for each such trial or permanent loan modification option.”

Section 1024.41(i) also provides that a “servicer is only required to comply with the requirements of this section for a single complete loss mitigation application for a borrower’s mortgage loan account.”

The trial court held that the defendants only had to comply with RESPA’s requirements to identify the loan owner “for one loss mitigation application” and granted summary judgment in favor of the defendants on all of the borrower’s claims.  This appeal followed.

The Fifth Circuit initially examined the borrower’s argument that the trial court erred in entering summary judgment because the defendants failed to raise their defense of 1024.41(i) as an affirmative defense. This was an issue of first impression for the Fifth Circuit.

As you may recall, Rule 8(c) of the Federal Rules of Civil Procedure requires defendants to “affirmatively state any avoidance or affirmative defense.”  The defendants denied the allegation that they did not comply with section 1024.41(i), but did not raise their alleged compliance as an affirmative defense.  Essentially, the defendants maintained “that they could not have violated RESPA by failing to comply with § 1024.41 because they did, in fact, comply with that section.”  The Fifth Circuit rejected the borrower’s argument, ruling that the defendants’ “use of § 1024.41(i) in their motion for summary judgment is merely an expansion of the denial in their answer.”

Next, the Fifth Circuit turned to the borrower’s argument that the trial court erred when it found that the defendants only had to comply with section 1024.41’s requirement to identify the loan owner for one loss mitigation application.  The borrower argued that this wrongly makes section 1024.41, which became effective on Jan. 10, 2014, retroactive.

The Fifth Circuit agreed that section 1024.41 is not retroactive, but nevertheless rejected the borrower’s argument in this case because “if the servicer complied with the requirements of the provision prior to the effective date, that compliance must be credited to the servicer because it need only comply with such a requirement once.”  To find otherwise, the Court noted, would wrongly read section 1024.41’s limitation on duplicative requests out of the statute’s effective date.

Further, the “purpose of the regulation is not to make already compliant servicers repeat their compliance actions, but rather to bring noncompliant servicers into compliance.”  Thus, “[s]ection 1024.41 is a forward-looking provision, but it accounts for a servicer’s past actions by requiring only one compliance per requirement.”

As such, when the servicer previously complied with section 1024.41 in response to prior loss mitigation applications, it did not have to repeat the name of the same loan owner in each subsequent response, and the trial court properly entered summary judgment on this issue and the alleged TDCA claim based on a violation of section 1024.41.

The Fifth Circuit also analyzed the borrower’s claim that the defendants violated sections 392.304(a)(14), (19) of the TDCA which provide that:

“a debt collector may not use a fraudulent, deceptive, or misleading representation that employs the following practices:

. . . .

(14) representing falsely the status or nature of the services rendered by the debt collector or the debt collector’s business;

. . . .

[or] (19) using any other false representation or deceptive means to collect a debt or obtain information concerning a consumer.”

The borrower argued that the defendants violated these provisions of the TDCA “by holding out the possibility of a [loan] modification.”  The Fifth Circuit had little trouble rejecting this argument because the defendants never promised the borrower a loan modification by asking him to submit loss mitigation applications and the borrower presented no evidence that the defendants knew they would deny the request when they asked for applications.

Finally, the Fifth Circuit wrote separately to admonish the borrower because the case history “demonstrates beyond cavil that [the borrower] has spent the last 10 years gaming the system through a series of applications for loan modification, a flawed bankruptcy filing, and the institution of this lawsuit.” The Fifth Circuit cautioned the borrower, “and his present and future counsel, if any, that further machinations to prolong this litigation or delay foreclosure proceedings could and likely will be met with sanctions.”

Thus, the Fifth Circuit affirmed the trial court’s summary judgment order in favor of the mortgagee and the servicer and against the borrower.

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Ernest Wagner practices in Maurice Wutscher's Commercial Litigation and Consumer Litigation groups, and leads the firm’s Insurance Recovery and Advisory group. Based in Chicago, he also supports the firm’s litigation matters in its Miami office. Ernest has substantial experience in various types of commercial and insurance recovery litigation. He has conducted more than 35 jury trials, and more than 150 arbitrations for plaintiffs and defendants. He has also successfully represented clients in numerous appeals, in various jurisdictions. Ernest earned his Juris Doctor from Emory University School of Law in Atlanta, Georgia, and his Bachelor of the Arts from the University of Iowa.

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